Market Musings on a Monday
Posted by Larry Doyle on January 12, 2009 10:05 PM |
With so many cross-currents in our economy and markets, it is little wonder that people feel overwhelmed and disoriented. The powers-that-be in Washington are in a period of transition with plenty of backroom dealing going on from both a political and economic standpoint. The financial markets remain challenged from a liquidity and valuation standpoint. Against these backdrops, I hope readers are becoming more comfortable with my analysis of the economy, the markets, and the world of finance at large. Let’s dive into the issues and topics I find most compelling.
Earnings and Outlooks
On the equity front, the bottom line — that being earnings — is ultimately what drives prices. Time and time again we will hear analysts and money managers “talk their positions.” These individuals are either blinded by the big picture or talking the party line. In our piece on January 8th, “Time, Why You Punish Me?” I stated that “earnings expectations truly concern me.”
Fast forward to today and we see that Citigroup is leaking information into the market that their Q4 2008 earnings will be significantly worse than expected. Initially, Citi’s Q4 2008 earnings (why do we still use that term? They have not made money in so long. Wouldn’t it be better to merely call them losses and save ourselves the headache?) were expected to be -$4 billion. Citi is now leaking to the market that earnings will more likely be -$6 billion and that is only because they are recognizing a gain of $4 billion on the sale of a German retail banking business. Thus, ex that sale, Citi had a $10 billion operating loss for the Q4 2008.
Also in regard to Citi, it was no surprise to me that they were the one banking institution publicly supporting the principal reduction program known as a “Mortgage Cram Down” (highlighted on December 23rd, “Everything’s Negotiable“, and January 1st, “What’s a Mortgage Cram-Down?”)
Why am I not surprised? Simply because it is now plainly evident that government authorities (you know Tim Geithner is involved) are very likely heavily involved in managing this organization. I think there is a strong possibility that after a variety of Citi’s divisions are sold the balance of the institution is nationalized. We will watch this very closely.
Under the heading “misery loves company,” Citi’s banking analyst indicated today that Bank of America’s earnings will be moved down considerably for Q4 2008 and get this, the BofA dividend will be cut from .32 to .05 !!! OUCH!!!
I have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.
“Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic?
We typically do not see companies, analysts, or the general business media provide truly aggressive insights into earnings. I give singular credit to Mark Gongloff in today’s WSJ‘s “Ahead Of The Tape.” He writes, “we have seen earnings expectations from analysts generally overly optimistic.” Furthermore, Gongloff quotes Alan Ruskin of RBS Greenwich Capital in stating, “equity analysts tend to be too bullish about the economy.”
Alcoa’s earnings were just released and came in at -.28 versus an expectation of -.05. More of the same.
I am not stating that analysts are intentionally misleading investors, but based on my history and experience I merely think they need to “get their eyes checked.”
People and Information
From my perspective, all business ultimately is about the people and the information. Even in those industries dealing with hard products and commodities, you typically have a choice of people with whom to deal. In the world of Wall Street and finance it is ALL about the people and information. Given the speed with which information travels and markets react, everybody always wants to get the first call.
Against this backdrop, Bernie Madoff remains out on increased bail despite the protestations of victims of his scam and the public at large. The prosecutor tried to have his bail revoked after Bernie tried to send some family jewels and heirlooms overseas. The judge today increased Bernie’s bail but allowed him to remain under house arrest because he does not believe Bernie is a danger to the public or a flight risk.
What does the prosecutor truly want from Bernie? People and information. Who knew what, when did they know it, and what did they do with it? While approximately $40 billion in losses from this Ponzi scheme has already been acknowledged and recorded, the prosecutor still has not yet set a court date for dealing with Bernie. I think there are potentially more fish in this net. I would not be surprised if Bernie both placed and received money in dealing with other hedge funds. What a tangled web he wove. I have a close eye on this story.
I recently saw a survey in which upwards of 70% of responders felt that their financial planner or broker provided poor service in 2008. I am not defending these advisors, but when firms are going out of business and analysts are overly optimistic, the advisors likely feel as if they have been fed to the wolves. Regrettably, there are never enough good people providing outstanding long term service through well developed relationships. I always believed when business is good, stay close to your customers. When business is bad, stay closer to your customers!!
One constant complaint about the financial services industry is a lack of transparency. Whether it is the total lack of transparency in the hedge fund space, specifically with Bernie Madoff, or the perceived lack of transparency with the government bailouts, the public distrust has never been higher.
Specifically in regard to the transparency with the Federal bailouts, I thought you may find it beneficial to see exactly where funds have been committed and already allocated.
Also on the people front, we heard from my special guest last evening about the need for finding a truly honest insurance broker and financial planner and making them earn your business. For those who missed it, Sean D’Arcy was enlightening in addressing the following:
1. current regulation and risks within the insurance industry versus 20 years ago…the need to get rating agency reports from your broker…DO NOT BLINDLY BUY INSURANCE
2. the differences between a mutual company and a stock company….as a holder of insurance you are taking the credit risk of your provider. You will want to know the difference in risks and how they impact you.
3. the difference in term insurance versus whole life versus guaranteed premium universal life.
4. on the personal finance front, how should people handle their 529 plans…
5. how should people best position their assets to generate maximum financial aid for a college student…
6. what insurance product can a person purchase if they have $1000 or so to invest…
Remember, it’s all about the people and the information.