There are several macro conundrums that overhang the global economy.
1.) Are Republicans & Tea Party members of congress so committed to their beliefs that they'd be willing to accept a U.S. recession / depression over their beliefs against increasing deficit spending or raising taxes on the rich?
2.) Does the EuroZone have the leadership, infrastructure and mechanisms to handle an over-leveraged, default-prone country? Secondarily, if Europe falls into a recession, will it spread to the U.S.?
3.) Is China in a construction bubble (very, very likely), and what are the global ramifications if it collapses or even slows down (commodity prices, manufacturing equipment, jobs in resource rich emerging economies, etc.)?
I don't have a clean answer for any of these questions, but I think any of them could lead to an economic blow up. As of Friday, my net exposure remained at nearly 10%.
Sunday, September 11, 2011
Why France is Fu...
It sure feels like the beginning of a collapse. One small event ignites a chain reaction. But paradoxically, it was not the event that caused the crisis. That blame should fall on the fragility of the system. Note, however, that I am not an expert European banking analyst, but these are my conclusions based on an hour of analysis.
Below is an article titled "Biggest French Banks ... Poised to be Downgraded by Moody's"
Link to Bloomberg Article
So is this rumor mongering, or do the facts justify concern? Let's look at BNP, the largest of the 3 banks mentioned:
As of 6/30/11, BNP has 1.93 trillion euro of assets, offset by 1.84 trillion euro in liabilities. So the equity stake in BNP is a slim 87bn euro. The reason why this is an issue is b/c the leverage (assets dividend by equity) is so very high at 22x. This means that if their assets (loans, available for sale securities, sovereign bonds, etc.) decline by more than 5%, then the equity gets wiped out, stock is worth zero. As of Friday, BNP had a $35bn market cap (according to Yahoo Finance).
Now their Greek bond exposure is only 3.8 bn euros (or 4% of total equity) so it's not enough to kill the bank if Greece defaults. I guess this is why the Bloomberg article suggests Moody's is only looking to lower BNP's rating by "one level."
But I guess the secondary question, and more important analysis, is how much of their 1.93 trillion in assets were from Greece and other struggling European countries? Below is a link to their 2010 annual report:
BNP 2010 Annual Report
I didn't see any chart that gave me a good answer (always a "red flag" when obvious questions aren't quickly and easily answered) so I'm going to use pg. 89, the workforce "breakdown by geographic area" as a proxy. In which case 27% of loans are "Europe (out of domestic markets)" - whatever that's supposed to mean. Let's assume 20% of which (complete guess) is from Greece or 5.4% of the total. BNP has 1.76 trillion in loans and other income producing assets so we can guesstimate that 95bn (5.4% of 1.76 trillion) is linked to Greece - that's more than the total equity value!
This may provide a little context as to why BNP stock has fallen 45% since the beginning of July. The market is saying "dude, you're insolvent."
Below is an article titled "Biggest French Banks ... Poised to be Downgraded by Moody's"
Link to Bloomberg Article
So is this rumor mongering, or do the facts justify concern? Let's look at BNP, the largest of the 3 banks mentioned:
As of 6/30/11, BNP has 1.93 trillion euro of assets, offset by 1.84 trillion euro in liabilities. So the equity stake in BNP is a slim 87bn euro. The reason why this is an issue is b/c the leverage (assets dividend by equity) is so very high at 22x. This means that if their assets (loans, available for sale securities, sovereign bonds, etc.) decline by more than 5%, then the equity gets wiped out, stock is worth zero. As of Friday, BNP had a $35bn market cap (according to Yahoo Finance).
Now their Greek bond exposure is only 3.8 bn euros (or 4% of total equity) so it's not enough to kill the bank if Greece defaults. I guess this is why the Bloomberg article suggests Moody's is only looking to lower BNP's rating by "one level."
But I guess the secondary question, and more important analysis, is how much of their 1.93 trillion in assets were from Greece and other struggling European countries? Below is a link to their 2010 annual report:
BNP 2010 Annual Report
I didn't see any chart that gave me a good answer (always a "red flag" when obvious questions aren't quickly and easily answered) so I'm going to use pg. 89, the workforce "breakdown by geographic area" as a proxy. In which case 27% of loans are "Europe (out of domestic markets)" - whatever that's supposed to mean. Let's assume 20% of which (complete guess) is from Greece or 5.4% of the total. BNP has 1.76 trillion in loans and other income producing assets so we can guesstimate that 95bn (5.4% of 1.76 trillion) is linked to Greece - that's more than the total equity value!
This may provide a little context as to why BNP stock has fallen 45% since the beginning of July. The market is saying "dude, you're insolvent."
Friday, September 2, 2011
Parlor Games - S&P Down 2.55%
Well I was wrong about the date of the Obama speech, but everything else seemed to fit my comments yesterday with somewhat surprising accuracy.
YTD I'm down 2.2% vs. -5.4% for the S&P and -12% for the Russell 2000.
YTD I'm down 2.2% vs. -5.4% for the S&P and -12% for the Russell 2000.
Thursday, September 1, 2011
7% Net Long / The Lowest Exposure I've had in Months
It's pretty radical how much my portfolio has changed over the last month.
I don't expect this rally to last and so I put on sizable shorts and hedges today (into the weakness) going from 25% net exposure to 7% in a day. I could change my mind tomorrow in a second as I think there's a good chance that I am too early with putting on this hedge and perhaps the S&P rebounds 5% from here before breaking down again. If I'm right however, and it was the correct call to put on these hedges, then I think it will breakdown swiftly with a 2-3% day tomorrow or next week.
We'll see. This is all a parlor game. The real investing is in figuring out which positions I want to own for the next few years (aka core positions). The hedges are just a way to try to preserve capital in the event of a market collapse where all positions, even cheap stocks, get crushed.
My core positions are currently DCIX / CA / SWY / WFC.
That said, from an economics perspective the market is eagerly anticipating August nonfarm payrolls and unemployment announcements tomorrow morning. I think the clues suggest that it's not going to be good. I guess the first clue is how many companies increased their hiring in August when the Country was facing a default and was downgraded? The second clue is that Obama is giving a speech on jobs today. He probably already knows the jobs figures that will be reported tomorrow, so I'd imagine, this speech is probably timed with a weak figure. Or why else would he make a speech? The third clue is that Obama picked Alan Krueger, to lead the council of Economic Advisors earlier this week. According to the Nytimes, Mr. Krueger is known for his "studies of labor markets."
As I said, this is all a parlor game. I'll take off my significant hedges in the blink of an eye if I think the market is going to keep this rally going.
I don't expect this rally to last and so I put on sizable shorts and hedges today (into the weakness) going from 25% net exposure to 7% in a day. I could change my mind tomorrow in a second as I think there's a good chance that I am too early with putting on this hedge and perhaps the S&P rebounds 5% from here before breaking down again. If I'm right however, and it was the correct call to put on these hedges, then I think it will breakdown swiftly with a 2-3% day tomorrow or next week.
We'll see. This is all a parlor game. The real investing is in figuring out which positions I want to own for the next few years (aka core positions). The hedges are just a way to try to preserve capital in the event of a market collapse where all positions, even cheap stocks, get crushed.
My core positions are currently DCIX / CA / SWY / WFC.
That said, from an economics perspective the market is eagerly anticipating August nonfarm payrolls and unemployment announcements tomorrow morning. I think the clues suggest that it's not going to be good. I guess the first clue is how many companies increased their hiring in August when the Country was facing a default and was downgraded? The second clue is that Obama is giving a speech on jobs today. He probably already knows the jobs figures that will be reported tomorrow, so I'd imagine, this speech is probably timed with a weak figure. Or why else would he make a speech? The third clue is that Obama picked Alan Krueger, to lead the council of Economic Advisors earlier this week. According to the Nytimes, Mr. Krueger is known for his "studies of labor markets."
As I said, this is all a parlor game. I'll take off my significant hedges in the blink of an eye if I think the market is going to keep this rally going.
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