Five Reasons to Avoid the Gold Rush (updated)
by ilene - September 9th, 2009 12:24 pm
Here’s a follow up video on American Express and an updated article on gold by Vitaliy N. Katsenelson, at Contrarian Edge. - Ilene
Vitaliy: I was on BNN-TV, a Canadian version of CNBC, discussing my take on American Express – a good company but not a good (fairly valued at the most) stock (click here to watch). Gold just ran through a $1,000 mark. I’ve been getting emails asking me if my thoughts on gold have changed, they have not. Here is an updated article I wrote a few months ago.
Five Reasons to Avoid the Gold Rush (updated)
The reasons why one should sell the cat, pawn the mother-in-law, and use the proceeds to buy gold are well known: the Fed is printing money faster than you can read this, which will result in inflation; the government is borrowing like a drunken monkey, so the dollar will be devalued; this will debase all currencies, so the only thing that will save you is the shiny metal.
However, here are some arguments why one should think twice before jumping in bed with gold bugs, or at least remain sober while determining gold’s weight in the portfolio .
1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enrons, Lehmans, Citigroups, etc. that either went bankrupt or got near it? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unanalyzable) and diversify – don’t put your all net worth into one stock.
2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps…
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Is there any upside in American Express?
by ilene - September 4th, 2009 4:40 pm
Is there any upside in American Express?
Courtesy of Vitaliy N. Katsenelson at Contrarian Edge
Financial stocks had a huge run up from their bottom. Many have doubled and tripled, but are they still cheap?
It’s almost impossible to value big financial institutions like Citigroup (C), Bank of America (BAC), or Goldman Sachs (GS) — they’re a lot like hot dogs — you don’t really know what’s inside of them; for the most part, they’re leveraged hedge funds.
They may appear to be cheap on a price-to-book basis, but the book is an illusive concept when it comes to financial stocks, especially when leverage, a deteriorating economy, and accounting assumptions may transform the book into a pamphlet in a New York second.
There are very few financial companies that one can actually analyze and thus value — American Express (AXP) is one of them, and I believe it’s a great proxy for other financial stocks. American Express’s financials are transparent, thus you can make some fairly reasonable assumptions of its normalized credit losses (net write-offs), borrowing costs, fixed costs, etc… and come up with a ballpark earnings power.
In 2007, American Express earned $3.26, however, at the time, its net write-offs of its credit-card portfolio were hovering at an all-time low of 3.3%.
American Express was benefiting from the temporary impact of a new bankruptcy law passed in 2005 (people rushed to file for bankruptcy before the stricter law went into effect, which lead to lower bankruptcy filings in 2006 and 2007), in addition to easy access of credit through home equity loans, low unemployment, and expanding economy.
The 3.3% net write-offs are not coming back anytime soon, so $3.26 of earnings (which implies a price-to-earnings ratio of 10 at today’s price) is a number we can dream and fantasize about, but won’t see for a long, long time.
Fast-forward to today: American Express’s losses almost tripled, approaching 10% (though this number is a bit exaggerated by American Express proactively cutting available credit to its customers). Wall Street expects the company to earn $1 per share in 2009. However, similar to $3.26 earnings per share, this number is not really meaningful either — bad times, as good times, will not persist forever.
To figure out American Express’s normalized earnings power, you need to make an assumption of its normalized net write-offs, among other assumptions (borrowing costs, new level…
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Capital One Chargeoffs Rise To 9.4%
by ilene - June 15th, 2009 3:24 pm
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Capital One Chargeoffs Rise To 9.4%; American Express Chargeoffs 10%; Card Issuance Drops 50%
Courtesy of Mish
Please consider Capital One Card Write-Offs Advance to 9.4 Percent.
Capital One Financial Corp., the Virginia credit-card lender that’s returning federal bailout money, said uncollectible U.S. card loans rose in May.
Capital One wrote off 9.41 percent of U.S. card loans on an annualized basis, compared with 8.56 percent reported for April, the McLean-based bank said today in a federal filing. Loans 30 days or more overdue declined to 4.9 percent from 5.04 percent.
Charge-offs for international loans advanced to 9.77 percent from 8.91 percent, and auto finance climbed to 3.62 percent from 3.46 percent.
American Express Card Write-Offs 10 Percent
Bloomberg is reporting American Express Posts Card Write-Offs at 10 Percent.
American Express Co., the largest U.S. credit-card company by purchases, said uncollectible loans declined in May, aided by the sale of consumer debts written off in previous months.
American Express wrote off 10 percent of managed U.S. card loans, compared with 10.1 percent for April, the New York-based company said today in a federal filing. The decline reflects proceeds from selling bad loans that were already charged off, the filing said.
Loans 30 days or more overdue at American Express declined to 4.7 percent from 4.9 percent in April, while at Capital One, based in McLean, Virginia, late payments fell to 4.9 percent from 5.04 percent. Capital One estimated its charge-off rate was understated by half a percentage point, citing a surge in the number of bankruptcies that delayed processing of that data.
Banks Reduce Credit Card Mailings
Looking ahead expect these numbers to get much worse. Odds are unemployment continues to rise for a year or longer after the end of the recession is announced. And with each uptick in unemployment chargeoffs will increase.
Is it any wonder Banks Reduce Credit Card Mailings?
A major shift in the kinds of direct mail that banks send out occurred last quarter, according to Mintel Comperemedia, a firm that tracks direct mail advertising.
Overwhelmed by delinquent
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.