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| http://www.gilder.com/ | Issue 360.0/October 17,
2008
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HEADLINES:
- The Week / Andy Kessler: New Life
- Friday Feature / Ken Fisher: Stocks to Survive On
- Friday Blogger Bonus / Google Handily Beats Wall
Street Expectations
- Readings /
The
Week /
New Life
ANDY KESSLER, Forbes.com (10/13/08): Thank you, sir, may I have
another? As the stock market gets spanked,down 40% in a year and a day, there
is a silver lining. We Americans get our lumps out the way, and start a new
life. Much has been made of the "mark to market" rule and its role in
the credit crisis, but it probably has saved us from 10-plus years of gloom and
doom.
Google the number 157 and the first result that comes up is the Financial
Accounting Standards Board (FASB) statement on fair value
measurements. It's way too boring to read, but what it says is that if a bank
or investment bank has a security that trades at 62 cents on the dollar, you
have to carry it on your books at 62 cents on the dollar. Pretty simple. You
may think it's worth more--well, of course you do, or else you would have sold
it, dummy--but the market says it's only worth 62 cents, so quit arguing.
The problem is that many markets, especially those for the now-toxic
mortgage-backed securities and collateralized debt
obligations (CDO), are thinly traded. This means, the argument goes,
that they don't reflect true value. Devious evildoers can set the price
wherever they want it. And since these securities are the collateral for
short-term loans that the entire financial system is built on, they are subject
to manipulation.
Like this: A hedge fund shorts a bank stock, then bids down the thinly traded
value of an AAA-rated CDO, a collection of mortgages from, say, the second half
of 2006, which is sitting on the books of said bank. Because of FASB 157, the
bank has to "mark to market" at the lower price, write down the difference
as a loss and raise more capital, and its stock goes down as previous
shareholders get diluted. It's one of the reasons the Security and Exchange
Commission halted shorting financial stocks, a Band-Aid on a bigger problem.
Well,
boohoo! They shouldn't have owned these crappy securities in the first place.
Mark to market just accelerated the inevitable, the write-down of bad loans.
For the system as a whole, it is always better to take your lumps post-haste.
Get it out of the way. Dow down 45%? So what? It was going to drop that much
anyway, and one fell swoop beats the Chinese water torture--drip, drip,
drip--of a decade of daily declines. And yes, even if it means losing a few
companies.
For me, even a flawed market price is better than no market price at all. On
paper, Wachovia has a book value of $75 billion and is
being bought by Wells Fargo for maybe $15 billion. Not
sure exactly what they're marking to.
To better understand a world without mark to market, go read Gillian Tett's
2003 book Saving the Sun. A quick
summary: Japanese banks made all sorts of horrendous loans in the 1980s. Many,
and maybe most, of the loans stopped paying interest after the Japanese bubble
burst in 1990. Banks' balance sheets were stuffed with non-performing loans
(NPL). Instead of writing them down, marking to market, they just sat there
gathering dust on their books. The banks stayed in business, but stopped
writing new loans, the result being Japan's Lost Decade. By the late 1990s, the
Nikkei 225 index had basically dropped by half.
Anyway, one Japanese bank, Long-Term Credit Bank, finally collapsed in 1998.
The Japanese government allowed an American buyout firm, Ripplewood, led by
J.C. Flowers & Co., to come in, buy the bank, rename it Shinsei (or New
Life) and write down as many NPLs as they could with the government taking the
loss. This was around 2000. The bank started lending again and generating
profits. So successful was this deal that Shinsei went public in 2004, clearing
a $6 billion gain for Ripplewood.
It may have been catastrophic if, like Lehman Brothers
in 2008, Long-Term Credit Bank had failed in 1991, with reverberations
throughout the Japanese financial system and probably the world. Their stock
market may--would--have crashed, dropping, uh, 50%. But the government could
have bought the bad loans, recapitalized the banks themselves and not lost the
last 18 years of global growth to China.
So as hard awful as a Dow dropping like a safe onto Wall Street and Main Street
is, cheer up. It's almost over. The gunk is getting cleared out. No pain, no
gain….
Read
the complete article:
http://www.forbes.com/opinions/2008/10/13/stocks-kessler-japan-oped-cx_ak_1013kessler.html
|
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Friday Feature / Stocks to
Survive On
KEN FISHER, Forbes.com (10/10/08):
Though I
walk through the valley of the shadow of death I fear no evil. Seems that
almost everyone else does, though. Most investors need their investments to
last them a long, long time, yet they're acting like the next few months are
everything. The shadow of death is an illusion. In the long term equities
always do well. They will now, too, even if they fall further first.
My
firm has 25,000 high-net-worth clients. A typical account would be that of a
couple aged 65 and 60 who need their money to last the rest of their lives, 25
to 35 years. They have a long time to go, and they accomplish nothing by
getting in and out of the market from fear now. Yet such folks are so
overloaded by the doom and gloom they hear around them that many must be
re-reminded of their primary purpose and long-term needs.
If
you have a time horizon that long, even a 9% minicrash, such as we had on Sept.
29, is something you can take in stride. Over long periods equities have always
done well compared with other liquid alternatives. Even if you have a shorter
time horizon, such as a decade, you know that stocks are more likely than not
to recover from a market decline.
I
hear 60-year-olds say nonsense like, "I won't be able to retire because of
the market's downturn." That's ridiculous. History has seen many similar
bear markets. Yet folks have kept retiring. The next bull market more than
makes up for what we lost in the last decline. The average bull market, of
which there have been ten since World War II, takes stock up 150% before the
cycle turns. The average 12-month rebound from the bottom is 36%. No, I don't
know where the bottom is. I just know that stocks don't go down and stay down.
We
can argue about where stocks are headed, and there are always two sides to the
argument. But put that aside. Think longer. Unless you are in your late 80s and
were an adult as World War II ended, stocks are cheaper, adjusted for tax rates
and interest rates, than they've been at any time in your adult life. That's a
simply stunning statement looking forward. You're walking forward. Stop
myopically looking at your feet and focus on the horizon. Just buy great
franchises at cheap prices now and be patient. Here are some long-horizon
stocks I like now.
Looking
past all the immediate hysteria, focusing several years ahead, it's hard for me
to see cheaper oil. Hence simple, strong holdings like Norway's StatoilHydro
seem logical. As a vertically integrated oil and gas firm with $220 a share of
proven reserves, this $89 billion (in revenue) business will keep growing
steadily. It sells for ten times likely earnings in 2009 and one times revenue.
It offers a 3.75% dividend yield.
The world believes McCain or Obama, and Congress, will beat up on the drug stocks. Hence they sell like nongrowth stocks. I suspect that, as happened when the Clintons were terrorizing the health care industry, the antipharma movement will generate more rhetoric than action. How can Congress curb drug companies without hurting the baby boomers who need their products?
You
don't need Viagra to get excited about Pfizer….
Read
the Complete List of Ken’s Stocks to Survive On:
http://www.forbes.com/personalfinance/forbes/2008/1027/206.html
__________________________________________
Friday Blogger Bonus / Google Handily Beats Wall
Street Expectations
Betsy Schiffman, Wired.com blog (10/16/08): While investors
fretted that Google would post disappointing results due to the economic
downturn, the company's third-quarter earnings easily exceeded Wall Street
expectations.
"It's astonishing that Google could deliver [these
results,]" said Bernstein analyst Jeffrey Lindsay.
Third-quarter earnings were $4.24 per share, and excluding the
costs of employee stock options, Google would have earned $4.92 per share, well
ahead of Street estimates for $4.77 per share. It's no small feat for a company
that was expected to get creamed by the dismal ad market.
It's also a welcome relief to industry watchers who looked to
Google as a barometer of the internet economy. And while it's a promising sign
that Google seems to be running normally, it's also worth noting that few
analysts expected the financial crisis to show its face in Google's third-quarter,
which closed at the end of September. The real question is whether Google can
maintain its current pace of growth in the fourth quarter of 2008 and the first
quarter of 2009.
Google's strong quarter also points to potential problems at eBay.
John Donahoe, the CEO of the auction site, noted on Wednesday night that eBay
has definitely been affected by sluggish consumer spending. Some analysts
therefore assumed that Google would likewise be hurt. Instead, Google hinted
that it could benefit from the downturn as penny-pinching Americans bargain
hunt online before making purchases.
"EBay was a real downer for the internet sector because they
blamed their weak performance on the economic environment and currency,"
said Lindsay. Google showed you can mange the currency issue by hedging. And
they delivered a very strong revenue performance despite the downturn. It
indicates that some of eBay's weakness is operational, and not dependent on the
economy."
Of course, one of Google's strengths in the third quarter was that
it controlled costs. The company only added a modest 500 new employees during
the quarter, bringing the headcount to 20,000, while revenue grew 31 percent….
Read
on:
http://blog.wired.com/business/2008/10/google-sets-the.html
__________________________________________
Readings /
Downturn Triggers Drop in Oil
Demand
http://online.wsj.com/article/SB122418052416641331.html
Wireless at Fiber Speeds
http://www.technologyreview.com/communications/21464/?a=f
Xbox + Netflix: Who’s Next
http://www.forbes.com/technology/2008/08/04/microsoft-netflix-hulu-tech-intel-cx_cm_0805msft.html
States Set New Data Privacy
Laws
http://online.wsj.com/article/SB122411532152538495.html
Fairchild FaresWell
Intel Ships 32GB Solid State
Drives
http://www.byteandswitch.com/document.asp?doc_id=166126&WT.svl=news1_2
__________________________________________
Friday Letter Editor: Mary Collins George / mcollins@gilder.com
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