Commentary: Morgan Stanley's fine print suggests deeper woes
Imagine a Morgan Stanley broker telling his or her client about some assets that are nearly worthless because they can't be sold. Would that customer feel any better that the brokerage was simply "reclassifying" that investor's losses?
That seems to be the question facing investors in Morgan Stanley today after the brokerage and investment bank said it reclassified $7 billion of funded assets and $279 million in unfunded assets from Level 2 to Level 3.
The levels are a new kind of accounting parlance Wall Street instituted last year. The bigger the number, the harder it is to sell or value the securities in question. In other words, Morgan Stanley no longer knows how much these assets are worth because no one is buying.
Morgan Stanley says the "reclassification" affects commercial whole loans, residuals from residential securitizations, interest-only commercial mortgage and agency bonds as well as commercial and residential credit default swaps. These are the kinds of subprime derivatives that some firms have written off.
Just as troubling for investors is how Morgan Stanley announced the move: It was buried on page 64 of its 191-page quarterly report. It's been a long three months since the firm won kudos for taking an aggressive $3.7 billion write-down that many thought would represent the worst for the firm.
A few weeks later, that loss had grown to more than $9 billion. Now, it appears those losses are going to be reclassified higher, and to top it off, the brokerage is being investigated by regulators over its role in the subprime crisis.
No broker who wanted to earn his client's trust would try to hide a loss behind slick words. What does Morgan Stanley think of its investors?
Tuesday, January 29, 2008
Tuesday, January 22, 2008
Should You Hold or Go to Cash in this Market?
With Monday’s bloodbath in Asia and in Europe, investors want to know what should they do? Should they panic and sell everything and move into cash, or should they hold on and keep absorbing large market losses?
Obviously if I actually could predict the future, I wouldn’t be blogging. Rather, I’d be sipping some kind of drink with an umbrella in it. But while none of us can see into the future, examining data from the past may help us shed some light on the current market situation.
An interesting article appeared in this weekend’s Seattle Times which spoke about previous market reactions to recessions. Whether we are in one or not is subject for another post. According to data dating back to 1953, recessions, on average, last 216 days, or just over seven months, and stocks post an average 8.64 percent decline during the first half of the pullback, according to Citigroup (C). That actually doesn’t sound too bad compared to the 16% we are down from high in October. Anyway, we are about half way through this cycle.
So what’s the good news? While the first half of a recession can punish stocks, the second half tends to reward investors. During the nine recessions dating back to 1953, S&P 500 stocks have gained 13.17 percent on average in the latter half of a recession, according to Citigroup.
Let’s hope history repeats itself again this year.
Obviously if I actually could predict the future, I wouldn’t be blogging. Rather, I’d be sipping some kind of drink with an umbrella in it. But while none of us can see into the future, examining data from the past may help us shed some light on the current market situation.
An interesting article appeared in this weekend’s Seattle Times which spoke about previous market reactions to recessions. Whether we are in one or not is subject for another post. According to data dating back to 1953, recessions, on average, last 216 days, or just over seven months, and stocks post an average 8.64 percent decline during the first half of the pullback, according to Citigroup (C). That actually doesn’t sound too bad compared to the 16% we are down from high in October. Anyway, we are about half way through this cycle.
So what’s the good news? While the first half of a recession can punish stocks, the second half tends to reward investors. During the nine recessions dating back to 1953, S&P 500 stocks have gained 13.17 percent on average in the latter half of a recession, according to Citigroup.
Let’s hope history repeats itself again this year.
What if the Fed Cut Doesn't Help?
With news Tuesday morning that the Fed is cutting the Fed Funds rate by three-quarters of a percent, it’s official: Things are worse than they seem with the economy.
The Fed, pushed by shattered worldwide investor psychology, is pulling out all stops to shore up confidence. Treasury chief Hank Paulson went so far as to call this latest cut a confidence builder.
Trouble is the “what if they give a party and nobody comes” syndrome. In this case, what if they do a big-bath cut and it doesn’t help?
The Fed did the right thing by cutting just a quarter of a percent a few weeks before the holidays. That would give them a chance to see how the consumer was really doing.
They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.
As a result, their confidence has been crushed, and it’s unclear how many rate cuts it will take to reverse the trend. The trouble, away from Wall Street, is really quite simple: America has been living out of its means, fueled by a Fed that made credit so cheap that it appeared, at one point, you were getting paid to take the cash. With today’s cut, the Fed Funds rate will fall to 3.50%; last time it was that low was August 9, 2005, when the market was higher than it is today. By contrast, it sank to 1% on June 25, 2003. Mortgage rates, meanwhile, for 30-year loans are averaging 6.33%, still well above their boom levels; ditto for the prime rate.
Here’s the problem: Even if rates once again fall to boom-era levels, credit standards have tightened to the point that even a little bit of sugar won’t help the medicine go down. And don’t go thinking everybody will refinance as mortgage rates slide. Unfortunately, their homes may not appraise out. Batten down the hatches: Ain’t over yet for the bad news — or the Fed.
The Fed, pushed by shattered worldwide investor psychology, is pulling out all stops to shore up confidence. Treasury chief Hank Paulson went so far as to call this latest cut a confidence builder.
Trouble is the “what if they give a party and nobody comes” syndrome. In this case, what if they do a big-bath cut and it doesn’t help?
The Fed did the right thing by cutting just a quarter of a percent a few weeks before the holidays. That would give them a chance to see how the consumer was really doing.
They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.
As a result, their confidence has been crushed, and it’s unclear how many rate cuts it will take to reverse the trend. The trouble, away from Wall Street, is really quite simple: America has been living out of its means, fueled by a Fed that made credit so cheap that it appeared, at one point, you were getting paid to take the cash. With today’s cut, the Fed Funds rate will fall to 3.50%; last time it was that low was August 9, 2005, when the market was higher than it is today. By contrast, it sank to 1% on June 25, 2003. Mortgage rates, meanwhile, for 30-year loans are averaging 6.33%, still well above their boom levels; ditto for the prime rate.
Here’s the problem: Even if rates once again fall to boom-era levels, credit standards have tightened to the point that even a little bit of sugar won’t help the medicine go down. And don’t go thinking everybody will refinance as mortgage rates slide. Unfortunately, their homes may not appraise out. Batten down the hatches: Ain’t over yet for the bad news — or the Fed.
5 Picks Prove the Moral High Road Does Not Lead to Investment Success
The figures are in, and vice beats nice. Look no further than this comparison between The Vice Fund [VICEX] and The Timothy Plan Conservative Growth Fund [TCGAX], which claims to be “America’s first pro-life, pro-family, biblically-based mutual fund group.”
The Conservative Growth Fund is only one of the funds in the Timothy Plan, but the others fared no better. Apparently the moral high road does not lead to investment success.
Investors looking to take the opposite tact have several options in microcap stocks:
New Frontier Media: (NOOF) With a 10% dividend and institutional support, New Frontier may be the most intriguing sin stock out there. Steel Partners and James Simons’ Renaissance Technologies each took large stakes in the company, which distributes porn adult films via pay TV and also has a fledgling internet operation. New Frontier is profitable, earning $.09 last quarter.
The downside? New Frontier lacks both technical and fundamental momentum. Its stock is trading near a 52-week low and earnings are down year-over-year. Of course, its a lot easier to wait for a turnaround if you are getting paid a 10% dividend.
Private Media Group: (PRVT) Private Media produces and distributes adult films, magazines, and digital media. Like New Frontier, Private Media Group is profitable. Last quarter, it earned 0.5 million euros on revenues of 7.5 million euros — respectable numbers, but not especially attractive for an 85 million dollar company.
If Private Media is to unlock value, it will have to find a way to increasingly monetize its huge catalog. According to Private, the future is in IPTV (internet protocol television), internet and mobile. The company has invested heavily in these businesses, but so far has only garnered meager returns.
Rick’s Cabaret: (RICK) The name may be straight out of Casablanca, but this is a far cry from the gin joint Bogart made famous. Rick’s operates a chain of “upscale gentlemen’s clubs,” and all those lap dances have paid off. Over the past four years, shares have rocketed from a little above $1 to over $20. The consumer may be pulling back, but not here. Rick’s sales are up 57% year-over-year. While the company may appear pricey relative to trailing earnings, Rick’s expects to earn $2 per share next year on the strength of recent and planned acquisitions.
VCG Holdings: (VCGH) A reader who is in the industry (on the business side, sorry to disappoint) suggested that VCG could be the next Rick’s. While the stock was on my watch list for years, I had long been skeptical of the related party transactions. Many of VCG’s clubs and operating contracts have been purchased from majority owner Troy Lowrie. The few deals I have examined do not appear particularly egregious, but the close dealing still warrants a certain level of caution. VCG expects to earn $.86-$.92 in 2008 and $1.15-$1.25 in 2009.
Playboy Holdings (PLA): No discussion of adult stocks would be complete without mention of Playboy. I expected it would be a much larger company, but it turns out that PLA only sports a $271 million market capitalization. Profits rose last quarter on increased licensing revenues, but the stock trades near its 52-week lows. The magazine may be in permanent decline, but the brand, 25-years of pictures and videos, pay-TV and internet businesses all have some value.
Please note that we are not advocating purchases in any of the above named securities, we are just noting that over the most recend time periods...there has been no advantage to taking the moral high ground when it comes to investing.
The Conservative Growth Fund is only one of the funds in the Timothy Plan, but the others fared no better. Apparently the moral high road does not lead to investment success.
Investors looking to take the opposite tact have several options in microcap stocks:
New Frontier Media: (NOOF) With a 10% dividend and institutional support, New Frontier may be the most intriguing sin stock out there. Steel Partners and James Simons’ Renaissance Technologies each took large stakes in the company, which distributes porn adult films via pay TV and also has a fledgling internet operation. New Frontier is profitable, earning $.09 last quarter.
The downside? New Frontier lacks both technical and fundamental momentum. Its stock is trading near a 52-week low and earnings are down year-over-year. Of course, its a lot easier to wait for a turnaround if you are getting paid a 10% dividend.
Private Media Group: (PRVT) Private Media produces and distributes adult films, magazines, and digital media. Like New Frontier, Private Media Group is profitable. Last quarter, it earned 0.5 million euros on revenues of 7.5 million euros — respectable numbers, but not especially attractive for an 85 million dollar company.
If Private Media is to unlock value, it will have to find a way to increasingly monetize its huge catalog. According to Private, the future is in IPTV (internet protocol television), internet and mobile. The company has invested heavily in these businesses, but so far has only garnered meager returns.
Rick’s Cabaret: (RICK) The name may be straight out of Casablanca, but this is a far cry from the gin joint Bogart made famous. Rick’s operates a chain of “upscale gentlemen’s clubs,” and all those lap dances have paid off. Over the past four years, shares have rocketed from a little above $1 to over $20. The consumer may be pulling back, but not here. Rick’s sales are up 57% year-over-year. While the company may appear pricey relative to trailing earnings, Rick’s expects to earn $2 per share next year on the strength of recent and planned acquisitions.
VCG Holdings: (VCGH) A reader who is in the industry (on the business side, sorry to disappoint) suggested that VCG could be the next Rick’s. While the stock was on my watch list for years, I had long been skeptical of the related party transactions. Many of VCG’s clubs and operating contracts have been purchased from majority owner Troy Lowrie. The few deals I have examined do not appear particularly egregious, but the close dealing still warrants a certain level of caution. VCG expects to earn $.86-$.92 in 2008 and $1.15-$1.25 in 2009.
Playboy Holdings (PLA): No discussion of adult stocks would be complete without mention of Playboy. I expected it would be a much larger company, but it turns out that PLA only sports a $271 million market capitalization. Profits rose last quarter on increased licensing revenues, but the stock trades near its 52-week lows. The magazine may be in permanent decline, but the brand, 25-years of pictures and videos, pay-TV and internet businesses all have some value.
Please note that we are not advocating purchases in any of the above named securities, we are just noting that over the most recend time periods...there has been no advantage to taking the moral high ground when it comes to investing.
Thursday, January 17, 2008
The Federal Reserve Has Failed Us
I happen to be one of those people that thinks the U.S. economy (and much of the world economy for that matter) is currently running in an unsustainable fashion with expectations of infinite growth (growth every single year) on a finite planet financed by debt.
I prefer to invest for the long term and as such I try and look at what will happen over longer periods of time. I can’t tell you if the price of gold or oil or any commodity will go up the next day. I can tell you what direction it will probably go over the next decade due to the fundamental economics. Much of the daily fluctuations in the stock market are not linked to fundamentals… but to fear, greed, wall street hype and the media machine. Sometimes the key to understanding where we might be headed is in looking at the basic building blocks of our situation.
Federal Reserve
The Federal Reserve is neither Federal, nor a reserve. It is a private bank that was established in 1913. I won’t bore you with the details. All you need to know is that it is owned privately - by people who could afford and had the power to start a central bank in 1913. It has never been audited. It controls the money supply. And the only Senator in the United States that seems to be asking hard questions of the Federal Reserve is Ron Paul. Perhaps he is the only Senator that understands economics? Perhaps he is the only one willing to stick his neck out to discuss the things that need discussion. I wish more Senators would question the Federal Reserve and whether we should abolish it.
The Federal Reserve controls the money supply by deciding to increase or decrease interest rates and whether to create more money. The whole point is to create a stable and steady economy. The U.S. dollar is NOT backed by gold. It is nothing more than a promissory note - a debt instrument. I believe fiat currencies are inherently flawed and doomed to eventual failure. Fiat currencies are easy to manipulate and that is significant problem. Leave my money alone! Don’t touch it, don’t manipulate it, don’t devalue it. Let it be.
In March 2006 the Federal Reserve stopped publishing the M3 index - reportedly because it costs a lot to collect this information and it wasn’t worth it. The M3 index is a report that tells us how many dollars are in existence. So lets get this right. The Federal Reserve (a privately owned company) has never been audited (ordinary citizens and corporations get audited all the time - The Fed hasn’t been audited since their creation in 1913) and now they NO LONGER PUBLISH HOW MUCH MONEY IS IN CIRCULATION. The same company that CONTROLS THE MONEY SUPPLY isn’t held accountable? How can you determine the value of a currency without that information? How do we truly know what the Federal Reserve has been doing? It could be conducting pure fraud and acting like a free ATM for its owners!? We don’t know. That should scare you. Sometimes I truly wonder, do the people have control over government anymore? Is voting once every four years really government by and for the people?
The Federal Reserve has been saving U.S. banks that invested in sub-prime mortgages. What about the pension funds? What about the average investor? Will they be bailed out? Nope. Just the banks. Funny how that works. The Fed bailing out their friends when they do dumb things that hurt the average American. Is it odd that the banks only own a small portion of the sub-prime mortgages and yet they are the only ones to get bail-outs…?
“The Federal Reserve is totally out of it. They’re destroying the currency
and driving up inflation, which will result in higher interest rates and a
worse economy. We now know the Fed doesn’t understand markets or
economics, but is just trying to bail out its friends on Wall Street at the
expense of 300 million Americans, nay, of the whole world.”
- Investment Guru Jim Rogers
Then there is the bigger question. Do you believe in the free markets and capitalism? Do you think the government should stay out of our business and let it be (laissez-faire)? I guess they think the free market won’t work without interference? Why else would we need the Federal Reserve? The whole point is to manipulate the money system in order to have a more stable economy. Tell me… is the economy stable? Was the economy stable in 1929 and the “Dirty 30’s”? The Federal Reserve has never done a good job.
Want another example of how the Fed has failed us? In the 1950’s a man could support his entire family with ONE average job. He could afford a nice home with the white picket fence and his wife didn’t have to work. Now women are forced to work outside the home just so the bills can be paid and her husband (and quite often her too) is working 80+ hours a week just to keep up with the workload. Inflation has slowly hidden the effects over several generations.
I tend to agree with the Austrian school of economics and believe government interference is counter-productive and has caused many problems. It has done nothing but push problems forward so that they can be dealt with another day. Pushing the problems forward hasn’t solved them… but merely delayed and intensified them and the consequences are scary. Instead of dealing with the problem of debt several decades ago, we are now in a much worse situation. We are headed towards economic disaster.
To stop a recession from happening after the internet bubble burst, the interest rates were lowered. That spurred a real estate bubble. Home values soared (people had cheap access to money) and people refinanced to take some of that money out and spend it. Others went into massive debt to build their dream homes. Lenders lowered their lending requirements to the point where they would lend money to people with no job, no income and no assets. Adjustable rate mortgages lured people in to dangerous mortgage situations. Interest only loans popped up. What happens when millions of people spend $500,000+ each on homes during the same two or three year period and also spend lots of money on furnishing their homes with appliances, decorations, furniture and electronics? A large economic boom! Now that so many people have spent 30+ years of their money all at once (thanks to the low interest rates decided by the Federal Reserve), the economy will slowdown even worse than what would have happened when the internet bubble burst… It’s inevitable. All those people will NOT spend another $500,000+ on another home this year… they already bought their home during the last three years… The Federal Reserve has interfered time and time again and it has always backfired later on.
Now What?
Now the Boomer’s will begin to retire. The most productive segment of society is going to become the biggest drain. The economy is in shambles, the stock market returns are lousy and homes are worth less than consumers paid for them (if they happened to be a recent buyer/builder as the Fed would have hoped they’d be).
The U.S. Dollar is falling… it is being done in such a way (hidden with no M3) that it actually looks like they are purposefully lowering the value of the dollar to cause wide-spread problems. Let’s face it, they are lowering the interest rates to help spur the economy but that is an action they know will lower the value of the dollar. Also by hoping more consumers take on MORE debt to stop the recession the economy will inevitably become even more shaky. Sorry, everyone is already maxed out! You can’t keep borrowing your way out of a recession. The dramatic swings in the U.S. Dollar are just the beginning. Soon, no one will know what the U.S. dollar is worth and foreign countries will sell their reserves. Then, the Fed or the government will probably create a solution: Ditch the dollar and create the Amero and a North American Union. This is scary stuff when you truly realize what it does to your constitutional rights and the future of the United States.
So far all the Federal Reserve has done is do a good job of getting EVERYONE into debt to others. Being indebted to others feels like a form of wage slavery. How much debt do you have?
I prefer to invest for the long term and as such I try and look at what will happen over longer periods of time. I can’t tell you if the price of gold or oil or any commodity will go up the next day. I can tell you what direction it will probably go over the next decade due to the fundamental economics. Much of the daily fluctuations in the stock market are not linked to fundamentals… but to fear, greed, wall street hype and the media machine. Sometimes the key to understanding where we might be headed is in looking at the basic building blocks of our situation.
Federal Reserve
The Federal Reserve is neither Federal, nor a reserve. It is a private bank that was established in 1913. I won’t bore you with the details. All you need to know is that it is owned privately - by people who could afford and had the power to start a central bank in 1913. It has never been audited. It controls the money supply. And the only Senator in the United States that seems to be asking hard questions of the Federal Reserve is Ron Paul. Perhaps he is the only Senator that understands economics? Perhaps he is the only one willing to stick his neck out to discuss the things that need discussion. I wish more Senators would question the Federal Reserve and whether we should abolish it.
The Federal Reserve controls the money supply by deciding to increase or decrease interest rates and whether to create more money. The whole point is to create a stable and steady economy. The U.S. dollar is NOT backed by gold. It is nothing more than a promissory note - a debt instrument. I believe fiat currencies are inherently flawed and doomed to eventual failure. Fiat currencies are easy to manipulate and that is significant problem. Leave my money alone! Don’t touch it, don’t manipulate it, don’t devalue it. Let it be.
In March 2006 the Federal Reserve stopped publishing the M3 index - reportedly because it costs a lot to collect this information and it wasn’t worth it. The M3 index is a report that tells us how many dollars are in existence. So lets get this right. The Federal Reserve (a privately owned company) has never been audited (ordinary citizens and corporations get audited all the time - The Fed hasn’t been audited since their creation in 1913) and now they NO LONGER PUBLISH HOW MUCH MONEY IS IN CIRCULATION. The same company that CONTROLS THE MONEY SUPPLY isn’t held accountable? How can you determine the value of a currency without that information? How do we truly know what the Federal Reserve has been doing? It could be conducting pure fraud and acting like a free ATM for its owners!? We don’t know. That should scare you. Sometimes I truly wonder, do the people have control over government anymore? Is voting once every four years really government by and for the people?
The Federal Reserve has been saving U.S. banks that invested in sub-prime mortgages. What about the pension funds? What about the average investor? Will they be bailed out? Nope. Just the banks. Funny how that works. The Fed bailing out their friends when they do dumb things that hurt the average American. Is it odd that the banks only own a small portion of the sub-prime mortgages and yet they are the only ones to get bail-outs…?
“The Federal Reserve is totally out of it. They’re destroying the currency
and driving up inflation, which will result in higher interest rates and a
worse economy. We now know the Fed doesn’t understand markets or
economics, but is just trying to bail out its friends on Wall Street at the
expense of 300 million Americans, nay, of the whole world.”
- Investment Guru Jim Rogers
Then there is the bigger question. Do you believe in the free markets and capitalism? Do you think the government should stay out of our business and let it be (laissez-faire)? I guess they think the free market won’t work without interference? Why else would we need the Federal Reserve? The whole point is to manipulate the money system in order to have a more stable economy. Tell me… is the economy stable? Was the economy stable in 1929 and the “Dirty 30’s”? The Federal Reserve has never done a good job.
Want another example of how the Fed has failed us? In the 1950’s a man could support his entire family with ONE average job. He could afford a nice home with the white picket fence and his wife didn’t have to work. Now women are forced to work outside the home just so the bills can be paid and her husband (and quite often her too) is working 80+ hours a week just to keep up with the workload. Inflation has slowly hidden the effects over several generations.
I tend to agree with the Austrian school of economics and believe government interference is counter-productive and has caused many problems. It has done nothing but push problems forward so that they can be dealt with another day. Pushing the problems forward hasn’t solved them… but merely delayed and intensified them and the consequences are scary. Instead of dealing with the problem of debt several decades ago, we are now in a much worse situation. We are headed towards economic disaster.
To stop a recession from happening after the internet bubble burst, the interest rates were lowered. That spurred a real estate bubble. Home values soared (people had cheap access to money) and people refinanced to take some of that money out and spend it. Others went into massive debt to build their dream homes. Lenders lowered their lending requirements to the point where they would lend money to people with no job, no income and no assets. Adjustable rate mortgages lured people in to dangerous mortgage situations. Interest only loans popped up. What happens when millions of people spend $500,000+ each on homes during the same two or three year period and also spend lots of money on furnishing their homes with appliances, decorations, furniture and electronics? A large economic boom! Now that so many people have spent 30+ years of their money all at once (thanks to the low interest rates decided by the Federal Reserve), the economy will slowdown even worse than what would have happened when the internet bubble burst… It’s inevitable. All those people will NOT spend another $500,000+ on another home this year… they already bought their home during the last three years… The Federal Reserve has interfered time and time again and it has always backfired later on.
Now What?
Now the Boomer’s will begin to retire. The most productive segment of society is going to become the biggest drain. The economy is in shambles, the stock market returns are lousy and homes are worth less than consumers paid for them (if they happened to be a recent buyer/builder as the Fed would have hoped they’d be).
The U.S. Dollar is falling… it is being done in such a way (hidden with no M3) that it actually looks like they are purposefully lowering the value of the dollar to cause wide-spread problems. Let’s face it, they are lowering the interest rates to help spur the economy but that is an action they know will lower the value of the dollar. Also by hoping more consumers take on MORE debt to stop the recession the economy will inevitably become even more shaky. Sorry, everyone is already maxed out! You can’t keep borrowing your way out of a recession. The dramatic swings in the U.S. Dollar are just the beginning. Soon, no one will know what the U.S. dollar is worth and foreign countries will sell their reserves. Then, the Fed or the government will probably create a solution: Ditch the dollar and create the Amero and a North American Union. This is scary stuff when you truly realize what it does to your constitutional rights and the future of the United States.
So far all the Federal Reserve has done is do a good job of getting EVERYONE into debt to others. Being indebted to others feels like a form of wage slavery. How much debt do you have?
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