Ted's Blog One Investor to Another... Will All Community Banks Close? February 17, 2012 - Of course not....but most likely they'll be bought by a regional or national bank to keep their doors open....and don't look for any new, local ones to take their place....that's because government regulations have gotten so onerous that the cost of implementing them is overwhelming the banking business.....basically there are 3 heavy tomes of regulations, written by Sarbanes-Oxley; Graham, Leach, Bliley and soon Dodd-Frank....the first set of directives are already in place from SOX and GLBA, as they're known in banking....Dodd-Frank is still in the works with plenty of unknowns still to come.....the basic problems are these: there are so many rules and laws now that must be complied with that banks must hire compliance specialists to enforce them....these are intelligent, capable individuals who cost a lot of money....if you're a small bank, you don't have the extra profits to pay for these people....yet you are required to keep up with and enact all of the required regulations....depending on the size of the bank, these costs can run from hundreds of thousands of dollars into the many millions....and none of these added personnel will generate one dollar of revenue....they are simply an added cost.....furthermore, it is most likely that all banks will have to raise their capital levels....that means instead of having $8 or $9 or $10 of capital for every $100 of loans a bank makes, it will need more.....when that happens, a bank can't lend as much and that means profits are lower.....so if profits are lower and expenses are higher, there is the inevitable pinch that is felt, lightly at first, then more and more until directors and management must cry uncle and give in to the highest bidder (if there is one) or simply close the doors of the bank.....another aspect of all the new rules: they require a large part of management's and directors' time so that the time spent on running the business gets taken up more and more with complying with the regulations.....there is no money to be made in complying with regulations.....so if you own stock in a local bank, you might want to talk with its president or CEO and find out how it's coping with the new world.....because like it or not, the new world is coming to your community bank and it will be more costly to make less money.....in fairness, not all sizes of banks are affected equally by the new rules, but all of them are affected....the question is: by how much and when?
Greece Is The Word...And Will Be For Some Time February 13, 2012 - Greece is back in the headlines....this time for good reasons....politicians made the hard decision (they will if they need money) and passed a new austerity program that will move them toward balancing the budget at some point....maybe not in our lifetime but sometime....but that isn't the answer for Greece because doesn't have a quick fix problem....it has decades of spending habits that need to be changed....and change never comes easy.....now there are riots in the street, but those will subside as common sense must prevail....no one can believe that a government can simply keep printing money to pay for programs that are either unnecessary or overstaffed....eventually that makes the currency worthless....then everyone suffers.....hopefully that message will eventually be learned by the rioters and they will start to rebuild their country rather than tear it down....just don't think it's all over for Greece and that any new money it receives will make it all better....there is no all better....Greece has chronic problems, not one and part of it is the national thinking.....until it begins to adjust its spending with its income, there won't be an end to cutting and riots and frequent requests for more money.....Greece isn't fixed; it's only temporarily out of the headlines.....
Facebook Is Coming! Facebook Is Coming! February 1, 2012 - Investors are supposedly foaming at the mouth to own part of Facebook.....it's coming public soon and they'll get their chance.....but before you join them, consider a few things....first, we don't know any numbers yet....they'll be out in the prospectus for all to see very soon....we do know that the number $100 billion is being bandied about as the valuation for the cyber king (second most visited site behind Google).....so without numbers it's hard to put a relative market value on the company....but we know that it's pretty well penetrated the developed countries where there is relative affluence....from that we can surmise that its revenue generation is probably peaking in those countries.....its focus for growth is emerging markets, countries where just making it through the day is the biggest challenge, not whether buying a new tv or iPhone is the big decision.....if the site shows ever increasing users, they will come from users that aren't going to spend as much as current ones...that means growth will slow.....this is very similar to the late nineties when one measurement for valuations was the number of eyeballs a site had....the problem was that those eyeballs weren't connected to wallets and while traffic might have be stratospheric, revenues weren't.....also, recent IPO's like Zynga show that just being popular isn't enough....sales and profits still count.....don't get too excited about Facebook.....it's valuable, and the initial surge may well be strong.....but if it's over priced, which it most surely will be, don't expect the mania to last long...investors have a way to waking up after the celebration to cold, sobering facts, and the fact is that Facebook has competition and it's most likely already reached its peak in profitability growth.....future growth won't be nearly as astronomical as the last few years....
REIT's Raise New Cash January 13, 2012 - Over the last week several REIT's (Two Harbor and Armour Residential as examples) sold more stock.....they're raising money to buy more mortgage backed securities, both agency and non-agency.....it got me to wondering why they would tap the markets now, especially with interest rates so low....the answer is: the spreads are still very wide for any institution, whether it's an REIT or bank or saving and loan because the cost of funds is almost zero....and the rates on mortgages are at least 3.5% to 4.0%, sometimes higher if they're more risky.....that means REIT's (the ones who are leveraged) can still make great spreads (the money they make between what they borrow and what the yield is on their investment) and keep paying high dividends.....many of these REIT's yield over 15% (Two Harbors: 17.7% and Armour: 18.3%, paid monthly by the latter)....investors are very skeptical about any firm that holds a lot of mortgage paper, whether it's a bank or an REIT, so prices have been squashed and dividends aren't enough to keep them higher....investors have all but abandoned this sector....but if you are comfortable with the idea of professionals carefully parsing each mortgage pool and buying only the ones with certain, higher quality, higher credit score mortgages, then you'll give REIT's another look....they've raised more money this week....they're going to put it to work and their yields will most likely stay the same (unless a stock goes lower which improves the yield)....and with the Fed keeping rates where they are for at least a year, the spreads for REIT's are almost guaranteed for the same period.....no wonder they're bringing in more cash: there's an opportunity here to make a lot of money.....
New Year, New Money Capital flows. It's another way of saying money moves. And expect new capital to flow into the stock market in the next few weeks. That's because many people contribute to their IRA's which are often matched by their employers. Stocks are usually the most common investment for IRA's (including ETF's and mutual funds). Oftentimes in January the market will see a boost as this new money goes to work. It can be in the billions. While some of the money will go into bonds or gold or savings accounts, the odds are high that most of it will go into the market. The timing is always a good guessing game, but January is a big month for adding to IRA's because the sooner money is put to work, the more return it can get. If we're lucky, this year will be no different. January may be a good month for stocks, just for this reason. Then if we get some decent economic news on top of it, we may start to see some real improvement for a protracted period, but that's a big if. However, the New Year will bring new money to stocks and that's always good.
Merry Christmas And Happy New Year!!! It's been a tough year in the stock market....but this week, it's time to relax a little, sit back and reflect on how grateful most of us must be for the country in which we live....I hope all of you have a great holiday season, enjoy it safely, and come back ready to face the challenges 2012 will bring....here's to all of you and may next year be the best investing year you've ever had.....we'll be here to help make it.....Ted Allrich and James Hale
Was That The Santa Claus Rally? Who knows.....let's look at what caused the big surge yesterday, sending the market up over 320 points.....according to the headlines, two factors caused investors to throw caution to the wind and start buying: better home starts (which actually were better apartment starts since it was the multifamily sector that saw the big increase) and the fact that Spain was able to sell more bonds at better yields than experts expected......those are the two reasons....does that sound like a strong foundation for a continuing rally?....obviously not....it does show how emotional investors are currently, willing to grab any excuse to rally the market.....today there is no follow through.....was this the Santa Claus rally?....it might have been....but just wait for the next bit of news that floats the hope of an economic gain in the U.S. or more financial stability in Europe (don't even need a remedy for the budget problems, just cash to forestall the problem longer), then you'll see another goose in the market as investors give up fear for a day and let greed have a moment in the sun.....but more clouds are coming and Santa Claus won't stay long, if he visits again.....there have been no real answers for Europe or the U.S. yet, nothing that suggests better times, economically speaking, are here or about to be.....stay defensive but don't get out of the market altogether....for no other reason than to take advantage of big jumps by selling into a rally, taking the proceeds and investing them again when the market slumps which shouldn't be too long....
Should You Short This Market? No...let me be more emphatic: NO!!!.....it's too late.....most of the bad news is baked into most stocks....how do I know?.....look at the P/E ratio to see if the worst isn't already figured into the latest prices.....take CLF (which I own) for example.....analysts think the stock will earn $12.78 next year....it's selling for $62.80 a share as of this writing....that's less than 5 times earnings.....of course, those putting on the shorts don't think the company will make the $12.78 in 2012 because of the slowdown that seems imminent in Europe and the concerns that China's economy isn't chugging quite as strongly as before......even if the company "only" makes $10 a share next year (no one is suggesting that, I'm just using it as an example), the stock is still selling at only a little over 6 times earnings......that doesn't seem excessive.....there are plenty of other examples.....the idea of shorting stocks sounds so enticing when you see something you own go down by several points a day....fast, easy money seems to be there for the taking.....but emotions are running this market, not basics....if you insist on shorting, be sure you understand all the ramifications that entails, and be sure you've done your homework on a stock's earnings, for this year and next... then check that P/E ratio against the average for the last several years....most likely it will be near or at the bottom of that range......just as emotions are negative at the moment (and have been for several days over Europe), any ray of hope will send this market fast....sometimes it moves ahead even quicker than it dropped.....beware in these emotional times.....is it time to buy?.....I don't think so just yet but it's getting close.... - Ted Allrich |
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