|
|
|
Market Events That Can Effect Your Portfolio | Market events change our investment returns very quickly. Whether geopolitical or internal to the US we need to know what these events mean in the long term. Portfolio Buzz helps you understand. |
|
Market Commentary
|
|
|
|
On occasion, political and economic events become much more important to portfolio management than basic market fundamentals. War and terrorism around the world, new energy discoveries, a global credit crunch, or the behavior of global equity markets are all examples of market events that can impact our investments.
We believe that we can provide our customers with valuable information, commentary and opinions on how individual investors might react to these market events. However, as each individual and their portfolio is unique, visitors to Portfolio Buzz need to make their own decisions based upon multiple sources of information and basic research.
If you have additional thoughts, comments or opinion regarding these market events, please email them to us via the "Contact Us" section of this website. Cogent and well thought-out emails may be published here with or without attribution, as you direct in your communication.
|
|
|
|
|
|
Harley-Davidson -- A Microcosm of the Economy
|
|
Sometimes, looking at a smaller, but revered company can give insight into our overall economy. In many ways Harley-Davidson (stock symbol HOG) is a market icon that can tell us a lot about what is really going on. Why?
• Harley-Davidson has an extremely strong brand
• It holds a strong position in the high-end consumer discretionary sector – certainly highly cyclical, but with underpinnings of great brand strength, conservative management, a relatively strong balance sheet, a high growth push into international markets and the support of a reasonably well-off consumer
• It has a strong consumer finance unit, which helps buyers purchase their new motorcycles – in fact 55% of 2007 motorcycles were financed
• It has a strong dedicated dealer distribution network which HOG is pushing into international regions
• It offers an alternative to high-cost transportation -- motorcycles don’t use a lot of gasoline
• Harley-Davidson manages inventory well, invests in R&D and, in low-growth years, is able to generate strong profits by lowering production below demand, thus preserving margins
MORE TO FOLLOW...
Official Website: www.Harley-Davidson.com
What more could we ask for? Isn’t Harley the consumer discretionary version of General Electric – albeit with a lower growth rate? Sure, GE’s core business is in industrial segments, but it also has a large finance unit, it has an incredible brand, it is extremely well-managed, it has a large footprint in alternative energy and it is pursuing global growth.
Actually, the comparison is telling. Both companies are at multi-year lows. In fact Harley-Davidson’s stock market price is approaching 1999 levels! Image, it has been dead money for 9 years.
Not surprisingly, both companies are suffering for the same reasons:
• They are both viewed as cyclical companies, and therefore will likely be heavily affected by the upcoming (current?) recession
• Both of them have a large dependence on their financing arms. Therefore they are being punished for their membership in the US financial system
• In fact, Harley normally securitizes a good portion of their consumer loans (e.g., sells them to others). But, the market for asset-backed securities has seized up. So, now HOG has to borrow from banks to keep their finance unit going. And, of course, banks are not lending. Same issues are driving GE’s stock down.
• With the recent drop in oil and commodity prices, fickle investors are getting out the alternative energy stocks
CONTINUED...
Official Website: www.GE.com
Net result, bikers can’t get financing, week-end warriors (doctors, lawyers, etc.) are pulling back, and the banking seizure is affecting Harley’s ability to fund its financing operation and generate profits.
This is just a microcosm of what’s happening around the world. Even the best companies are getting slaughtered.
Thank god multiple governments around the world are focusing on fixing these problems. If GE and Harley-Davidson are at risk, then we should be afraid of the markets
It is not a pretty picture.
|
|
|
|
|
|
|
|
|
Euro Zone Collapse
|
|
This weekend has not been good for the EU. A major summit of EU bigwigs concluded they would assure cross-border cooperation during this credit crisis, and (from unofficial sources) would make sure that no large institutions would fail.
Germany followed a few hours later with a unilateral guarantee that deposits in German banks would be safe, and increased the bail out plan for Hypo Real Estate, a large real estate lender.
The UK responded with “huh?” -- Apparently caught off guard. What happened to cross-border cooperation?
Previously, last week, Ireland guaranteed deposits in six major banks, Denmark made moves, Belgium paid up big time and others got involved with the rising panic.
And, following the big summit, this weekend Iceland announced they would do something (what??). And, an Italian bank indicated it needed capital. Italian government is not yet commenting.
Wow!
So what do we do?
As usual, Europe lags the US in good times and in bad. They are about to crater big time and they do not have the strong economic bones that we have. In other words, they will probably go down further and for longer than the US.
We recommend that you underweight Europe a lot (0%?).
Further, we can expect the contagion to affect Japan as well, although Japan may hide the problem for some time. In the short term, the yen will likely increase in value versus the dollar, but in the long term, Japan will realize the same problems of the EU and US. Gradually get out of Japan, equities and bonds.
As for the developing nations; the jury is out.
|
|
|
|
|
|
|
|
|
Municipal Bond Default – The Next Shoe to Drop?
|
|
October 3, 2008
Today should have been a banner day. Congress passed the rescue bill! We have action!
Ready, fire, aim!!
Unfortunately, our California governor soured the scene by also announcing today that his state may be in deep financial trouble because of the banking crisis. How can this be? Consider the following:
• Real estate price drops have battered traditional banks’ balance sheets
• Banks are responding by tightening credit standards and reducing the amounts that they are willing to lend – sometimes exacerbated by a gradual run on deposits if the bank is viewed as “suspect”
• At the same time, states and local municipalities are getting lower tax proceeds because of the economic slow down
• They need short-term loans to keep their municipalities running, but the guarantee of stable tax receipts is open to question
• The banks are reluctant to loan
• The states and local governments need help
While California is the first to comment, look for news of distress across the country in coming weeks, especially in areas where real estate speculation has fueled this death spiral or where the economic slow down has been most severe; Michigan, Nevada, Florida, Rhode Island, etc.
This looks like another shoe dropping. In fact, this financial crisis is starting to look like a centipede, with one foot after another ready to drop another shoe on a daily basis.
The implications are not good for the investor. Muni bonds are traditionally a safe haven. In most cases these bonds are insured to bolster their ratings. Even so, if we have a glut of defaults, then the insurers will be at risk, with attendant risk to the investor.
So what to do?
We need to be cautious with muni bonds. As with commercial paper (including attendant money market funds) and traditional GSE bond funds, we now have to limit exposure to muni bonds.
All of this argues for diversification of “safe investments.” It used to be that dumping everything into MBS securities, money markets, muni bond funds, treasury funds, gold ETF’s or defensive equities represented an escape from volatility and potential default. That world has changed (at least temporarily.) Instead, we need to spread our “safe money” across multiple “safe” assets, or risk that the next safe haven to dissolve may be the one we have always depended upon.
It is time to be cautious. This centipede market has many more shoes to drop.
|
|
|
|
|
|
Bailout, Rescue or Workout – It Doesn’t Matter
|
|
9/29/2008
The frenzy in Washington, the tough words from the Fed, the Treasury and the Congress are surely comic theater! They all talk a lot; yet demonstrate ignorance of basic economics.
On the one hand, we need to deal with a severe financial system crunch:
• Banks are not loaning money
• Commercial paper markets are drying up
• Money market accounts are at risk
• Major financial institutions are putting themselves up for sale
• Bank failures continue
• The contagion is going global, and it appears to be getting worse
On the other hand, Washington focuses on ideological and political issues:
• Creating multiple oversight bodies, headed by bureaucrats
• Punishing institutions by demanding US ownership in return for buying bad assets
• Potentially punishing CEOs, whether they are responsible or not for the existing malaise
• Providing $700 billion in installments, ensuring that the Congress stays involved and can grandstand for political gain
• Parties bashing each other continuously to make political points
If the situation wasn’t so serious, we might all laugh. Unfortunately, it’s serious and each of us must decide what to do with our money. We are not Wall Street, we are not Washington and we are not simply a demographic. We are people. We are all classes of our economy.
Whether we call this a bailout, a rescue or a workout, do we care? No!
Now, let’s complicate the issue
• No one knows whether any legislation out of Washington will work
• Further, the state of the economy is not good. We won’t know how bad things are for a few weeks (e.g., during earnings season), but it does not look bullish
• The global effect is real – e.g., a global slowdown or recession will make things much worse here
It is time to be very, very conservative. The markets are going to stop being preoccupied with the Washington dance, and will focus on fundamentals. The fundamentals are going to be very bad, and the financial system bailout will be open to question for a long time.
The economy and the market will be going lower.
In this environment, cash is king -- cash under your mattress, cash in FIDC guaranteed accounts, cash in money markets that are guaranteed. Therefore, we recommend the following:
• Change your asset allocation – increase your cash position and reduce bond and equity exposure
• Reduce exposure to global equities
• Focus on large cap, dividend-paying equities with sound balance sheets in defensive sectors
• Move cash into accounts that are guaranteed -- find out whether your money market accounts are guaranteed by the government
Sit and wait. You and I are not smart enough to know were the bottom is.
Sleep at nights.
|
|
|
|
|
|
|
|
|
| Back to Market Watch Page |
|
|
|
| | Links to Popular Sections of Portfolio Buzz | | | | | | | | | | | | | | | | | | |
| | | | Popular External Website Links | | | | | | |
| |
|
 |
