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Low Rates Mean What?

brightonsecurities — Mon, 29 Aug 2011 13:50:09 +0000

The economic and market turmoil of the last few years has sent many investors to the safety of the bond market, especially the market for US Treasury securities. With a flood of money coming in, bond prices have risen and interest rates have fallen to record lows. Low rates affect different people in different ways. Here are a few of them:

Lower mortgage rates. This one is obvious, and can mean a lower monthly payment, or home ownership for people who might otherwise be renters. Home ownership tends to drive other economic sectors such as appliances, furniture, lawn care, etc, so that’s a plus. But despite low rates, some potential buyers are unable to buy due to tightened lending requirements – subprime is dead, for now.
Lower savings rates. This angle gets the most attention from retirees, many of whom have for years supplemented their retirement income with bank interest. Rates have gotten so low that some banks may start to charge for holding depositor funds. Some of the recent market volatility may be due to novice investors seeking what they can’t get at their bank – meaningful interest income. Unused to volatility, they may actually cause more of it through frequent deposit and withdrawal activity driven by anxiety.
A hamstrung Federal Reserve. For 30 years the Fed has often used interest rates as a spur to the economy. But with rates so low, lowering them further offers little leverage. Economists have been asking if the Fed is “out of bullets.” Some have insisted that they are not. But the more they insist, the less I believe it. This will limit the government’s ability to help our economy out of recession.

So what do low rates mean? They reflect a lack: a lack of confidence, a lack on inclination to invest. And the answer to that lack? Economic growth. Growth means more jobs, more consumer purchasing power, more tax revenues for governments at all levels. Next year is a presidential election. You can be sure to see and hear plenty of prescriptions for growth from both sides of the aisle. If recent history is any guide, our only real hope is growth from the private sector as the lesser of two evils.

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).

Wall Street Rumors

brightonsecurities — Wed, 24 Aug 2011 18:41:42 +0000

It has been nearly four years since the US banking sector has been imploding due to the millions of bad mortgage loans made during the housing bubble:

June 2007: Subprime mortgage firms collapse like dominos under the weight of bad loans; Bear Stearns bails out a hedge fund loaded with junk debt.

January 2008: In what will turn out to be a poison pill, Bank of America swallows Countrywide for $4.1 billion, helping Countrywide avert bankruptcy, and handing BofA a fat portfolio of toxic loans.

March 2008: Investment bank Bear Stearns collapses and is acquired by JP Morgan in a shotgun wedding arranged by the Federal Reserve.

September 2008: In one weekend, Lehman Brothers files for bankruptcy, insurance giant AIG gets a federal bailout, and Merrill Lynch is bought by Bank of America in yet another rescue buy. The nation’s largest savings & loan, Washington Mutual, collapses. Something close to sheer panic reigns on Wall Street.

November 2008: Citigroup, struggling with $300 billion in toxic assets, is bailed out by taxpayers.

March 2009: the Standard & Poors 500 Index hits bottom, down 57% from its October 2007 peak.

There was more, much more, but this is a blog post, not the Great American Novel, so that’s plenty to make my point. Why do I bring this up today? Because now rumors are swirling on Wall Street that JP Morgan may buy Bank of America (with assistance from taxpayers, of course). Time will tell if the rumors are true. But what is clear is that the effects of bad mortgages overhanging our financial system are still being felt. Four years in, and subprimes still have the power to sink even the biggest banks.

GTC

What About Gold?

brightonsecurities — Fri, 19 Aug 2011 12:26:53 +0000

That’s a question we get asked a lot lately. Stocks have been weak, bond yields low, and gold has been surging, closing yesterday at roughly $1800 per ounce. The price per ounce has more than doubled since mid-2009, drawing plenty of attention from investors and analysts. This raises two questions:

What are the factors underlying the sharp rise in price?
Does the rise point to more increases, or is the current price unreasonably high?

The factors driving the current steep jump in gold prices seem mostly related to fear and uncertainty. Gold has been seen as a haven in uncertain times, and has been considered a reliable store of value over centuries and across cultures. But unlike bonds, real estate, and some stocks, gold does not pay any income. And gold in coin or bullion form must be stored. The fear aspect of demand puzzles me. Unless you’re expecting an end-of-the-world “Mad Max” or “Night of the Living Dead” scenario, do you really think you’ll be buying eggs and milk at the grocery store and paying in gold? Not likely. The more likely reason for the spike in gold prices is a collective lack of confidence: in national governments, in big banks, in Wall Street. Politicians, bankers, and traders seem to take good care of themselves, and when one needs help the other is there with bailouts or campaign contributions. Workers facing layoffs don’t have that luxury, and cynicism on the part of investors may make them look at alternatives. After all, a bar of gold won’t lay off 10,000 people and then pay itself a bonus.

But will gold keep going up? Though at an all-time dollar high, gold is still below its 1980 peak when adjusted for inflation. Factors that point to more gains include growing prosperity in India and China, both traditional net buyers of gold, and volatility in securities markets that can scare investors into buying gold. But if you are old enough to remember the last time metals prices spiked – 1980 – you will recall that it seemed like everyone was buying and selling gold. That spike didn’t end well, with prices per ounce down 50% two years after the 1980 peak. When everyone seems to want to buy the same asset, eventually everyone does. After that, who’s left to buy? It happens in every bubble, and that’s your risk now.

GTC

Kodak’s File Cabinets

brightonsecurities — Wed, 17 Aug 2011 15:07:11 +0000

Kodak has been an imaging giant almost since there has been imaging. But they have been eclipsed by their own foot-dragging in digital imaging, and even their digital cameras sales are falling since nearly every new phone has a camera. That has been bad news for Kodak.

Until now.

Over decades, Kodak has developed patents covering important imaging processes. That camera-phone-in-every-pocket problem may now turn those patents to gold. If there are more cameras (in phones) there may be more need for those imaging patents. Cases in point: an Apple-led group recently bought patents from Nortel for $4.5 billion. Nortel had expected to raise only $900 million from the sale. And then there was Google’s $12 billion purchase of Motorola Mobility, mainly to get control of Motorola’s patent portfolio.

What does this mean for Kodak? A piece by Bloomberg today suggests that the Big Yellow Box is worth 5 times its current price based on patents alone. Which means that Kodak’s search for gold in its file cabinets may yield quite a haul.

GTC

Out on a High Note

brightonsecurities — Wed, 17 Aug 2011 12:54:49 +0000

Our Brighton Securities Softball Team wrapped up the summer season last night with an 11-3 win over the Rochester General Hospital Emergency Room Team. They had beaten us soundly twice this summer and have a roster of skilled players, but we came from behind after 2 rough innings. As Coach Kravetz would say, “We dominated in the clutch!” At least I think he would say that.

GTC

Monday Roundup

brightonsecurities — Mon, 15 Aug 2011 13:11:20 +0000

Merger & Acquisition activity continues despite the recent market volatility. This morning we have Google buying Motorola Mobility for $12 billion, and the world’s largest oil driller, Transocean, making a bid for Aker Drilling, a Norwegian firm. Both deals are for huge premiums over Friday’s closing prices. Apparently big companies with cash and access to capital have confidence in the economy, or they would be keeping their checkbooks closed.

Warren Buffet has an Op-Ed piece in the NY Times where he details his low tax rate and why he (and others in his shoes) should pay more. Hard to disagree with him. And Floyd Norris reviews wild stock markets of the past, and who is (and isn’t) to blame. Both of these are excellent start-your-week reading.

NPR has a story about record-low mortgage rates and why that may not do much for homeowners. Many people who could benefit from lower rates can’t refinance since the value of their home has dropped and they don’t have enough equity. They quote a guy who suggests that Washington get involved. Yeah, brilliant idea. The big banks lowered lending standards and look how well that worked: most of the biggest banks nearly put themselves out of business. And they should be pushed to lower their standards again? Insanity. The LA Times has a different angle.

Bank of America is shrinking, announcing today the sale of its international credit card business. So here’s the capsule history of BofA: get big, choke on bad growth, get bailed out by taxpayers, get smaller. I wonder when they’ll write the chapter about taking care of their shareholders?

GTC

Is This the 1930’s?

brightonsecurities — Mon, 15 Aug 2011 12:31:31 +0000

The New York Times thinks maybe it is. Here’s a link to a front page article from Friday:

Aftershock to Economy Has a Precedent That Holds Lessons

But maybe all it proves is that journalists maintain archives. With the internet, we now have archives, too, and I remember similar comparisons to the ’29 crash from 1987. Check out this front page from the day after the October 19^th crash:

NY Times Front Page 10/20/87

Journalists extrapolate the present, just like anxious investors. It is seldom a useful exercise for either.

GTC

A Busy Week

brightonsecurities — Fri, 12 Aug 2011 13:40:35 +0000

I love my job and generally look forward to weekends no more than any work day. But I will be happy to get a break over the next couple of days. We have had an unusually volatile week in the stock market It started in earnest Tuesday last week, with the Dow down 265, over 2%. Last Thursday we were down 512 points, but Friday was quiet. Monday brought unwelcome fireworks – down 634. Then Tuesday up 429, Wednesday back down 519, and yesterday back up 423. I’m tired already and today hasn’t even started.

There was plenty of business news to stir the pot. Washington punted on dealing with our national debt, in Europe the debt demons lurched from one country to another, threatening the Euro (and global economic stability). In an effort to pour a little oil on roiling markets, the Fed made an unprecedented move, stating that interest rates would be kept “exceptionally low” through mid-2013. In over 30 years of following Fed policy I have never seen such a term-certain pronouncement. And the week’s not over.

Meanwhile individual investors are dealing with the sturm und drang and still have to do the laundry and walk the dog. Long term investors with the correct perspective have mostly sat out the volatility, bargain hunters have made cautious forays to buy quality at low prices, but plenty of people have anxiety over the state of the markets.

I have seen plenty of up-and-down over the years, and remain long-term bullish on America. I plan a couple of days relaxing in a hammock over the weekend and we’ll see what Monday brings.

GTC

The Punchbowl Stays

brightonsecurities — Wed, 10 Aug 2011 12:48:31 +0000

There’s an old saying in the economic-analysis field (sounds scintillating, doesn’t it: economic analysis) that the Federal Reserve has the ability to “take away the punchbowl.” The meaning is that when the Fed provides cheap money (read: low interest rates) it causes a party in the financial markets. Low rates tend to be good for the economy, and for stocks and bonds. So when the Fed is considering raising rates, they are said to be taking the punchbowl away, or ending the party in the markets.

Late yesterday, after seeing US stock markets drop nearly 20% over the last few weeks, the Fed essentially bolted the punchbowl to the table and promised free punch for the next two years. The FOMC stated it would keep rates “exceptionally low” through 2013. After the announcement stocks dropped sharply and then, as traders did a double take on that unusual language, stocks turned and soared, with markets closing up 5% in a welcome relief for investors.

Easy money may be a real help to our limping economy. But free punch in big gulps can come with a cost: a hangover is always possible. And that hangover might be inflation. Watch the price of gold as your barometer for that. Much as we hate unemployment and stock market volatility, if inflation comes back we’ll hate that more.

GTC

Volatility and its Returns

brightonsecurities — Tue, 09 Aug 2011 17:49:19 +0000

Let’s start with this: the 1,000 point drop in the Dow Jones over the last few days has been No Fun.

Why do we put up with this? Why stay invested if it’s no fun? For an answer, I look to some clients who don’t seem to be too put out by all the ruckus. Here’s a composite sketch: he or she is retired, a little older, some but not all are elderly. The most prominent commonality: quality common stocks comprise the majority of their portfolios, and have for many years. This, of course, goes against financial planning orthodoxy. Why on earth wouldn’t I tell the 80-year-old widow to sell off some of her stocks? After all, stocks are risky, we’ve seen that. So what would I have her sell? Exxon, that she has owned since the 60’s? How about P&G, seller of soap and toothpaste?

Fact is, these clients know their investments and are comfortable with them. They know that the price per share might go down, but the dividends seldom do. For every Kodak and its dwindling business there is a Johnson & Johnson, an AT&T, a DuPont, a Hershey. They know that these companies have been, for the most part, steady and satisfying investments over the long haul. They don’t know what their investments will do tomorrow, next week, or next year. And neither do I. But they are confident that if they stay diversified and keep a quality portfolio, they’ll probably be just fine. And I agree.

GTC

What AAA Means

brightonsecurities — Mon, 08 Aug 2011 12:38:27 +0000

Late last Friday, Standard & Poors did what had been rumored to be coming: it downgraded US Treasury debt from AAA to AA+ for the first time in history. There’s no mystery to the Friday night action; the intent was clearly to let the shock of the change be absorbed by markets before they reopened Monday morning. Here’s a quick list of what it will mean – and what it won’t:

Higher interest rates on US bonds? Not yet. Interest rates have been falling for the past few weeks, and right now you will get no more than 2.5% on a 10-year Treasury bond. No one actually expects that the US won’t pay.
Higher mortgage rates? Don’t rush to lock in. Rates will probably fall further. If I were in the mortgage market I would be patient.
How about stocks? Markets are headed lower for now, and are down overseas. There will likely be bargains, but as always it pays to choose very carefully.
Potentially biggest near-term impact is political. The 2012 election cycle is already rearing its head and the downgrade will be something you can’t escape hearing about.

A credit rating downgrade is not necessarily a permanent thing. If the US can improve its fiscal and monetary policies then it is perfectly plausible that S&P would upgrade the Treasury back to AAA. Also let’s not forget that S&P (along with Moody’s and Fitch) were the very same folks who gave AAA ratings to toxic bonds during the mortgage bubble – securities that in many cases blew up with disastrous results.

GTC

Can We See It From Here?

brightonsecurities — Fri, 05 Aug 2011 13:52:22 +0000

I often post about why I think it’s not the end of the world. And yet again today, I think it’s not. But with a day like yesterday, people are asking if maybe we can see it from here. Stocks were down sharply yesterday, and I would be surprised if they weren’t off to a weak start this morning. Psychology moves herds; herds move markets.

Strip away the madness of crowds, though, and you can focus on two things: 1. your personal circumstances and 2. What you really own. Your investment decisions should be dictated by your circumstances, not by the actions of a trader in Hong Kong or a 401k participant in Miami, even if their moves can affect the market. If you aren’t retiring for 10, 15, 20 years, keep your decisions focused on that fact, not on day-to-day volatility. And about that what-you-really-own thing: if you own conservative, well managed investments, you shouldn’t have a problem in the long run. Do you really think people will stop buying soap and toothpaste?

Most important: take a deep breath and think before you worry too much. Talk to someone you trust. We have been here before, markets don’t always move in one direction. If I had to guess, we’re closer to a bottom than a top.

GTC

Markets to Washington: Drop Dead

brightonsecurities — Wed, 03 Aug 2011 13:46:14 +0000

One of the all-time classic news headlines was printed in the New York Daily News in 1975 when NY City was facing a serious budget crisis (note that at lower right it says “Stocks Skid, Dow Down 12” – I wish). Now we have financial markets home and abroad skidding on the news that Congress and the President have “fixed” a threatened Federal default. Stock market turmoil around the world is a clear signal of what investors think of the fix: it’s a sham.

Markets are weak because investors don’t believe that Washington has any intention of changing its borrow-and-spend ways. People know that you can’t borrow and spend forever in your own home, and that a reckoning will come for those who eschew financial discipline. It might have been better had Washington defaulted. At least we’d know that they were grappling seriously with the nation’s debts.

GTC

Monday Roundup

brightonsecurities — Mon, 01 Aug 2011 15:05:20 +0000

There is plenty of financial news this morning:

All eyes have been on Washington where it looks like a default will be averted, as I suggested it would. US financial markets opened sharply higher, but have fallen back. Why? Congress and the President have only delayed our nation’s financial reckoning, and markets see that and are not impressed.

First Niagara Financial is buying HSBC’s upstate NY branches, which will give First Niagara the leading market share position in Rochester. First Niagara is said to have outbid M&T Bank (already has plenty of branches) and Key Bank (since the financial crisis not enough muscle to make the buy). One hopes they will do a better job than HSBC in running the local operation. I also have a concern for First Niagara shareholders. We have seen this bank do deal after deal to get bigger and bigger. Now they are a large bank within their markets; can they start to bring earnings to the bottom line and continue to increase dividends to shareholders?

And today’s Wow! news: PAETEC sells out to Windstream. While most PAETEC shareholders are no doubt happy with today’s 20% price boost based on the merger news. City Hall is nervous as it becomes increasingly apparent that the planned PAETEC headquarters – crown jewel of the Midtown development – will not get built.

GTC

And Here’s Our Other Team

brightonsecurities — Thu, 28 Jul 2011 18:46:46 +0000

When you stop by either of our offices you’ll see our employees dressed for business and keeping busy. After business hours we all manage to keep busy, too, but we dress a little differently, especially on Tuesday nights. That’s when you’ll find our BSC Softball Team at the Cobb’s Hill baseball diamonds practicing America’s pastime. Not everyone on the team is an employee, but everyone has a good time

GTC

More Power to You

brightonsecurities — Wed, 27 Jul 2011 14:43:06 +0000

I saw an article in the Democrat & Chronicle yesterday that is nearly an annual event: record demand for power at our local electric utilities. This is not uncommon around the country, and for a number of reasons:

Some cite global warming and a corresponding demand for air conditioning in the hottest parts of the summer.
Population growth will see corresponding growth in demand for power, as will resurgent economic activity as we continue to recover from the recession.
Increasing prosperity also fuels demand. Thirty years ago it was the exception for homes in the northern parts of the US to have air conditioning. Now it is increasingly common, just as it is common for households to have two cars rather than just one, to have larger homes than 30 years ago, and so on.
Intersecting with prosperity is technology. Computers, smart phones, DVRs and the like have become ubiquitous. If you have looked around your home at night you see little green glowing spots, like fireflies, signifying your TV, coffeemaker, printer – you get the idea. Technology takes power and we are consumers of technology; power comes with it almost without thinking.

It has me thinking about investments that may prosper. First would be electric utilities. Mergers have reduced the number of public utilities from as recently as ten years ago, but there are many sound companies in the field worthy of evaluation. Next of course would be the fuel that generates that power – coal and natural gas, mainly. For many years utilities have been seen as stable generators of not just power but also cash dividends, and that remains true in many cases today. Always consult your advisor and do your homework before plunging in, but don’t overlook this sector.

GTC

Go Ahead: Default

brightonsecurities — Mon, 25 Jul 2011 15:15:54 +0000

We are hearing a lot lately from clients who are concerned about the possible ill effects on the markets of a looming federal default. While I hate to see clients having an anxious time or losing sleep, a heightened level of contact tells me things:

What we hear from clients generally echoes what clients hear from the news media, and the amount of contact is in direct proportion to the level of hysteria (or euphoria, as the case may be). Google “federal default” and you’ll get 234 million hits.
For better or worse, investors pay attention and respond to the news media. It’s usually for worse, because it’s the job of the media to report yesterday’s or today’s news, not tomorrow’s. Successful investing takes place by thinking about tomorrow.
When a given financial topic takes on a life of its own, that often means the trend is played out, or nearly so, and the smart money should already be gone by then.

So it is with the debt ceiling talks and the fear of default. There are three reasons why I no longer fear a default.

The stock market tends to be a leading indicator, and in the last 12 months the Dow is up roughly 25%.
We have a date certain for the “end of the world”: August 2^nd is the supposed drop-dead date for default.
There is near-universal sentiment that a default will be a huge disaster.

Think about the last big market drop, late 2008 through early 2009. The market had been weak (down 25%) for 12 months before the financial crisis really became a crisis in September 2008. That was a great example of the market as a leading indicator. The market headed down early, and spent a year pointing to the disaster before it happened. Not so today. And that whole “date certain” thing, please. When has any financial cataclysm ever been accurately predicted by any credible source? Leave dates certain to biblical scholars. Perhaps the best evidence that a default would be a yawn is the universe of Chicken Littles telling us how the sky will fall. Remember Y2K? Planes were going to fall from the sky, the power grid would cease to function, no water, no food, cows would refuse to give milk, whatever. It was a non-event preceded by a year’s worth of hysteria about what a huge disaster it would be.

I still think default will be averted. But if it is not: yawn.

GTC

Zillow and Your Prescription

brightonsecurities — Thu, 21 Jul 2011 13:21:49 +0000

What do they have in common? Nothing. It’s what sets them apart that is worth noting. Zillow, a real estate site known for aggregating price and tax information on houses for sale, went public yesterday in yet another Tech Bubble 2.0 offering. Although the shares initially tripled (yes, tripled), they fell back a bit and closed up only 79% from the offering price of $20. That gives Zillow a market value of over $600 million for a company with sales of $30 million last year, or 20 time sales. That bears repeating: sales, not profits, were $30 million. There were no profits. Why pay up? Partly because Zillow is a fast-growing company, and investors are always looking for the next Google. May’s LinkedIn IPO, and the IPO of Chinese internet-services provider Qihoo 360 are more examples. LinkedIn and Qihoo have sales-to-market-cap ratios of roughly 30 times sales. There are plenty of people who will patiently explain to you why Tech Bubble 2.0 is different from the tech bubble of 10 years ago. Just like people would patiently explain, back in 2006, why buying yet-unbuilt condos in Florida would result in huge profits for flippers.

Technology is an area of great potential and many of these companies will do well. My caveat is simple: price. Let’s get back to your prescription. This morning, pharmacy benefits manager Medco announced that they would be acquired by larger rival Express Scripts for $29 billion. That’s a price of 1x sales, and less than 20 times earnings – actual profits! I’m not suggesting that Medco is a better company than Zillow or LinkedIn or Qihoo. But I am suggesting that investor behavior, chasing investments based on ideas more than on numbers, can and does lead to bubbles. When Tech Bubble 2.0 bursts, some companies will survive and others will not. Choose carefully.

GTC

Thanks to Our Team

brightonsecurities — Tue, 19 Jul 2011 13:25:42 +0000

On July 12^th a team of 12 BSC clients and employees participated in a fundraiser at Rochester Brooks Int’l Trap & Skeet Club. In this the 11^th annual event, over 130 participants raised more than $45,000 to benefit the Seneca Waterways Council of the Boy Scouts of America. It was a great day to be outdoors, and we thank all the participants for helping to benefit such a great organization.

In the photo above, back row, left to right:

Doug Hendee, Darren Holupko, Jim Cady, Jim Hoesterman, George Arnold, George Conboy, Joe Arena, Craig Densmore, Brennan Redmond, Alexandra Conboy

Front row: Chris Cromwell, Pete Sherman

GTC

Monday Roundup

brightonsecurities — Mon, 18 Jul 2011 13:06:16 +0000

Stock markets can expect to see higher-than-normal volatility as investors worry about Eurozone economic problems and continued brinksmanship in Washington over US debt and spending issues,

They can’t manage our finances, but the Federal government can make trouble for successful businesses. Google is now a target of a Federal Trade Commission (FTC) antitrust probe. Unlike AT&T, which had a near monopoly on phone service decades ago, Google has plenty of competitors (Bing, anyone?). But Google’s success in offering a convenient and highly useful service makes them a target. Thanks, FTC.

This week and next are peak time for corporate earnings reports. Today we’ll hear from Gannett; Tuesday, Apple and Johnson & Johnson; Thursday, PepsiCo; and Friday, GE and Xerox. We’ll hear from Eastman Kodak next week.

GTC

Like It’s 1999

brightonsecurities — Fri, 08 Jul 2011 13:35:14 +0000

The Internet was still novel, if not new, and more people were getting on board daily. It was considered certain that massive profits would follow, even if there were few profits in evidence at the time. Wall Street was partying in 1999, raking in millions for technology firms issuing stock and for their underwriters. By March of 2000, the bubble had popped, and the markets began a two-year decline that would see the NASDAQ Composite, an index stuffed with tech companies, down more than 80%.

Some of those newly-hatch IPOs, like Pets.com, didn’t survive the bursting of the Dot-com Bubble, as it became known. Other once-promising firms still exist, but are worth small fractions of their original price. Sycamore Networks is a good example. It went public in late 1999 and ended its first day with a valuation of $14 billion. Today, twelve years later, you could buy the entire company for $650 million, about a nickel on the dollar of that first-day price.

I am put in mind of all this by reading a story today about Twitter and their current value, and all the will-they-won’t-they-go-public chatter. The NY Times reports Twitter is worth $8 billion despite having sales of only $200 million (that’s 40 times sales) and being “close to profitability.” The same article mentions that online game company Zynga is expected to go public soon at a valuation of $20 billion – 33 times sales and over 200 times earnings. By comparison, Exxon Mobil sells for just over 1 x sales and about 10 x earnings. Not high-tech enough? Apple sells for 4 x and 15 x, and Google for 6 x and 20 x.

Welcome back to the tech funhouse.

GTC

A Federal Default? – Part 2

brightonsecurities — Thu, 07 Jul 2011 14:08:40 +0000

In my last post I speculated on the possibility that the Federal Government might default on its obligations. The media drumbeat about possible dire consequences has been getting louder by day. Here are two predictions:

There will not be a default.
If there is a default, the consequences will be far more mild than the media consensus is suggesting.

Here’s why. Let’s assume you sold your house to a couple and you are holding the mortgage. They have always paid you on time, and they have good jobs, but it has become obvious that they live beyond their means. In addition to the mortgage, they have car payments and are relying on credit cards to fund some of their spending. Recently they have been squabbling about whether they should try to get more income or try to cut their spending. As a consequence, there is a risk that they might delay or miss a mortgage payment. As a lender, could you live with a late payment if it meant your borrowers cut back their borrowing and spending? Or would you feel safer with the status quo?

There are other factors to consider. The US doesn’t borrow in a vacuum. We compete for investor dollars in an open marketplace. After all, investors don’t have to buy US Treasury securities – why not consider China, or Kazakhstan? The answer is obvious. To paraphrase Winston Churchill, US Treasury bonds may be the worst investment, except for all of the others.

In sum, the current default debate is a tempest in a teapot.

GTC

A Federal Default?

brightonsecurities — Tue, 05 Jul 2011 13:42:03 +0000

You can’t escape the daily stories in every news outlet: concern about the Federal Government’s debt ceiling, which, if not increased by Congress, could lead the US to default on its obligations for the first time ever. The ramifications of a default are said to be catastrophic. So let’s see: only the Congress stands between a placid summer and looming catastrophe? That’s what the media is pitching.

I don’t buy it. Last week US stock markets had their best week in two years, up over 5%. The DJIA is up nearly 9% YTD, with more than half coming in the last 5 trading days. Does that make any sense, that investors are buying with the end of the world in sight?

There are a couple of things to keep in mind:

Markets are perhaps the original form of crowdsourcing – increasingly viewed as a good way to get accurate information within reasonable parameters. As such, markets tend to be leading indicators; good predictors of future events.
Markets react most strongly to news that is, well, news. A surprise will move markets. Widely expected events tend to elicit a yawn. A Google search of “US Debt Ceiling” gets about 10 million hits.

In my next post we’ll examine the likely consequences of a default.

GTC

Friday Roundup

brightonsecurities — Fri, 01 Jul 2011 12:23:28 +0000

Sorry, No Jackpot

Eastman Kodak’s hoped-for billion dollar windfall didn’t happen last night. Yesterday the US Int’l Trade Commission was set to rule on Kodak’s patent claim against Apple and Research in Motion. In an ambiguous decision, the commission affirmed part and reversed another part of a previous ruling, and set yet another deadline for a final decision. I hope Kodak hasn’t spent that billion yet, because it looks less and less like they are ever going to see it. Watch for the stock to take a hit today. The shares have been trading as if each one came stapled together with a lottery ticket. But that ticket has been scratched off and, so far at least, it hasn’t been a winner.

Up Next: Earnings Season

Within the next few weeks you will see 2^nd quarter earnings reports from most major companies. There will be the typical mixed bag, but the theme will be better, stronger, higher. Look for dividend increases as well. The US economy continues to recover and grow, and investors can be increasingly confident about the strength of well managed companies.

Now How About the Rest of Them?

Lee Farkas, convicted of bank and mortgage fraud, has been sent to prison. Good enough; justice served. You might ask “Who is this guy, did he wreck Bear Stearns? Did he bankrupt Lehman Brothers? Was he behind the mismanagement at AIG?” The answers would be no, no, and no. He ran a mortgage company called Taylor, Bean & Whitaker. Who? Right, you never heard of them. Now that Mr. Farkas off to jail, when will they go after the criminally incompetent idiots who blew up the mortgage and banking sectors? Hello, Preet Bharara – we’re waiting.

Brighton Securities wishes you a happy 4^th. We hope you enjoy a wonderful long weekend with family and friends.

GTC

Jackpot?

brightonsecurities — Thu, 30 Jun 2011 17:24:48 +0000

Today at 5 we’ll find out whether Eastman Kodak will hit the jackpot. At 5pm sharp the U.S. International Trade Commission will issue its ruling on whether Apple and Research in Motion infringed Kodak’s patents on in-phone camera technology. If the result goes in Kodak’s favor, it could mean a billion dollars in royalties for the beleaguered Yellow Box.

Nobody would scoff at a billion, but it means more to some than others. Apple makes $1 billion in profit on average every week. It takes Research in Motion a good two months to do that. And Kodak? They haven’t had a billion dollars in annual pretax income in over ten years. In fact, the entire market value of Kodak as a company is today less than $1 billion. So if they win, this would be a jackpot.

Here’s hoping the home team wins one. I have no idea as to the merits of the patent dispute, but would love for our dwindling group of friends and neighbors who still have jobs at Kodak to have something to cheer about, if only for a little while. If they do win, let’s hope senior management doesn’t squander the cash like they have so many other times over the last 20 years.

GTC