The ongoing financial turmoil and financial discussion thread

[MoneyGuy]

I think a lot of you guys will still be analyzing this thing after the recovery has started. A few years from now you'll be banging your head on the wall muttering, "damn, damn, damn." Remember, based on history (which some of you aren't giving much cred right now) in the first 40 days of the recovery you'll get a bounce up that is 33% of what you "lost" in the bear market.

As for the spring-loaded comment, there are astounding amounts of cash just sitting on the sidelines right now twiddling its thumbs, and waiting. Just the enormous pension plans alone.... At a point like this, it doesn't take much and then it goes.

[Phanuthier]

I guess I had another Q for your MG, does the entire market move as a whole, or do you see some sectors (i.e. tech) following?

I've been on the side lines for tech stocks because to me, it seems like tech stocks have just started taking the hit the past month (job loss, bad earnings report, etc)

[Bobblehead]

I'm not convinced that any recovery will be springloaded.

There are companies out there that have financing that will need to be renewed. I can't see credit being near as easy to come by as it was when these firms initially got financing, so who knows what will happen.

For instance, XM/Sirius; they have $1 Billion dollars in financing coming up for renewal in a couple years. Unless they have a pretty darn solid business plan I think they may have trouble getting that money. How many other firms are going to need to attempt the same thing and how it works out for them is an unknown. The investment banks that remain are going to be picky, both by necessity and because with fewer lending venues, they can be picky. I just can't see the credit being relaxed enough to allow a spring loaded recovery.

I can see markets being fairly volatile for a while and trending back up, but I don't think in the future we will be able to look back and see a single spike that represents "the recovery".

[tvp2003]

So, for the novice investor, how specific should he or she be getting with respect to choosing what to invest in? Sector specific? Stock specific? Mutual fund specific? It's becoming more and more apparent that some companies and/or industries will make it whereas others won't (or at the very least, some are in better shape than others) -- what does that mean for diversification?

[RougeUnderoos]

Originally Posted by corporatejay

Do people really think that it's worth it for the CEO of a major corporation to hop on a southwest flight to DC? Their time is pretty valuable, they can't hold a meeting or talk about strategy or do business on a southwest flight, or waiting in line for security. I get it, it looks awful, but come on.

Judging by performance, everyone is probably better off if these guys use their "valuable time" on the golf course, and don't talk about strategy while they are there.

This is like showing up to the welfare office in a limousine. It not only looks awful, it is awful. It's just plain old stupid.

[Claeren]

EXCELLENT article about how comparative currency value/solvency is (and will continue to be) driving the stock market valuations:

http://www.minyanville.com/articles/.../index/a/20123

[...]

Secondly, stock prices are being driven more and more by currency movements. Why is this? As governments take on more and more risk, as they price more and more assets for the market, and as they transfer debt from private to public, the common denominator, or release valve, becomes the currency.

When a government that can create its own money becomes insolvent, it is manifest in a a much lower currency. Ironically it is manifest in a higher currency in the first stages as debt is destroyed. But as government take on more and more assets financed by printed dollars it becomes weaker. We are seeing that struggle play out each day. When the dollar goes up due to deflationary pressures, stocks go down. When the government replaces debt with its own by printing currency and takes the risk as it did with the Citigroup (C) bailout (a huge amount for one company), the amount of dollars printed to finance the bailout causes the dollar to drop and stocks to go up.

[...]

Claeren.

[dustygoon]

Originally Posted by Bobblehead

I'm not convinced that any recovery will be springloaded.

There are companies out there that have financing that will need to be renewed. I can't see credit being near as easy to come by as it was when these firms initially got financing, so who knows what will happen.

For instance, XM/Sirius; they have $1 Billion dollars in financing coming up for renewal in a couple years. Unless they have a pretty darn solid business plan I think they may have trouble getting that money. How many other firms are going to need to attempt the same thing and how it works out for them is an unknown. The investment banks that remain are going to be picky, both by necessity and because with fewer lending venues, they can be picky. I just can't see the credit being relaxed enough to allow a spring loaded recovery.

I can see markets being fairly volatile for a while and trending back up, but I don't think in the future we will be able to look back and see a single spike that represents "the recovery".

Credit markets are a good place to look for signals as they generally give signals that help tell when things begin to improve.

Defaults of US high yield bonds and loans have totaled of $30b par value so far in 2008. Compare that to $160b from 2000-2002 which was not considered to be near as bad a period as what we are facing now. This is early innings.

There will be a time to buy. This is a once in a lifetime opportunity to pick up market leading companies at bombed out prices. I have bough some equities but i have more than hedged those with buying double short ETF's. The stocks I have bought are higher dividend, strong market leader, and strong cash flow. Return on equity is good to look at while P/E ratios are a joke. Equity analysts collectively think S&P500 earnings will grow +7% still in 2009.

History suggests that markets will rally quickly.....when markets bounce back from a recession, 1/3 of gains happen in first 30-40 days. Stock market bottom has averaged to occur 4 months before the economy bottoms. So i guess timing wise, don't wait for GDP to turn positive, but look for some economic indicators looking like they are turning around.

[Phanuthier]

Originally Posted by fotze

In past recessions, have entire countries or some of the worlds largest companies gone bankrupt right at the beginning of it?

Did you have to ask that question on post #666?

[SeeGeeWhy]

Originally Posted by Slava

I see, there is the faulty premise though. There are dozens of very solvent companies today. In fact there are dozens of companies that are valued for less than the cash they hold on their balance sheets, let alone future growth. In other words, if a company has 100 Billion in cash the stock market today values the company at 90 billion....hardly insolvent!

Hey Slava, is there any quick way to make up a list of the companies in this position?

[Bobblehead]

Originally Posted by fotze

In past recessions, have entire countries or some of the worlds largest companies gone bankrupt right at the beginning of it?

I've actually come at your question from a couple of directions, but I just think the answer is no, I don't think that (major) companies have gone bankrupt right at the start.

Now the question is, maybe that is a good thing - perhaps the ones in the most trouble went down first instead of lingering a long, slow death.

Or maybe the Big 3 are the ones who are going to linger. I think the fact is every crisis is different. There is no script on how this one is going to play out. The best we can do is try to look at similar situations in the past and apply all the knowledge we have gained since then, whether it be from the S&L crisis in the late 70s or the Japanese/Asian crisis in the 90s.

I just keep investing a set amount out of my paycheque every couple of weeks. Dollar cost averaging, dollar cost averaging....

[Gozer]

[Nancy]

Originally Posted by fotze

I just decided to direct my 1000 per paycheck into a money market fund (the safest thing I am able to put it in). Enough of this crap. I'm already hugely leveraged in the market, need some cash to balance it out a while. Unless someone can give me a guarantee of something better than 1%, slava?

After the fund manager takes his 2% MER, that leaves you with what, 0.1% return?

[MoneyGuy]

Originally Posted by tvp2003

So, for the novice investor, how specific should he or she be getting with respect to choosing what to invest in? Sector specific? Stock specific? Mutual fund specific? It's becoming more and more apparent that some companies and/or industries will make it whereas others won't (or at the very least, some are in better shape than others) -- what does that mean for diversification?

Novice investor usually means little cash. Buy stocks and you're probably dead. You may hit a home run your first at bat, but I can pretty well guarantee that it'll explode on you. Funds are the best place to start. Call Slava.

Originally Posted by dustygoon

There will be a time to buy. This is a once in a lifetime opportunity to pick up market leading companies at bombed out prices. I have bough some equities but i have more than hedged those with buying double short ETF's. The stocks I have bought are higher dividend, strong market leader, and strong cash flow. Return on equity is good to look at while P/E ratios are a joke. Equity analysts collectively think S&P500 earnings will grow +7% still in 2009.

History suggests that markets will rally quickly.....when markets bounce back from a recession, 1/3 of gains happen in first 30-40 days. Stock market bottom has averaged to occur 4 months before the economy bottoms. So i guess timing wise, don't wait for GDP to turn positive, but look for some economic indicators looking like they are turning around.

I posted these statistics a long time ago in this thread. In the first 40 days of the recovery the market usually recovers a third of the bear-market losses. In the first year, 80 per cent. Stocks tend to move about six months before the economy does. This is because investors make decisions in anticipation of their expectations for the economy. Now I'm thinking economic recovery mid way through 2009, so market recovery should start early in the new year. Also, a big part of the reason for market moves is investor emotion. As the calendar turns and people in the Excited States look forward to a new president, that could be a spark that could start the blaze. That's a good analogy. Sometimes it just takes a small spark to start an inferno.

[Cowboy89]

Originally Posted by fotze

I just decided to direct my 1000 per paycheck into a money market fund (the safest thing I am able to put it in). Enough of this crap. I'm already hugely leveraged in the market, need some cash to balance it out a while. Unless someone can give me a guarantee of something better than 1%, slava?

I'm willing to bet there's some fixed income instruments that can get you better returns than that with a more than acceptable risk profile. In the bond market even A and AA corporates are paying up huge to refinance their debt right now.

[Cowboy89]

Originally Posted by fotze

I'm stuck with the options the work plan provides.

They don't offer a selection of bond funds?

[Slava]

Originally Posted by fotze

In past recessions, have entire countries or some of the worlds largest companies gone bankrupt right at the beginning of it?

Yes, and there are commonly huge bankruptcies and companies failing as you hit bottom. Historically this includes names such as Franklin National, First Penn and of course LTCM.

Originally Posted by SeeGeeWhy

Hey Slava, is there any quick way to make up a list of the companies in this position?

There is not really a quick and easy way to do this. I have to say that just because the cash is higher than the valuation though does not guarantee you returns...it will obviously give that company a competitive advantage however, and should be considered.

Originally Posted by fotze

I just decided to direct my 1000 per paycheck into a money market fund (the safest thing I am able to put it in). Enough of this crap. I'm already hugely leveraged in the market, need some cash to balance it out a while. Unless someone can give me a guarantee of something better than 1%, slava?

I can get you a flat 3.05% if that helps?

[Slava]

Originally Posted by Nancy

After the fund manager takes his 2% MER, that leaves you with what, 0.1% return?

There is no money market fund that has a 2% MER....

[Nancy]

Originally Posted by fotze

I'm stuck with the options the work plan provides.

Check if they pay interest on cash balances and compare that to the MM fund performance. Or go for a GIC if you can.

[Cowboy89]

Originally Posted by Slava

There is not really a quick and easy way to do this. I have to say that just because the cash is higher than the valuation though does not guarantee you returns...it will obviously give that company a competitive advantage however, and should be considered.

A lot of companies in that position have time bombs on the liabilities side and that's precisely why their equity is so out of favor despite a large positive cash position. Also I agree that there's no quick way to evaluate companies with this in mind because it would take an analyst a bit of time in each case to properly deconstruct the timing and nature of the liabilities.

[Slava]

^ I know what you are saying, but that isn't always the case either. Some companies just have a huge cash balance sitting there for expansion or development plans. It is also a case of the markets over correcting and taking down stock prices below where they ought to be.