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.
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.
5. The survival of American automobile companies – General 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.
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 - performance since 2004
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.
The economic turmoil the past two months has sent some very mixed signals to people who do not fully understand the commodities market cycles and global economic forces. The global economic train is now in the midst of a long and dark recession tunnel. The actions taken by the large economies of the world, such as the United States, and European countries, the past two months have made the average investor skittish and scared. They see stalwart financial companies like AIG, Wachovia, Washington Mutual and General Electric either crash and burn or bought out by other companies or halved in price. Their 401Ks, Roth IRAs and other investment accounts tumbled. To make matters worse, they see high crude oil prices that had peaked above $140/barrel go on a crash dive to barely above $60. Wasn’t the global demand of oil, especially from China, India and other emerging markets suppose to keep gas prices above $4.00 for good? Now they are back well below $3.00. Other commodity prices, such as silver, copper and platinum followed suit. All tanked from multi-year highs just reached not long ago this year.
However, contradicting this gloomy wave of news was the ‘strengthening’ of the U.S. dollar and the 30%-plus drop of gold prices. Gold was supposed to be seen as the safe haven when things go bad. Well, now things are really bad so why is gold also dropping? And why is the dollar strengthening when the U.S. economy is tanking? How can this be? In the simplest explanation, although quite wrong and unsubstantiated, was that the commodity bubble had bursted. Gold dropped because the demand for commodities was over. Many people began believing this and even some gold bugs were confounded by what was going on.
Their is a very simple explanation for it, and all the reasons for the dollar strengthening and gold prices crashing are all temporary. As a matter of fact, it provides the best opportunity to buy gold in several years. The recession is in much deeper quicker than anyone thought. Many investors are being forced to sell even their safest haven assets in order to cover for their losses on the risky side, such as stocks, houses, hedging, etc. This includes the liquidation of gold. They do not want to do this but are forced to. This is a major factor in the instability on the down side of gold. Second, the safest non-gold haven for money is U.S. Treasuries. They are one of the only things that guarantee still a net positive return, albeit a small interest rate, at this juncture in the economy. Countries have no choice but to buy more Treasuries because the faith in other fiat currencies is still not strong enough since this is a global recession. This temporary strength in the dollar against other fiat currencies also has a downward push on gold prices and other commodity prices since they are all priced in the dollar. That means $100 now buys more gold than before.
The thing is these two actions are only temporary. These actions are only to save the global recession from a global depression right now. These are short-term reactions to a longer term problem. These actions are known as deleveraging. It is allowing the new economic state to take root. It is a finite process and will soon come to an end. Why? The federal reserve continues to pump lots of new unbacked dollars into the economy. And the $700 billion dollar bailout begins this week. The Feds announced that they will give the initial $125 billion dollars to nine banks. What does this all mean? INFLATION! And soon, HYPER-INFLATION. U.S. Treasuries will have no choice but to increase their interest rates in order for countries to continue buying them. Mortgage rates will rise, as they already are, even though recession takes root. The dollar will reverse trend and weaken due to inflationary pressures. More dollars will come home to roost from other countries. What does all this mean? Gold will rise, rise, rise.
Update 6:15pm: So the Dow Jones goes up 890 points (10.88%) today, with the NASDAQ and S&P500 posting similar percentage increases today. The two main reasons for such a historic rise (second largest point increase of Dow Jones ever) is due to bargain hunters and an expected interest rate cut by the Federal Reserve. Although the cut might help in the credit and liquidity crisis, this is another long-term inflationary signal. If Treasuries have lower interest rates, who will buy them? More Dollars will come back to America, which means a weaker dollar. Although this might help the current local minimum (credit and liquidity), the entire graph continues to head towards a weaker dollar and a continuation of the commodities bull market and a rise in gold prices.
Disclaimer: This is a commentary by an amateur investor and is not meant to be taken as professional advice.
How Anyone Can Invest Profitably in the World’s Best Market
Author: Jim Rogers
WHY I READ THIS BOOK
This is my second book review on the precarious economic situation in global economics, specifically in America. The first one was The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel, by Stephen Leeb. Now, under the assumption that America is on the cusp of a long recession or some sort of economic crisis, I decided to read a book about a neglected investment area that already is in the midst of a long bull market, commodities. Commodities are the raw materials, natural resources and hard assets that prop up everything in our quality of life, from food such as corn, sugar, and pork, to infrastructure such as copper and rubber, to energy such as oil and natural gas. Without commodities, and a speculative market for it, we would be seeing drastic regional and daily price differences of everything, ranging from televisions to groceries to jewelry.
I had heard of Jim Rogers before, but not much about his past. He came to fame in the 1970s where George Soros and him created the Quantum Fund that far outperformed the S&P in the high-inflation oil-crisis 1970s. The Quantum Fund returned over 4200% in that first ten years while S&P returned only 47%. After retiring in 1980, he went on to travel the world many times over… literally. He set the Guinness Book of World Record in 1992 by motorcycling over 100,000 miles across six continents (he details in his earlier book Investment Biker). He has traveled across China multiple times. Then in 2002 he set another world record by driving through 116 countries and 245,000 kilometers with his wife in a custom-made Mercedes. His current claim to fame is creating the 1998 Rogers International Commodity Index and predicting the current commodities bull market in 1999. This was during the height of the dot com when commodities were at multi-year lows and in a major bear market. He has also been a guest professor of finance at Columbia University, a moderator of finance shows on CBS and FNN. Like Soros, Rogers has also moved his entire family to Singapore because of the belief that Asia is the next financial epicenter and America is due for a major economic crisis.
“Commodities get no respect.” The first line in the book. I’d have to say I agree with him. I’ve been investing for less than 10 years and no one talks about commodities the way they talk about stocks and mutual funds. I guess most people only talk about automobiles like Corvette and Accord (stocks) or General Motors and Honda (mutual Funds). Unless you are a true car enthusiast, you leave the details about engines, suspension and chassis to the experts. However, we know that the materials that make up a car or a company’s products are what makes them run and exist. In short, Rogers pretty much expresses in simple terms that the supply and demand fundamentals of most commodities are way out of whack (his words). Supply is on the short side and demand is increasing.
The flow of this book is very good. He first builds his credentials. Then he talks about the history cycles of commodities, specifically the fundamentals of supply and demand. A step back with a primer on commodities and the exchanges that exist is next. Finally, it’s chapter by chapter of specific commodities that stand to gain in this bull market.
As with all these books, there is always an overt or covert “I told you so” in the writing. It is understandable because the authors are usually taking a contrarian viewpoint and in order to build credibility they have to show that their previous contrarian positions have panned out. Rogers is no exception when he describes the track record of his futures picks. Having the Quantum Fund with Soros as part of your credentials sure doesn’t hurt. What is interesting is that Rogers is at an age where he really doesn’t have to prove anything to anyone. His writing style clearly shows this. It is very relaxed and simplistic. He talks about his past and trips around the world in a casual sense as if everyone can do it. He also refers to his mistakes and weaknesses as humourous because they turned out for the better. His attention to detail and research is remarkable.
In short, the commodities he talks about in detail are mostly nothing new. Everyone knows that China is tilting the balance of supply and demand in many key economic areas, such as oil and steel. However, Rogers has been preaching this since 1999 when oil was $10 a barrel and Asia had just overcome the 1997 financial crisis. The last thing anybody was thinking about was a commodity bull market. One viewpoint that was interesting was his lackluster enthusiasm of gold as a commodity. Although he maintains a small stake in it, he views it as something that doesn’t always follow the fundamentals of supply and demand, and that it’s historical cycles are harder to predict. He’s still bullish on it, but not as bullish as more obvious ones, such as oil and certain other metals. His other interesting viewpoint is on India. His first-hand experience in the country leads him to a different viewpoint than the public majority.
Each chapter about a commodity is interesting to read. He describes the importance of it in everyday life and markets and the historical cycles of it. The set up is to show why he thinks it is time again for that particular commodity to be a high-flyer.
Although this book was published in 2004, it is well-known that Rogers has been predicting the current commodity bull market since 1999. Let’s look at the performance of some of his suggested commodities since 1999 and 2004.
Light Crude Oil
Approximate price/barrel and return since 1999
1999 price: $15
2004 price: $35…..133%
2008 price: $130…..767%
Although there are signs of a bubble since 2007, high oil prices are clearly here to stay.
Approximate price/oz and return since 1999
1999 price: $270
2004 price: $400…..48%
2008 price: $900…..233%
Rogers is not as enthusiastic about gold. Although it has strong returns, it’s not as strong as the other commodities.
Approximate price/oz and return since 1999
1999 price: $380
2004 price: $800…..111%
2008 price: $2000…..426%
Low supplies with increasing demand makes this commodity a high-flyer.
To be fair to him, I will leave the rest of his suggestions to readers. However, in looking at the monthly returns of most commodities, it is quite apparent that Jim Rogers is on the spot. Check out other phenomenal returns here.
The writing style of this book is so laid back it borders on conversational. However, it works for Jim Rogers because he appears to truly enjoy life like a kid. His wild-child trips around the world are not just rich-man-spending-money trips, but a big part of his research. His first-hand experience in living different cultures surely helps his perspectives. He is known for impeccable research, with simple logical explanations. If you believe the commodities bull market is far from over, as Rogers does, I suggest picking up this book.