Forex Pips – Guide To Profitable Forex Spread Betting Rotating Header Image

Stocks

Avoid Banks Stocks

Jul 7th, 2010
by admin.
No comments yet

Credit risk always seems to come out of nowhere. But usually it comes out of somewhere…like the dirty, little recesses of a bank’s balance sheet – the places where bankers hide all their unrecognized losses.

Ever since the suspension of rigorous mark-to-market accounting rules one year ago, banks have gained the ability to “time” their credit losses. This development does not feel like progress. Banks now possess the ability to defer embedded credit losses for a very long time, in the hopes that a “typical” postwar rebound in house prices and employment comes to fruition. But that’s not happening. In fact, housing and employment conditions are worsening. As a result, the US banking sector has been piling up an enormous stash of unrecognized credit losses.

Banks may be able to play their games of “make-believe” for a while longer, but they cannot get away with completely ignoring their losses, especially when the evidence is overwhelming that these losses are real and irreversible.

Going forward, increased foreclosure activity and mortgage losses will become a growing problem for bank stocks. We could soon see a reacceleration of credit provisioning in the banking sector, which might weigh heavily on bank stocks.

Mark Hanson of M. Hanson Advisors does great work on the details behind the headline foreclosure and housing price statistics – the kind of granular research that’s scarce on Wall Street. Hanson estimates, using data from the Mortgage Bankers Association, that there are 8 million mortgage loans in the “distressed” category, with and estimated 6.4 million headed for liquidation (foreclosure, short sale, or deed-in-lieu). April saw a record 92,500 foreclosures. At that pace, it would take the market over 8 years to work through the estimated foreclosure backlog.

This is much too long if the US housing market is going to return to anything resembling a free market over the next decade. So instead of a continuation of slow foreclosure processing, Hanson believes foreclosure activity will accelerate.

In a recent missive, Hanson writes:

When factoring in April’s 92.5k record Foreclosures (not including short sales), the distressed pool shrank by only 63.1k units… At this pace, it will take 101 months to clear the pool of 6.4 million loans headed for liquidation. At a pace of 180k Foreclosures per month, twice April’s record high, it will take 42 months to clear the existing distressed inventory.

On the bright side, based upon the default and Foreclosure pipe action, which I track in real-time daily in aggregate and on an originator and servicer-specific basis, it seems that over the past few months the banks have regained a mind of their own. Unlike action I tracked as early as January 10 when all the big servicer’s [notice of default] through foreclosure charts looked the same, most have diverged.

In fact, two of the nation’s top four servicers…have opened the flood gates beginning in March. And the GSEs, who led the Foreclosure charge higher beginning in Feb, are in property liquidation mode, which could force all the big GSE servicers to quickly follow suit on their own portfolios – none expected the GSEs to blink first and do not want to get left in the liquidation dust.

Perhaps this is the first sign in almost two years of an efficient default and Foreclosure process poking its head out. Time will tell.

I’ve read Hanson’s updates for years. You won’t find a more thorough, independent (conflict-free) analysis of the foreclosure statistics.

It’s fairly obvious that the backlog of foreclosures has built up like water behind a dam. The feds are trying to control the amount of water flowing through the dam. But it remains to be seen if they can keep controlling it to the degree that they have.

Once the dam gives way, the market may be shocked at how quickly the headline foreclosure numbers accelerate. A saying you often hear in the banking business is: “the first loss is the best loss.” (The same saying will eventually apply when banks as a group rush resolve their zombie commercial real estate mortgages).

Hanson highlights that Fannie Mae and Freddie Mac have recently accelerated their foreclosure activity. So the big banks, which service most of the GSE mortgages, can’t be far behind. If banks become convinced that housing prices will take another dip, they’ll look to liquidate their housing inventory ASAP.

The likelihood of this development argues for continuation of the “deflation,” or risk-averse, trade – basically, short stocks, long Treasuries.

Dan Amoss
for The Daily Reckoning

Avoid Banks Stocks originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Don’t Buy the Stock Market…Buy Stocks

Jun 15th, 2010
by admin.
No comments yet

Special situations look like a particularly good spot to be in these days. Why? I’ll explain below…

But first, it may help to take a minute to explain what a special situation is. It’s actually an old concept. The best definition may be that of the great Ben Graham – famed value investor and mentor to Warren Buffett.

Back in 1946, Graham gave his definition of a special situation. “In the broader sense,” he wrote, “a special situation is one which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance.”

In other words, a special situation is an investment in which some event – or catalyst –promises to make you gains in the stock, even if the overall market goes nowhere. This doesn’t mean special situations are immune to market forces. Of course they aren’t. But as Graham says, in the typical special situation, “the result depends upon corporate developments, and not on market price.” More of your gains are tied to whether or not your catalyst comes through or not. Ideally, as Graham writes, you want to be in a situation where “if your deal works out, you are sure to make a profit, but if it doesn’t, you may still make a profit.”

There are many such opportunities, but they are often difficult to find. I have identified a number of them for the subscribers of my investment service, Mayer’s Special Situations.

A few of these stocks have already delivered gains. Others are still in the wait-and-see phase. AEP Industries (NASDAQ:AEPI), for example, is the target of a large activist shareholder who has proposed that the company put itself up for sale.

Clearly, a sale is not essential to make AEPI a profitable investment. Perhaps management will, as they’ve hinted, buy back lots of stock, instead. The point is that the something out of the ordinary is happening – something that could produce a sizeable profit for shareholders.

Joel Greenblatt, a successful investor who devotes a lot of attention to special situations, wrote a book entitled, You Can Be a Stock Market Genius. This book is like a handbook of special situation investing. “The underlying theme to most of these investment situations is change,” he writes. “Something out of the ordinary course of business is taking place that creates an investment opportunity.”

Again, the list of what those out-of-the-ordinary things are is long – spinoffs, mergers, restructurings, asset sales, distributions and more. “The great thing is,” Greenblatt writes, “there’s always something happening.”

As a result, special situations are a rich vein to mine. We don’t have to cover the whole field. We just have to find one or two a month and we’ll have plenty of ideas, probably more than we need. For me, many of the best special situations reside in out-of-the way stocks that are simply too small for me to recommend to my large base of Capital & Crisis subscribers.

Getting back to Graham, he also makes an interesting historical observation about special situations that I think is relevant to our own market today. In the years 1939-42, the overall market was not so hot. As Graham put it, “During these years, the trend was unfavorable for those owning standard issues [the big blue chips]… By contrast, many bargain industrial stocks scored substantial advances – especially since the early war years brought proportionately greater business improvement to the secondary companies than to the leaders.”

The idea being that if the market is going to be sluggish and the economy tepid – as I think ours will be – then you don’t want to own the elephants or the headline companies. Generally speaking, you don’t want to own the biggest companies, because they are the market. They are most exposed to the economic winds. It is more difficult for a very large company to grow faster than the economy, for instance.

The smaller companies that occupy some niche have less binding them. Doubly so for the special situation that has some future “event” that could unlock value embedded in the stock. Special situations, I like to think, come with their own onboard motors. And that’s why special situation investing is particularly attractive right now.

Chris Mayer
for The Daily Reckoning

Don’t Buy the Stock Market…Buy Stocks originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Buying Stocks at the End of the World

Jun 3rd, 2010
by admin.
No comments yet

Well, they don’t make it easy for you.

Yesterday, the Dow rose 225 points. Enough to keep people guessing. Enough to keep people in the market. Enough to give the ‘recovery’ spotters something to look at and investors something to hope for.

Is the market really headed down…or not?

Most likely, yes…it’s a real bear market. And it will probably continue for years.

And even if it isn’t, it’s probably best to think it is.

Why?

Because most stocks have still not hit their ultimate lows. If you can’t see the bear market’s final lows in your rear view mirror, they must be ahead of you. Remember, the broad pattern of the stock market is from an epic high to an epic low…with years of up and down movement in between.

When you buy stocks in the middle of the market’s pattern…when they’re not cheap…you’re completely at the market’s mercy. If it goes up, you do all right. If it goes down, you lose money.

Since we don’t know what direction the market is going, we’ll just wait until stocks are cheap. Then, we won’t have to worry about which direction the market takes.

Besides, if we don’t know which direction the market is going, we have to assume that there are even odds it will go down or up. Even odds aren’t good enough for us. We don’t want a level playing field. We want a playing field tipped in our direction. We don’t want an honest card game; we want a deck we stacked ourselves.

Which would you prefer, dear reader: to make a dollar…or not lose one? If the odds are even, it assumes one is as a good as the other. But they’re not. If you hold onto a dollar, you keep 100% of it. If you make a dollar, on the other hand, you pay taxes on it. After tax, it could end up being worth only 50 cents. That means you’d have to believe a bull market was twice as likely as a bear market before you should invest.

Do you think that? We don’t. We think this market is more likely to go down than up. By our reckoning, the bear market began in January 2000. The feds fought it with every weapon in their arsenal. Monetary policy. Fiscal policy. Booby traps. Propaganda. Scorched earth. Everything. And the market responded…for a while. Greenspan’s ‘emergency’ low interest rates caused a huge bubble. Stocks rebounded.

And then the bubble blew up.

The Dow fell below 7,000 in March 2009. This time, the feds brought out another, even more powerful weapon. They blasted away with “quantitative easing” – adding .2 trillion directly to the Fed’s reserves. And once again, the market bounced…until about a year later, when the quantitative easing program came to an end.

You can fight a downturn. You can hold off a bear market – for a while. You can distort a correction – making it much more twisted and nasty. But you can’t stop it. One way or another, mistakes will have to be reckoned with. Markets will eventually discover what things are really worth. And in a real downturn, they’ll always discover that they are worth less than people thought.

History shows that after a peak is reached, stock prices will keep falling until they become bargains again. So, if you knew that a stock would eventually sell for less, why buy now? Why not wait? What’s the hurry?

The reason given for yesterday’s big bounce was a pleasant report from the housing market. More houses are being sold, said the news.

Does that get you excited, dear reader? It doesn’t do anything for us.

Another report tells us that inventories of unsold houses are still building up.

Meanwhile, The New York Times reports that there is a crisis brewing in student loans. We didn’t have to read the article. Students get out of school. They can’t find a job. How do you expect them to pay back their loans?

A report in the local paper tells us that more students than ever are enrolling in community college.

Overall, the economic reports are broadly encouraging…but still consistent with our Great Correction hypothesis. This is NOT a normal recovery. Nor is it the end of the world.

Our strategy is to wait ’til the end of the world comes; then, we’ll buy stocks.

Bill Bonner
for The Daily Reckoning

Buying Stocks at the End of the World originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold

Some Oil Stocks Are Oversold

Jun 2nd, 2010
by admin.
No comments yet

Sweaty hand-wringing over US stocks continues. The S&P fell another 1% and change yesterday.

Of course, leading the market down, yet again, was everyone’s favorite oil stock British Petroleum (BP). Indeed, uncertainty is the order of the day…how big is the spill, when will it be capped, how much will it cost? The company said yesterday it has already spent billion on cleanup.

What about legal issues? There are already 26,000 claims against BP on the docket, including 150 lawsuits.

Add to that, the US attorney general announced his own civil and criminal investigations into the spill. That announcement, along with the weekend failure of “top kill,” bumped BP shares down 15% yesterday.

Since the spill, BP has seen its market cap chopped by billion – one-third of its market value.

President Obama also announced a moratorium on all deep-water drilling projects. The ban, as you might imagine, is not only a dollar short and a day late…but also bad policy.

“Let’s look at the immediate impact on the Gulf of Mexico energy industry,” our energy expert Byron King suggests, “Every drilling project costs in the range of 0,000- million per day. Close down dozens of these projects all at once, and you’ll witness an instant drought of funds in the energy economy. Indeed, it’s an overnight drilling depression.

“That day rate and other overhead cost for a drilling project are not just ‘Monopoly money.’ Each drilling project supplies direct employment to several hundred workers and technical staff, as well as indirect employment to hundreds more in the service industries…

“I expect that we’ll see a slew of players – operators, drilling contractors, service companies and vendors – declaring force majeure in the coming weeks. Some firms will attempt to get out of burdensome clauses that require them to perform and/or pay, during a time when no one can work due to the government moratorium. Typically, however, the drilling contracts provide contractors some protection. It’ll create work for the lawyers – at least the ones who aren’t already busy suing BP.

“It’s plenty bad that the fishing and tourism economy of the Gulf region is hurting because of the BP oil spill. There are entire arcs of personal hardship just from that alone.

“Now we can watch, over the coming weeks and months, as energy workers lose their jobs. This includes engineers who make 0,000 per year, rig workers who take home ,000, all the way down to dockworkers making per hour loading sacks of cement on flat-back boats. Oh, and the boat owners? They may not make their payments to the bank, either.”

BP is not alone. Transocean, Halliburton and Cameron – each linked to the disaster – fell double digits yesterday. But it didn’t stop there. Offshore drillers with no stake in Deepwater Horizon are getting pummeled, too. The herd fears the moratorium will become politically popular…and, therefore, permanent.

At the end of the day, the sell-off creates a buying opportunity. Oil stocks and oil service stocks are now “way oversold,” maintains Mr. King. “Unless, that is, people are going to give up using oil.”

Addison Wiggin
for The Daily Reckoning

Some Oil Stocks Are Oversold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


Daily Reckoning
gold