INSIGHTS
Investment News and Opinion
No where to run, nowhere to hide.
One of the best Octobers for our markets gave way to a very rough opening in November.
If you’d like to put a name and a face on one reason for the most recent market swoon, look no further than New Jersey’s own Jon Corzine. He’s a former Goldman Sachs senior partner, US Senator and governor of New Jersey and most recently, the CEO of MF Global Holdings.
Boasting of his credentials and connections, Jon raised a lot of money and made huge bets. The markets do not care who you are, as Jon found out. After only 20 months as CEO, MF Global posted a quarterly loss of $192 million, and $6.3 billion in wrong way bets on the infamous European debt. Their $40 billion bankruptcy petition is on the scale of Chrysler’s.
The regulators are left to sort out this filing, and to find an estimated $600 million that is “missing” from customer accounts. The good news is that MF Global is not a bank, will not be bailed out by taxpayers, and has a new CEO. Jon had plenty of help in getting to this bankruptcy, and unlike most politicians, there is nowhere for him to hide. The bad news is that there is always another Jon Corzine waiting in the wings.
Think Fast!
You’ve got your hands full – of books, papers, dishes – and someone, with let’s say a tennis ball, says “Think Fast” as they pretend to toss the ball to you. You jump in response. This sophomoric gag gets a laugh from one side, a rebuke from the other. Sound familiar? This game was much more prevalent when our sons were much younger and they loved to “get me.”
Traders play this game too. A traders’ version of Think Fast happens when information is being released by a company and traders react by trading the daylights out of the stock. Trade first; think later -maybe – and move onto the next trade. It’s a trader’s game but one that long term investors can be impacted by if you let them “get you.”
Another version played lately is the release of oil from the US Strategic Petroleum Reserve (SPR). The current administration in Washington announced June 23rd that they were going to release 30 million barrels of “sweet crude” oil from our reserve to help ease the stress on oil supplies due to the Libyan crisis. The US, along with 27 other countries, will release 60 million barrels into the international market in hopes of replacing some of the estimated 140 million barrels of production lost by Libya due to their “conflict.”
Tapping our reserves has only happened 2 other times since this 727 million barrel reserve was created in 1973; 20 million barrels were tapped in 1992 during the Gulf War and 11 million barrels released in 2005, post Hurricane Katrina.
Is this a sophomoric political game of Think Fast that has campaign 2012 all over it as some suggest? Or, is this a well thought out long term strategic move that will help the US economy – by lowering the price of gas at the pumps, ramping up jobs, manufacturing, etc.?
Think Fast – Gotcha!
And in this corner
A couple of young up-starts battle it out in the ring to become the next “Champ.” Media hype is everywhere. Followers of each fighter are loud and passionate. The promoters are enjoying the attention and making side bets. I think of my father’s favorite boxers as he listened to the Friday night fights – guys like Tunney, Dempsey, Louis, Marciano, and Ali to name a few.
Well, we have a new style of Friday night fights. The Champ is the 219 year old New York Stock Exchange.
The Big Board, as it is affectionately known, is now a compilation by merger of the NYSE Group and Euronext – the European combined stock market.
The contenders for the title are DB and N/ICE.
DB – is the Deutsche Börse, AG that can trace its trading origins back to 1585! This exchange was formed through a series of mergers, the last in 1992. It’s a large and formidable challenger.
N/ICE is in the other corner. This contender promises the one-two punch of the NASDAQ, established in 1971, and ICE, the Intercontinental Exchange that began in the late 1990s as an exchange for trading energy commodities. They are fast, light and nimble.
The fight began February 15, 2011 with the announcement that Germany’s Deutsche Börse and NYSE had agreed to merge in an all stock deal. DB would have 60% ownership, NYSE, 40%. They would incorporate the merged company in Amsterdam, with the name of the merged exchanges still undecided. Estimated value of this merger is $9.64 billion.
The news hit the Street like a sucker punch – NYSE in the hands of a foreign exchange! Whaddya mean no NYSE? How could we lose an icon of American Capitalism?
The second punch was thrown by N/ICE – their offer comes in at $11.3 billion – offering cash and stock, and keeping “The Big Board” a US company.
The last round will begin on April 28th. That’s the date of the NYSE shareholder meeting to vote on the DB, or N/ICE merger offer.
This is a classic fight. Cigar smoke all but obscures the ring. I’m cheering for the underdog to win and keep the title- and the “Big Board” in the US.
Betting on snowfalls
We’re a tough, hardy, wintery crowd here in Wisconsin. The most recent snow storm slowed us down for a day or two, but we’ve got winter figured out pretty well and are able to get out and enjoy the snow.
Heck, we even have a football team that doesn’t let snow, cold, ice or frozen tundra keep them from winning the XLV Super Bowl. (What a great game! Hats off to the Steelers)
This winter many US cities, towns and entire states have broken long standing records for ice, snow, and arctic cold temperatures. From coast to coast many of us enjoyed more than a few days off due to extreme weather. The disruption in and cost to businesses can be staggering. Think back to the hundreds of flights delayed, diverted or canceled by the latest Midwest and East Coast blizzards.
Now businesses (and gutsy individuals) can hedge against winter. According to a story posted by CNN Money.com the Chicago Mercantile Exchange began offering snow futures in 2006 with just two contracts and now offers more than 6 locations. Investors can bet on snowfall levels in New York City’s Central Park, and at the Chicago, Minneapolis, Boston and Detroit airports.
Other contracts allow for businesses to hedge against either too much, or too little snow. Here’s one example: The owner of a snow removal company bet that Chicago would get more than the 37 inch average snowfall this winter. He bet the snowfall would total more than 49 inches. He bought a contract for $37,000 that would pay his snow removal company $16,000 for every inch above the 49-inch level.
During the latest blizzard, the contract settled for $130,000. Hopefully, this will help offset higher costs associated with his company having to clear that much more snow. The reverse wager could be profitable if he were to bet on too little snow next year.
Look for a wider array of winter and weather related contracts being used by more and more companies. While we can’t control the weather we can at least manage the financial impact of it. And hopefully, you’ll get out and enjoy winter.
A hard day at the Reserve
December 2010
A hard day at the Reserve
As Chairman of the Federal Reserve, Ben Bernanke seems to have no friends, hardly any backers and a hoard of analysts ready to dissect every word the poor guy speaks.
Ben has been discussing and debating policy with members of the Federal Open market Committee (FOMC) as they make key decisions about our interest rates and growth of our money supply and economy.
Recent criticism is based on this November’s announcement that the Fed would begin QE2- aka-Quantitative Easing – Round 2. This newest round is meant to compliment QE1 that began in the free fall days after Lehman Brothers collapse in September 2008.
In the first round of QE, the Fed announced it would buy up to $600 billion of direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and mortgaged backed securities (MBS) backed by Fannie, Freddie, Ginnie Mae. Thankfully, QE1 worked in keeping our financial system from collapsing. (What to do about Fannie and Freddie is another huge issue)
According to the November 3, 2010 Federal Reserve’s press release, it notes that based on the slow pace of our economic recovery and “to help ensure that inflation, over time, is at levels consistent with its mandate (to foster maximum employment and price stability), the Committee decided today to expand its holdings of securities.”
The FOMC will be buying a “further $600 billion of longer –term Treasury securities by the end of June, 2011 or about $75 billion per month. Their goal is/was to lower interest rates.
Stay tuned as QE2 works its way through the bond and stock markets, the economy, pundits and politicians.
Happy Thanksgiving 2010
Our Wisconsin weather has finally turned colder – it feels and looks like November with our forecast of wind and rain and snow ushering in this Thanksgiving.
Take time to enjoy all of your blessings – we do have so many.
Take time to enjoy your families and friends – even if the gathering gets a bit hectic.
Take time to enjoy all the freedoms we have – and keep a place in your hearts and in your prayers for those service men and women and their families who will be worlds apart this Thanksgiving.
Take time to enjoy the health you are blessed with – even those aches and pains of everyday life.
From my family, to yours, our very best wishes for a Happy Thanksgiving filled with family, friends, love, and laughter. Safe travels to all!
One at a time
Lost and Found
A few weeks ago on a Sunday morning, my husband and I were on a long bike ride. Just a few miles after we turned towards home, I realized I had lost my very old drivers license that I use for ID and $7 in singles I had clipped to my license. We reversed course but didn’t find my ID or cash.
We talked about what we would do if we found someone’s IDs with cash attached and hoped that whoever might have picked up my ID would do the same.
Three days later in the mail was my old license, the seven dollars and a note that read; “Janet, I found this on the bike trail in Port Washington. According to the internet, this is your current address so I thought I’d send it to you. Have a great day. Lisa” That was the best mail I’ve received in a long time!
I called and spoke to Lisa’s husband Steve. I thanked them for doing the same thing I would have done. Steve was gracious and said it’s just who they are. They run a company called GuildCreative. They have a tag line that reads “Creative Solutions That Make A Difference.” I’m betting they run their company the same way they handled my lost ID and cash. It’s the same way that you and I do things; the way that 99.99% of the companies we work with do things.
I am very frustrated with the endless stream of negative rhetoric from Washington about businesses of every size and shape. Despite what the media likes to report, we know and thankfully work with great people who are working as hard as they can, doing things the right way while trying to earn a living to support their families and secure their futures. I trust their word and appreciate their honesty and integrity. They too are making a difference.
Our collective psyche is bruised; we lack confidence to move ahead, to hire, to expand, to grow. Given the policies that have come out of Washington over the last few years, its’ no wonder we are looking and feeling beat up. As investors we need to look past the next week, or quarter or the next “talking expert” and decide what works best for our portfolios. I have an unshakeable faith in this country, and in the people that make it work. We need to find our country’s lost ID and return it. One at a time.
The real Onion
Which is the real Onion headline?
- To Protest Hiring of Nonunion Help, Union Hires Nonunion Pickets
- Pay More Taxes Now
- Florida Marlins Delay Game until their Fans show up
- Norfolk Southern’s Century Bonds Roll
You may have seen the humorous (and often bawdy) Onion newspaper that used to be found just around college campuses but now is found in many locales. Their headlines can be pretty clever. Now even Main Street media seem to be using Onion-like headlines. Which headline is from the Onion?
Headline #1 is from a Wall Street Journal article which details in Washington “… that the Mid Atlantic Regional Council of Carpenters is seeking paid demonstrators to march and chant in its current picket line outside the McPherson Building, an office complex here where the council said work is being done with non union labor.” Jobless recruits get minimum wage to ‘March around and sound off’. Picketers are paid $8.25 an hour. The union rate was not disclosed.
Headline #2 is from a Forbes.com article. With record deficits and spending from all levels of government, and with the 2001 and 2003 tax rates set to expire on January 1, 2011, look for our tax rates at all levels to increase. Perhaps recognizing how very fragile our economy is, Washington could vote to maintain the current rates through 2011. We can only hope. In the meantime, check in with your attorney and accountant to discuss the best tax strategies for you.
Headline #4 is a WSJ article about the August 23rd sale by Norfolk Southern of a 100 year bond. Norfolk raised $250 million by selling debt that was added to an existing $300 million 6% debt issue that is due in 2105. The “new” paper was priced to yield 5.95%. Companies like McDonald’s (30 yr 4.875%, 10 yr 3.5%) and Wal-Mart (30 yr 4.875%) are taking advantage of what some managers have called the lowest rates in at least 15 years. This is essentially what homeowners are doing by locking in record mortgage rates.
Headline # 3 is the real Onion headline and just for fun. The markets don’t have to worry about buyers and sellers showing up; just which side the majority will be on during a given day. I have a good idea that the markets and the Onion will continue to supply us with plenty of headlines.
Too good to put down
Could it be 2 years since the worst of the banking crisis began to engulf Wall Street and Main Street? I’ve just finished reading Andrew Ross Sorkin’s Too Big to Fail that offers a fascinating look at those frightening and chaotic days of the near collapse of our banking system.
The book isn’t light nor is the subject; it’s not a fast beach-chair kind of book. But I couldn’t put it down.
From the inside jacket cover it’s described as “A brilliantly reported true-life financial and political thriller that goes behind the scenes of the financial crisis on Wall Street and in Washington. TOO BIG TO FAIL vividly details the backroom deal making and secret alliances made in the rush to save the world economy from collapse.” This book is all that and much more.
I did come away with a much better appreciation of how money moves in this world and who the power brokers, politicians, players, and personalities behind alot of this chaos were, and in some cases, still are. I am very grateful that throughout this crisis we had some of the best and the brightest people working around the clock trying to solve this. Many of their names were not in the headlines, but their contributions were huge.
Let me know if you’d like to borrow my copy. I’d love to hear your take on this inside story of Washington and Wall Street.
127 and rising
Have you been watching the World Cup matches? My family and I have and we did check the sound on our TV as we wondered what the “buzz” was. All through the first USA match that we watched, the constant background noise was distracting.
Later that evening, we were entertained by a very happy US fan who serenaded us with his vuvuzela – its the plastic trumpet that has become the signature of the World Cup matches from South Africa. That’s the background noise that accompanies these very emotional matches. Rueters reports that playing one vuvuzela produces 127 decibels of sound, which easily drowns out a chainsaw that produces “only” 100 decibels. Now multiply that by thousands of fans and you too will turn down the volume.
If all the markets could blow their own horns, I think the decibel level would be higher that 127. As the World Cup gathers teams from across nations and continents, so does our economy gather data from and react to global markets. The WSJ article (Mark Gongloff and Nesil Stany June 30, 2010) that accompanies this graph speaks of a “Trifecta of trouble – European debt woes, China’s slowing groth and that stagnating US recovery…”
This trifecta is making a lot of noise right now. The uncertainty surrounding the growth of our economy and specifically taxes going forward are just two concerns we have. But they are loud and clear. I wonder who is listening.
