Dylan does an awesome job explaining the Goldman Sachs debacle. I was going to write something about this today, but I think Dylan's take is as good as it gets so I figured I would just let him do the talking.
The bottom line is Goldman Sachs is pure evil and needs to rot in hell as far as I am concerned. Wall Streets obsession around making money is going to destroy this country if these large banks are not stopped.
Lets hope the SEC charges are the beginning of the end for the pigmen!
Great job Dylan!:
Part 2
Saturday, April 17, 2010
Wednesday, April 14, 2010
The Fed's Newest Bubble
Well it looks like the Fed has done it again.
They have successfully created another bubble. You can call this one the Equity Bubble. Once again it was done using the same toolbox of low interest rates.
It's amazes me when I watch this country keep making the same mistakes over and over again. Greenspan has been vilified post housing bust for keeping rates too low for too long in response to the last recession at the beginning of the decade.
Yet me have managed to do the same exact thing all over again before we have even fully recovered from the last time we made the same stupid mistake.
Any reputable economist will tell you that keeping interest rates too low for too long creates the perfect environment to create bubbles. The massive amounts of money created by such policy eventually begins to flow somewhere. This time it landed in stocks.
When looking at our previous bubbles created by our two decade old Ponzi finance system(tech, housing, and now stocks) they all had one thing in common: The ability to borrow money at extremely low rates.
So Why Stocks This Time?
- borrow at practically zero.
As a bank in this environment you are going to make a fortune when you borrow at zero and lend to a home buyer at 5% or buy 30 year bonds that pay a 4.6% yield. It's almost impossible to lose money in such a rate environment when you are allowed to hide your losses with "hide the sausage" accounting.
Eventually, a large piece of this newly created money then inevitably begins to flow into stocks.
This got the stock bubble started. Then(like any other successful bubble) you need to suck everyone else in.
How do you orchestrate this if you are the Fed? Take away all other investment options.
Investors(especially senior citizens) are desperate for yield. Many of the elderly depend on it. By dropping rates to zero, the Fed has wiped out CD's, money markets, and treasuries as solid yielding investment options.
This essentially forces both the public and fund managers into buying stocks and junk bonds in a desperate chase for yield because the "safe" investments pay them nothing.
Just like the housing bubble: The higher the market goes the more people get sucked in like any other Ponzi scheme.
Eventually, the bubble turns into a euphoria where investors can't get enough until the music stops(which it always does)..
I am not sure if we are into the euphoria stage yet but one thing is for sure: Bubbles never end well.
I find at sad that investors are forced to throw their retirement portfolio into a bipolar market that soars and crashes ever few years.
Just look at the s&p 500 over the past decade or so:
They have successfully created another bubble. You can call this one the Equity Bubble. Once again it was done using the same toolbox of low interest rates.
It's amazes me when I watch this country keep making the same mistakes over and over again. Greenspan has been vilified post housing bust for keeping rates too low for too long in response to the last recession at the beginning of the decade.
Yet me have managed to do the same exact thing all over again before we have even fully recovered from the last time we made the same stupid mistake.
Any reputable economist will tell you that keeping interest rates too low for too long creates the perfect environment to create bubbles. The massive amounts of money created by such policy eventually begins to flow somewhere. This time it landed in stocks.
When looking at our previous bubbles created by our two decade old Ponzi finance system(tech, housing, and now stocks) they all had one thing in common: The ability to borrow money at extremely low rates.
So Why Stocks This Time?
In my opinion its multi faceted.
Firstly:
The banks have basically found their version of heaven:
- Hide their losses via fraudulent accounting- borrow at practically zero.
As a bank in this environment you are going to make a fortune when you borrow at zero and lend to a home buyer at 5% or buy 30 year bonds that pay a 4.6% yield. It's almost impossible to lose money in such a rate environment when you are allowed to hide your losses with "hide the sausage" accounting.
Eventually, a large piece of this newly created money then inevitably begins to flow into stocks.
This got the stock bubble started. Then(like any other successful bubble) you need to suck everyone else in.
How do you orchestrate this if you are the Fed? Take away all other investment options.
Investors(especially senior citizens) are desperate for yield. Many of the elderly depend on it. By dropping rates to zero, the Fed has wiped out CD's, money markets, and treasuries as solid yielding investment options.
This essentially forces both the public and fund managers into buying stocks and junk bonds in a desperate chase for yield because the "safe" investments pay them nothing.
Just like the housing bubble: The higher the market goes the more people get sucked in like any other Ponzi scheme.
Eventually, the bubble turns into a euphoria where investors can't get enough until the music stops(which it always does)..
I am not sure if we are into the euphoria stage yet but one thing is for sure: Bubbles never end well.
I find at sad that investors are forced to throw their retirement portfolio into a bipolar market that soars and crashes ever few years.
Just look at the s&p 500 over the past decade or so:
My Take:
Markets aren't supposed to look like this! I believe the rally we have seen in 2009 wouldn't have been nearly as strong if CD rates were at 5% like they have been historically.
Investing in a zero interest rate environment has now changed the whole game. It turns the market essentially into a speculative casino where investors desperately try to find returns.
I bet if you took a poll: 80% would tell you that they hate investing in an environment like this where they are forced to take huge risk in order to find return.
I know it aggrevates the heck out of me.
Who in the hell wants to work all their lives and put their life savings into something that resembles Space Mountain at Disney World? The average person in this country doesn't want to invest in a roller coaster ride that gives them nothing but a couple heart attacks and zero returns when it is all said and done.
The Fed's policies however tell you that they could care less about the average person in this country. It's all about taking care of their Wall St. buddies.
The Bottom Line
I don't know where we are in this bubble but one thing I do know is this:
Buying stocks because there are no other options versus buying them based on valuations is a recipe for disaster.
When was the last time you heard about P/E values on CNBC? Been weeks since I have heard them talk about it. Hell, they probably can't even figure out the real P/E valuations because their is so much crap that's sitting on so many corporate balance sheets that's not being accounted for because of fictitious accounting rules.
God only knows how many worthless bad loans remain valued at 100% on Bank of America's balance sheet.
Don't be fooled folks: Markets that are made ignoring fundamentals eventually end up getting torched.
To be fair and balanced are earnings up? Of course, but look what they are being compared to. The economy virtually stopped from Sept. 2008-March 2009. If you are an average company you should be beating earnings after downsizing and increasing productivity in response to the great recession!
The question is can it be maintained? The answer is No Way Jose IMO.
What's scary is the quarterly earnings are probably going to look good which is going to throw even more investors onto the train we like to call the stock market.
Like any other bubble, this one will blow too and when it does there will be no place to hide because the Fed has used all of it's ammo to create the currentequity bubble.
The way it will blow will be two fold:
- The mark to fantasy game ends and losses are realized.
- Interest rates march higher as the risk of default rises as we continue to play "hide the losses" from the Ponzi finance game that peaked with the housing bubble.
If you are long enjoy the ride but watch out for that cliff that lies straight ahead.
Disclosure: No new positions at the time of publishing
Tuesday, March 30, 2010
Wall Street's "Yield" Obsession Will Not End Well
It was another green day on Wall St as investors continued to gobble up stocks.
I have recently taken a step back to re-evaluate the lunacy that we are witnessing in the stock market. Stocks as we all know have been risin practically everyday despite waves of bad news both here and abroad.
The market basically refuses to to acknowledge the fact that the economy has shown very few signs of improvement. The recovery bet is still on but I think the market is rising for another reason at these lofty levels.
Stocks have gotten way ahead of themselves at this point. even many of the market bulls are beginning to admit this.
IMO, the reason we continue to move higher despite no evidence of a recovery is because stocks and junk bonds are the only investment options left that offer any return. Think about it: Treasuries and CD's offer basically zero return.
As the baby boomers continue to walk away from the workforce, they are becoming increasingly dependent on yields in order to fund their retirement. Fund managers as a result are taking huge bets on junk bonds and stocks in order to produce the yields that investors demand.
The problem with such an investment strategy is it forces muntual fund and retail investors to into things like junk bonds that are overvalued and not fundamentally sound.
Example:
Let's take a look at what happened to (ORNAX) which is a higher yielding "junk" muni bond fund back in 2008 when the market got whacked:
I have recently taken a step back to re-evaluate the lunacy that we are witnessing in the stock market. Stocks as we all know have been risin practically everyday despite waves of bad news both here and abroad.
The market basically refuses to to acknowledge the fact that the economy has shown very few signs of improvement. The recovery bet is still on but I think the market is rising for another reason at these lofty levels.
Stocks have gotten way ahead of themselves at this point. even many of the market bulls are beginning to admit this.
IMO, the reason we continue to move higher despite no evidence of a recovery is because stocks and junk bonds are the only investment options left that offer any return. Think about it: Treasuries and CD's offer basically zero return.
As the baby boomers continue to walk away from the workforce, they are becoming increasingly dependent on yields in order to fund their retirement. Fund managers as a result are taking huge bets on junk bonds and stocks in order to produce the yields that investors demand.
The problem with such an investment strategy is it forces muntual fund and retail investors to into things like junk bonds that are overvalued and not fundamentally sound.
Example:
Let's take a look at what happened to (ORNAX) which is a higher yielding "junk" muni bond fund back in 2008 when the market got whacked:
My Take:
As you can see above, these higher yield funds perform well as long as the credit spreads don't blow out as a result of a loss of confidence in it's holdings.
Right now only 6% of ORNAX's holdings are rated AAA, and only 17% are rated A or higher. The of rest it's holdings for the most part are BBB and lower or in other words "junk".
When the market is rallying and the Fed is pumping money into the stock and credit markets markets these funds are OK to hold. If you grabbed junk bonds in 2009 they have been very good to you because the spreads on debt have been coming in.
The problem here is since we have no "mark to market" accounting, we don't have any real price discovery as to how much these assets are really worth.
This is extremely dangerous for anyone holding these investments because the risk of holding such "garbage" assets is not being appropriately priced into these holdings. As a result, you are basically holding a pile of "dog doo" in return for a high single digit yield.
What you need to ask yourself is what happens to this garbage when the fundamentals once again get priced back into the markets? Umm, just take a look above and you have your answer. (ORNAX) dropped from about $13 down to %5 in a matter of months.
So much for that more "secure" high yield bond investment.
The Bottom Line
What we are witnessing right now in the markets is a "flight to junk" versus safety in order to find the yields that are no longer available in treasuries and CD's.
As a result, stocks and bonds are both rallying because there is no other place to put your money that returns a decent yield. As a result, both have become ridiculously over valued.
The P/E ratios on stocks have now soared to over 100-1 in many areas of the S&P 500 which is worse than the tech bubble back in 1999!
This type of investing will end in tears because eventually the fundamentals ALWAYS matter. Make sure you take a look at your financial statements to see if you have been thrown into junk yielding investments by your financial advisor and make adjustments accordingly.
The stock market is insanely overvalued right now and mutual funds currently only hold only about 3-1/2% of their assets in cash. The last time we saw such low cash holdings was 2007 and we all know what happened after that.
IMO, you must be very risk averse after a 60% rally in the markets. I am in the process of tweaking some of my bond portfolios that included a few high yielding instruments.
Preservation of capital should be a high priority of any investment portfolio right now until we see more evidence of an improving economy. This should include a high percentage of treasuries, CD's, and money market funds.
Remember: Getting paid 6% holding a high yield junk fund doesn't look so hot when it drops 70% in value!
The same could be said for holding stocks that are rising as a result of being chased by a bunch of "bubble headed" mutual funds that are desperately searching for yields in order to satisfy investors.
It's time to "get out" when investors are buying stocks for no fundamental reasons whatsoever. You want to own stocks when investors are buying them based on the belief that their potential for growing earnings looks promising. One look at the economy should tell you that the chances of this are slim to none right now.
Most of the earnings growth we have seen has been a result of inventory builds and "Hocus Pocus" accounting.
Any positive earnings seen in the financial sector are the biggest joke of all. Right now they basically don't have to report any of their real losses because the accounting rules are allowing them to hold obvious "distressed" assets at full value. The whole earnings game in this sector is nothing but a sham.
Be careful out there folks. Don't be the retail investor left holding the bag when Wall St decides to hit the SELL button when this game of "hide the sausage" is over.
Disclosure: Currently bond holdings include (PTTRX) (JENSX) (JAHYX).
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