Tuesday, July 31, 2007

Bookmarking "Finance Trends Matter"

As you may have noticed, I've recently added social bookmarking features to the blog.

I recently added a "Bookmark" link in the Finance Trends sidebar, which allows you to bookmark Finance Trends Matter in your personal browser and to many of your favorite social bookmarking sites.

I've also added the AddThis bookmark widget in the footer of each post. Now you can save any individual post as a "favorite" or bookmark in your browser, or share them on Digg, Del.icio.us, Google Bookmarks, or any number of bookmarking services.

I hope these new features will help you organize information, enhance your visit, and allow you to share this blog and its content with others.

I'd also like to thank a couple of fellow bloggers who helped me add these features to the site. To Amanda at Blogger Buster, and Charles at The Kirk Report, thanks for your help in adding these important features! I couldn't have done it without you.

Thanks for reading, sharing, and bookmarking Finance Trends Matter!

Monday, July 30, 2007

Bloomberg opinion on "subprime infection"

Bloomberg's Mark Gilbert says the tremors from the subprime debacle are being felt in all areas of the interconnected global financial markets.

The pain is being felt in an array of tradeable assets. As Gilbert puts it, "Derivatives, corporate debt, loans, and bank stocks are all getting trashed".

In today's opinion column, he offers up, "Five Signs That Subprime Infection Is Worsening".

Here's an excerpt from that piece regarding short bets on Moody's share price:

...Do Bet Against Moody's

Investors made more than 23 million bets against Moody's Corp.'s share price in the month to mid-July, according to Bloomberg data on the total amount of stock that was sold short and hasn't been repurchased yet. Those trades, known as short interest, have surged from 18 million in mid-June, and have almost quadrupled in the past four months.

Moody's shares have declined about 10 percent in the past two weeks, extending their loss for the year to almost 20 percent. Frederick Searby and Jason Lowe, New York-based analysts at JPMorgan Securities Inc., this month cut their second-quarter revenue-growth forecasts for Moody's to 19.4 percent from 21.5 percent, and their earnings-per-share forecast to 68 cents from 69 cents.

``Should debt markets become less issuer friendly, CDO issuance could be adversely impacted, hurting Moody's results,'' they wrote in a research report.

I find it interesting that Moody's, along with Standard & Poor's ratings service, would stamp their investment-grade ratings of approval on some rather opaque and unsound mortgage-backed securities and CDOs, but we now know these ratings to be part of the greater subprime debacle.

What renews my interest in this aspect of the story is when, in a separate article, I read that S&P and Moody's also maintain lowest investment-grade ratings on the bonds and bank loans of commodity trading firm Glencore.

Like the mortgage-backed securities and CDOs, Glencore seems rather secretive and opaque. Unlike the subprime-laden securities, the Swiss commodities firm is also
highly admired and increasingly profitable!

If you were to judge possible investments solely on the basis of the ratings, you might think that all BBB rated instruments were alike. This is obviously not the case and never has been.

So you see, it pays to examine your investments more closely, and to note any
conflicts of interests when accepting outside "help" from the ratings agencies and analysts.

Okay, tangent over. I just want to highlight one more part of Mark Gilbert's article. This excerpt concerns the role leverage plays in these markets:

Once fear grips a leveraged market, the so-called credit fundamentals aren't worth the paper you print your spreadsheets on. The yield on the benchmark 10-year U.S. Treasury note has declined to about 4.8 percent from as high as 5.3 percent seven weeks ago, as investors seek the warm, comforting embrace of the U.S. debt market.

``While the fundamentals, such as global growth and corporate balance sheets, are at their best for arguably decades, the technicals are as bad as we've ever known them and arguably the worst in the era of leveraged finance,'' Jim Reid, a London- based credit strategist at Deutsche Bank AG, said in a research note last week. ``Never has so much money been thrown at and been levered up in credit and never has there been such a liquid derivatives market to hedge risk.''

Please check out the rest of Mark's article, as there are a number of important points made on the topics of leverage, deal financing, performance of financial industry shares, and more.

Saturday, July 28, 2007

What lies ahead for the markets?

After last week's action in the world financial markets, it's time to take a breather and consider what lies ahead.

First, a review of some of the questions that might come to mind in the wake of our recent market events. The following are some of the concerns that seem to be planted in a great many minds.

  • Are we in for a major U.S. stock market correction?

  • Will the stock markets of emerging economies continue their outperformance of the U.S. markets, or will they overheat and begin to reverse themselves?

  • Have the credit markets been infected by the subprime market's contagion of fear, or are we merely seeing a temporary repricing of risk?

  • Have credit conditions tightened, and if so, does this spell the end for the LBO/private-equity boom?

To answer these questions, let's look to the insight of two noted financial thinkers and investors: John Mauldin, of Millennium Wave Advisors, and Marc Faber, of Marc Faber Limited.

Mauldin has written a piece called, "The Subprime Virus", which looks at the fun and folly of market prediction, while pointing out the usefulness of making predictions and creating economic scenarios in order to assess possible investment risks.

Here's the lead in to his analysis of the recent events in the credit markets.

John Keynes, upon being confronted by someone that he had made a different prediction than what he held a his current view, is famously quoted as having said, "When the facts change, I change my mind. What do you do, sir?"

And I think that everyone in the group would agree. While we take the "game" of investments very seriously, if you do this long enough, you will get humbled quite often. That is why you constantly evaluate your analysis, and change them when the facts change.

And the credit markets are changing their opinion in a very rapid manner. Earlier this spring, the credit markets started to get concerned about subprime mortgages. But "everyone" said it would not spread to the rest of the credit markets, so there was no cause for concern. I was not so sanguine. I have consistently thought that the entire credit markets would be affected, through a tightening of credit standards. And now the markets are starting to agree.

If you read through the essay, you'll see that Mauldin is making one very important point. The "credit markets are acting in tandem", and many assets are currently heading down together due to a tightening of credit and an unwinding of yen carry trades. The leverage that fueled synchronous rallies in stocks, high-yield bonds, and commodities is now working against traders and investors on the downside.

We also have some similar points being made by Marc Faber in a recent Bloomberg Television interview.

Speaking on Friday, Faber gave his reasons as to why the recent market corrections were a bit overdue. In Marc's view, the market internals have lately been much weaker than the leading stock indices would otherwise suggest.

He also adds that credit growth, which has fueled many of the recent asset bubbles in commodities, stocks, and real estate worldwide, is slowing, and that this will cause problems for the economy. As for LBO and dealmaking activity, Marc feels the peak has been reached.

So, if you are one of the investors or market watchers pondering such questions, you may find it worthwhile to review the arguments and opinions offered above. Good reading and listening, and we'll see you on Monday.

Friday, July 27, 2007

Features of the week

We have some excellent articles and interview features for you this Friday. So sit back, relax, and enjoy our "Features of the week".

1. "Subprime Shockwaves". Bloomberg TV examines the fallout from the recent wave of subprime mortgage defaults and their effect on the U.S. housing market and the economy.

Guests include Richard Syron, CEO and Chairman of Freddie Mac, economist Robert Shiller, Pimco's Paul McCaulley, Jim Chanos of Kynikos Associates, and investors Marc Faber, Jim Rogers, and Ken Fisher (watch out for the hypnotic hand gestures).

2. Jim Rogers tells Reuters he's cautiously bullish on Chinese shares.

Despite an incipient bubble, the globe-trotting investor sees investment opportunities in companies serving China's needs in railways, education, water, renewable energy, and environmental cleanup.

3. "Blackstone Falls to Record Low in Debt Market Freeze". Shares of Blackstone Group have fallen to a new low, making the buyout firm the worst-performing IPO this year.

4. "Bond Risk Soars to Record as Investors Flee Corporate Debt". This is going to hurt.

5. An FT/Harris poll of wealthy nations reveals a backlash
against globalization.

6. "Gloom or doom for global markets?". Marc Faber speaks with Resource Investor.

7. Why technology stocks have come full circle. Views of investor Robert Turner.

8. Blissfully Uneducated. How modern education fails us.

9. "Education: Free and Compulsory", a monograph by Murray Rothbard.

10. Research funded by the Templeton Foundation shows altruism and giving leads to a healthier life. Hat tip to Abnormal Returns.

"Absolut Capitalism". The vodka that created a marketing revolution is up for sale.

12. Aleph Blog on the "Five pillars of liquidity".

13. "The Future is Solar", according to energy watcher Robert Rapier.

14. Updated world oil forecasts, including Saudi Arabia. Courtesy of The Oil Drum's ace.

15. "How I became a libertarian", by Robert Stewart.

16. Your moment of Zen. Ted Williams and the Atlantic Salmon.

Have a great weekend, everyone.

Thursday, July 26, 2007

Credit market worries spread

We spoke yesterday about worsening conditions in the credit markets, as fears from the subprime mortgage bond market had spread to the corporate and high yield debt markets.

Today we see more evidence of a contagion of fear, as credit fears join with worries over higher oil prices and the state of the U.S. housing market. The result: a reversal to yesterday's gains in the leading U.S. stock indexes, as U.S. stocks declined sharply in morning trading.

The fallout in stocks was not limited to U.S. markets. European and Asian shares also suffered from fears of a slowdown in the takeover market due to higher borrowing costs. More on that from Reuters:
U.S. stocks tumbled on Thursday on signs of further deterioration in the U.S. housing market, a jump in oil prices and a worsening climate for financing corporate takeovers.

The broad Standard & Poor's 500 stock index fell 2 percent at one point, and the steep decline led the New York Stock Exchange to impose trading curbs which restrict large-block sales when a stock was falling.

The slump was worldwide, with overnight equity losses in Asia and the worst drop in European shares in more than four months. U.S. Treasuries rallied, meanwhile, on a flight to safety.

And here's Bloomberg's take:
Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.
The Standard & Poor's 500 Index fell to its lowest in almost three months, while Europe's Dow Jones Stoxx 600 Index dropped 2.7 percent, its biggest retreat since March. Benchmark stock indexes in Brazil, Mexico, Argentina, Korea, Poland, Russia and Turkey slid more than 2 percent.
``We're seeing a global repricing of risk as the cost of capital ratchets up,'' said Joseph Quinlan, chief market strategist at Bank of America's investment strategy group in New York. Bank of America's investment-management unit oversees about $566 billion. ``We're working our way through a period of angst and anxiety.''
The interesting thing to note here is that junk bonds and emerging market debt are finally beginning to be priced in a manner that would more accurately reflect their historical risk levels.
Here are two paragraphs from the above linked Bloomberg article that illustrate the recent flight from risky assets:
The cost of the credit-default swaps, used to bet on the ability of companies to repay debt, is the highest in more than two years. The U.S. benchmark CDX Investment Grade Index jumped $6,000 to $62,750, Deutsche Bank AG said.
Emerging-market bonds tumbled, pushing yields over U.S. Treasuries to the widest since September, as investors reduced their holdings of riskier securities. The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 15 basis point to 2.1 percentage points at 11:37 a.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point is 0.01 percentage point. The risk premium is the widest since Sept. 26.
So, we can see that recent worries over the state of the credit markets and the U.S. economy are sending a ripple of fear through the financial markets worldwide.
Short-term worries or lasting effects? Only time will tell, but until then, we'll be here to help you appraise the situation.
With that in mind, here's some more market coverage you might find useful and interesting.
"Rising credit fears rock equity markets" - FT's John Authers comments on the day's market turmoil and cites Jeremy Grantham's opinion of the stock market's slow reaction to credit market problems in this US Daily View video.
"Global Stocks Drop; Investors Shun Risk on Debt Woes" - Bloomberg.
"Goldman Sachs, Bear Stearns Bond Risk Soars, Credit Swaps Show" - Bloomberg.

Wednesday, July 25, 2007

Debt is a four-letter word

Have you seen the headlines this morning?

Things are cooling off big time in the debt markets, and the drop off in demand for high-risk debt is getting pretty intense.

Some of the most prominent stories on Bloomberg are those detailing the turn in the credit markets, as investors decide they are no longer willing to take on risk in corporate bonds and high-yield debt.

Here's a quick wrap-up of what's going on in the credit markets.

"KKR Fails to Sell $10 Billion of Boots Loans".

"Chrysler, Facing Resistance, Abandons Loan Sale Plan".

An excerpt from the Chrysler piece:

Chrysler abandoned plans to sell $12 billion of loans to complete its purchase by Cerberus Capital Management LP after investors balked at purchasing the high-yield, high-risk debt, according to investors who were briefed on the decision.

The unit of DaimlerChrysler AG scrapped the sale of loans linked to its automotive business after failing to find demand, said the investors, who declined to be named because the terms aren't public. Banks led by JPMorgan Chase & Co. will assume $10 billion of that debt and Cerberus and DaimlerChrysler agreed to buy the remaining $2 billion, the investors said.

``The implications of this are simple; there remains a significant amount of risk aversion in the market,'' said Peter Plaut, an analyst at New York hedge fund Sanno Point Capital.

And further down the page...

As Chrysler and its banks led by JPMorgan Chase & Co. sought to arrange financing for the Cerberus deal, investors vanished amid concerns that a crisis in the subprime mortgage market may spread to corporate bonds. Companies' plan to raise $300 billion in bonds and loans for leveraged buyouts also caused buyers to back off.

JPMorgan Chief Executive Officer Jamie Dimon last week described the drop off in demand as ``a little freeze.'' Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, said yesterday that lenders are ``frozen'' and ``absolutely nothing is moving."

There is no mistaking it; the fallout in subprime has definitely spread through the credit markets. Debt has become a four-letter word.

Meanwhile, Pimco bond manager Bill Gross is voicing the opinion that cheap financings which fueled the recent LBO/private equity boom have come to an end.

An excerpt from, "KKR, Blackstone, Find 'Tide Is Going Out,' Gross Says":

The cheap financing that fueled the leveraged buyout boom is over, according to Bill Gross, manager of the world's largest bond fund.

``The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote today in his monthly commentary on Pimco's Web site. The shift ``promises to have severe ramifications for those caught in its wake.''...

...A growing lack of confidence has ``frozen'' lenders, backing up the market for high-yield new issues so that ``absolutely nothing is moving,'' Gross wrote in his commentary. Investor resistance has increased borrowing costs and will bring an end to lax financing standards, he said.

You can also watch video of Bill Gross' comments to Bloomberg TV.

According to Gross, the buyout boom is not necessarily over, but the current "freeze" will significantly raise the costs and difficulty level of financing current and upcoming deals.

Stay tuned for news of further developments in the corporate bond and credit markets.

Monday, July 23, 2007

Market risk and derivatives: interview

Catching up with some of the latest Financial Sense Newshour broadcasts, I'm currently listening to an interview with Richard Bookstaber, author of the new book on financial markets and derivatives risk, A Demon of Our Own Design.

The premise of Bookstaber's book, as he tells FSN host Jim Puplava, is that some of the more notable crashes in recent financial history were driven not by economic events, but rather by the growing use of complex financial instruments known as derivatives.

According to Bookstaber, whose career was spent creating and studying derivatives and risk management models, markets have become increasingly crisis prone with the increase of financial engineering.

While he feels that derivatives serve a legitimate purpose, he also believes that their widespread use creates greater complexity and an increased likelihood of unforeseen effects, such as the portfolio insurance cascade of the 1987 stock market crash, and the 1998 blowup of Long Term Capital Management (LTCM).

According to host Jim Puplava, and other reviewers, Bookstaber's book is supposed to be a very readable account of how these sometimes arcane derivative instruments can shape market risk. If you'd like to get a sense of what you'll find within, have a listen.

The interview is available here. Check it out.

Friday, July 20, 2007

Features of the week

Record M&A activity, lessons on investing, thoughts on the commodity "super cycle", $80 oil, and more. That's what we have for you today in our "Features of the week". Read on!

1. Brent crude within sight of record. London's benchmark crude oil contract nears $78, "less than a dollar shy of its record $78.65" of last August.

2. Thoughts on the "commodity super cycle" and inflation. Steve Saville, via Safehaven.

3. How to Leave Iraq. Time Magazine calls for an "orderly withdrawal" of U.S. troops from Iraq.

4. Mergers, mergers everywhere. With $2.7 trillion in deals done in the first half of 2007, worldwide M&A activity is set to hit a new record this year.

5. Jim Grant speaks with Bloomberg about the credit markets, subprime, and his investment outlook. An excellent interview. Hat tip to John at Controlled Greed for this one.

6. Miami's condo glut is pushing Florida to the brink of recession.

7. "There has never been a tougher time to be wealthy", says Bloomberg's Matthew Lynn.

8. The New York Times on our, "New Gilded Age".

9. Is your city/town in recession? Michael A. Nystrom documents local business conditions in, "Boston's Crumbling Economy".

10. As the U.S. national debt piles up, Mike Hewitt asks, "Who do we owe and how much?".

11. "Lesson 1 on the Stock Market", courtesy of Zapata George Blake.

12. Investors should stay away from covered calls, warns Motley Fool.

13. "Pitting Buffett versus Lampert". James Altucher wonders who is the better investor, Warren Buffett or Ed Lampert?

14. "The importance of having ideas". Another hit from James Altucher's FT column.

15. Warning signs for hazardous stocks, courtesy of Best Way To Invest.

16. An introduction to Income Statements and Balance Sheets, from Best Way To Invest.

17. "No wonder Boris Berezovsky has so many enemies", concludes Edward Lucas. Hat tip to Gideon Rachman's blog.

18. Robert Blumen discusses, "The Myth of the Platform Company".

That's it, gang. Have a nice weekend.

Thursday, July 19, 2007

So many blogs...

So many blogs, so little time. Today we look at a very interesting post from the Financial Philosopher entitled, "Financial Blogs: Overcoming the Poverty of Attention". The theme: finding quality and efficiency in a sea of new reading material.

You may remember that the Financial Philosopher's previous post about financial blogs centered on the question of whether these new information sources were helping to make the markets more efficient.

Now, Kent (the Philosopher) takes the opposite side of this argument by proposing that, "the same proliferation of blogs may be creating a distracting "over-abundance'" of information".

In other words, we may be drowning in too much information. If we try to process too much news and information, we find that we can't remember or absorb much of anything at all.

Therefore, it's important to limit our intake of information and focus on the information sources we find most valuable and unique. How does the Philosopher accomplish this task?

He does this by setting up an efficient "portfolio" of blogs, with each blog meeting a checklist of criteria that he has set for his own needs and interests. To see the Financial Philosopher's
blog portfolio and learn his methods of selection, read on. It's a great post, and as for advocating a careful selection of information sources, I couldn't have said it better myself.

Thanks to the Financial Philosopher for his kind mention of Finance Trends Matter, and thanks to the readers of this blog who have just finished reading our 500th post. Cheers!

Wednesday, July 18, 2007

Mid-week wrap up

Oil prices near $80, the Dow flirts with the 14,000 mark (but retreats), and worries over the state of the credit markets grow as subprime problems continue to leak out of the "containment" box.

Let's do a quick overview to see where we stand at this Wednesday market close.

Here's news from Bloomberg following today's close:

The U.S. stock market suffered its worst day in a week after Intel Corp.'s earnings and the prospect of banks' growing loan losses prompted concern profit forecasts will be reduced in the weeks ahead.

Intel sparked the biggest tumble in semiconductor shares in almost five months after saying increased competition forced it to cut computer chip prices. Citigroup Inc. and JPMorgan Chase & Co. led 86 of 92 financial firms in the Standard & Poor's 500 Index lower following Bear Stearns Cos.' disclosure that investors in two hedge funds were wiped out by bad bets on subprime mortgages.

The S&P 500 lost 3.2, or 0.2 percent, to 1546.17. The Dow average dropped 53.33, or 0.4 percent, to 13,918.22. The Nasdaq Composite Index slid 12.8, or 0.5 percent, to 2699.49.

Key themes today were disappointment over earnings, Bernanke and the Fed's growth forecast for the U.S. economy (cut downwards from an earlier forecast), and worries over the fallout in the subprime mortgage bond market and the cratering ABX indices.

On top of all this, we've got everyone paying attention to higher energy prices as the price of crude oil creeps back towards $80. We'll let T. Boone Pickens take it from here, as he describes his forecast for higher oil prices to CNBC.

See you tomorrow.

Update: Dow closed just above 14,000 on Thursday's close. See the Bear Mountain Bull's latest market wrap-up for more.

Tuesday, July 17, 2007

Paul van Eeden interviews

Hard asset investors (and speculators), today's your day. We have two interviews with investor and newsletter writer Paul van Eeden for you; both highlight his uniquely considered views on a number of issues.

First, an audio interview with Paul van Eeden courtesy of Minesite's Commodity Watch Radio.

Here, van Eeden explains his investment philosophy and his methods of operation in resource sector speculations. Paul's seasoned view of the risks and opportunities in resource and mining shares will be useful to anyone interested or involved in these sectors.

In the second interview, a HoweStreet video clip filmed during the June 2007 Vancouver World Gold and PGM Conference, Paul covers the topics of commodities, base metals, investing in mining shares, and monetary inflation.

While there are a lot of interesting points made here, the bulk of the interview centers around van Eeden's view of the base metals market and why prices have been largely driven (in Paul's opinion) by speculative fund buying.

While Paul has steered clear of the base metals market in the past couple of years and watched recent upward moves from the sidelines, he offers an interesting view of why the risk/reward profile in these markets no longer matches his personal criteria.

You're always likely to get a contrary point of view on the markets from Paul van Eeden, and these clips won't disappoint on that count. So watch, listen, and enjoy.

Monday, July 16, 2007

Ron Paul visits Google

We've got video of Ron Paul's recent visit to Google at its Mountain View campus, courtesy of YouTube and Jeremy Hermanns' blog.

If you want to know what's going on in America in 2007, have a look at this video. The Google staff came out in force to hear Presidential candidate Ron Paul deliver his message of liberty, limited government, and free markets.

Representative Paul answers a litany of questions from Google exec Elliot Schrage and audience members on a very wide range of issues, and it makes for a very interesting and candid discussion.

And, brace yourself for this, you will actually see a candidate speaking honestly here. Paul is willing to take stances on issues that might otherwise have alienated a segment of his audience, had he not been so forthright and eloquent while elaborating on his positions.

All in all, a great discussion and an excellent introduction to Ron Paul's libertarian and constitutional values. Watch it, bookmark it, and pass it around.

Friday, July 13, 2007

Features of the week

Welcome to our "Features of the week", where we pull together some of the most interesting articles, news, and interview features around and present them to you in a single, convenient post. There's some great stuff ahead, so grab a chair and enjoy.

1. Recruiting brains: Back in the early 1990s, Bill Gates surprised Forbes publisher Rich Karlgaard when he told him that Microsoft's chief competitor was Goldman Sachs. Why Goldman?

Gates explained that Microsoft was in the "IQ business" and needed the best brains available to continue its development and success. Therefore, the company had to compete with top-tier investment firms in an effort to attract the best available young minds.

This trend is becoming even more apparent in recent years, and Bloomberg chronicles it in, "Goldman Meets Match In Googleplex When Recruiting Graduates".

2. Too much leverage? FT's Gillian Tett wonders if we've learned our lesson from LTCM.

3. Presidential candidate Ron Paul is face to face with mainstream media bias (and plain rudeness) as he joins ABC News' George Stephanopolous for a sit down interview.

4. Ron Paul remembers the life and achievements of Dr. Hans F. Sennholz.

5. Dollar pays for European interest rates as the Euro reaches new highs against the dollar.

6. Minesite interviews investor Marc Faber in a two-part audio interview. Parts one & two.

7. Richard Daughty (aka, Mogambo Guru) on the "Pressure Cooker of Inflationary Food Prices".

Five business lessons from Costco. Hat tip to Abnormal Returns on this one.

9. Hyperinflation and political oppression make for, "Desperate times in Zimbabwe".

10. Zimbabwe. "How to stay alive when it all runs out".

11. An Economist special audio report on changes in Hong Kong since the 1997 handover.

12. FT Markets - "Global overview: Gloom turns to euphoria".

Via FT Alphaville, Insitutional Investor's, "20 Rising Stars of Hedge Funds".

14. What will become of the Merc's trading floor in the wake of the CME-CBOT deal? A little bit of Chicago trading history in this piece from Bloomberg.

15. Guess who wants to outlaw Porsches and Ferraris in Europe? Bloomberg's Doron Levin on the secondary agenda behind the EU's CO2 emissions laws.

16. Sham Gad on Value Investing. The blog of a young value investor who hopes to build an investment partnership modeled after the original Buffett Partnership and Pabrai Fund.

That's all, folks! Have a great weekend.

Thursday, July 12, 2007

Subprime shakeout: questions loom

As the subprime mortgage shakeout continues to ripple through the markets, FT Alphaville looks at two different elements of this story: the macroeconomic perspective, and the contagion effects made possible by financial innovation.

As was pointed out
in these pixels on Wednesday, there are two elements to the subprime mortgage shakeout in the US.

The first, macroeconomic, concerns the extent to which the woes in the subprime sector of the mortgage market spill over into the broader US housing market, and spark a slowdown in overall consumer spending.

The second is a question regarding financial innovation, which has created transmission mechanisms across the wider credit markets, whereby problems can leap between seemingly unrelated markets such as US mortgages and European leveraged loans, which are funding the current buy-out boom.

As Paul J Davies wrote here yesterday: “if contagion between markets is fueled by such mechanisms then the sell-off in credit could be the harbinger for a much broader systemic sell-off of risk across all asset classes - that at least is the most bearish, apocalyptic version of current market concerns.”

The Alphaville post goes on to survey reactions to the subprime fallout from various bloggers and market analysts. While some are expressing little surprise over the current state of things, others are busy making a case for "containment".

But as S&P and Moody's move to cut their ratings on mortgage backed securities (the very securities which they often trumpeted as investment grade), worries over the extent of the damage continues to mount.

Still, there is no time better than the present for some good old-fashioned spin. So with that in mind, let's take a quick look at how the "well-contained" subprime mortgage fiasco has affected investors in other areas of the market.

Minyanville writer Kevin Depew has been chronicling the way in which the subprime "containment has been spreading" for some time, now. Here's a look back at the growing problems in the debt markets from late April, in which Depew observes that a "behavioral contagion" of fear might cause a panic to spread through other portions of the debt markets. Lots of amusing commentary here.

My favorite of all the "containment" statements heard so far (and I'm only a casual observer) is this quote from a recent article that appeared in The Economic Times:

“Risk aversion appears to be mainly contained within credit markets."

The best part about this line is that it's taken from an article entitled, "Subprime woes spread to stocks and dollar". Think about that one for a minute...

For more background perspective on the subprime and mortgage-backed securities market, see our recent roundup entitled, "Not another subprime post?!".

Wednesday, July 11, 2007

Global money supply, and M3 data

Since we've been talking a bit about inflation and money supply growth lately (actually for some time now), I thought It might be useful to provide an easy to save reference link to some money supply data resources.

It's been somewhat difficult to gauge certain forms of money supply growth lately for a variety of reasons. Back in February of 2006, while discussing the outrage over the Fed's decision to stop reporting M3 money supply figures, I mentioned that this latest move away from accountability and transparency might create an added incentive for private economists and investors to reconfigure and publish the money supply data on their own.

Thankfully, this proved to be the case as outlets such as Nowandfutures.com and John Williams' ShadowStats.com started to provide their own reconstructed M3 figures.

There are even some sites which will tell you how to calculate M3 data
(with very close approximation) for yourself.

Now the only problem we have is finding global money supply data, which in some ways is a bit more difficult than it used to be.

However, thanks to the internet, it's also much easier to share the data once we've found it.

The Economist, which used to print a table of money supply growth in the back of their magazine, has relegated these figures to the Markets & Data section of their website.

Year-over-year growth figures in global money supply can also be found in a table updated monthly at Financial Sense Online's Market Monitor.

The OECD monetary aggregates are another source for money supply growth figures.

You can also find data on money aggregates at many of the central bank websites. This should provide a useful link for anyone seeking to find bank data and research at a national or global level.

Hope you found this to be a useful resource. Remember to save these links or bookmark this post for reference. And share!

Monday, July 09, 2007

Hyperinflation and the bond markets

Here's one for all you economic philosophers and "bond market vigilante"-types. The question I'm currently turning over in my mind is this: can the U.S. experience hyperinflation, or will the possibility of such an extreme inflationary spiral be held in check by the bond markets?

The current thinking on the possibility of the United States experiencing hyperinflation seems to be split between those who say it can (and likely will at some point in the future), and those who feel it cannot, for precisely the reason stated above.

I spent part of the weekend reading some of Richard Russell's recent remarks, and part of his June 20 newsletter dealt with this very topic.

Russell is of the opinion that, as far as hyperinflation goes, "it can't happen here" because of the size and depth of our present-day bond market and money markets.

He also feels that if inflation were to really heat up, the bond market would "start to crumble" and things would generally start to fall apart. Interest rates would go higher, the stock market would collapse, and business would begin to fall apart. This in turn would cause inflation to disappear as all manner of assets begin to deflate, or so the story goes.

While I hold Richard Russell and his writing in the highest regard, I must say that I have to wonder about his reasoning on this issue. I am just not sure that I would agree with it.

I am still struggling with the answer to these issues, but something about this argument strikes me as rationalization. So we have a very powerful and well-developed bond market. Does that mean that it would survive the final stages of a rapidly escalating inflationary cycle or keep such a cycle at bay?

The theory of the bond market vigilantes holds that bond traders will sense inflation and mitigate its effects by pushing interest rates higher, thereby keeping central banks and governments relatively honest.

The main problem with the theory of the bond vigilantes these days is that no one can seem to find them. Whether they've been overrun by non-traditional forces or have simply disappeared has been a recurrent theme for discussion in recent years.

I've heard some very insightful arguments concerning the bond vigilantes and their eventual return, but I've yet to read of their ability to stop an impending hyperinflation in its tracks.

Also, if the government were to issue bonds in excess of the amount people were willing or able to lend, they could simply monetize the debt by selling their bonds to the central bank, who, in turn, would print the money needed to pay for them.

Creating money out of thin air is, of course, an inflationary exercise. Taking this method to its extreme would provide the impetus for a hyperinflationary episode.

So far I've seen nothing to suggest that bond investors, or anyone outside of governments or money-controlling agencies, have the power to overcome an over-issuance of money and credit, or an impending hyperinflation.

In the meantime, if anyone can tell me (in plain English) why the bond markets have the power to stop a U.S. hyperinflation in its tracks, I'd be interested to hear the explanation.

Friday, July 06, 2007

Features of the week

Hello, everyone, and welcome to our "Features of the week". Let's jump right in and get started.

1. "Crisis, what energy crisis?". Our friends at The Oil Drum: Europe have put together an impressive post that looks to spur debate about our energy future.

Over fifty links to Oil Drum articles over the past year are included. Topics include ethanol and biomass, solar and wind, and uranium and nuclear power. Plus, reviews of important net energy metrics and sustainable living topics. You might want to bookmark this link for reference.

2. Interviews with Jim Rogers and Marc Faber on CNBC World and Bloomberg.

3. Art dealer sells a Raphael painting for 100,000 times his purchase price.

4. Rare objects have become increasingly sought after as the world's rich have turned their attention to tangible investments and rare art.

Bloomberg tracks this trend in the recent article, "Oil Millionaires Chase Dwindling Supply of Islamic Treasures".

5. Despite widespread bearishness, the global boom could continue, says Puru Saxena.

6. Don't tell me about inflation! Mike Hewitt discusses "Propaganda with a Capital 'P'".

7. Carbon trading soars, and Futures Magazine details the business at the Chicago Climate Exchange (CCX), and the European Climate Exchange (ECX).

8. When it comes to global futures trading, Asia's almost here. For now, an overview of Asian derivatives products available to international traders.

9. A panel of investors discuss the possibility of a global correction in, "Stock and Bond Bull Markets - The Beginning of the End?".

10. "Slovenian Shares, Top World Performers, Cost More Than China's".

11. Investors take note: The U.S. Supreme Court may dismantle taxes on municipal bonds.

12. Paul Kedrosky on Google's new draggable driving directions feature.

13. Henrik Soke's Active Investor's Blog is a new source for investment news and stock picks.

14. Sprott Asset Management discusses the, "Global Cooling For US Bonds".

15. Prostate cancer is a profound risk for American men over the age of forty. Unfortunately, there is much disagreement among doctors regarding possible treatments.

This report from Bloomberg Markets Magazine profiles five men who decided to look into the matter for themselves and shape their own personal treatment strategies. Read this article and then pass it on to five friends.

Have a great weekend, everyone.

Thursday, July 05, 2007

Golddiggers of 2007

Who wants to marry a billionaire? That's the question posed by two separate articles which aim to share lessons on how to marry rich. Today, we share those lessons with you.

Appalled? Intrigued? Then read on for more, as we survey the possibilities for materially motivated matrimony in 2007.

First off, an article from the Financial Times Weekend Magazine, dated October 8, 2005.

In, "For richer, not poorer", Edi Smockum surveys the scene for eligible billionaires and finds a few palatable options among available men, but notes that the high-living millionaires of bygone cinema days seem few and far between.

In the interests of updating this piece I will mention that one of the prospects, Australian James Packer, is off the table, having recently wedded model Erica Baxter. Sorry, girls.

And so we move on to our next piece, the very recent, "Money-struck: How to meet and marry a billionaire".

The main theme here is the importance of moving in the same social circles and/or work environments of the prospective mate/rich quarry. This applies equally for men and women on the make. Also, brains and class are now seen as more desirable attributes in a prospective female spouse than a bombshell body.

And hey, once you're done absorbing (laughing at/along with) all the tips on how to cozy up to the eligible rich, there's even a quiz that lets you find out whether or not you've got what it takes to marry for money.

So enjoy, and when you make your match, don't say we never did anything for you!

Tuesday, July 03, 2007

Jim Rogers and Marc Faber on CNBC

Market's closed, kids, at least in the US.

Everyone over to Bear Mountain Bull's house for iced tea and clips from a CNBC discussion with investors Jim Rogers and Marc Faber. I'll bring the Milano cookies...

We've also got a Bloomberg interview clip with Marc Faber for you. It seems CNBC World and Bloomberg are both revisiting the Asian financial crisis ten years later, and both channels have chosen the Thailand-based Faber as a source of insight into past and present financial and economic conditions.

Plus, Jim Rogers in a recent Bloomberg TV appearance. The discussion centers around water, agricultural commodities, emerging markets, and the rising stature of women worldwide.

Be sure to check out both sets of clips.

Happy Independence Day!

Monday, July 02, 2007

Bond market update & outlook

According to Bloomberg News, the current turmoil in the debt markets arising out of the recent subprime and CDO mess is benefiting Treasury bond prices.

In fact, their recent article on Bear Stearns' effect on the treasury market even goes so far as to say that Treasury investors should be thanking Bear Stearns for "smothering the bear market" in bonds.

Here's why:

Traders who cut their holdings of U.S. government debt just a few weeks ago as retail sales increased and job growth accelerated are now snapping up Treasuries. Demand is being fueled by speculation that losses at hedge funds owning subprime mortgage bonds such as those managed by New York-based Bear Stearns and London-based Cambridge Place Investment Management LLP will spread and slow the economy.

The article goes on to detail past instances in which panic among investors and speculators has led to a "flight to quality". These periods of panic and risk reassessment are usually brought on by the sudden failure of a large investment fund, a catastrophe, or threats of war and geopolitical strife.

Indeed, subprime worries are not the only reasons being offered
today as bond prices rally. As Reuters explains, government bond prices remained firmly higher today due to security fears in Europe and the Middle East.

U.S. Treasuries rose on Monday, sending 10-year yields below five percent for the first time since early June, as global bonds rallied on recent security worries and shrugged off strong U.S. factory data.

Traders said attempted car-bomb attacks in London on Friday, Saturday's attack on Glasgow's airport in Scotland, and the killing of seven Spanish tourists and two Yemenis in a blast in Yemen kept a constant bid in the Treasury market.

Now that we've heard the explanations for the short-term movements, let's move on to the larger question. Is the bear market in Treasury bonds likely to be over ("smothered"?) due to the recent flight to quality in the debt market?

In my non-expert opinion, I would have to say no, this is not an end to a bear market in Treasury bond prices. If anything, we are closer to the beginning of such a move. Why?

Interest rates are very likely to go higher over the longer term, and the cycle towards higher interest rates (and higher inflation) has only been in force for the past two or three years.

The last big interest rate cycle in the West was the 1981-2003 downward trend in US interest rates which coincided with the twenty year-long bull market in bonds (I believe that's how people now refer to the period).

The next long term cycle is therefore likely to be a long-term rise in interest rates and a longer-term bear market in bond prices. Anything happening now is probably a short-term distraction from the bigger picture trend.

But the main thing to point out is that, whether I'm wrong or right on my forecast, we have to appreciate the importance of separating the shorter-term movements ("noise") from the structure of the longer-term trends.

While the event-driven moves make headlines on a day-to-day basis, we have to distinguish them from the greater overall picture and put their importance into the proper perspective.

Of course, if your investment or speculation horizon is much shorter, and short-term events take a dominant share of your attention, then these longer-term considerations may not mean much to you. But to those who are looking out to the farther horizon, these distinctions are important to make.

Sunday, July 01, 2007

Not another subprime post?!

We've devoted a fair amount of coverage to the ongoing fallout in the subprime mortgage and CDO markets in recent weeks.

For those of you who just can't get enough of this financial car crash (or for those who would simply like to learn more), we offer the following subprime roundup. It's the latest take on what's happening in subprime, with a view to the possible knock-on effects in the debt market.

We'll also take a look back to April, when people like Scott Simon of Pimco were offering their view on why they were staying conservative with their asset-backed bond investments.

Plus, you'll see an interesting Bloomberg video panel in which Simon and others debate the extent of last spring's subprime problems.

First off, here's a recent take on what lies ahead for the subprime and debt markets, courtesy of John Mauldin and friends. The following is an excerpt from, "$250 Billion in Subprime Losses?".

It is hard to know where to start when trying to analyze the current problems in the subprime mortgage markets, there are just so many points that beg to be made. So, not necessarily in order of importance, let's look at a few items.

First, as Dennis Gartman so frequently states, there is never just one cockroach. If you see one, you know there are more in the wall. Bear Stearns is just the first. They may be the canary in the coal mine which warns us of more problems to come.

Will the problem in the subprime market spread to other areas of the debt market? The answer depends on what you mean by spread.

Read on for Mauldin's assessment of the problems in the subprime market and how the ongoing turmoil will affect the appetite for risk going forward. See also, Doug Noland's latest Credit Bubble Bulletin for a discussion on why CDOs are "the tip of a derivatives iceberg".

And now we go back in time to April 2007 when Scott Simon was asked by Bloomberg TV to sum up his views on the housing market, and his firm's (Pimco's) strategy on investing in asset-backed bonds. His answer: we stay conservative.

You can bet that Simon's views were shared by Pimco's head honcho, Bill Gross, who recently opined that Moody's and Standard & Poor's ratings services were fooled into labeling these Residential Mortgage-Backed Securities (RMBS) and CDOs as investment grade instruments.

Well prudence and rating agency standards change with the times, I suppose. What was chaste and AAA years ago may no longer be the case today. Our prim remembrance of Gidget going to Hawaii and hanging out with the beach boys seems to have been replaced in this case with an image of Heidi Fleiss setting up a floating brothel in Beverly Hills. AAA? You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a “tramp stamp.” Many of these good looking girls are not high-class assets worth 100 cents on the dollar.

And if you're interested to see how everyone felt about all these issues back in April, please see this subprime market panel video moderated by Bloomberg's Brian Sullivan. Note the informal poll taken on the spread of subprime problems in the opening minutes of this group discussion.

Well, I think we're up to date. Hope this post has offered some insight into these rather complex issues.