Tuesday, April 5, 2011

QE3, Quick Easy Fix

The Fed's quantitative easing has clearly helped move U.S. equity markets in the right direction.  With the possibility of the Fed's third installment of quantitative easing right around the corner, investors should take a close look at their current positions and what effects the Fed's decision may have on their portfolio. 

After two rounds the fed is clearly winning, but at what cost?  Yes the market has seen some substantial gains since the inception of the QE policy, but it is impossible to distinguish the success of the program with corporate profits reaching all time highs.  Overall trading volume has been substantially down in 2011.  Individual investors have been on the sidelines all year watching their equity heavy portfolios grow.  Hedge funds, mutual funds, and ETF's are responsible for most of this years volume, which is somewhat scary.  As long as the large active fund managers stay bullish investors will continue to see their portfolios grow, but it doesn't take much to change the fund mangers mind.  No matter how good the U.S. economy is doing, no matter how much hiring is taking place in the private sector, and no matter how many billions U.S. corporations are beating estimates by, the market is at the mercy of the "Mega-Fund Managers."

It all comes back to jobs.  The most common talk among amateur investors is about the market growing without any substantial job growth.  Truth be told, the businesses that survived "The Great Recession" have learned how to run their operation as lean as possible and will likely not be hiring at the same rate as they did in the past.  Expect to see corporate margins continue to increase across most sectors as revenues surpass 2007 levels, but yet headcount remains at 2009 levels.  The fat has been trimmed and those that survived are highly skilled and much more valuable to their employers than ever before.  There will be plenty of cannibalism of employees in certain industries, putting much more of an emphasis on applicable experience over education.  This will only make the job hunt that much harder for recent grads. 

Where do we go from here?  Well, there are two options...  QE3 would likely keep markets climbing north for a few more months, and the end of quantitative easing will likely have fund managers scrambling to sell and harvest some profit from this rally.  Looking long term it would probably be better to go ahead and ween us off the QE bottle now during the upcoming summer lull and expect to see a very active fall if this holds true.  If there is no QE3 the 3 - 5% correction following the announcement should present a great buying opportunity.  U.S. companies are making money and no matter what the fed does they will continue to grow revenue and margins.  This fall could look very similar to the rally in 2010 that started when Republicans took over the house.  Equity markets continue provide investors with the greatest growth potential, while the fixed income market remains asleep at the wheel.

Bond funds are the last place growth oriented investors should be investing.  Instead, those that are seeking income should look to closed end funds.  Most of the well managed funds that have a proven track record of not touching capital, have increased NAV in line with the S&P 500, but their price has surpassed the benchmark index.  Whether it is REIT's, CEF's, MLP's, or high yielding telecom/utility/pharmaceutical stock, there are plenty of alternatives to bonds for the income needy that actually offer the potential for growth.

Thursday, February 24, 2011

Is the Market Ready to Resume it's Bullish Ways?

Equity market closed mostly down today, but finished the the day with a strong push.  Have the past few days been strictly a result of global political turmoil, or was that just an excuse for a market correction?  It appears to have been some of both.  Investors could not look past the trouble in Libya, like they did Egypt.  The situation in Libya is terrible, but it presented investors with an opportunity to harvest some profits from the run up in equity markets over the past 6 months.  A month from now will these negative sessions be viewed as entirely news driven, or will this be considered a standard market correction that was sparked by the news?  The most likely scenario will be markets continuing to grow like they have so far in 2011 with a few of these news driven corrections.  This market will continue to go higher and tomorrow should be a great buying opportunity for those who need to boost their equity position.

Monday, February 21, 2011

Oil Slick Approaching Destin

Saturday morning we headed out of Destin Pass in search of snapper, grouper, and amberjack.  The conditions could not have been more perfect. Calm seas, a gentle breeze, and about 70 degrees.  It doesn't get much better than that.  Our first stop was a wreck approximately 7 miles south of Destin.  On our way there we came across what the media has long forgotten, oil.  We were about 5.5 miles offshore and the slick measured approximately 100 yards wide and extended as far as we could see to the west.  It was the same nasty brownish colored toxic mix that filled the news all summer long in 2010.  I have contacted several government and environmental groups to try and find out more about our findings.  Pictures and exact locations will be posted soon.  Please check back for updates.

Friday, February 18, 2011

Bulls Keep Running

All three major US stock indices finished up for the third strait week.  The Dow Jones Industrial Average closed at 12,391.25, the highest the index has closed since June 5, 2008.  The NASDAQ Composite closed at it's highest mark since October 31, 2007.  The tech heavy NASDAQ finished the week at 2833.95.  The S&P 500 stock index gained ( 1343.01, +2.58, +0.19% ) today to finish the week at it's highest level since June 17, 2008. 

Caterpillar Inc (CAT), one of 2010's best performing stocks, shares led the charge for the Dow today by adding 2.4% on some stellar numbers.  Surprisingly positive earning reports have almost become expected on Wall Street this year.  After a third strait week of gains the talks of a pull back are once again growing in popularity.  Are investors willing to keeping riding this bull, or will they do some profit harvesting and stop to catch their breath?  We will not get an answer until Tuesday, because US markets will be closed Monday in observance of Presidents Day.  Enjoy the long weekend.

Gumbo at the Beach

Grab your heartburn medicine of choice and head on over to the 22nd Sandestin Gumbo Festival.  It will feature some of the gulf coast best culinary minds displaying their take on the Cajun classic.  The gumbo festival will kick-off Sandestin's "Taste of the Village" in it's inaugural year.  "Taste of the Village" will have Village merchants supply guest with some of their tastiest culinary delights.  Live music and the smell of mouth watering food will be in the air all weekend.  It should be a great time for people of all ages, and great opportunity to get out and support some local businesses.  Enjoy the beautiful weather this weekend, and drive safe.

BP and Feinberg at Odds Over Final Payment Formula

BP argues that Feinberg's final payment formulation is far to generous.  In a 36 page letter to the Gulf Coast Claims Facility, BP breaks down the entire claims process including suggestions on how final payments should be calculated.  The claims facility is currently using a formula that factors in a loss of 70% in 2011 and 30% in 2012.  These percentages will be multiplied by actual demonstrated 2010 losses.  According to BP these projected loss figures are too high, and will result in overly generous final payments.

There is no reason that they shouldn't be overly generous.  No one made them drill in the gulf, and no one made them run there rig recklessly.  But when it comes to compensating residents of the gulf, BP should be required to go above and beyond.  Think about it like this: BP is trying to make this a very exact quantitative process, but there proposal neglects to factor in diminished quality of living.  Gulf coast residents lives have been impacted in some many more ways than lost income, and they should all be included in payments.  It appears that this letter is already backfiring on BP.  Media and politicians are tearing them apart and this should lead to some loosening of the purse strings by the claims facility in hopes of saving face.

Thursday, February 17, 2011

Florida Toll Bridge Faces Bankruptcy

The white sands of Florida's emerald coast may be oil free finally, but the tourism driven area still faces some stiff economic headwinds.

Images Courtesy of Crusiersnation.com
Images Courtesy of Crusiersnation.com

The emerald coast will be making history soon, for all the wrong reasons.  The Garcon Point Bridge that is located in Gulf Breeze, FL is on track to default on it's approximately 2.2 million dollar bond payment that is due July 1, 2011.  Tolls are the bridges sole source of revenue and unless there is a sudden surge of traffic, the Santa Rosa Bay Bridge Authority will default on it's payment and subsequently file for bankruptcy.  Making it the first toll road in the state of Florida to do so. 

No pity needed here.  This project was scrutinized from day one, and should have never taken place.  The proposed Garcon Point bridge would only benefit those traveling to Gulf Breeze or Navarre beach.  Neither of which draws anywhere near the numbers of the Destin area beaches.  Thanks to some lofty traffic estimates, from a San Francisco agency, the project was deemed a good idea and began to grow legs.  Not without criticism.  Santa Rosa county and the State of Florida had there reservations and chose not to finance the project forcing the Santa Rosa Bay Bridge Authority to seek it's capital in the private sector.

The debatable project received it's financing from the issuance of  $94,993,714.05 in Santa Rosa Bay Bridge Authority (Florida) Revenue Bonds, Series 1996.  The individuals with the vision to go through with the project have all departed except for one, Morgan Lamb.  Who I must commend for sticking around to clean up this mess.  As for the rest of them, I am going to defer to one of my mother's favorite sayings, "If you can't say anything nice, don't say anything at all."  In case you were wondering, here is a list of the Santa Rosa Bay Bridge Authority members in 1996, and other key players:
  • Mahlon W. McCall, Chairman
  • David Morres, P.E., Vice Chairman
  • I. H. Northup, Jr., Secretary/Treasurer
  • Charles G. Baxley, P.E., Member
  • Shirley Lee Brown, Member
  • R. S. Burch, Member
  • H. E. Prescott, P.E., Member

  •  Feasibility and Traffic Consultants: URS Greiner, Inc., formerly URS/Coverdayle & Colpitts, New York, New York
    • Financial Advisor: Public Financial Management, Orlando, Florida
    Unfortunately for the Santa Rosa Bay Bridge authorities debt holders there is only one thing for certain, a very large loss of principal on their investment.  The bridge authorities bonds have been trading as low as $39 (par = $100).  Politicians across the state are watching Gulf Breeze while also saying a prayer of thanks that this didn't happen in there region.  If this doesn't lead to a more conservative fiscal policy, I don't know what will.  Let's all keep our fingers crossed for some traffic. 

     All of the above information is public knowledge and can be found at the Municipal Securities Rulemaking Board's website.

    The municipal bond market is much more diverse than Meredith Whitney makes it out to be.  Debt issued by municipalities should no more be lumped into a single class than the debt of Enron and GE.  Municipal bonds, a.k.a. Muni bonds, are created to fund dozens of different types of projects, and sometimes just to fund other bonds. Read, research, and read some more before you do anything. 

    As with any investment, you must perform your due diligence before making a purchase.  If you are not familiar with the different types and structures of municipal debt please consider reading this fellow bloggers' recent post:  Default and Bankruptcy in the Municipal Bond Market

    Thanks to the Northwest Florida Daily News for some of the information.

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