December 11, 2023

Newspapers Reveal Secrets To Wealth Accumulation

Today’s horrendous economic news on Singapore would seem to suggest that now is a poor time to be considering the purchase of foreign stocks.

Singapore GDP Posts Biggest Fall On Record

SINGAPORE — Singapore plunged deeper into recession in the fourth quarter as gross domestic product marked its biggest quarterly decline on record, said the government, which lowered its projection for 2009.

The darker outlook for the small, trade-dependent economy — considered to be a bellwether for the rest of the region — likely means the government will step up spending to offset a slowdown in manufacturing and a rapid cooling in the construction and services sectors.

Singapore’s economy contracted at a seasonally adjusted, annualized pace of 12.5% in the quarter, accelerating from a 5.4% decline in the third quarter, according to the Ministry of Trade and Industry’s estimate. It was the biggest contraction since the government began publishing seasonally adjusted data in 1976.

Citigroup economist Kit Wei Zheng is more pessimistic. He forecasts GDP will contract 2.8% this year.  “If we are correct, 2009 will mark the most severe recession in Singapore’s history,” he said.

Now let’s consider the advice of Warren Buffet  – “Be greedy when other are fearful and be fearful when others are greedy”.  The best advice is also the toughest to follow and none of us “feel good” buying on bad news.   For those who do invest based on the feel good factor, consider the following super bullish article from February 12, 2007.

Singapore: The Safest Route to Asia’s Riches

AS A RULE, SMALL TROPICAL ISLANDS HAVE AN OBLIGATION to the rest of the world to preserve themselves as sun-filled, rum-soaked, licentious getaways. But Singapore doesn’t do laid-back very well. Nearly 4,200 flights take off and land each week at its bustling airport, and its port is the world’s busiest. At 4.41 million, the number of mobile-phone users exceeds its adult population, and sometimes they all seem to be talking at once. Even Singapore’s national pastimes — eating and shopping — are pursued with a ferocity that might make a New Yorker blush.

When the purchase of stocks is the easy decision, the reason it’s easy is because bullish news is usually a phenomenon associated with tops, not bottoms.

Courtesy of

Emotions aside, where would you rather buy?

Similar Chart? Similar Ending?

Every bubble in history required easy credit, for without that credit buyers could not buy.  As prices rise, more buyers enter, fueled on by easy credit and increasing prices – a positive feedback loop.

What happens when the credit stops?

Dow Jones

This chart is reminiscent of other markets that no one ever thought would drop:

Nikkei 1990

Dot Com 2000

Oil 2008

The Good News About Retail Sales

If you only read the headlines, you are probably under the impression that the economy is totally collapsing.

The economy is weak and many are paying the price for being over leveraged, but when you see  hysterical headlines, it makes sense to examine the data.  For example, consider the following headline which seems to imply that retail sales are collapsing.

Retail Sales Notch Biggest Drop in 39 Years

Further in the article we learn that:

Overall, same-store sales for November fell by 2.7% from last year, according to the International Council of Shopping Centers Inc.’s index of 37 stores, the biggest drop since 1969, the first year that the council began collecting data. Same-store sales are closely tracked because they provide a snapshot of a retailer’s results, unaffected by new store openings.

“It’s an awful start to the holiday season,” said Michael Niemira, the council’s chief economist and director of research, who lowered his combined November and December sales forecast to flat to a 1% drop. “It looks to us as if it will be the weakest holiday season in our record,” he said.

Despite the gloomy retail news, many retail stocks rose Thursday, suggesting some investors believe retail sales have bottomed. Despite a 2.5% drop Thursday in the Dow Jones Industrial Average, shares of Nordstrom Inc. rose 10.2%, Abercrombie & Fitch Co. 7.8% and Tiffany & Co. 10.8%.

Should this headline have been “Retail Sales Show Modest Decline“?  A drop in sales of less than 3% given the lack of confidence by the American consumer (spurred no doubt by the headlines) does not really seem that catastrophic.  In addition, the rise in the stock price of many retailers on this news also implies that many investors believe that the worst has been seen.

The same retail news is examined by Ken Fisher who arrives at a more optimistic conclusion.

The bearish headlines have gotten bolder, and the panic has gotten worse (notwithstanding the late-November rebound). So I’m even more bullish now.

On Nov. 14 the headlines screamed, “October Retail Sales Down–Worst Ever Recorded.” Stocks buckled. But virtually no one noticed that the “recording” had started only in 1992. Since then we’ve had just one recession. The same reporting failed to mention anywhere that October sales, excluding autos, gasoline and building materials, which everyone already knew about, were down only 0.5%, which was hardly remarkable.

Simply nowhere in the mass media have I seen it reported how strong third-quarter earnings were. Roughly two-thirds of firms reported higher earnings through Nov. 25. Also, two-thirds reported earnings stronger than analysts’ latest expectations. Yet we only heard about the laggards. Excluding financials, 67% of companies reported earnings better than the year before, and 68% exceeded expectations.

On Oct. 13 the s&p 500’s dividend yield was 3.74%. That means it exceeded the yield on the ten-year Treasury note for the first time since 1958. Did you see a headline about that?

Business inventories are at record lows for the start of a recession, and that fact should make the recession milder.

I have previously observed that now may be a time to go long, based on the the incredibly negative headlines (Breathless Hysteria Overdone?).

The bad news headlines are really good news if you consider the following:

– lower spending may imply that the personal savings rate is increasing as the consumer rebuilds his balance sheet and becomes more frugal.  If the consumer wisely chooses to spend less and save more, retail sales will of course decline somewhat – you can’t have it both ways.

– much concern has been expressed that credit card debt will be the next crisis for lenders.  To the extent that credit card companies are reducing credit lines and consumers are spending less, this should help to mitigate this potential problem.

– lower retail spending may imply a reversal in attitude towards the use of debt to finance every purchase, which would be a positive development.

-a new found frugality by the consumer and a reluctance to take on more credit, although a negative factor for the retail industry, will in the long run be a positive factor for the country’s financial system and the consumer.

Breathless Hysteria Overdone?

The stock market has suffered one of the worst declines in history as we all know.

At this point, however, the breathless hysteria over how much worse things will get has become overdone.  Markets discount bad news and this market has discounted everything except the end of civilization.  The talking head predictions of doom dominate the headlines.   Today is probably psychologically equivalent  to when oil was peaking at $150 and predictions of $300 dominated the headlines.

Without bothering to consider what the future will bring, at this point there is money to be made on the long side.   The market is extremely oversold.  Nothing does in a straight line.  High quality Dow stocks have 5-7% dividends.  The Fed’s zero interest rate policy will force money into higher risk investments.  There is optimism building about a new Administration.

Besides some of the Dow stocks I am increasing my positions (on down days) in DIA and SSO.

Let’s all have a Merry Christmas!

Where Have All The Stock Buybacks Gone?

Given the magnitude of the stock markets decline, one would think that there would be major announcements from companies announcing stock buybacks.  I recall after the crash of 1987 when numerous companies announced major stock buyback programs in an attempt to inspire confidence and shore up stock prices.

As reported in Barrons this week,  stock buybacks declined by 90% from last year during the latest 10 day period, this despite the fact that the average stock has declined by around 50%.  So one may certainly be inclined to wonder why corporate America would be heavily buying back their own stock as the market was at all time highs but not now when, arguably, the stock is a better buy due to price declines.  Maybe some shareholder will ask this question of management at the next annual stockholders meeting.  Perhaps a better time to have asked about stock buybacks was when corporate management was spending hundreds of billions to buyback stock when times were good.

I have never been a fan of stock buybacks for these reasons:

– studies have shown that over time, share price performance of companies buying back stock does not exceed those of companies that do not repurchase shares.

-if management cannot intelligently invest funds back into their core business at a greater return than the cost of capital, then they should instead pay dividends to the shareholders, who will at least have something to show for their investment, since as stated above, stock buybacks do not lead to share price gains.   Microsoft was one of the few major corporations that actually paid a substantial dividend  to shareholders a few years back instead of repurchasing stock.

-unless a company is debt free, would it not have been better to have paid down debt instead of dissipating funds buying back stock?   As mentioned in a previous post, GE spent billions on stock buybacks at high prices and now has to borrow money at 10% rates.   I don’t see how this makes sense as a long term strategy.

-how many of the companies buying back stock have their long term compensation plans and bonuses tied to the EPS performance?  Quite a few I would imagine, which makes the decision to buy back stock all the easier since it directly increases management’s pay while the shareholders get nothing.  (Buying back stock decreases the outstanding shares used in computing the earnings per share, so a stock buyback will serve to increase the reported EPS.)

-how hard is it to conceive of the possibility that someday, markets will decline and cash will be dear, so why not pay down debt or simply increase your cash holdings to be used in an opportunistic manner at some point in the future?  Apparently, not too many members of corporate America ever thought about this or else we would now be hearing about a lot of stock buybacks and company buyouts.

-Exxon Mobil has spent billions buying back stock as their oil reserves shrink year after year.  With prices of oil and gas companies selling for a fraction of the price of a year ago, why are they not opportunistically reinvesting in their business by buying cheap oil and gas reserves via cash acquisitions?

-Merrill Lynch announcing a $6 billion stock buyback in 2006 – one for the history books of poor timing and inept management, although it may be topped by Merrill’s prospective owner, Bank of America, who despite needing taxpayers funds from the TARP, decides to invest $7 billion in the China Construction Bank.  I think BAC has a real problem here and the stock price reflects management’s decision making.  BAC’s
“investment” in China, GM executives flying on their plush corporate jet to Washington to beg for taxpayer funds – I think the pattern here is part of the reason for the economic crisis that we are in.

My conclusion is that a shareholder should carefully evaluate an investment in any company engaging in major stock repurchase plans.

Loan Modification – Someone Forgot To Ask The Investors

Purchasers of mortgage debt, formerly known as investors but now known as bag holders were distressed that Bank of America (BAC) did not consult with them prior to deciding to modify customer mortgages, as reported by the Wall Street Journal.   The problem was not with the mortgages actually owned by BAC, but rather the mortgages owned by others and merely serviced by BAC.  Apparently so enamored with the idea of saving the banking industry by reducing the rate and loan balances of the lucky mortgagees, BAC decided to apply their therapy to mortgages that they merely service but do not own.

The problem with attempting to modify mortgage loans en masse is that many mortgages originated over the past 5 years were sold to investors as mortgaged backed securities.  BAC maintains that they can modify these investor owned mortgages based on “delegated authority” per the loan servicing contract they have with the investors.   Obviously some of the investors in the serviced mortgages don’t see it that way and are looking to BAC to make them whole on any write downs given to the borrowers at their expense.   These are the types of issues confronting the industry in their attempts to modify mortgages.

Mortgage modifications are seen as a win/win situation by the FDIC, many banks and some of the mortgaged backed securities investors since it appears to offer the ideal solution – homeowners get to keep their homes, foreclosures decrease and the ultimate loss on the loan modification theoretically is less than   foreclosing on the property.  This may all be work out to every one’s advantage unless property values continue their decline which I consider to be a likely scenario.   Home prices won’t stop dropping regardless of government efforts until the economy stabilizes and until the ratio of family income to cost of ownership reaches an affordable level.

The issue with loan modifications that I and others see is one of moral hazard; this program is institutionalizing the repudiation of debt on a national scale and the cost and negative consequences of this rationale are open ended.  In an excellent article by Peter Schiff, he describes loan modifications as “the mother of all moral hazards” as follows:

“No doubt prodded by the administration, Fannie Mae and Freddie Mac announced a new attempt to stop the fall in home prices and foreclosures through a loan modification program that would cap mortgage payments so that a homeowner’s total housing expenses would not exceed 38% of household income for home owners who are 90 days delinquent.

In a classic case of unintended consequences, the plan will encourage a massive new round of delinquencies and household income reduction as homeowners will jump through hoops to qualify for the program and maximize their benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forgo such sacrifices. Those who are not 90 days past due will intentionally become so. In many cases, dual income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work related expenses will likely exceed the after-tax value of the lost paycheck.

Unfortunately, the last thing our economy needs is falling household incomes and even more bad debt. But that is precisely what this plan will give us.”

Transferring all the losses of homeowners, automakers, banks, insurance companies, credit card companies, mortgage companies etc etc onto the balance sheet of the US Government does not correct the incredible excess of leverage that has been ongoing in this country since the early 1980’s; it merely transfers the losses to the US taxpayers and shortens the day that the US Government itself will need to be bailed out.

American Express – A Single Digit Stock?

Despite the horrendous 72% sell off in American Express this year, I would still not be a buyer at the recent price of $19 for the following reasons.

From my personal experience in the mortgage business, I have seen many people turn to their credit cards once the home equity cash out loans were no longer available to them.  The credit cards were used to maintain a now unsustainable life style or to bridge the gap between income and living expenses.  Now that credit card lines are being reduced or simply maxed out, the last option for many people is now closed.  Since AXP gets around half of their revenue from the fee charged to merchants when a credit card is used, this income is obviously going to see a reduction.

Moody’s recently cut AXP’s investment grade by one notch to A2 (still very respectable) but the trend is clear.  Moody’s is expecting the recent earnings decline at AXP to continue, especially in view of the broad economic weakness and overleveraged consumer.

The fact that AXP decided to request $3.5 billion in capital from the Treasury’s TARP fund also raises many red flags – if AXP wasn’t expecting further problems in its basic business they would not be requesting theses funds.  In any event, AXP needs to refinance approximately $24 billion of debt over the next year; if the credit card securitization window remains closed, AXP may be back in line very soon for another TARP injection.

AXP expanded its business during the peak of the credit boom, expanding their credit card loans by some $26 billion over the past 4 years – an increase of 68%.  Timing is everything and they definitely got this one wrong, possibly by assuming that an overextended credit card customer would simply pay off his unmanageable credit card debt with his next cash out mortgage refinance.  Unfortunately for AXP, the days of constantly borrowing more money to pay off past borrowings has come to a halt.

Also, extremely unfortunate for AXP is the consumer attitude that debt that cannot be easily paid off should be easily forgiven, either by the company that lent the money or the bankruptcy courts.  If AXP needs proof of this, they can check out the Bank of America, Citibank, JP Morgan etc loan modification programs for mortgages.  At a time when collarteralized debt is being forgiven, unsecured credit card debt will be easily walked away from as well, as evidenced by the 100,000 plus (and increasing) personal bankruptcy filings each month.  Overleveraged consumers forced to borrow for years to bridge the gap between incomes and expenses will no doubt have no trouble being approved for a Chapter 7 debt liquidation instead of the Chapter 13 payment workout resulting in zero recoveries for AXP on outstanding credit card debt.

If you apply conventional, historical valuation metrics to American Express, the stock looks ridiculously cheap.   Unfortunately, I don’t thinkthe present economic disaster is going to end anytime soon and if that is the case, AXP will be facing a bleak future not only in its future earnings but also in its ability to refinance their 6/1 leveraged balance sheet.

World Economies Burn, Politicians Debate

As the world economies implode the presidential candidates debate who is the angrier man; doesn’t seem to be inspiring very much confidence in the marketplace.

Smaller countries world wide are collapsing – Bulgaria, Estonia, Romania, Turkey – we will find out how interlinked the world really is.  Iceland couldn’t have set itself up better for bankruptcy than if they had deliberately planned it.

The GAP sales plunge 25% – expect to see massive layoffs as companies dramatically cut costs starting with labor.  Very few businesses can sustain a 25% sales drop without either closing the doors or slashing costs.

AIG burns through the original $85 billion in Fed funds in a week and comes back for $38 billion more; does anyone believe that they won’t need more?  We may find out what the US Treasury lending limits are before this is over.

Where is the mighty (mythical?) plunge protection team when you really need them?

A 20% plunge in stock values over 7 days is a crash.  These types of declines usually do not stop until one day we are lock limit down and the selling burns itself out.

On the bright side, if you have any spending money left after the Crash of 2008, a vacation to the Caribbean is getting cheaper by the day: A Silver Lining for Vacationers in the Caribbean

Buy on the bad news?

It was difficult to tell today if the late Monday afternoon rally that brought the Dow back almost 400 points off the lows of the day was due to program trades or real buyers “buying on the bad news”.  If the buying was from bargain hunters brave enough to commit their capital on bad news, they certainly had a lot of reasons to buy.  In fact, if there are enough investors willing to “buy on the bad news” that read the Wall Street Journal, then we should be looking at a 5,000 point rally.  Some selected Journal excerpts follow.

Stemming the Crimson Tide

The credit freeze turns into a full-blown panic; no one wants to lend to anyone including interbank lending;  over $4 trillion in banks held by uninsured (and nervous) depositors; no easy solution to a massively over leveraged global financial system; Wachovia debacle does not inspire confidence in government’s efforts.

Iceland Risks Bankruptcy, Leader Says

Island nation cut off from global financial system as government prepares to takes over nation’s banks; tiny country’s bank assets are 10 times the economic output of the nation of 300,000; krona off 40% this year against euro and inflation is 14%.

My Comment: Iceland is bankrupt already, they simply haven’t filed the papers yet. Iceland has no capacity to bail out their banks; the real question is who will bail Iceland out?  I guess no one saw any problem with a couple of banks increasing their assets to 10 times the size of Iceland’s entire economy.

Long-Term Bond Markets Dry Up

The highest credit rated companies are shut out of the long-term credit markets; “credit is all but shutdown” said William Bellamy, direct of fixed income; CDS protection on $10 million of investment grade debt now cost $185,000 vs. a $40,000 per the credit crunch

Bofa Cuts Dividend, Posts Lower Profit

Per CEO  Ken Lewis, “It’s a damn disaster…These are the most difficult times for financial institutions that I have experienced in my 39 years in banking.”

My Comment: Dividend cut saves Bofa $5.6 billion per year which is $5.6 billion less to be spent by investors (consumers) and $5.6 billion less to be taxed by the government.

Mall Vacancies Grow as Retailers Pack Up Shop

Mall vacancies see highest rate since 2001; shopping center vacancies highest since 1994; landlords are giving breaks to tenants to try and keep them from leaving.

My Comment:  Landlords have to give big concessions to keep tenants; lower rents result in lower cash flow and more defaults on commercial loans; commercial loans next big nightmare for the banks.  Despite markdowns of up to 60%, consumer keep their wallets shut (Big Discounts Fail to Lure Shoppers) as credit card companies decrease or close down credit lines in a self defeating cycle.  The consumer was tapped out before the credit crisis, living off of credit cards and home equity lines of credit; sounds like another massive government rebate program is on the way.

If further reasons are necessary to buy this “market bottom” on the “bad news”, just pick up tomorrow’s Wall Street Journal.