U.S. Treasury and The Fed

I recently read an article that pointed out that in 2011 the Federal Reserve purchased 61% of U.S. Treasury bond issuance.  In the markets there is a lot of speculation about another round of quantitative easing (which is sometimes called QE3).  Such speculation has kept the equity markets afloat, rising and retreating on QE3’s prospects.  However, with such massive purchases it seems that the Fed never actually backed off their last quantitative easing scheme.  Meanwhile, non-Fed buyers of our bonds (foreign purchasers, banks, mutual funds, etc.) are buying at much lower levels than at any point since the “Great Recession”.  And that’s not because borrowing is down.

I wonder if the Fed is creating a bubble in government debt.  Or, assuming the bubble has been created, if the Fed may be trapped into buying all these bonds.  An affirmative answer to either one of those questions could make the 2008 crisis look like child’s play.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Crowd Funding vs. Fat Cats

We regularly get questions from people wanting to invest in “hot” new companies. Lately all the media buzz about a looming public offering of shares from Facebook has more people than ever wondering how they can get in on the action.

The answer usually is: they can’t.

Think about it: people are interested because they expect that an investment in something like Facebook could make them some quick cash, maybe a lot of it, and there’s a good chance they could be right.  So ask yourself this – would the big Wall Street underwriters who bring such firms to market really let the average investor make some easy money, or would they share the bounty with their favored fat cats? Remember who we’re talking about. These are many of the same firms who brought us the financial crisis, took huge bailouts, then paid millions in bonuses to retain their “best” people. They don’t exist for the average investor.

That’s where “crowd funding” comes in. The theory is that small startups can go to the public – the average investor – and get investment capital to start and grow businesses.  NPR’s Morning Edition did a story about crowd funding this week.  Sounds like a fine idea, but lurking behind it s the ever-present specter of securities fraud. Stock scammers are not new, and a hallmark of their crooked trade is to prey on the unwary, often in modest amounts. It’s not hard to imagine a website touting plausible-sounding “up-and-coming” companies and encouraging the unwary to make a small investment.  Plenty of people might “invest” $5, $100, $1000 hoping for a long-shot win. After all, people throw away money on lottery tickets every day. Experience suggests that such sites would pop up, collect money, and disappear, leaving investors with nothing and regulators hunting a thin trail.

Crowd funding sounds like a good idea, but without adequate safeguards for the investing public, it won’t be a path to Fat Cat status.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

$1,600,000,000 (that’s billion with a ‘b’)!!!

Oh, it’s still missing!?  The $1.6 billion dollars that “vaporized” from MF Global!?  Let me refresh everyone’s memory as, apparently, a fairly significant “vaporization of capital” warrants only brief news coverage because we have much more urgent things to cover like “The Situation,” whoever that is,  heading to rehab.  MF Global mixed its clients’ money with its own and, now that MF Global is in bankruptcy, a bunch of that client money has disappeared.  Important and newsworthy idea?  Of course it… wait, nevermind, the Kardashians just came on.

So now what is proposed is a new “Corzine Rule.”   Mr. Corzine, the former governor of New Jersey, former Goldman Sachs head and more terrifying,  potential FOMC Chairman, was the president of MF Global when said funds were “vaporized”.  The proposal would make it mandatory for a futures firm’s principal to sign off on any money moved from client  segregated funds if it is more than 25% of the firms excess segregated funds. Now, call me crazy here, but I think that the first person to approve the funds being moved should be the client.  In  the MF Global case this didn’t happen.  I am also of the understanding that at a future’s fund, much like at a brokerage firm, comingling client funds and firm funds is illegal!  So, in the case of MF Global, what the firm did was already illegal?  But we’re considering a new law to make it doubly illegal!? Really??

Let me get this straight.  Jon Corzine is still not in jail nor is he charged with anything, the $1.6 billion is nowhere to be found and we are proposing a new rule which at its core addresses something that is already illegal.  Wow.  Anyone think a new law enforced as weakly as the old laws will change anything!?

Is it any wonder that average people look at what is going on in the financial industry and just shake their heads in disbelief?  It’s my industry and that’s precisely what I have been doing for 4 years now.  Where has the idea of client service gone?  Where has the idea gone that our single purpose as professional financial advisors is to serve our clients?   Actually enforcing the laws we have would go a long way toward pushing people like Corzine, whose self-interest trumped his committment to his clients, out of the business.

We don’t need a new law; we need to return to the idea that we work for our clients. 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Doug Hendee, CFP^®

Related articles

• MF Global Workers Expected to Be Called to Testify Before Congress (dealbook.nytimes.com)
• Jon Corzine Sued by Farmers over Missing Millions (blippitt.com)
• Execs at bankrupt MF Global may get bonuses (bottomline.msnbc.msn.com)

Political Risk: United States

As investors, we usually think of political risk relative to international investing – e.g. will Brazil honor contracts or will China steal our technology?  But there are more dimensions to political risk these days. 

Today, House Republicans released their 2013 budget.  Now, I don’t know what Vegas would say, but I’m confident that the chances of the budget becoming law are akin to flying pigs.  However, this budget proposal does remind me of the political battle that is likely to take place later on this year. 

If you think the gridlock over the payroll tax extension was frustrating, just wait until the much larger Bush tax cuts are about to expire again.  If you thought the Joint Select Committee on Deficit Reduction’s results were embarrassing, just wait until the harsh medicine of its failure is on our doorstep.  If you thought these debates were poisonous and only resulted in kicking the can down the road, just wait until we do it all again, all at once, during a Presidential election year.

In August of 2011 Standard & Poor’s downgraded the U.S. credit rating not because our national credit card was maxed out quite yet, but rather because of S&P’s lack of faith in our policymaker’s ability to constructively work together to find solutions for our long-term debt trajectory.   Whether or not that credit rating mattered is up for debate, but it’s hard to disagree with S&P’s conclusions about Congress. 

We could, and should, be leaders in the world with regard to fiscal responsibility in government, but that is unlikely with our current crop of representatives.  Now that the congressional pipeline is full of critical and controversial fiscal matters, it’s advisable to consider the political risk in our own country – something we’re neither used to nor likely to be happy about doing.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Update: Apple as an Income Stock

In my previous post I discussed the potential of Apple becoming an income stock. Today the company announced that it would begin paying a $2.65 quarterly dividend, a current yield of about 1.8%. Along with the dividend Apple plans to buy back $10 billion of its stock. I believe returning capital to the shareholders is the right move for Apple. They will retain more than enough cash to continue research & development as well as any acquisitions the company might seek. The shareholders are the owners of the company and if management is not putting this excess cash to work, it should return it. As I mentioned in my previous post, a dividend will make for an interesting dynamic as the company now fits the bill for funds/investors who seek current income from their investments. Apple is up nearly 50% year-to-date. I will be interested to see the effects of this fundamental change as time goes on.

Sam DiNorma

 (This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

There is a Difference Between Loving a Company and Loving That Company’s Stock

This is a current chart of Apple stock in white on top of a 2007 chart of Google in orange.  I am not making any predictions here, but Todd Harrison at Minyanville says it best  “We’ve seen this parabolic frolic before and it was always different—until it wasn’t.”

 

Doug Hendee, CFP^®

Magic Numbers?

What happened to the “news” story that was Dow 13,000?  Over the last few weeks as US stock markets rose and the Dow Jones Industrial Average flirted with 13,000 stories filled the financial media.  Their content was a typically breathless “will it or won’t it” close above that magical mark. Experts opined on the “psychological importance” of this and other market measures.

And then what? US financial markets have been up for 7 straight trading days, the Dow is solidly over 13,000 (13,200 as I write this) and it’s not a topic anymore. Why not? My view: it was never a legitimate topic in the first place.

I started in the investment business when the Dow was at 1,000 and can remember when some people predicted that the Dow would reach 5,000, or 7,000, or even 10,000 – some day.  I also remember the “experts” who denounced those predictions as crazy, impossible fantasies.  Marks don’t move based on the level of some arbitrary index. Markets move, in the long run, based on dollars and cents: sales, earnings, dividends. The rest is noise. I’m bullish on the US economy, and I’m bullish on our stock market. Ignore the noise; enjoy the ride.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Related articles

• Did I Miss Something? (brightonsecurities.wordpress.com)

Cycles

Recently, my colleague Brennan published a post relating our current economic climate to that of the 1970’s.  This concept of a cyclical economy is something that has been studied in great detail for many years.  As Brennan posed, history never repeats itself exactly, but there are often many measurable similarities. I will refrain from discussing the statistics, historical and mathematical studies on cycles (believe me, there are thousands).

What I believe to be more important are the emotional effects on investors.  No matter how many economic crises we have, or periods of time where it is near almost impossible to lose money in the markets, we seldom consider anything but the present.  This is why it’s so important to have an evenhanded, unbiased plan for reaching your financial goals. When you’re down on your luck it seems as if things will never get better and when you’re flush you convince yourself that this will go on forever.  The same is true with investing, where mother market will always find a way to surprise you.

Sam DiNorma

 (This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Kodak’s Apple Problem is Apple’s Kodak Problem

• George Eastman was attacking apples before Steve Jobs was born. 
• However, George grew up in apple country (I don’t mean Cupertino) and must have had an appreciation for NY State’s delicious varietals. 
• There’s a very good argument that Kodak was the Apple of its day.

So, why is today’s American technology behemoth trying so hard to beat the tar out of yesterday’s?  The longer answer has to do with competition, technology, and imaging, but in the end only the short answer matters: money.  Both Kodak and Apple think they own the same very lucrative idea and they want the matter settled so that they can continue (or in Kodak’s case, start again at) making money.

Yesterday, Judge Allan Gropper ruled that he would not “unfreeze” the lawsuit Apple has brought against Kodak over patent infringement.  Since Apple thinks it owns one of those patents, it would prefer to get a court ruling saying so before the patents get sold as it will be more difficult for Apple to regain the rights to that patent if they get sold to a third party.  Yesterday made that a whole lot harder.

How does this matter to Rochester?  The patent sale is an enormous factor in Kodak’s ability to fund its pension, the Kodak Retirement Income Plan or KRIP.  Let’s look at some numbers:

KRIP is funded at either 86% (PBGC) or 90.5% (Kodak’s 10-K), depending on who you want to believe.  That leaves the dollar amount of the underfunding at either 700 million or 500 million.  Let’s split the difference and call it 600 million.  Estimates of the value of the patent portfolio Kodak wants to sell range from 2.2 billion – 2.6 billion.  Before Kodak can make up the funding gap, it has to pay back the DIP loan it got to get it through the first part of bankruptcy: 950 million.  Still waiting after DIP and the pension are 2.6 billion in bondholder debt and a pile of unpaid vendors and some environmental remediation.  But what will Kodak have left to pay them?

$2,000,000,000 (Patents) – $950,000,000 (DIP) – $600,000,000 (Pension) = $450,000,000. 

That’s 450 million left over to pay back 2.6 billion + of debt and have enough money to keep operating a business!

Now, bankruptcy is going to reduce the bondholder, vendor and environmental debt (and reduce retiree benefits outside of KRIP) to some degree and Kodak has other valuable assets to try to sell (profitable business lines, real estate).  But if you take a moment and think about how much worse a situation Kodak will be in if they don’t sell those patents – that is, if that 2 billion dollars is not available to pay off the DIP, pension and some other debts – you will understand just how critical the patent sale is to Kodak and to Kodak’s retirees.

Yesterday’s decision takes Kodak a step closer to being able to sell those patents.  Hopefully, this is a pattern that continues.

Chris Cromwell

WSJ on the Topic: http://on.wsj.com/yNB8w8

History Repeats (or at least rhymes)

Investors often use historical comparisons to help gauge expectations on their investments.  While this is a useful practice, history is full of time periods that have little in common with one another.  If we look at the returns of a balanced portfolio (60% stocks / 40% bonds) from the years 1900 through 2010, the inflation adjusted returns were roughly 4%.  However, there were long periods of booms and busts.  There were the post war booms in the 1920’s and 1950’s, as well as the deregulation / declining interest rate boom in the 1980’s and 1990’s.  On the other hand there were painfully long bust periods such as the war decades and the Great Depression.  My point is that some time periods were better than others.  So it helps to focus on the time periods during which the overall economic environment is similar to what we are experiencing today to get a better understanding of what we might expect.  Consider the following features of today’s economic environment:

• High misery index
• High unemployment
• Rising energy and commodity prices
• Low inflation adjusted yields on government bonds
• Rising government regulation and involvement in the economy
• Decelerating productivity growth

It was Mark Twain who famously said that “History does not repeat itself, but it does rhyme.”  And so it is true today as the points above were also uniquely prevalent during the 1970’s.  Unfortunately the 70’s were one of the long bust periods.  But there were investments that did relatively well.  So, when you are looking to the past to help inform your current decisions and expectations, pay extra special attention the 1970’s.  It may help you navigate today’s stormy seas.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).