Saturday, December 29, 2007

Terrorism is Alive, Dangerous, and Impacting the Markets.

The death of the former prime minister of Pakistan Benazir Bhutto's and the subsequent decline in the world equity markets should serve as a wake up call to all of us that the Taliban is serious about what they want to do to us. One of the reasons she was attacked was because she was a woman and in a leadership position something the Taliban cannot accept. In covering this horrific event the press, at least what I saw in the US press, was more concerned about how it happened and was less concerned about the message from the terrorist.

The coverage on CNN was so focused on how that they actually brought in an expert to review the film frame by frame to try and figure out if she died from a gunshot or something else. The constant playing of the frames, reminded me of the Zapruder Film of the John F. Kennedy assignation. The attention to detail of how it was accomplished ignored the real issues.

No matter how much we want to ignore terrorism it is still out there and impacts our lives and our investments. Just when we think things are moving the right direction an attack like this one sends a message that takes away our confidence. As much as we would like to think we have terrorism under control we don’t. We have been successful in keeping attacks out of the United States but they continue in other parts of the world,

I thought it was interesting to watch the presidential candidates reaction to the assignation or perhaps the lack of reaction. Perhaps the shock of the act has stunned the candidates to rethink some of their positions on terrorism and how to deal with this serious problem. With the Iowa primary in a few days’ comments about the attack will be muted at best from the Democrats. On the other hand Republicans may be more aggressive on the subject.

We have one last trading day in 2007 I don’t expect any significant rally. What I’m concerned about is how will this terror event impact the first weeks of the New Year? We still have the problems of the sub-prime issue. Housing continued to deteriorate and more banks will have to report losses on SIV’s. Stock prices may look cheap based on projected earnings for 2008 if those earning due in fact materialize.

In mid January the retail sales for December will be reported and most of the banks will report any write-downs from housing and other loans. I would be surprised if the Holiday sales were much improved over last year. In addition we will want to see fourth quarter earnings for the retailers to get some idea of the markdown necessary to attract buyer. Rumors on the street suggest that Merrill Lynch my report as much as an additional $15 billion in write-downs, and a major European bank is in trouble.

I don’t think we are out of the wood and most of the talk in the coming week will focus how slow will the slowdown really be and for how long. I wish I had better news to start the New Year but I’m afraid that many of the problems we discovered in the last 4 months of 2007 are still unresolved. I expect that 2008 will be a year of continued volatility and that being paid interest and or dividends will be a great thing for investors.

Dan Perkins

Thursday, December 20, 2007

Who is going to own who when this is all said and done?

In 2005 and 06 $1.2 trillion in sub-prime mortgages were sold to somebody.

OK this week we had Morgan Stanley and Bear Sterns report in excess of $10 billion in write-downs of sub-prime mortgages. So far, including this week, about $50 billion has been written down. Moody’s said yesterday that they were reviewing about $173 billion in mortgage-backed securities for possible down grades. Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006.

The most recent number as to the size of the problem in the sub-prime markets I saw was upwards to $500 billion. If there has been reported about $50 billion in write offs then we have only see 10% of the potential problem. Citibank and Morgan, in order to replace some of their lost capital, sold to Asian and Middle Eastern investor’s minor ownership interest in their firms.

What concerns me is if the number of $500 billion is reasonably correct then we still have $450 billion or so to go, who is going to own who when this is all said and done? The European central banks loaned out this week $500 billion dollars to provide liquidity. The rumor on the street is that a major European bank is in deep trouble because of their exposure to the sub-prime market. I think it is important to understand that the problems in the mortgage market are not isolate to the United States.

Cheap money and skyrocketing real estate price was a global opportunity or perceived to be opportunity. The chickens are coming home to roost and are bringing home with them all the debt that has to be paid off and the money is not there to make the mortgage payments. We as Americans want tings over and done with so we can move on to the next thing whatever it is. The problem with sub-prime loans is that it does not matter how much we want the sub-prime problem to be over with it, but it just will not go away.

The other rumor on the street is that the additional write down for Merrill Lynch, to be reported by the end of the month, could be an additional $8 billion to $15 billion. When you couple the $8 billion already announced at the high end that would take the loss to $23 billion dollars—if correct then Merrill would be forced to find additional capital.

I bring this to your attention because the credit markets and the world central banks know there is a huge problem and they are trying to keep it contained. I believe the pressure is building for a major credit collapse on a global basis, which I believe, will lead to a recession late next year.

Dan Perkins

Friday, December 14, 2007

We had a difficult week this week

The Dow was off 300 points for the week and if that isn't bad enough we closed on the low for the week and the day on Friday. I was explaining to a client recently how volatile the markets have been over the last 4 months. During that time we have seen two ten percent corrections and we may have started a third with the performance this week.

Over Time,
One Week or Four Months Disappears on the Charts

Let’s look at two days this week and see just how volatile the markets are. On Tuesday, more commonly called “Fed Day” the Open Market Committee cut the Fed Funds interest rate by 25 basis points (one quarter of one percent). The markets did not like the small cut in the Fed Funds interest rate and no cut in the discount rate. The result was that the stock market closed down just under 300 points for the day. Wednesday morning the market surged off the wimpy Fed move the day before, at one point, the Dow Jones was up about 250 points. Then it gave all that back and was down about 80 points. The market closed on Wednesday up about 45.

You Do the Math

So, in the matter of two days, the market went down 300, up 250, down 325, and then up 40 points. We took a slight breather on Thursday and then went down 178 points on Friday closing at the low for the day and the week. These market swings can drive you nuts! If you let them get to you. If you pull back to a year and look at the chart of the market, it will be hard to see what happened this week, and the further out you go in time the less you notice the volatility of this week.

My point is that if you have a longer term view the weekly or monthly movements have little impact on returns. I know it is hard to watch all this turmoil in the markets, that is the reason by and large I don't pay that much attention to short-term changes in the market. What I ask myself is: do I want to continue to own what I own? I do expect that the markets will continue to be ranged bound till the end of the year. I also expect the volatility we have been experiencing to continue.

Credit Markets Say the Trouble Isn’t Over

Recently I wrote about Special Investment Vehicles (SIV) that is off the balance sheets assets of the banks and brokers. Two weeks ago E-Trade sold $8 billion of SIV’s for 29 cents on the dollar. On Friday Citibank announced that they were moving about $43 billion in SIV’s to their balance sheet out of Level Three accounts. Level three assets are assets that the bank can carry at any price they choose. Many of the investments in Level Three usually have no market and therefore it is very difficult to establish their value.

By moving assets out of Level Three to Level Two they now have to figure out a price. Some people think that the value of these SIV’s is between 50 cents to 70 cents on the dollar. When Citibank moved these assets Moody’s lowered the credit rating of the bank. The credit agencies think the bank will have other write downs because of this movement of assets.

When Citi took their write downs for sub-prime loans they left the value of the SIV’s alone ($83 Billion) and carried them at par or face amount, no loss. As other banks will be forced to follow Citibank lead we will get more information as to the magnitude of potential losses in SIV’s. It may well take several quarters into next year till we find out the extent of the credit problem.

Dan Perkins

Charlotte Hope Perkins Born 12/7/2007

I have not updated recently because I have been preoccupied with the birth of our first grandchild. Charlotte Hope Perkins, was born around 9:30 PM on Friday, December 7. Roughly 21 inches long and just under 9 pounds.

Try this link to see pictures of Charlotte.

She came home with her parents on Sunday, but was back in the hospital on Monday afternoon with Jaundice. She came home again on Wednesday and is settling in with her parents. We will see her again in a week or so, but it was hard for both of us to leave her on Wednesday.

For some reason I never thought much about being a grandparent, but when I held her on Sunday morning, we became fast friends. In the hospital Gerri, worked with Jen on feeding the baby and I was able relieves mom and grandma to hold her when she got fussy. At just under 9 pounds, when you think about it, she was a big baby, but when you hold her 9 pounds in your arms she is very small.

Dan Perkins