Monday, November 05, 2007
Big Timber Falls on Wall Street
This is the 94th Musings post so it appears we will get to the 1000th hit before the 100th post. Both milestones will be quite amazing to me. I have done very little to promote this blog, and perhaps I will start to do more promotion after next year. It's not that I am against widening the audience - on the contrary, readers are welcome to spread the word - but I do prefer some anonymity concerning the author, at least through 2008. After that anonymity won't be a consideration. Still the blog continues to be fun to write, and I am pleased to have regular readers.
-----------------------------------------------------------------------------------
In short order, some very big company CEO's have taken the axe (O'Neal, Prince Parsons), and more are apparently cued up (Cayne, Sullivan?). Short tenures and instant culpability for disappointing results are why it is necessary to pay CEO's so much. The O'Neal case at Merril Lynch is especially instructive. By all accounts, he did a splendid job turning Merrill around and pushing them far beyond their dominant retail brokerage origins. Unfortunately, that was also his undoing as the company's risk management function did not properly contain its investment in mortgage securitizations (Whose did? Only Goldman Sachs seems to have totally avoided this debacle). So right away he gets canned, and then to add insult to injury, the headlines are about his nine figure exit package, none of which was really severance! All of it was his vested pension, options, and restricted stock. So I feel better that even though his reputation was unfairly tarnished, at least he won't end up on welfare. Seriously, being CEO is no bowl of cherries these days, especially in a big company. They work 24x7 (Cayne is being pilloried for spending his vacation playing in a bridge tournament and being out of touch for a few days), endure tremendous pressure, and get bounced, tarred and feathered at the drop of a hat. Not for me, thanks.
-----------------------------------------------------------------------
Folks in this country are having a tough time dealing with the fact that the USA is not the economic sun, moon and stars (though it still may be the center of universe). Imagine that our economy is impacted so much by China, India, Europe and other places. Well, thank goodness it is. The demand from those countries, though keeping up energy prices, is also making the world safe for our export oriented companies and softening recession threats. It used to be the USA provided the only meaningful consumer demand in the world, and when we caught cold, the rest of the world got pneumonia. People may not see it that way yet, but both our economy and the world's will be better off because there is more balance and effective international demand for consumer goods.
However, with that comes more responsibility for a reasonable dollar policy, one that neither strengthens nor weakens the dollar unnecessarily. Right now the dollar is too weak, so weak, in fact, that a number of countries that have pegged their currencies to the dollar are reconsidering the wisdom of that policy. I would prefer to see the Fed peg the price of gold in dollars, say at $500 an ounce, instead of trying to modulate the economy by balancing inflation and recession risks. Another possible system would be to start with a given gold price target and add 2% to it each year to allow modest inflation and monetary expansion.
-------------------------------------------------------------------------------
My concern that the credit crunch would retest the highs of anxiety and the lows of financial asset prices has come to pass very quickly. Housing is nowhere near a bottom - at least 6-9 months away, and a couple of years before any upturn. When picking stocks, balance sheets are more important than ever in this environment. That means picking stocks close to book value (not more than 2X) and with the less debt the better. Right in my formula's wheelhouse. Now you just have to hope the numbers on the balance sheet are real. As we have seen, no one really has much idea concerning the quality of the assets underpinning these securitized mortgages, or anything else that the capital markets have spun out the last couple of years. It will be interesting to watch the ratings agencies downgrade everything and anything in the coming months.
-----------------------------------------------------------------
Still we keep buying. On 10/31, it was 100 shares of home builder Centex CTX), admittedly a very deep position to take, at 26.70. Then on November 1, I bought 1900 shares of Wolverine Tube (WLVT) at 1.10, the same price as the rights that expired last week, but it's actually cheaper to make a limit order with my discount broker than to exercise rights. Finally, today, I bought 50 shares of Boyd Gaming (BYD) a new name at 40.05. When things get tough, it is better to own the casino. Which reminds me, time for the periodic disclaimer: neither redwavemusings nor its author are investment advisors and the strategies and securities mentioned here are for readers' interest only, and are not recommendations. They may not be suitable investments for readers (or even the author).
-----------------------------------------------------------------------------------
In short order, some very big company CEO's have taken the axe (O'Neal, Prince Parsons), and more are apparently cued up (Cayne, Sullivan?). Short tenures and instant culpability for disappointing results are why it is necessary to pay CEO's so much. The O'Neal case at Merril Lynch is especially instructive. By all accounts, he did a splendid job turning Merrill around and pushing them far beyond their dominant retail brokerage origins. Unfortunately, that was also his undoing as the company's risk management function did not properly contain its investment in mortgage securitizations (Whose did? Only Goldman Sachs seems to have totally avoided this debacle). So right away he gets canned, and then to add insult to injury, the headlines are about his nine figure exit package, none of which was really severance! All of it was his vested pension, options, and restricted stock. So I feel better that even though his reputation was unfairly tarnished, at least he won't end up on welfare. Seriously, being CEO is no bowl of cherries these days, especially in a big company. They work 24x7 (Cayne is being pilloried for spending his vacation playing in a bridge tournament and being out of touch for a few days), endure tremendous pressure, and get bounced, tarred and feathered at the drop of a hat. Not for me, thanks.
-----------------------------------------------------------------------
Folks in this country are having a tough time dealing with the fact that the USA is not the economic sun, moon and stars (though it still may be the center of universe). Imagine that our economy is impacted so much by China, India, Europe and other places. Well, thank goodness it is. The demand from those countries, though keeping up energy prices, is also making the world safe for our export oriented companies and softening recession threats. It used to be the USA provided the only meaningful consumer demand in the world, and when we caught cold, the rest of the world got pneumonia. People may not see it that way yet, but both our economy and the world's will be better off because there is more balance and effective international demand for consumer goods.
However, with that comes more responsibility for a reasonable dollar policy, one that neither strengthens nor weakens the dollar unnecessarily. Right now the dollar is too weak, so weak, in fact, that a number of countries that have pegged their currencies to the dollar are reconsidering the wisdom of that policy. I would prefer to see the Fed peg the price of gold in dollars, say at $500 an ounce, instead of trying to modulate the economy by balancing inflation and recession risks. Another possible system would be to start with a given gold price target and add 2% to it each year to allow modest inflation and monetary expansion.
-------------------------------------------------------------------------------
My concern that the credit crunch would retest the highs of anxiety and the lows of financial asset prices has come to pass very quickly. Housing is nowhere near a bottom - at least 6-9 months away, and a couple of years before any upturn. When picking stocks, balance sheets are more important than ever in this environment. That means picking stocks close to book value (not more than 2X) and with the less debt the better. Right in my formula's wheelhouse. Now you just have to hope the numbers on the balance sheet are real. As we have seen, no one really has much idea concerning the quality of the assets underpinning these securitized mortgages, or anything else that the capital markets have spun out the last couple of years. It will be interesting to watch the ratings agencies downgrade everything and anything in the coming months.
-----------------------------------------------------------------
Still we keep buying. On 10/31, it was 100 shares of home builder Centex CTX), admittedly a very deep position to take, at 26.70. Then on November 1, I bought 1900 shares of Wolverine Tube (WLVT) at 1.10, the same price as the rights that expired last week, but it's actually cheaper to make a limit order with my discount broker than to exercise rights. Finally, today, I bought 50 shares of Boyd Gaming (BYD) a new name at 40.05. When things get tough, it is better to own the casino. Which reminds me, time for the periodic disclaimer: neither redwavemusings nor its author are investment advisors and the strategies and securities mentioned here are for readers' interest only, and are not recommendations. They may not be suitable investments for readers (or even the author).
