• The Death of Equities: Part of a Never-Ending Series
    Posted by on March 25th, 2009 at 9:48 pm

    John Authers has an interesting article in today’s Financial Times. In it, he questions the received wisdom of investing in stocks for long-term financial planning.
    This is a serious question because even if stocks are the best long-term investment, and I believe they are, the fact is that it takes longer than people realize to see the benefits. The cream rises to the top but it can take an awfully long time. Stocks had a miserable period from the mid-60s to the early-80s, and the last nine years haven’t been much fun either.
    It seems pretty unreasonable to tell folks to have patience when the time frame needed can be half a person’s pre-retirement planning. Arthurs writes:

    Further, recent experience challenges that basis of modern finance, the ‘efficient markets hypothesis’, which in its strongest form holds that prices of securities always reflect all known information. This implies that stocks will react to each new piece of information, yet without following any set trend – a description that cannot be applied to the events of the past 18 months. On these foundations, theorists worked out ways to measure risk, to put a price on options and other derivatives and to maximise returns for a given level of risk.
    This theory also showed that stocks would outperform in the long run. Stocks are riskier than asset classes such as government bonds (which have a state guarantee), corporate bonds (which have a superior claim on a company’s resources) or cash. So the argument was that those who invested in them would in the long run be paid for taking this risk by receiving a higher return. That is now in question.

    Unfortunately, Arthurs errs here by confusing EMH for CAPM which was developed by William Sharp (and others) in the 1960s.
    Stocks should outperform bond over the long haul simply because of the nature of the two asset classes. A bond is a loan and therefore implies that lender and borrower both believe that the borrower can get a better ROE than the interest rate charged on the loan. Not surprisingly, this is why stocks have beaten corporate bonds.
    While government bonds have won the race over the past decades, Felix Salmon rightly points out that we’re currently looking at a T-bond bubble and a trough for stocks.
    Jonathan Clements reiterates the long-term case for stocks:

    Over the past 60 years, gross domestic product has climbed 6.8% a year—and shares prices have climbed 7%, as measured by the Standard & Poor’s 500-stock index. On top of that 7% a year, investors also collected dividends.
    True, share prices didn’t climb in lockstep with the economy and, indeed, investors had to suffer through some horrendous bear markets. Still, as long as the economy continues to grow over the long haul, the stock market should remain a decent long-run investment.

    Felix adds: “I suspect the pendulum is going to swing back on that front, which means that stock-price growth could lag GDP growth indefinitely.” That could certainly happen for a little while, but I have to object to the word indefinitely. If the stock market were to trail GDP indefinitely well…there wouldn’t be anymore stock market. Why bother using the public markets to raise funds? There would be no point.
    The premium of stocks over long-term corporate is real albeit small and highly volatile. The lesson is that investors should always have a sizable portion of their assets in fixed income.

  • Will a Secondary Market Develop?
    Posted by on March 25th, 2009 at 11:07 am

    One question I have about the Geithner Plan—or more specifically, an outgrowth of the plan—is will a secondary market for these toxic assets develop?
    There’s been lots of talk of how individual investors can jump on board, and that’s fine. But what happens once Pimco suddenly wants to start ditching these assets? There’s a saying that in a bear market, if you can’t sell what you want, sell what you can. Could we suddenly see these assets flood the Street?
    Hey, what if banks start buying them back? Stranger things have happened. AT&T was broken up only to see the Baby Bells buy each other.
    As an investor, I would strongly be disinclined to take part in an auction. But I would like to see how some assets start trading. I just don’t know what will happen.

  • Obama’s Presser
    Posted by on March 25th, 2009 at 9:12 am

    At the 42:25 mark of this video, President Obama takes a question from a reporter with Ebony. Naturally, Richard Pryor and Tim Reid were three decades ahead of themselves (3:38 mark).

  • Dear Mr. Liddy, I Quit
    Posted by on March 25th, 2009 at 9:09 am

    The New York Times reprints a resignation letter sent from a Veep at AIG’s Financial Products division. All I can say is read the whole thing.

  • Pounding the Tables for Sysco
    Posted by on March 25th, 2009 at 8:41 am

    Barron’s has nice things to say about Sysco (SYY), one of our Buy List stocks:

    There’s no doubt that Sysco, the nation’s largest foodservice distributor, is facing tough times as cash-strapped consumers cut back on visits to restaurants, the company’s biggest customer.
    However, management has been able to pare expenses successfully — Sysco actually beat analysts’ estimates last month on cost-cutting measures — leaving it with a growing dividend, currently yielding 4.2%, and plenty of free cash. Also, as smaller rivals struggle, Sysco, with its heft, can more easily steal market share and buy troubled competitors.
    “It’s happened before; they come out stronger after a recession and pick up new customers,” says BB&T analyst Andrew Wolf. “Though this environment is really unprecedented, they have very strong free cash flow and operating culture to manage through this.”
    Indeed, the company has outperformed its peers in the last year. The stock lost 23% in the past 12 months, about half the 41.8% loss seen by the broader market, and ahead of its rivals tracked by the Dow Jones Food Retailer & Wholesalers Index, down 28.5%.
    With a forward price-to-earnings multiple of 12.5, near its historic lows, this is an excellent time for investors to get into this industry-leading “best of class” company, as Wolf calls it.

  • Bond Auction FAIL
    Posted by on March 25th, 2009 at 8:37 am

    The British government tried to auction off 1.75 billion pounds worth of 4.25% 40-year bonds. The total bids they got were only worth 1.63 billion pounds.
    That’s not a good sign. I don’t think Gordo will be around much longer.

  • Top Hedge Fund Earnings Last Year
    Posted by on March 25th, 2009 at 8:18 am

    Alpha Magazine looks at what the top hedgies pulled down last year:
    1. James Simons (Renaissance Technologies Corp.) $2.5 billion
    2. John Paulson (Paulson & Co.) $2 billion
    3. John Arnold (Centaurus Energy) $1.5 billion
    4. George Soros (Soros Fund Management) $1.1 billion
    5. Raymond Dalio (Bridgewater Associates) $780 million

  • Yesterday’s Rally
    Posted by on March 24th, 2009 at 10:15 am

    The S&P 500 had its fourth-best day yesterday since the 1930s. The top two days came last October. Number three came after the market crash in 1987. Bloomberg notes that the last two weeks have seen the best 10-day run since 1938.

  • Paging Sherman McCoy
    Posted by on March 24th, 2009 at 9:58 am

    From Bloomberg:

    Eat-What-You-Kill Bond Traders Rise From Wall Street Wreckage
    Wall Street bond trading is heading back to the 1980s, when private partnerships and independent firms dominated the market.
    Jon Bass, who traded debt five seats from Salomon Brothers Inc. Chairman John Gutfreund and later helped run fixed income at UBS AG, joined equity broker BTIG LLC to help start its credit operation last month. BTIG, with a pool table and gym adjoining its seventh-floor midtown Manhattan trading room, is one of more than 50 credit dealers seeking to take advantage of the widening gap at which securities are bought and sold.
    Smaller firms are emerging from the wreckage of the world’s largest financial companies, which are conserving capital following more than $1.2 trillion of writedowns and credit losses since the start of 2007. They’re luring traders with a shot at $500,000 commissions for two days’ work as banks that accepted federal bailouts retrench and slash bonuses.
    “I don’t mean to dance on anybody’s graves here, but it’s just this incredible opportunity to reassemble a securities firm that does business the right way,” said Lee Fensterstock, chief executive officer of one of the firms, Broadpoint Securities Group Inc. in New York. “That business is going to lead with brain as opposed to capital. We’re not planning to run big balance sheets or big leveraged positions.”

  • Hey Can I Play?
    Posted by on March 23rd, 2009 at 1:56 pm

    Timmy’s plan is a pretty good deal for institutional investors. You basically have the government as your silent partner and your downside is limited. James Kwak at Baseline Scenario thinks the public should be allowed in on the action as well.
    Thanks to BlackRock, individuals may have a way to invest:

    BlackRock will raise money from investors such as pension funds and endowments for the new Treasury programs, Fink said. The company might consider creating mutual funds so that individual investors can also participate.