Tuesday, September 16, 2008

Financial Meltdown...

Given yesterdays plummet of international markets, I think it is safe to safe we are facing a financial meltdown, a buzzword that has been going around this morning.

The Motley Fool probably summarizes best the fear that is driving today's (Tuesday Sept 16) uncertainty, which is the possibility that AIG will collapse. I am going to post a much more elaborate analysis of yesterday and today once the market has closed and the dust has settled, but here is what Motley Fool has to say:

http://www.fool.com/investing/dividends-income/2008/09/16/financial-meltdown-day-2.aspx

You'll hear from me soon!

Tuesday, September 9, 2008

TSX has second worst day in a year

I told you it looked ugly!

The TSX Composite Index shed 487 points today, closing at 12,147. This represents a drop of 3.86%, which is the second worst drop that the market has had since today last year. The only drop bigger than that in the last year was on January 21, 2008, when the market dropped just over 600 points. It is hovering extremely close to its 52 week low as well, which conveniently also fell on that nasty January 21st date, at 12,132.

Since August 28, only several days ago, the index has slid 11.66%, or 1,603 points. Even uglier is the 3 month figure. Since June 9, 2008, it has lost 2,814 points, over 18%! As I mentioned before, this market has been up and down, and volatility is the name of the game.

It is obvious by looking at the sectors of the TSX Composite that the resources sector is leading this downward spiral. Today alone the S&P/TSX Capped Gold sector index was down 9.5%, as were Materials at 8.2% and the S&P/TSX Capped Energy index, down 6.5%.

Not helping us Canadians very much are some major developments that happened yesterday and today in the United States. Firstly, the government announced a bailout of Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM). . Both of these companies are the major players in the US mortgage markets. Each company has seen their shares prices free fall as investors jump ship in anticipation of the takeover. Without going into detail, they provide liquidity to the secondary mortgage market by buying mortgages off banks and bundling them for sale to investors. This allows the banks to lend more as they get cash for their mortgages. For more idea on the basics of it, read my last post. While this news comes as a relief to some, it reinforces my assertion below that the US sub-prime mortgage crisis is not over, and won't be going away anytime soon. It is important to stay on top of this story, and I will try to do that for you and summarize it here as it unfolds!!

Other major news (well, events) in the states is that shares of Lehman Brothers (NYSE: LEH), one of New York's most well known investment banks, got hammered today and dropped 44.95% to close at $7.79. Investors fear that the company is on the verge of default, as options for raising capital are becoming further and further beyond reach. What does that mean?

In simple terms, there are only three ways a Company can raise capital using the market:

1.) Sell equity, like common shares, to the public and receive cash. Today's free fall plunge is proof investors are not too keen on buying their shares, so that really doesn't appear to be a viable option... especially at the abysmal price of $7.79.

2.) Sell debt, like bonds or other fixed income product, with the promise of a stream of interest payments on the debt. For a distressed Company like Lehman, this might not be an option as their obligations related to mortgage debts keep mounting, which is what is ruining them in the first place. Adding more liability to the equation when your capital ratios are all out of whack is not likely and potentially not possible.

3.) Third, and more plausible, is that the company could sell off assets to convert them into cash. There have been rumors that they were looking to sell a major branch to Korea's Business Development Bank. Apparently that rumor appears to be more and more unlikely.

So, these 3 options might not occur and Lehman will likely continue its death spiral tomorrow. What we saw happen with Bear Stearns when it collapsed in March '08 under similar circumstances was a larger player, J.P Morgan Chase, come in and buy the entire company as the distressed price of $10.00 / share.

As I write this, a financial news alert just popped up that after the market closed (which was three hours ago) Lehman announced it would announce some "key initiatives" tomorrow morning to address this capital-raising issue.

All in all, a pretty crazy day. Stay tuned to see what happens with Lehman!

PS - In the meantime, keep your cash away from the market still. It doesn't appear to be getting any better!

Friday, September 5, 2008

It's been a while...

When I started this blog, I started with the intention of writing once or twice a week. I wrote an entry in November... and now we are in September, 10 months later. Between those two dates I have graduated, moved cities, bought a new home, started a new job, studied for and wrote a big exam, partied and... well I haven't had much time to work on this!

I enjoy writing though so I am going to try and restart this effort. The caveat here: if you find financial / market news boring, stop reading this, because you will find it painful and worthless. If you do follow the market at all or are interested, read on.

I'll start with a comment about my Lululemon (NASDAQ: LULU) pick. I called for a buy at $39 - $40 in November 2007.. subsequently, it traded up to about $50 in December, a month later. If you timed this right that would have represented a 20% pop, not bad for a one-month hold. Unfortunately, what hindsight now has provided us with is a broader perspective of what the hell was happening with market. LULU, being a consumer discretionary stock, has tumbled and is trading around $18.

That is what this post is about: the state of the US, Canadian and global economies. It's ugly. Everyone has heard of the subprime mortgage crisis in the states: banks went out and let the average Joe's in the US to obtain a mortgage, even if they couldn't really afford it or have the credit score to do so (hence the term "subprime" - these dudes are not prime borrowers). They charged a higher interest rate for these mortgages, which means more income for the bank, and life was good. Joe has his house and makes his payments. The bank gets there payments and are happy. If Joe stops making his payments, the bank repossesses Joe's house and sells it. With real estate values climbing in the States, no problem. They sell it and get there money back. The bankers in New York figure they want in on all this money action so they figure out how to package a bunch of mortgages together and sell them to investors (which is where financial instruments like mortgage backed securities and asset back commercial paper are derived from.. which I won't get into).

Uh oh. Then the US housing market slump comes into play as the number of buyers is drastically reduced by the slowing US economy. Remember supply and demand in economics class? What happens when nobody wants to buy something? The price goes down. So housing prices started going down. With the economy faltering, guys started to lose their jobs. Now they can't make the payments on their mortgage. They default, and the bank takes their home back. Problem is, they turn around to sell this home, and they can't sell it for as much as the mortgage is. This snowballs: more and more homes go for sale at lower prices, but nobody is buying. The investors were supposed to get this stream of payments from these mortgages get screwed, the banks get screwed, Joe lost his home, so he is screwed, and voila! You have the US subprime mortgage crisis: it is ongoing. It is this crisis that lead to the collapse of the Bear Stearns investment bank. Everyone is getting their faces ripped off.

How does this affect you and I as investors? Nobody really knows when this subprime crap will be over. The US economy is damn near a recession, the Canadian stock market is all over the place with Ontario also near recession and our market going up and down like a yo-yo, following the price of oil (which we produce a lot of). The markets don't seem to be making any money and everyone is uncertain and shaken about the markets. Investors are scared. This is not a good time to be trying to play the stock market.

What do I think investors should do?

A lot of people my age say "hey Morgan what should I invest in? I have a couple grand and I want to make money." My answer today is keep your couple grand in cash - or something that is really close to cash. Cash is essentially risk free, so you won't have a negative return on it. However, cash sitting in your chequing or savings account will make you next to nothing, so don't do that with your extra cash. I would be buying into a mutual fund that invests only in Canadian T-Bills. This way you'll make about 3.5% to 4% on your cash (for as long as you leave it in there).. Doesn't sound like much, but it is better than piling your money into the market and losing 10, 20, 50 or 100% of your money.

To summarize: Cash is king. Stay out of the stock market. Don't buy GICs cause they lock you in for some period of time - the T-Bill fund can be traded daily and is a very liquid market. You won't lose any money, you won't make very much, but you also won't lose sleep or lose your shirt. Cash won't rip your face off.

Hope I didn't bore you too much :)

Wednesday, November 14, 2007

LULU: Lululemon and why it is a buy

Lululemon (NASDAQ: LULU, TSX: LLL) is a rapidly growing retail outfit specializing in yoga apparel. If you haven't heard of them, you need to get out more.

Wednesday a report came out saying that a lab cannot confirm the company's claim that it's VitaSea line, which is supposed to be made of 24% seaweed, contains any seaweed at all. Take a look at the story.

The market didn't really like this news, as reflected by the drop when the markets opened. Take a look at the drop at the beginning of the one day graph. It traded all the way down to US$39.75, but recovered later in the day to close at US$44.29.

Why am I writing about this? Because I like the Lululemon growth story. I think the company has some serious long term growth potential that I want a piece of. It has recently traded as high as US$60.70. It is a relatively new issue as well, going public during our last summer. I would not buy it at $60 or $50, but it's current valuation is "oversold" in my opinion, and the news made the wimps run away from the stock.

I plan on publishing a more detailed analysis in the near future (when I have more time on my hands), but I thought this was the most interesting play for the day. Buy LULU now and hold it. Let the growth story pan out and I think you'll have a winner. If it goes down in the short term, buy more!

A bonus: our Canadian dollar is such that US equities are relatively cheaper than they would have been in history. In the longer term, the Canadian dollar will likely depreciate against the US, and so a speculation on a currency gain in the long run is also a reason to buy and hold LULU.

That is it for now, your comments are appreciated!

Tuesday, November 13, 2007

First Entry...

Well, here it is.

My first "Blog" post ever. I've been meaning to do this for about a year now, as I often find myself discussing money, the markets, the dollar, the price of oil, economics, blah blah blah... if you find these topics boring, stop here!

If you are at all interested, please check back soon and watch for some commentary. I plan on discussing specific stocks, market situations, and general macro-level stuff.

If you enjoy it, leave a comment!

More to follow...