All Herds End Up Over The Cliff
More herd thinking…
Successful investors avoid the herd. And right now, there are a herd of earnings analysts that are leaning bullish going into the second quarter earnings season.
Over the past few quarters, expectations have been lowered for a significant number of companies. Many still managed to disappoint, or barely stumbled over the bar. And most of them did so by cutting expenses, not by increasing sales.
According to the Bespoke Investment Group, 578 companies in the S&P 1500 have seen their earnings estimates increased. By comparison, only 389 have seen their estimates cut.
The economy is no better off than it was three months ago. Sure, job losses have shrunk. But the numbers are still negative. And there is a limit to how much companies can cut their expenses, without cutting their own throats.
If analysts stay this bullish going into earnings season, you can expect the next few weeks to be very messy on the downside.
Packaged investment products are never as simple as they appear and when they start popping up everywhere it’s never a good sign.
Credit Suisse Group will soon offer a new aluminum ETF. It sounds simple. The fund buys aluminum to back its shares. In turn, that will put pressure on the aluminum markets and drive prices higher. At least that’s what is expected.
“But wait a minute,” says IDE’s Steve McDonald. “Aluminum is already up 50% from its lows. And there are a lot of gray areas here. Does the fund buy aluminum or futures on aluminum? Will it be leveraged? How much?”
Each of these variables poses a very different risk. And most of us don’t understand the aluminum market well enough to bet one way or the other on how this will work. But that won’t stop investors from pouring in.
These packaged products are never as simple as they appear. And they often end up costing people a lot of money. In the ‘80s it was growth funds. The ‘90s gave us tech stocks and funds. The past few years it was real estate.
“Now,” says Steve, “it’s commodities. Don’t get sucked into the current commodities herd. All herds end up over the cliff.”
Stick with time proven investments vehicles that you know and understand. You’ll be wealthier and sleep better at night.
A safer bet on China…
Exxon Mobil is increasing its chemical business in China. The company figures that demand for chemicals will increase faster than demand for gasoline and diesel.
Demand for chemicals in China is climbing 10% a year, says T.J. Wojnar, a senior vice president at Exxon. The company expects demand to rise for the next 15 years.
To take advantage, Exxon opened a new plant in the Fujian Province this year. The company will expand its plant in Singapore in 2011. “More than half of the world’s petrochemical growth is going to be in China, so there’s definitely room for more facilities to be built out there,” Wojnar added.
China is the second largest chemical market after the U.S. And because personal income is increasing, so is demand for lighter materials to replace metal and wood.
Chemicals are also the second largest area of capital expenditure, after overtaking oil refining. If Exxon is investing this kind of money into chemical production, you can bet it’s a huge growth opportunity. And Exxon Mobil is a safe way to play it.
The list of foreclosures keeps growing…
Last March the editor of Housing Predictor, Mike Colpitts, estimated that the number of foreclosures would top 7.6 million by 2012.
That number just went up. The new estimate is 10 million foreclosures. That is roughly the combined populations of Los Angeles, Chicago, Houston, and Philadelphia – the 2nd through the 5th largest cities in the U.S.
All losing their homes.
And as dire as those numbers sound, it might get worse before it gets better. It is estimated that 16 million borrowers now owe more than their house is worth. Certainly many of these people will be throwing in the towel.
Economists should stop making predictions…
We would all be better off if economists would behave more like historians. They’re pretty good at telling us how something happened in the past. But they’re awful at telling us what will happen tomorrow and why.
So let’s give credit to Robert MacIntosh, chief economist at Eaton Vance Corp. in Boston. MacIntosh certainly knows the limits of his profession. He recently gave Bloomberg News this prized nugget: “I'm not a believer yet that this is a robust economy.”
Don’t stick your neck too far out there, Robert.
Several times recently, we have warned you about the pending commercial real estate implosion. Goldman is now sternly advising the same course.
This week Goldman Sachs warned investors to steer clear of banks and insurance companies that have heavy exposure to commercial real estate. The bank says the downturn in CRE is already much worse than they had expected… and it’s going to get worse.
Goldman expects a 42% decline in appraised values from the 2007 peak. That is much sharper than the 28% they forecasted earlier. At the same time, the 35% vacancy rates are almost double what the bank expected them to be. Of course, rents are also falling, eroding the fundamentals even more.
Goldman’s advice is to steer clear of the regional banks which are heavily focused on real estate. Instead, they suggest that investors should consider larger, consumer-focused banks instead.
That is where we differ. You should stay away from almost all banks. Why? Because not even the banks themselves or the regulators know what they are worth.
Need proof? How about this…
As of June 30, government regulators had identified 416 “problem banks.” That’s a 15-year high. But there was notable bank that didn’t make the list – Georgian Bank, the second largest Atlanta-based bank.
But there were a lot of banks that didn’t make the list. What makes Georgian Bank so notable? It’s notable because Georgian Bank failed last week. The FDIC estimates it will require $892 million to pay back the bank’s depositors.
So what does this say about the government’s list of “problem banks” when nearly a billion-dollar bank failure didn’t even show up on their “problem” radar just a few months ago?
It suggests that the regulators and even the banks themselves have little idea what is in their books or the true value of those assets. It also suggests that what we have been saying for some time is true. There are a lot more bank failures ahead.
Plan accordingly.
Good Investing,
Bob Irish
Investment Director
Investor's Daily Edge
More herd thinking…
Successful investors avoid the herd. And right now, there are a herd of earnings analysts that are leaning bullish going into the second quarter earnings season.
Over the past few quarters, expectations have been lowered for a significant number of companies. Many still managed to disappoint, or barely stumbled over the bar. And most of them did so by cutting expenses, not by increasing sales.
According to the Bespoke Investment Group, 578 companies in the S&P 1500 have seen their earnings estimates increased. By comparison, only 389 have seen their estimates cut.
The economy is no better off than it was three months ago. Sure, job losses have shrunk. But the numbers are still negative. And there is a limit to how much companies can cut their expenses, without cutting their own throats.
If analysts stay this bullish going into earnings season, you can expect the next few weeks to be very messy on the downside.
Packaged investment products are never as simple as they appear and when they start popping up everywhere it’s never a good sign.
Credit Suisse Group will soon offer a new aluminum ETF. It sounds simple. The fund buys aluminum to back its shares. In turn, that will put pressure on the aluminum markets and drive prices higher. At least that’s what is expected.
“But wait a minute,” says IDE’s Steve McDonald. “Aluminum is already up 50% from its lows. And there are a lot of gray areas here. Does the fund buy aluminum or futures on aluminum? Will it be leveraged? How much?”
Each of these variables poses a very different risk. And most of us don’t understand the aluminum market well enough to bet one way or the other on how this will work. But that won’t stop investors from pouring in.
These packaged products are never as simple as they appear. And they often end up costing people a lot of money. In the ‘80s it was growth funds. The ‘90s gave us tech stocks and funds. The past few years it was real estate.
“Now,” says Steve, “it’s commodities. Don’t get sucked into the current commodities herd. All herds end up over the cliff.”
Stick with time proven investments vehicles that you know and understand. You’ll be wealthier and sleep better at night.
A safer bet on China…
Exxon Mobil is increasing its chemical business in China. The company figures that demand for chemicals will increase faster than demand for gasoline and diesel.
Demand for chemicals in China is climbing 10% a year, says T.J. Wojnar, a senior vice president at Exxon. The company expects demand to rise for the next 15 years.
To take advantage, Exxon opened a new plant in the Fujian Province this year. The company will expand its plant in Singapore in 2011. “More than half of the world’s petrochemical growth is going to be in China, so there’s definitely room for more facilities to be built out there,” Wojnar added.
China is the second largest chemical market after the U.S. And because personal income is increasing, so is demand for lighter materials to replace metal and wood.
Chemicals are also the second largest area of capital expenditure, after overtaking oil refining. If Exxon is investing this kind of money into chemical production, you can bet it’s a huge growth opportunity. And Exxon Mobil is a safe way to play it.
The list of foreclosures keeps growing…
Last March the editor of Housing Predictor, Mike Colpitts, estimated that the number of foreclosures would top 7.6 million by 2012.
That number just went up. The new estimate is 10 million foreclosures. That is roughly the combined populations of Los Angeles, Chicago, Houston, and Philadelphia – the 2nd through the 5th largest cities in the U.S.
All losing their homes.
And as dire as those numbers sound, it might get worse before it gets better. It is estimated that 16 million borrowers now owe more than their house is worth. Certainly many of these people will be throwing in the towel.
Economists should stop making predictions…
We would all be better off if economists would behave more like historians. They’re pretty good at telling us how something happened in the past. But they’re awful at telling us what will happen tomorrow and why.
So let’s give credit to Robert MacIntosh, chief economist at Eaton Vance Corp. in Boston. MacIntosh certainly knows the limits of his profession. He recently gave Bloomberg News this prized nugget: “I'm not a believer yet that this is a robust economy.”
Don’t stick your neck too far out there, Robert.
Several times recently, we have warned you about the pending commercial real estate implosion. Goldman is now sternly advising the same course.
This week Goldman Sachs warned investors to steer clear of banks and insurance companies that have heavy exposure to commercial real estate. The bank says the downturn in CRE is already much worse than they had expected… and it’s going to get worse.
Goldman expects a 42% decline in appraised values from the 2007 peak. That is much sharper than the 28% they forecasted earlier. At the same time, the 35% vacancy rates are almost double what the bank expected them to be. Of course, rents are also falling, eroding the fundamentals even more.
Goldman’s advice is to steer clear of the regional banks which are heavily focused on real estate. Instead, they suggest that investors should consider larger, consumer-focused banks instead.
That is where we differ. You should stay away from almost all banks. Why? Because not even the banks themselves or the regulators know what they are worth.
Need proof? How about this…
As of June 30, government regulators had identified 416 “problem banks.” That’s a 15-year high. But there was notable bank that didn’t make the list – Georgian Bank, the second largest Atlanta-based bank.
But there were a lot of banks that didn’t make the list. What makes Georgian Bank so notable? It’s notable because Georgian Bank failed last week. The FDIC estimates it will require $892 million to pay back the bank’s depositors.
So what does this say about the government’s list of “problem banks” when nearly a billion-dollar bank failure didn’t even show up on their “problem” radar just a few months ago?
It suggests that the regulators and even the banks themselves have little idea what is in their books or the true value of those assets. It also suggests that what we have been saying for some time is true. There are a lot more bank failures ahead.
Plan accordingly.
Good Investing,
Bob Irish
Investment Director
Investor's Daily Edge
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