Wednesday, April 02, 2008
A couple of things I heard on CNBC this morning
I grabbed my usual ten minutes of CNBC this morning while waiting for the TH Daughter to get ready for school, and heard two interesting points. First, Joe Kernen goaded his guests to agree that Fed Chairman Ben Bernanke was entitled to walk with a bit of swagger today, insofar as the stock market's almost 400 point rise yesterday seemed to signal a turning point in sentiment, particularly about asset writedowns. I am not a Wall Streeter or stock operator, but it certainly feels as though yesterday's monster move, particularly in financials, could be a turning of the tide. Either that, or this post is correct, in which case we are screwed. Time will tell.
Second, I heard a perfectly American sounding trader named "Boris" argue that the dollar had bottomed against the Euro. Not only has the Euro failed to rally on each bit of economic news -- a suggestion that its bull run is getting tired -- but the Russian central bank threw a switch yesterday and began buying dollars. The Russians, according to "Boris," are regarded as excellent traders of currency. Apparently the Russian central bank has made several very smart currency moves, including having started selling dollars for Euros when the latter traded at a mere $1.34 per.
All of that reminds me of some crow to eat myself. April 1-2 are the days on which I have traditionally mocked the New York Times for its inability to forecast currency markets. Three years ago today, with the Euro around $1.30 the Grey Lady's editorial board declared that "the dollar is heading down, no matter what" on account of the incompetence of the Bush administration. Now, it was not at all clear whether that would be a bad thing for Americans, but to the New York Times it was yet another reason to complain about Republicans. In any case, two years ago the Times was looking very wrong, insofar as the dollar had appreciated to $1.21 to the Euro notwithstanding the paper's claims that the greenback was "heading down, no matter what." Not having bet actual money on its trade and with credibility in apparently infinite supply, the editors felt no need to confess error in their own predictions.
Well, today the Euro is at $1.56 and I am man enough to admit that the dollar has, indeed, dramatically since that newspaper's original prediction three years ago. True, the editors were wrong for a long time before they were right, but their prognostication of April 2, 2005 is true today and has been for more than a year.
Suffice it to say, I will remind you when -- and I use the word advisedly -- a Euro again costs less than $1.30, especially if it happens before the Obama administration.
CWCID: Glenn Reynolds, for the Mr. Snitch post.
7 Comments:
By 
Charlottesvillain, at
Wed Apr 02, 09:52:00 AM:
I'm not surprised that the professional cheerleaders on CNBC are giddy this morning. To say that they have a "long bias" is to understate matters by several magnitudes.
I enjoy watching equities go up as much as the next guy, and have considerable exposure to long equities, since I realized long ago I have no ability to time the market in the short or intermediate term, and I believe that in the long term equities are more likely to go up than down.
That said, my view is that there is a lot more pain in store for financial institutions. We are nowhere near the bottom of the real estate cycle. If the US economy has recession, which seems likely, default rates will continue to climb. The more we learn about the systematic underwriting failures, the bigger and worse the problem seems to be, and well beyond the "subprime" space. Commercial real estate is showing signs of strain as well, and will probably drag some regional banks under.
The real unknown is what we can expect in the area of corporate defaults, which have been well below historical average for the past several years. The problem in this market is one of leverage, since credit default swaps have massively increased the likely impact of high default rates. The notional value of exposures greatly exceeds the actual outstanding corporate debt, which means that even a return to a modest average default rate of 3.5% will be magnified. No one really knows by how much, or who will be affected. A hard recession and steeper default curve could endanger some financial firms.
(One interesting wrinkle is that the past couple of years saw the issuance of a lot of "covenant lite" loans, for which an event of default may be difficult to define. This might mitigate the dervivatives problem, but may result in "zombie" companies that continue to exist but should be taken out and shot. Time will tell.)
Furthermore, Banks and Wall Street firms have a major problem that few are focusing on. Write downs aside, how are they going to replace the revenue that used to be generated by mortgage securitization, CDO issuance, and LBOs? These markets remain broken with no real prospects of recovery anytime soon. This will have pretty major implications for their income statements, not even considering the impact on the overall economy that the loss of these credit facilities will have over the longer term.
So, I have no special knowledge and certainly am not offering advice, but I don't think we've seen the worst. (Of course if Erin Burnett wants to personally convince me, I remain open to pursuasion.)
By Jeff Faria, at
Wed Apr 02, 10:15:00 AM:
Of course, CNBC has a vested interest in seeing a market move-up. Historically they lose viewers when the market tanks.
As far as my post is concerned, there is a difference between a "market bottom" and a foundation for a new bull market. The more reliable (in my opinion) commentators (not on CNBC though) say that the market has shown conviction in the recent surge. That does not mean we won't retest the bottom. We certainly will.
I believe we will see a substantial writedowns in assets. I also believe the country has fundamental problems in many areas (schools, corruption, socialistic government) that are a drag on economic progress. But these problems (alas) are not new, so they are factored in (more or less).
Some states are in serious financial jeopardy as well, by the way. New Jersey looks like NYC in the '70's. NJ will get worse (lots) before it gets better, they are still deep in denial. On the other hand, Texas - yow.
What does all this mean? I think if you invest in a company with a compelling story that is run well, preferably in some tech area, you should do OK. Some commodities should do well. But this isn't the 90's, where everythig goes up. Watch carefully where you step, 'cause some assets will still sink like boulders in a swamp. And remember, this is LONG term.
And turn off CNBC.
By Georg Felis, at
Wed Apr 02, 10:41:00 AM:
I would presume then, this is the time for companies to take careful inventory of their assets, paying particular attention to any asset that supposedly increased dramatically in value over the last 5-10 years (because they would have the highest probability of being over valuated)?
I am not sure many companies have the (fill in adjective here) to take such a hard look at their crown jewels, for fear of finding paste.
By joated, at
Wed Apr 02, 11:13:00 AM:
I don't trade in stocks so take this with that in mind.
If, over coffee every morning, someone asks me what the weather for tomorrow is going to be and I say, "Rainy." I'm going to be correct sooner or later. Doesn't mean I know a damn thing, however.
Give me a prognosticator who can forcast the markets actions for tomorrow (+/- 10 points) eight out of ten days and I'll start thinking about giving him some money for short term investments.
By 
, at
Wed Apr 02, 12:28:00 PM:
joated, short term predictions are incredibly hard to make, since the stock market in the short term follows Brownian motion (i.e. random). It is only over the long term that trends arise (and many academics claim that there are no patterns even then).
By Jeff Faria, at
Wed Apr 02, 12:51:00 PM:
"I am not sure many companies have the (fill in adjective here) to take such a hard look at their crown jewels, for fear of finding paste."
Well, that is so true. But it narrows down the field rather nicely then, doesn't it? Eliminates the chaff.
Speaking of chaff, let's not forget that most stock analysts are themselves quite inept. When you find something (or someone) that works, stick with it. That's why I got behind that author, Morris. He has written quite a number of books, and has shown insight in each subject he has tackled.
(I don't make any money for saying this, either. No commission. FYI.)
I will never forget the day I turned off CNBC for the last time. It was that Opening Bell show, I think that was the name of it. There's this one good-looking analyst, I think his name was David. (He was the only reasonably attractive one of the bunch, so he was easy to pick out.) This was after the big dotcom crash, and things were bottoming out. The market was still shaky, this is early 2001 I think. So this guy, David, is talking about chip stocks. Specifically, he's talking about Intel. And he's saying he doesn't see that the stock can go anywhere. He was noting the boom-bust nature of this kind of tech stock, but he's saying uh-uh, not this time. Well, this is interesting, I thought to myself. This guy must have some insight. Tell us why!
It's because, he says, computers have all the power they would ever need. Why, my machine is plenty fast for email and browsing the net and Excel charts, he explains. Who needs a faster computer?
That is when I knew, beyond any doubt, that none of these guys could see past their nose, and that I was wasting my time.
Have not gone back to CNBC since.
By Georg Felis, at
Wed Apr 02, 04:08:00 PM:
The problem I hit with “Eliminates the chaff” is the exceedingly difficult job of differentiating between a company who has realistically looked over their assets and is forecasting a certain growth vs a company with delusionary opinion of their own self-worth (eg Enron).
