by ilene - September 28th, 2010 2:19 am
The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.
Editor’s Note: The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.
When we analyze our current crisis, focusing on the past few years of economic activity blinds us to the history and context that are vital to understanding the root cause. What we have been experiencing is not the result of an unforeseen economic crash that appeared out of the blue with the collapse of the housing market. It was certainly not brought on by people who bought homes they couldn’t afford. To frame this crisis around a debate on economic theory misses the point entirely. To even blame it on greedy bankers,…
by ilene - August 30th, 2010 7:20 pm
Courtesy of Chris Pavese
Quick follow up on our Earnings Revisions post from yesterday. In that post, we explained that:
Consensus earnings estimates for 2011 and 2012 are still greater than $95 and $108, respectively, at the same time that GDP estimates are plummeting (although still don’t face the harsh economic reality). To put these figures into perspective, analysts were forecasting a near 20% decline in earnings at the market’s trough. Today, expectations are for 22% growth in the year ahead.
We show an example of this optimism below. Cummins is a global leader in the design, manufacturing and distribution of engines and related technology. The company’s engines are found in a wide range of vehicles and equipment from emergency vehicles to 18-wheelers, berry pickers to 360-ton mining haul trucks. Management has done a tremendous job managing through the crisis. Costs have been cut relentlessly, resulting in a leaner organization with greater operating leverage. The balance sheet is rock solid. Not to mention its image as a ‘safe’ play on the secular growth of emerging market infrastructure development. It’s no wonder the street is in love with the stock.
We have a difficult time arguing any of the points above. Our concern is that the bar is set awfully high just as we stare right into a cyclical slowdown at best and more likely, something much more problematic. Note the company’s historic EBIT margins below. Margins increased from 1.4% at the start of the decade to a peak of 9.4% as the global economy marched straight up through 2006 on the back of the Chinese growth engine fueled by a credit-obsessed American consumer. Then . . . something changed. And something changed quite quickly. As economic growth screeched to a halt in 2008, margins followed, moving in a straight line back to 1.7% in Q3-09. But with ‘a little’ help from the greatest monetary and fiscal stimulus in economic history, orders reappeared and a stream-lined Cummins surprised analysts quarter after quarter, in route to a magical V-Shaped Recovery.
So what’s next? In classic fashion, consensus has basically straight-lined that v-shaped recovery over the next few years, as shown by the last piece of the chart highlighted in red and representing consensus estimates through 2011. Wall Street bulls – of which there…
Morgan Stanley On Why The US Will Not Be Japan, And Why Treasuries Are Extremely Rich (Yet Pitches A 6:1 Hedge In Case Of Error)
by ilene - August 8th, 2010 9:14 pm
Morgan Stanley On Why The US Will Not Be Japan, And Why Treasuries Are Extremely Rich (Yet Pitches A 6:1 Deflation Hedge)
Courtesy of Tyler Durden
We previously presented a piece by SocGen’s Albert Edwards that claimed that there is nothing now but to sit back, relax, and watch as the US becomes another Japan, as asset prices tumble, gripped by the vortex of relentless deflation. Sure enough, the one biggest bear on Treasuries for the past year, Morgan Stanley, is quick to come out with a piece titled: "Are We Turning Japanese, We Don’t Think So." Of course, with the 10 Year trading at the tightest level in years, the 2 Year at record tights, and the firm’s all out bet on curve steepening an outright disaster, the question of just how much credibility the firm has left with clients is debatable.
Below is Jim Caron’s brief overview of why Edwards and all those who see a deflationary tide sweeping the US are wrong. Yet, in what seems a first, Morgan Stanley presents two possible trades for those with access to the CMS and swaption market, in the very off case, that deflation does ultimately win.
Morgan Stanley’s rebuttal of the "Japan is coming" case:
There are many arguments that suggest the US is going the way of Japan, and while UST yield valuations may appear expensive, a regime shift has occurred and we should use the deflation experience of Japan as a guideline. We respect this point of view, and our colleagues in Japan provide some compelling charts.
In Exhibit 3 we show how the richening in the JGB 5y led to a significant flattening of the curve. Ultimately CPI turned negative and Japan did in fact move into a period of deflation. It makes sense for the 5y to outperform, as investors believed in a low rate and inflation regime for an extended period. Most money is managed 5 years and in, which thus makes the 5y point so attractive in low rate regimes because it represents the greatest opportunity for money managers to own duration, yield and return. The same is happening in the US as the 5y point is richening extensively as investors seem to be surrendering to a low rate and low return environment. But this may be premature.
Note that it took ~2-years before the
by ilene - April 16th, 2010 12:33 pm
Courtesy of Zero Hedge
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
by ilene - October 7th, 2009 7:51 pm
Courtesy of Henry Blodget at Clusterstock
More Michael Mauboussin… This time explaining the power of peer pressure to make you think stupid things.
(Specifically, and more alarmingly, the power of what other people think to actually make you PERCEIVE the world differently--even when the "reality" you are perceiving is obviously false.)
Aaron Task, TT: In his latest book, "Think Twice: Harnessing the Power of Counterintuition," Michael Mauboussin, describes the 8 common mistakes investors make.
In the accompanying video, we drill down on one particularly nettlesome problem that even the most sophisticated investors share with junior high students: The powerful influence of peer pressure.
Based on the work of renowned Psychologist Solomon Asch in the 1940s and 1950s, behavioral economists know social pressure can make a person say something they know to be false. A more recent version of the same experiments at Emory University’s fMRI lab reaffirmed the results and showed the group’s answers changed people’s perception right vs. wrong. Even those participants who remained independent had higher activity in the fear center of their brains when bucking the group’s conventional wisdom, Mauboussin notes.
In an world where "everyone" thinks they’re a contrarian investor, the implications are profound…
See Also: The 8 Boneheaded Mistakes Investors Make