On any given day the worst sectors may underperform the broader market by 50 or 60 basis points. Today, materials and energy underperformed the broader market by roughly 450 basis points. If you have a good argument for why this happened I'd love to hear it.
A market correction is defined as a 10% drop. We haven't had a correction in any of the major indices for quite some time, but we are close right now.
At a decline of 8.31% we are 1 or 2 down days away from a correction. As a point of reference, a 20% decline is a bear market. Naturally along with the correction comes enhanced volatility. I've got a running bet with 3 to 1 odds that we'll hit 35 before the year is out. What do you think?
I think I told someone the other day that as sick as it sounds, buying Google now, even at $700 would probably look smart in 5 years. I won't back down from that statement, but I will say that buying Google on the dips is probably the best way to scoop up shares. If you look at the graph below I think you can make a strong argument that buying Google when it is within 5% of its 200 day exponential moving average is a safe bet. Even after the after market action today that left google at 627 the shares are still 16.5% above their 200 day EMA. In other words, you may want to wait another 50-60 points or so before you dive in.
Bill Miller's market commentary is a must read for investors looking for perspective on market events. You can read his commentary at the lmcm website. Bill gives a great synopsis of the current market environment and then follows it with his value equity commentary:
One of the enduring features of the findings in behavioral psychology as it applies to finance, a subject I have discussed many times over the years, is the almost complete inability of those who are aware of them to actually apply them. You can attend Richard Zeckhauser’s seminars at Harvard, read lots of articles and case studies, be reminded of how recency bias, or anchoring, or the representative fallacy, or myopic loss aversion impair clear thinking and skew decision making, and still fall prey to them and others of their ilk the moment you are confronted with real world situations.So what do you think, is it time to start buying Citigroup and housing stocks?
The recent precipitous decline in financial stocks, especially those related to housing, which sent Countrywide Financial (CFC) to $12 last week, and led to 20 to 30% drops in financial guarantors in a day or so—after they had already dropped between 25 and 50% this year—is a case in point. After falling 20% in only a few days on no news, and this after being down 50% for the year, CFC rallied over 30% in one day once they reported their results and indicated they would be profitable for the 4th quarter and expect to earn a reasonable return on equity of 10-15% for all of 2008. The price action on both sides was driven by emotion – first fear, then relief – and was hardly the result of a careful analysis of Countrywide’s long term business value. That, by the way, we think is in the $40’s compared to its current price of about $14-15.
This is not unusual. Warren Buffett has often noted how any knowledgeable analyst would have pegged the value of the Washington Post at about 5x what it traded at in the 1974 bear market, yet no one wanted it at that price. The 2002 bear market saw some similarly amazing prices. AES traded under $1. It will generate over $1 of free cash flow this year and is up 20 times from the lows of 2002. Yet fear set its price, as it did those of Nextel, Tyco, Corning, Amazon, and a host of other companies at that time.
Today fear dominates the pricing of housing stocks, of mortgage related securities, of financials, and of many consumer stocks. Confidence and optimism underlay the pricing of energy, materials, industrials, and non-US stocks, especially those of emerging markets, and China in particular.
I am reminded once again of the quote that sits in the front of Ben Graham’s Security Analysis, from Horace’s Ars Poetica: “Many shall be restored that now are fallen and many shall fall that now are in honor.” (The quote does not say “all” by the way, just “many”).
Some market analysts are now expecting bank and brokerage writedowns to increase to between $100 and $500 billion, mostly due to the decline in value of Level 3 assets. Most of these writedowns will come as a result of a new FASB rule limiting the ability of companies to avoid valuing hard to value assets. According to the FASB terminology:
Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced.Considering the sheer volume of Level 3 assets that most of the major US banks hold on their balance sheets and in off balance sheet entities, it seems shareholders would be very concerned about the degree to which banks can manipulate the value of those assets by changing their own assumptions. When banks finally reveal that those assets are truly as worthless as many of us assume, they will take even larger write-downs:
U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank's chief credit strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15.
``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' Janjuah said. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark- to-make believe.''
Wall Street's biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley, the second-biggest U.S. securities firm, has 251 percent of its equity in Level 3 assets, making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah.
The credit crunch is not over yet, and the worst may still be in front of us. If Wall Street is hurting this bad you have to imagine that we should see some more hedge fund blowups in the coming weeks. Hedge funds can hold off on valuing their assets longer, but eventually they will have to pay the piper.Hat Tip: Bloomberg
Greg Mankiw writes: "Hedge fund manager Mark Sellers tells Harvard business students the secrets to success as an investor. An excerpt:As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer. Look at Buffett; he's one of the best writers ever in the business world. It's not a coincidence that he's also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly."
Okay, so today's news about Google's entrance into the telecommunications world has been rumored for months if not years. But, today's announcement was still real news and represented what for many was a significant departure from the announcement they were expecting. Many thought Google would announce a GPhone, not unlike what you see to the right. What they got was an alliance of 33 companies attempting to rewrite the rules of the cell phone world. I won't get you my first impression here. Rather, I will shower you with links. It is a cop out, but I really can't do this story justice. If you read this in order it is better:
1) Andy Rubin: The Man Behind the Google Phone
2) Google Phone CrunchedThe Google Phone — which, according to several reports, will be made by Google partners and will be available by the middle of 2008 — is likely to provide a stark contrast to the approaches of both Apple and Microsoft to the growing market for smartphones. Google, according to several people with direct knowledge of its efforts, will give away its software to hand-set makers and then use the Google Phone’s openness as an invitation for software developers and content distributors to design applications for it.
If the effort succeeds, it will be the most drastic challenge to date of the assertion by Microsoft — the godfather of the desktop PC — that Google and other members of the so-called open-source world can imitate but not innovate.
Reports started trickling out last week that Google is ready to announce its Gphone, or rather Gphones. It is more a reference design, than a single phone. Android-based phones will start to come out on the market in the latter half of 2008 (from HTC at minimum). One mobile startup CEO I know says he was contacted on Friday by Google and given the final go-ahead to port his app onto Android, which his company has not even started to work on yet. The software development kit will be available on November 12. Today’s announcement is just that. There is nothing concrete here in terms of products or services, but going mobile represents a major growth opportunity for Google, which wants to bring the Internet (along with search and contextual ads) to your phone.3) Bloomberged
Spending on mobile-phone ads may jump to $11.4 billion worldwide by 2011 from $2.17 billion today, according to Informa Plc, a London-based research firm. Google, in Mountain View, California, gets 99 percent of its more than $10 billion in annual sales from advertising, mostly by selling text links next to search results on its own pages and partner sites.
Google shares passed $700 last week, gaining $100 in less than a month, on speculation the company would extend its lead in Internet advertising into wireless devices. Gene Munster, an analyst at Minneapolis-based Piper Jaffray & Co., predicted as early as August that Google was developing software to run mobile phones.
4) WSJ
Android is a bid to change how the wireless industry operates. Carriers traditionally have decided what applications most consumers see on their cellphones, setting rules and negotiating fees for software developers to gain access. Google has struggled at times in recent years to get its products -- including Google Maps, Gmail email and its search engine -- onto mobile phones in a way that's easy for people to use. With Android, software makers can theoretically write applications that run on any user's phone -- and consumers can freely browse the Web.
As discussed last week, it appears the RMB is poised to appreciate rapidly. This is from China financial markets:
According to a Bloomberg article today, the RMB was up 0.56% last week, reaching 7.456 to the dollar. This may not sound like a lot if you trade dollar/euro, but it is easily the biggest one-week jump in the US dollar value of the currency since it was suddenly revalued by 2.1% in July, 2005. According to a Bloomberg article, RMB forward contracts imply a price of 7.38 by the end of this year and 7.25 by the end of the first quarter. The article did not list the contract expiration date or a more precise RMB value, so my calculations may be slightly off, but this implies a 6.4% annual appreciation between now and the end of the year and a 7.0% annual appreciation between now and the end of 2008’s first quarter. Implied annual appreciation during the first quarter of 2008 is 7.3%.
Two reasons are generally given for the increase in appreciation rate, and both probably are true. The first, and more cynical, reason is that there will be a meeting later this month between Chinese finance officials and their European counterparts, along with a meeting between France’s President Sarkozy and President Hu, and everyone expects the currency to be a very important topic of these meetings. As they often do before such discussions, the Chinese authorities may be allowing the currency to appreciate to help deflect some of the expected anger. One of the claims much beloved of journalists and China-watchers is that foreign pressure on Chinese authorities is almost always counterproductive, a claim about which I am extremely skeptical.
The second reason for the more rapid rise in the currency is that the inflation scare is ringing serious alarm bells in Zhongnanhai (the leadership compound), even while publicly the authorities still insist that inflation is a one-off temporary food thing. Given the anxiety, it is striking to me that fuel prices were raised by nearly 10% last week and that there are rumors that other controlled prices may also rise. This can’t help but feed into inflationary expectations. I think the only thing that can easily explain the timing of such rises must be that the costs of the subsidies must be higher than the authorities are willing to support, although perhaps there is also a sense that they should get all the bad news out of the way as quickly as possible.
If market assumptions are correct and the RMB does begin to appreciate at 7.3%, with bank deposits yielding 3.8% you can earn 11.4% in US dollars if you can smuggle money into China and deposit it in a bank. Even the most intrepid of my hedge fund friends in New York wouldn’t sniff at those kinds of returns, especially since the biggest risk is upside risk – a sudden maxi-revaluation. There’s the problem – an obvious danger of speeding up the appreciation rate is that it might set off another wave of speculative inflows, thus pushing monetary conditions even more out of whack. Poor PBoC – dammed if they do, damned if they don’t.
