Silent Archimedes

Posts Tagged ‘AIG’

2008 Year in Review – Top 10 in Finance

Posted by silentarchimedes on December 22, 2008

Let’s get right to it.

10. Yahoo rejects Microsoft’s $45 billion takeover offer – February 11, 2008. This one has to rank as one of the most stupid business decisions ever. Since Yahoo practically started the internet search business back in the 1990s, they have quickly given up their dominant position to Google in the past ten years without a major fight. By the middle of 2007, Google had a 53.6% market share of the search engine business, versus Yahoo’s rapidly shrinking 19.9%. Microsoft’s $44.6 billion in cash and stock offer was literally a lifeboat and gave Yahoo the best chance for long-term survival. Yahoo rejected the offer and a later offer in May valued each Yahoo share price at $33. Yahoo’s share price had been languishing around $19 in recent years. Yahoo’s CEO and founder Jerry Yang demanded $37/shr! Eventually Microsoft got tired of Yahoo’s demands and pulled all negotiations off the table. What is Yahoo today, end of 2008? The share price is $13.03 and Yang was ousted in November. Although Microsoft still has lukewarm interest in Yahoo’s search business, the main opportunity for Yahoo has passed.

9. Housing prices continue to go down town – It’s amazing how so many analysts and normal people knew that the meteoric rise of housing prices was due to risky ARMs and other loans that were impractical and ticking time bombs. It’s amazing the federal government did not see this coming or chose to not do anything about it. Because of the dot com bust from a few years ago and the recession soon after, the Feds turned a blind eye and let free credit run rampant. The bomb went off in 2006, and median housing prices have gone on a free-fall from an inflation-adjusted high of $275,000 in 2005 to near $200,000 at the end of 2008. It will take a good while to sort this thing out. Housing prices are still historically high and with high unemployment rates, increasing foreclosures will continue to flood an already over-supplied realty market.

8. Unemployment rate – The United States has been pretty lucky in terms of unemployment rates for the past two decades or so. Ever since the recovery from the high inflation, 9.0+% unemployment rates of the early 1980s, the rate has stayed well below 8.0%. Since 1995, the rate has performed even better, only touching above 6.0% once during the short recession recovery in 2003. In January 2008, the rate was around 5.0% but had already been steadily rising throughout 2007. Since this January, the rate has put on the rocket boosters and is now at 6.7% nationally, with no signs of slowing down. Several states, such as Michigan (9.6%) and Rhode Island (9.3%) already have unemployments rates above 9.0%! Another five states have rates above 8.0%! Stats were from Nov 2008 and look to be higher when December stats come out.

7. What happened to the commodities bull market? – Oil, gold, silver, platinum and copper. All were at multi-decade highs in 2007 and even in 2008. Since then? Crude oil prices have dropped from $150+/bl to $37/bl! Most commodities lost more than half their values. Exchange-traded funds such as SLV, GSG, and XLE all dropped more than 50%. The one exception so far has been gold. Although gold prices have dropped from a high over $1000/oz, they have not dropped below $700/oz, and have recovered into the $800s since then. Gold is an unique commodity and it appears that it mostly trades as a safe-haven currency than a physical commodity. In looking at the chart of GLD (below), gold prices have solidly bottomed out at $70/shr and is looking like it will have a strong 2009.

SPDR Gold Shares (GLD) Performance since Jan 2007.

SPDR Gold Shares (GLD) performance since Jan 2007

6. Remember the $168 billion original stimulus package? – That amount seems so little nowadays especially when Obama is bandying around an $800B to $1 trillion stimulus package. Add to that the $750B bailout package given to financial companies and automobile companies. This is a year of bailouts and stimuluses and so far they have not helped the economy. Instead, the state of the economy is at its worst at the end of 2008. The expected package by Obama will be an early focus of the Obama administration. I think most people could use an extra few hundred dollars in their pockets.

Pixar's Mater - Help me!!!
Pixar’s Mater – Help me!!!

5. The survival of American automobile companiesGeneral Motors, Ford Motor Co. and Chrysler became the poster child of the current economic crisis hitting main street. On display was the millions of jobs, especially blue-collar jobs, in America at risk of disappearing due to the recent decades of mismanagement, overhead and foreign competition of the US auto industry. With the finance industry easily getting a $750B bailout, it seemed absurd that an industry that for decades represented hard working Americans and unions had to literally beg for a few billion dollars to survive. It was obvious where the attention of politicians were. Although Bush recently said that $18B of the $750B bailout would be immediately used to prop up GM and Chrysler, the long fought battle was wasted time and energy by the attention garnering and bureaucratic Congress.

4. Bernard Madoff arrested on $50B Ponzi fraud scheme – When the $50 billion Ponzi fraud scheme by Bernard Madoff was revealed in early December, it was the main headline of major news websites for a mere few hours. Since then, as more details trickle out, the fraud continues to take a back seat to the macro-economic recession covering the globe. In any other year, the news of a legendary and consummate businessman (and a former NASDAQ chairman) being arrested for a fraud-scheme covering possibly the largest dollar amount in Wall Street history would ripple for weeks, if not months. However, with white collar crimes dominating the post-dot-com era (Enron, Worldcom, Martha Stewart, Tyco and the 2008 unraveling of the hedge fund industry), the public is now immune to financial fraud. Quite unfortunate. (See here for What is a Ponzi scheme)

Corporate bankruptcies on the rise in 2008.

Corporate bankruptcies on the rise in 2008.

3. Bankruptcies and those near it – It has been a sad year for many corporations as they head towards bankruptcy. Many of them well-known with years of solid profits. The list continues to grow and the impact of the recession on the consumer and his/her buying habits is only beginning. Circuit City, Linens ‘N Things, KB Toys, Frontier Airlines, Mrs. Field Cookies, Steve & Barry’s, Whitehall Jewelers, Mervyns, Sharper Image and Waffle House are some of the big name bankruptcies. And this list doesn’t even mention financial companies, which I discuss in #2. See this list for a more comprehensive list of corporate bankruptcies in 2008.

2. The demise of the hedge fund and mortgage finance industry – The derivatives market has become a multi-billion (if not, trillion) dollar investment industry that is complicated and largely misunderstood, even by the most astute financial advisors. Derivatives, as its name suggests, are investment products that are created off of actual traditional investment products. That means their intrinsic value is conjured up and their existence puts them closer to full-blown gambling. The current financial laws and oversight are not suited for such trading. Over the years hedge funds and derivatives took on more and more of the investment strategy of major financial corporations. Derivatives that were based on risky mortgages and insurance eventually collapsed as housing prices plummeted with lendees’ inability to pay the mortgages. The result has been a credit lockup unforeseen in decades. Major financial companies toppled and its effects are still not fully known. Major companies that totally collapsed include Bear Sterns, Lehman Brothers, Washington Mutual, ANB Financial, Fannie Mae, Freddie Mac, and AIG.  See this list for a more comprehensive list of financial collapses in 2008.

KBW Philadelphia Bank Index - Collapse since 2007

KBW Philadelphia Bank Index - performance since 2004

US Recessions since WWII (Courtesy of CNN)

U.S. Recessions since WWII (Courtesy of CNN)

1. Recession or Depression – Which leads to the number one financial news in 2008. Are we in a deep and difficult recession or a depression? In early December, it became official that the U.S. went into a recession in December 2007. To some analysts, this is good news because it means we are closer to coming out of it.  As you look at the chart on the right, most recessions last around one year. Based on the official Dec 2007 start date, historically we would already be on the tail end of the recession. However, to other analysts, this is bad news because the worst is yet to come, and we are already twelve months into it. With no light  seemingly at the end of the tunnel, these analysts portend a long recession. Bad news from around the world keep coming in and the bottom of the current economic crisis still has not occurred. Oil prices continue to drop, gold prices have since rebounded (bad for economy), and the dollar index has begun dropping again. Signs of major inflation on the horizon are evident, especially with the massive bailouts and the Feds lowering the overnight interest rate to its lowest level ever, 0%-0.25%.

The entire 2008 Top 10 in Finance is all bad news. Most of them have to do with the current economic crisis. The key hope is that the Bush administration is finally over and 2009 brings a more adept and intellectual administration that will do just about anything to get America out of the economic dump. An administration that seems focused on the middle class and job creation. However, with it comes more and more national debt and the mortgaging of the future. There seems to be no alternative. This will most likely lead to long-term inflation when countries such as China, India, Russia and other Asian countries continue their rise to redefine the existing  economic world order. This is not to say that the United States is doomed to be a second-bit player, as we know that is unlikely. However, the country needs to refocus on what made it a superpower in the first place, investments in technology, jobs, science, and innovation.

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Diversify investments you must! Or AIG you will become…

Posted by silentarchimedes on September 17, 2008

American International Group, Inc.

American International Group, Inc.

The fall of AIG (American International Group, Inc.) will be studied in economics classes for many many years to come. It is such a precipitous fall that it’s another one of those corporate stories where employees and investors alike get blindsided. However, as with most of these corporate tragedies, there are always warning signs leading up to the collapse. When the federal goverment announced yesterday they were bailing out AIG by infusing $85 billion to take control of 79.9% of it, it marked the biggest victim in the latest credit/mortgage/insurance crisis. Since AIG is the biggest insurance company in America, it had some of the most exposure to credit and financial services. This should have been a warning sign when other icons like Bear Stearns collapsed. As a matter of fact, when the bailout by J.P. Morgan was announced on March 24, 2008, AIG actually rose over $1. It did drop a few dollars in the next few days but because the entire market was down. This shows how little investors know about the financial details of a corporation. Here is the AIG chart:

AIG's quick fall from over $50 to $2

AIG Daily Chart - the quick collapse from $50 to $1

Ever since I started investing out of college during the peak of the dot com era, all the advice kept saying was to diversify your investments. To invest in very stable and safe companies that provided stable returns to balance the riskier investments. They suggested to invest in General Electric (GE), and Proctor and Gamble (PG), Philip Morris (PM), and, yup, AIG. As we know, GE has also had its troubles since Jeff Immelt took over for the legendary Jack Welch as CEO. But the collapse of AIG has to be one of the most shocking ever. Just look at AIG’s performance since 1985:

AIG Stock Chart - 1985 to current

AIG Stock Chart - 1985 to current

However, the point of diversifying is well taken. It just shows that not any one company is immune to troubles at a macro and micro level. That such stable entitites as AIG and GE can also hit walls. That you have to do your research and do it well. That even if you do do your research there is still risk. The fall of AIG also reminds us of two other great corporate tragedies, Lucent Technologies (LU, and now ALU), and Enron. Although AIG’s troubles have more to do with macro-issues such as the financial industry and the world credit crunch, an implosion as I’d like to call it, Lucent’s and Enron’s were more of a micro-level collapse, an explosion as I’d like to call it. Lucent’s collapse had more to do with management’s inability to sustain sales in a tech bubble and using ill-advised methods, such as loans to companies with no prospects of profit, to its own customers. Enron’s collapse was similar in that management used devious and sleight of hand tricks to show improving sales, even when analysts began doubting them.

Lucent chart before buyout by Alcatel

Lucent chart before buyout by Alcatel - From high of $80 in 1999 to under $1

The collapse of Enron

The collapse of Enron

The fed bailout of AIG is ironic. One can argue that the AIG troubles are the fault of the Feds to begin with. This whole mortgage and credit crunch crisis can be laid at the foot of Alan Greenspan and the dollar making Fed machine. When the dot com burst and 9/11 occurred, the U.S. went into a recession. The most historically logical thing to do would have been to just let the economy play itself out. The craziness of the dot com bubble was not correctly monitored by the Feds, else people would not have lost all their fortunes to paper money. So if the Feds did not get involved during greedy times, why get involved during recessionary times? It was very poor management. So instead of letting the recession play itself out, the Greenspan Feds simply pumped more and more dollars into the economy and dramatically decreased the regulations required for access to credit. The huge amount of extra credit in the economy created the housing bubble which burst and the credit crunch ensued. What will be interesting is what Ben Bernanke and the Feds do now. Does he bail out the economy again at the expense of our future or does he play tough and do the right thing? So far, the Bernanke Feds have given mixed signals. They’ve been trying to play a slightly tougher hand than Greenspan, by saying no more bailouts. But saying and doing are two different things. Since then they have bailed out Freddie Mac, Fannie Mae, and now AIG. All three, way too big to let fail. Although they decided to leave interest rates alone this week, we will see how much moxie they have when the markets keep falling while inflation keeps rising. Additionally, it appears that the annual summer correction of gold and oil is over. It will be interesting to see what happens as we head into winter.

So what is the moral of this story? Yes, one must diversify its investments. However, do not just diversify in specific corporations and industries. Also diversify into mutual funds, bonds, and CDs. Diversify in non-dollar investments, like gold, silver, other commodities, and currencies. The economic times of America will be very very unpredictable in the next ten to twenty years as globalization plays itself out. America will either remain alone at the top of the economic ladder, or new leaders such as the rising East, like China and India, become competing economic behemoths. Be in position to capitalize on this. Read books about it. For suggestions click on the Economics category to the left of my blog. I have been reading economic books like crazy lately and writing reviews on them. Let me know if you have any questions , suggestions or comments.

Happy investing!

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U.S. economy in major trouble

Posted by silentarchimedes on September 16, 2008

US Economy in Turmoil

US Economy in Turmoil

Most people in the country still have not felt the impact of the economic troubles, but make no mistake, the economy is teetering on the brink of a major crisis. When financial stalwarts like Bear Stearns, Merrill Lynch, Lehman Brothers, and AIG collapse, you know something is brewing. The last two recessions, both during the two Bush presidencies, never saw the collapse of major corporations. What most economic followers know is that they should have. Instead of letting the recessions naturally play out, the Bush administrations and the Greenspan Feds interfered too much by playing with our futures for the sake of the present. The early 1990s recession ended because of a huge increase in credit card use and personal loans. The early 2000s recession ended because of easy access to home mortgages and personal loans. Both recessions saw a huge infusion of dollars onto the world markets. Both of them are now biting us in the butt. This is a major credit crisis on our hands. The government must let it play out. Another band-aid and we will just have a more devastating crisis in the near future.

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