The ongoing financial turmoil and financial discussion thread

[Claeren]

Originally Posted by Phanuthier

I hear ya Claeren, but at the same time, we're reaching levels where companies are priced far below their net equity (asset - libabil) which seems to mean that you are getting the profits of the business for free, in addition to getting a good deal for an asset. I see it sort of like a pinball machine which is worth $1000 and is bringing you in $20 a month. If right now, its only making $5 a month but in the future, its going to bring you in $20 a month, would you buy the pinball machine for $800?

I think its real tough to try and predict the absolute lows and the absolute highs. I mean, GM, Chrystler and Ford have been dying for years now, the news here isn't anything new; the only thing that will suffer are paper losses IMO and probably to the suppliers or any industry integrated with automobiles. To me, that should deter someone from buying the good fundamental companies at a fair or value price.

I am not saying the entire world is going to melt down either, so I agree to a point that the lower we go the more resistance there is.

That being said I would be careful not to think of the past as the present. ALL of the numbers you look at are past performance. The entire point right now is that all of these companies are leveraged, the companies they buy from and sell to are leveraged, and the end customers of all the finished good and services are leveraged. ALL to the max they can be and ALL soon to be forced to cut back those positions.

Take GE, they have been pumping up their profits with 20-to-1 borrowing. Because they have to reduce that position to 8-to-1(?) going forward they have to say goodbye to virtually all of their profits and a substantial piece of their equity (as it never really existed in the first place.) In GE's case this readjustment will likely enough to bring them to the brink of collapse, in many other cases it will in the very least cause massive layoffs and the such....


Deflation is a slow death. The world powers are doing their best in inflate the economy again but I am not sure after such massive and shocking mismanagement of both government and finance by America inflation does not overshoot into hyperinflation.

Like i said, not matter what happens it is bad at this point and IMO we hit 7300 again before we hit 9000+.


Oh, and the crisis is just starting to hit Canada. Home sales (along with virtually every other retail good) have hit a wall and the reality of that is starting to hit home. Home prices in Calgary down 15% now and dropping faster by the month, car sales off a cliff, furniture sales non-existant, etc etc. Scotiabank showed a few cracks today with their big write down and right on schedule Canada wil start to follow the rest of the worlds path about 18 months behind. AS layoffs mount in America they will start to mount here and prices across the board will deflate. All of the sudden stock fundamentals won't hold at such a firm floor -- which is why deflation is so nasty....



Claeren.

[Phanuthier]

Yeah, 2 stocks I'm watching closely and have been dropping like rocks have been 2 Canadian strongholds, Bank of Nova Scotia and Teck Comico (BNS, TCK). BNS has long been known for conservative operations, and their margins are very good; they have said that they did not invest in bad mortgage debt, but I hear leaks that they might take a hit. They will survive, and there will be a good time for me to buy them, but I'm thinking not yet. As for TCK, they got roasted in their Elk Valley (I believe it is) investment, but their business is almost the foundation of the Canadian business; they're down 95% so at some time, their net equity is 1/9 of their market cap (!!!), and their margins are very strong showing that they are a strong business, minus a few mergers. Are they the natural resources version of AMD, i.e. AMD's acquisition of ATI that sunk them? I dunno... its something I gotta reserach a little more, but by the historical numbers and the actual worth of the company, TCK should be a strong long term investment.

I decided to dip my feet (not alot, 1% of my portfolio ) on Las Vegas / Macau Hotels. In general, I love casino businesses, especially ones with strong franchises that operate in Macau. Low operating expenses, money coming in through the roof and thus profits that go beyond any businesses wildest dreams. As long as these guys don't fold, these franchises should return to its origanal value, which would be 2000% of its current value.

I'm not a fan of GE, I don't see what Buffet see's in them. Either its Buffet being smart investor Buffet, or Buffet being a patriot Buffet, both equally possible. If you ask me, Siemens looks like a more profitable business. I like GE Research over Siemens research which could make it stronger in the future, but Siemens looks to be a more profitable business right now.

7300 is low, very low, and very below its resistance level on the DOW. I don't think it should stay in the 7000's very long, the equity in these businesses alone are worth more then that, forget its profitability. I think we're still seeing alot of hedge funds and options and whatever kicking this thing between 8000-9000; I bought at the end of today, because I saw good companies at fair/value prices, not because I saw fair companies at good prices.

[Slava]

Man there are a lot of things that I want to post about here!

A) The Manulife One issue: This is a short-term problem in my eyes. The LIBOR rate has been dropping and as it continues to get back in line with historical norms things should straighten out. I've seen the red flag forum...I don't think that anything I have to say is going to change minds there, and it would be just throwing mud on my part. You get in the mud with a pig and you both get dirty...only the pig likes it!

B) As far as GE you have to consider that Buffett got a certain deal that the average guy isn't getting there. His money is LIFO....so he's pretty safe.

C) BNS might be one of the more conservative banks when compared to CIBC...but that isn't necessarily saying a whole lot! There have been some questions I've heard about the Mexican operations and the possible losses there for a little while now. They are also on the hook for $400 billion for Teck..so take that for what its worth.

Anyway, I'm not a single stock guy, so this is just conjecture on my part.

[Flames in 07]

This may have been discussed, but what happens to interest rates here in the short and medium term? I gather they go down in the very short term, but I don't understand what happens after that? Does it stay depressed because central banks try to promote activity? Or does it shoot up because the US starts printing $$$?

[Slava]

Originally Posted by Flames in 07

This may have been discussed, but what happens to interest rates here in the short and medium term? I gather they go down in the very short term, but I don't understand what happens after that? Does it stay depressed because central banks try to promote activity? Or does it shoot up because the US starts printing $$$?

In the short term rates will be coming down (by all indications). The medium term is hard to predict at this point (and kind of depends on your definition of medium term).

Over the long term though, rates increase without question. We are historical lows here...so there is really only one way to go over the longer term.

[metallicat]

Can it be expected that at some point in the future, rates will hit double digits again? I realize that is hard to predict, but any indication whatsoever?

[Slava]

Originally Posted by oilers_fan

Can it be expected that at some point in the future, rates will hit double digits again? I realize that is hard to predict, but any indication whatsoever?

I would say no. We are talking longer term here, but realistically a jump to 6-7% from where we are today is a huge jump. That alone will hurt a lot of people who are budgeted tightly at 4-5% though.

[Flames in 07]

ya I guess I was referring to if rates would get up near 8-10 percent. I have floated a mortgage but am quite exposed if it gets up to 10 precent or so.

[T@T]

Originally Posted by Slava

I would say no. We are talking longer term here, but realistically a jump to 6-7% from where we are today is a huge jump. That alone will hurt a lot of people who are budgeted tightly at 4-5% though.

I saw it happen in 80-81, I think rates jumped about 5% in 2 years, I remember the Herald had a page of forecloser sales.

With the size of some Calgary morgages it would spell "doom"

25 year term morgage for 300k at 6% is $1920.00
25 year term morgage for 300k at 11% is $2940.00

I guess there would be a few less "beemers" in the driveways.

[Flames in 07]

ya that's the part I don't get. What spurrs rates up to that level?

[Slava]

Originally Posted by T@T

I saw it happen in 80-81, I think rates jumped about 5% in 2 years, I remember the Herald had a page of forecloser sales.

With the size of some Calgary morgages it would spell "doom"

25 year term morgage for 300k at 6% is $1920.00
25 year term morgage for 300k at 11% is $2940.00

I guess there would be a few less "beemers" in the driveways.

Well I'm just giving my opinion here...its not that I don't recall history. I don't foresee that interest rates will go from 4% to 15-20%.

There is no question that there will be a lot of people hurting if rates go up 5% in a couple of years though.

[Dan02]

Originally Posted by Slava

Well I'm just giving my opinion here...its not that I don't recall history. I don't foresee that interest rates will go from 4% to 15-20%.

There is no question that there will be a lot of people hurting if rates go up 5% in a couple of years though.

i know i would.

[metal_geek]

Not sure why the intrest rates would go up... Someone correct me but I thought lowering rates was used to reduce deflation and increasing rates were used to lower inflation.

Wasn't it Japan that lowered thier rates to 0% trying to stop thier crash but once they hit 0% all their leverage was gone? Isn't the US at 1% now and talking about lowering rates again.

I'm not sure why the rates in 80-81 were so high, was inflation the big problem that caused thoes 18% rates?

[Ronald Pagan]

I'm not sure why the rates in 80-81 were so high, was inflation the big problem that caused thoes 18% rates?

Yup.

Regan ran on a platform that he would kill inflation. He appointed Volcker to the post who went to say in one of his first speeches that we would see the largest interest rate increase since the birth of Christ.

Economic shock therapy.

[T@T]

Originally Posted by metal_geek

Not sure why the intrest rates would go up... Someone correct me but I thought lowering rates was used to reduce deflation and increasing rates were used to lower inflation.

Wasn't it Japan that lowered thier rates to 0% trying to stop thier crash but once they hit 0% all their leverage was gone? Isn't the US at 1% now and talking about lowering rates again.

I'm not sure why the rates in 80-81 were so high, was inflation the big problem that caused thoes 18% rates?

It works a couple of ways.

In a recession the banks get hosed on a lot of loans and get scared to lend money, they basicly refuse to lend unless the earn top dollar, the BOC will then raise the rates to get them lending again.

In 80-81 it was much the same as today, we had a large boom in 77-79 and then the crap hit the fan.

[Nancy]

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[kevman]

Don't look now...TSX down 500 points or 5.9% already...

[Top Shelf]

Oil also touched below 50$...

[Skyceman]

Boy, this is a really tough market to be deeply invested into right now. And here I thought I was getting a bargain back in September. Ouch.

Thankfully, I've found some solace in using options (covered calls). A short term capital gain strategy that can be a decent good way to make a profit even in markets like these. Anyone else tried using options?

[Claeren]

It looks like Citi Group is on the brink:
http://finance.yahoo.com/news/Citigr...-13634423.html


That $5+/share rule for major pension funds is an interesting tidbit I never knew about. GE only needs to fall $8/share to face the same bleak outlook! lol



As for the high interest rate debate, it seems to me one of two things happen (or both!). They lower interest rates to zero (or close to zero as they are now) and watch as the economy STILL slowly contracts year after year in a deadly but slow deflationary cycle. From what I have read, $37 Trillion USD(?) in debt is being supported by <4% in assets and equity (combined, mostly illiquid assets not liquid equity) by the largest 8 or so financial institutions and needs to be destroyed, and debt destruction on that scale is deflationary.

People get caught up in how much new government money is being pumped into the system to create inflation but (as a great article at Minyanville pointed out) people have to accept debt that is being offered for it to be inflationary. Right now banks and such are soaking up that captial but they are not then extending it to customers as cheap debt - or inversely, people do not want any more debt than they already have. Until all of this newly minted money by the US government starts getting taken up interest rates will remain low.

The hyperinflaiton scenario, in my mind, occurs if/when that deflationary cycle has run its course and people start using all of that money to do things other than cover potential losses. Then interest rates have to spike to slow things down and bring balance back to the money supply/market stimulus. It is a lot easier to create new money than it is to destroy it and generally the natural way to do so is to reduce the value of all money (inflation, potentially hyperinflation when you are talking about balancing trillions and trillions of dollars) which results eventually in high interest rates.

But what do I know!?



Claeren.