Posts filed under “Analysts”

Who Steered You Wrong About the GS Case?

Amongst the regular complaints I have about the financial media is the lack of accountability of alleged experts. The bad stock picks, the terrible market calls, the unsupported opinions, all blithely made and forgotten. Yet the same experts are trotted out week after week to give more money losing advice.

The silver lining to this institutionalized incompetence is that its good for business for those who are not incompetent. Nonetheless, it is horrifying to watch on a daily basis.

Nowhere has the lack of qualifications been more evident than in the coverage of the SEC indictments of Goldman Sachs. The parade of pundits who opined about things they knew nothing about was an impressive display of the blind leading the foolish. The silliness got so bad that it forced to stop doing more important things to post 10 Things You Don’t Know (or were misinformed) About the GS Case. I was surprised that this became the single most read post in the Big Picture’s history.

Now that Goldman Sachs has lost their will to fight and settled the case for a record breaking amount, the same media fools who told you a) this was a weak case and b) GS was going to win are now spinning this massive Goldman Sachs defeat as some sort of a Goldman victory.

Don’t believe them. This is a painful loss for Goldman Sachs, with expensive repercussions likely to last far into the future:

• Our “no-brainer” bullet point proved to be dead on: GS conceded misleading disclosures, and hence was forced to settle. This will be important in related actions (keep reading).

• As we noted yesterday, Goldman paid the highest fine/settlement in the history of the SEC. For an ego-driven corporate culture such as Goldie, that is a painful loss. Silver lining: Settlement was under a billion dollars. Regardless, expect some high profile resignations to follow.

• Goldman admitted material omissions/misstatements in their marketing materials; They disgorged profits and made up investor losses (Yves notes IKB and ACA were made whole). When you admit to misleading investors, you open the firm to future liability from all clients who bought money-losing synthetic derivative products. Hence, this is a significant litigation risk for GS — client civil suits to follow.

• The latest brain dead spin: “The settlement is only the price of a few days’ revenue.” See here and here. This is a classic example of conflating two unrelated issues: 1) The biggest SEC settlement ever; 2) GS is an incredible money machine.  But the latter says absolutely nothing about the former. The bottom line remains this is a black eye, and an early Christmas present for the litigators who represent Goldie’s clients who lost money on CDO deals.

Bloomberg reports that the settlement changes the vetting and approval process for the marketing of structured securities. “Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors.”

In other words, the entire street, and not just Goldman Sachs, lost this case.

Here is a question for GS shareholders: Why didn’t Goldie write a $20 million check to settle this a year ago? What sort of bad legal advice did they get, and from whom? What executives allowed what should have been a simple action to turn into a record setting settlement?

• First Moody’s now Goldie: Warren Buffett is the other loser in the case. His claim that GS didn’t commit fraud was wrong. Now Buffett looks like just another shareholder defending an investment, right or wrong. There is mud on his formerly squeaky clean reputation.

~~~

Which leads me to our headline question: What media pundits, talking heads, and other fools completely blew this one?

I don’t mean honest analysis that turned out to be incorrect — that is part of engaging in informed debate, using imperfect information, about unknowable future outcomes. What I am referencing is — who really shat the bed on the Goldman Sachs case? Who got this totally wrong? Who continues to get this wrong?

Category: Analysts, Financial Press, Legal, Regulation

Corporate Cash: Top 20 Firms = $635 Billion

I mentioned earlier that corporate cash has been piling up since 1982. The number that is being bandied about (via the Fed) is that the 500 largest non-financial firms have $1.8 trillions dollars in cash. I wasn’t sure how the Fed came up with their number, and I wanted to look at the data in…Read More

Category: Analysts, Federal Reserve, Valuation

James Montier Resource Page

Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. Tim is based in Hamburg, Germany. More of his articles can be found at Eurosharelab (www.eurosharelab.com).

Republished here with permission.

~~~

I met James Montier at a value investment seminar in Italy in 2007 where he presented. We had long discussions later the day and into the evening on value investing and investment strategy.

James was kind enough to put me on his distribution list and I really looked forward to each of his articles as they always taught me something.

Unfortunately James decreased his writings since taking a position with the asset manager GMO in 2010.

I decided to put this resource page together so Eurosharelab visitors can also benefit from James’s investment wisdom.

James Montier’s Amazon Page shows all the books he has authored as well as the following short biography:

James Montier is a member of GMO’s asset allocation team.

Prior to that, he was the co-Head of Global Strategy at Société Générale and has been the top-rated strategist in the annual Thomson Extel survey for most of the last decade.

Montier is the author of four market-leading books:

• The Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)

Behavioral Finance: Insights into Irrational Minds and Markets

Behavioral Investing: A Practitioners Guide to Applying Behavioral Finance

Value Investing: Tools and Techniques for Intelligent Investment

He is a Visiting Fellow at the University of Durham and a Fellow of the Royal Society of Arts.

2010

In this May 2010 article called I Want to Break Free, or, Strategic Asset Allocation does not equal Static Asset Allocation James Montier talks about in the beginning investing was a simpler and happier.

The essence of investment was to seek out value; to buy what was cheap with a margin of safety. Investors could move up and down the capital structure (from bonds to equities) as they saw fit. If nothing fit the criteria for investing, then cash was the default option.

But that changed with the rise of modern portfolio theory and, not coincidentally, the rise of “professional investment managers” and consultants.

In March 2010 Miguel Barbosa in his Simolean Sense blog interviewed James Montier about his book Value Investing: Tools & Techniques For Intelligent Investing.

In the second part of the interview Miguel talks to James about his other book The Little Book of Behavioral Investing – How Not To Be Your Own Worst Enemy.

In this February 2010 article, the first since joining GMO, James Montier asks Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt from the financial crisis.

2009

In November 2009 article titled Only White Swans on the Road to Revulsion James Montier makes the argument that that the housing bubble and the crisis following its collapse was not an unforeseen event but rather the result of over optimism and the illusion of control, two classic human behavioural mistakes.

This article is the text of a speech called Six Impossible Things Before Breakfast, or how EMH has damaged our industry which James Montier delivered at the at the August 2009 CFA UK conference on “What ever happened to EMH”. Dedicated to Peter Bernstein (EMH = Efficient Market Hypothesis)

Here is the video recording of the above mentioned speech by James Montier: Six Impossible Things Before Breakfast. The video is 42 minutes long, but well worth watching.

The financial times in this 24 June 2009 article EMH, AMH: Edwards and Montier ride again motions James Montier leaving Societe Generale to join US investment manager Grantham Mayo Van Otterloo & Co, just after he and Albert Edwards won the Thomson Extel European analysts award in May 2009 as the top global strategy team.

In this 2 June 2009 research paper Forever blowing bubbles: moral hazard and melt-up James Montier explored the bubble phenomenon and what happens in the future after a bubble pops. He explores the possibility that all the government rescue packages initiated in 2008 have the possibility to again inflate a substantial bubble.

In this 24 June 2009 Financial Times article called Insight: Efficient markets theory is dead. James Montier explains why the efficient markets theory is dead but still lives because of academic inertia.

In June 2009 James Montier’s published this list of his Favorite Investment Books as well as a Summer reading list of more recent titles.

In May 2009 shortly after the market started its recovery from its March 9 2009 lows James Montier in this article titled Sucker’s rally or the birth of a bull? asks if this is a suckers rally and if so what investors could do to protect themselves. He also gives a few short ideas from his shorting screen.

In this 27 January 2009 article Clear and present danger: the trinity of risk, James Montier writes about the three primary and interrelated sources of investment risk; Valuation risk, business or earnings risk and balance sheet or financial risk.

Read More

Category: Analysts, Contrary Indicators, Investing, Valuation

Wall Street Still (Always) Too Bullish

Barron’s Alan Abelson points us to a rather intriguing — and sadly, none too surprising — data point: “Week in, week out, Bloomberg taps Street analysts for their prognostications of where they expect the S&P 500 to wind up the year. Despite the turmoil in the markets, those stalwarts—13 of them—have steadfastly held to their…Read More

Category: Analysts, Investing

Goldman on FIFA World Cup

> Be sure to check out the Goldman research piece on World Cup Soccer World Cup and Economics 2010 It is a surprisingly fun approach to economic research . . . >

Category: Analysts

McKinsey: Equity Analysts Are Still Too Bullish

> Surprise! Analysts remain too Bullish: “Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually…Read More

Category: Analysts, Investing, Valuation

“Bonds are for Losers” Revisited

When Dave Rosenberg and Jim Grant squared off for a debate — dubbed “Bonds are for Losers” — in late March, the 10-year was sitting at about 3.90 and the 30-year at about 4.75.  The room was overwhelmingly on Grant’s side (yields have nowhere to go but up), although Rosie did sway some opinions during…Read More

Category: Analysts, Fixed Income/Interest Rates, Markets

Reverse Engineering AAA Ratings

Q: How did Wall Street manage to convince the rating agencies to slap investment grade ratings on Junk? A: They had cheat codes ! Here is Gretchen Morgenson and Louise Story in today’s NYT: “One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit…Read More

Category: Analysts, Credit

More on Mortgage Delinquencies & Retail Spending

The latest bad meme to develop legs is the idea that strategic mortgage defaults are goosing retail sales. We looked at this last week in Are Defaults Really Driving Retail Spending? as an idea driven mostly by anecdote (some quite ugly), but unsupported by any hard data.

To those pushing this idea, I ask this: Are these mortgage mod requests from egregiously irresponsible spendthrifts the exception, or the rule? And, if they are more than an exception, would you please produce actual data supporting this thesis?

After my post on this, I got dozens of emails with anecdotal stories of defaulting homeowners going on spending sprees. Many were so similar that I presumed they were email forwards from the same source. Also, Bill Gates wants to send me to Disneyland.

I started hunting for more info on this. I came across three items that are worth discussing. (if you know of any other data sources in this, feel free to mention in comments)

The first item was a quote from Mark Zandi in Monday’s WSJ:

How much can the world count on the U.S. consumer?

U.S. consumers remain the single largest source of global demand, even if their clout isn’t what it once was. J.P. Morgan estimates U.S. consumer spending will account for one-fourth of the global total in 2010, down from about 35% in 2003. Still, the global recession spread to Latin America and Asia when U.S. buyers put away their credit cards.

In recent months, U.S. consumer spending has turned upward and may continue that way for some time, says Economy.com economist Mark Zandi, who figures pent up demand will boost car and home sales. But the long-term outlook is hardly solid. Part of the reason for Mr. Zandi’s short-term bullishness is that he figures about five million households aren’t making payments on their mortgages, giving them as much as $60 billion to spend—for now. -WSJ

Zandi appears to have come up with his $60 billion figure (as far as I can tell) by taking 5 million delinquent home owners X a ballpark $1000 per month mortgage X 12 months = $60B.

Let’s take a closer look at Zandi’s analysis to see if it holds water.

- The March 2010 NFP report data had 15.0 million unemployed persons; the number of “long-term unemployed” rose to 6.5 million — 44.1% of total unemployed. An additional 9.1 million people working part time because full time work was unavailable.

Its reasonable to surmise that there is a huge overlap between the 24 million people either unemployed or under employed, and the 5 million foreclosures, and 6 million+ late mortgage payers. We can reasonably make a connection between a fall in income and foreclosures and defaults.

-Confusing cause and effect. Most people don’t default to get more money; they default because they have run out of money.

When your income plummets — in 15 million case above, by 100% — you stop spending except for necessities. The majority of hard working Americans who are unemployed (or under employed) and who are delinquent on their mortgages because they have run out of money. Merely failing to pay that liability, does not men you therefore have lots of extra cash burning a hole in your pocket.

- Therefore, Liabilities — what is owed by defaulting homeowners — are not the same as Disposable Income. Not paying that liability is not a windfall — its a sign of economic distress. That $60 billion is a collective measure of how much homeowners owe, not how much they have.

And this is coming from me, the guy who advocated that the economy needs more foreclosures . . .

The second item was from Minyanville’s James Kostohryz. He blamed the idea on Perma-Bears, stating they are “running out of excuses for why retail sales rose so strongly in March of 2010” (Are Mortgage Deadbeats Juicing Up the Economic Numbers?).

But James takes it a step further, crunching the numbers to determine, if true, how much this could be impacting spending. His conclusion? The most that strategic defaults are helping retail sales is about $228 million per month — “~0.026% of monthly Personal Consumption Expenditures (PCE) which are averaging about $863 billion per month.” Hardly enough to explain the significant uptick in retail sales.

Read More

Category: Analysts, Consumer Spending, Credit, Retail

Dick Bove – Open Mouth Insert Foot

The following was written by an analyst who has long criticized how Wall Street covers itself. It is published anonymously due to his firm’s legal & compliance rules. ~~~ At 9:43 AM ET on CNBC, Dick Bove (Rochdale Securities) said Goldman would pay a fine and this will pass (3:00).  He also called the stock…Read More

Category: Analysts