Tuesday, May 29, 2012
WHAT HAPPENS HERE IF GREECE EXITS THE EURO?
Another downturn? Or something much less severe?
If Greece leaves the eurozone in the coming months, what kind of financial ripples could reach America?
Nobody can predict the endgame yet; Greece may even stay in the euro, although that is looking less and less likely. The big concern isn’t what happens in Greece – it is about what could happen in Spain or Italy as a result of what happens in Greece.
The effects from a Greek default (and eurozone exit) would likely be felt on four fronts in America – but first, an economic chain reaction would almost certainly play out in Europe.
A Greek default could imperil Spain & Italy. If Greece leaves the euro, then Greek bondholders lose their money. A crisis of confidence in the euro could prompt institutional investors to either walk away or demand even higher interest rates on Italian and Spanish bonds. The European Central Bank could then step up and provide emergency lending, bond buying and recapitalization efforts. If those efforts were to fall short, the worst-case scenario would be a default in Italy and/or Spain.
It could also hurt U.S. banks that aren’t sensibly hedged. If Italy and/or Spain default, a severe downturn could hit EU economies and U.S. lenders would be looking at a huge potential problem. If they are capably hedged against the turmoil in the EU, they could possibly ride through it without a lot of damage. If it turns out they have made foolishly speculative bets (cf. Lehman Brothers, JPMorgan), you could have a big wave of fear, which in the worst scenario would foster a credit freeze reminiscent of 2008. Would the Fed step in again to unfreeze things? Presumably so. Without its intervention, you could have a Darwinian scenario play out in the U.S. banking sector, and few economists and investors would see benefit in that.
The good news (relatively speaking) is that U.S. banks have cut their exposure to Greece by more than 40% as that country’s sovereign debt crisis has unfolded. Pension funds and insurers have joined them.1
Stocks could fall sharply & the dollar could soar. The greenback would become a premier “safe haven” if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities (and by extension, the retirement savings accounts and portfolios of retail investors).
U.S. companies could be hurt by fewer exports to Europe. Right now, 19% of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China; as Deutsche Bank notes, the EU accounts for 25% of global trade.2
Our recovery could be hindered. Picture higher gas prices, a markedly lower Dow, the jobless rate increasing again. In other words: a double dip.
In mid-May, economists polled by Reuters forecast 2.3% growth for the U.S. economy in 2012 and 2.4% growth in 2013. These economists also believe that were the fate of Greece not on the table, U.S. GDP might prove to be .1-.5% higher.2
If politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to EU/IMF bailout money. Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. Global stocks would be pressured, but maybe on the level of 2011 rather than 2008. (Maybe the impact wouldn’t even be that bad.)
In a rockier storyline, Greece becomes the brat of the EU – a newly radical government rejects the bailout terms set by the EU and IMF, Greece leaves the EU and starts printing drachmas again. The EU, IMF and maybe even the Federal Reserve act rapidly to stabilize the EU banking sector. Early firefighting by central banks results in containment of the crisis after several days of shock, with U.S. markets recovering in decent time (yet with investors still nervous about Italy and Spain).
Containment may be the key. If a Greek default can be averted or made orderly by the EU and the IMF, then the impact on Wall Street may not be as major as some analysts fear – and who knows, the U.S. markets might even end up pricing it in. Greece only represents 2% of eurozone GDP; our exports and credit exposure to Greece are minimal at this juncture. Our money market funds have mostly stopped investing in Europe. So with diplomacy and contingency planning afoot, a “Grexit” might do less damage to the world economy than some analysts believe.2
Citations.
1 - www.csmonitor.com/USA/Latest-News-Wires/2012/0514/Greece-s-economic-woes-may-hurt-US [5/14/12]
2 - www.cnbc.com/id/47562567 [5/25/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Monday, May 21, 2012
THE RUN THAT WASN'T
The nation of Greece has a current population of 11.3 million people, which is just slightly fewer than the number of people who reside in the state of Ohio--roughly .165% of the global population. Its economy (measured by GDP) is roughly .478% of the world's total, falling somewhere on the global list behind Colombia, Iran, the United Arab Emirates, and one rung ahead of Malaysia.
Yet for some reason, we are not receiving daily reports about the economic situation in Columbia, the United Arab Emirates, or, really, any other country on a daily basis. What happens at the teller windows of banks in Singapore, Turkey or Sweden are not widely reported in the global press, and they do not drive the performance of U.S. stocks on a daily basis.
So you would be justified in wondering why global stocks have been falling on news that (as reported virtually every you look) Greek citizens took 1.2 billion Euros out of their banking system during a two-day period, at times causing those banks to run out of cash on hand before noon. And, of course, the answer is that we are all spooked when somebody panics in our midst. The lines at Greek teller windows have scared (this is a complex economic term) the bejeebers out of investors who imagine that the Greek banks are insolvent.
Actually, the opposite is true; Greek banks are about to regain access to loans from the European Central Bank, which has already lent 100 billion Euros under its European liquidity operations. Meanwhile, according to Capital Economics (based in Toronto, London and Singapore), Greece's central bank has a program in place called Emergency Liquidity Assistance (ELA) which functions much like America's Federal Reserve system. The Greek parliament has approved ELA of up to 90 billion Euros, and the troubled Greek banks apparently have plenty of collateral left to gain such funds.
Compared to all this, 1.2 billion Euros should not be too much of a shock to the system--even if people continue drawing out their savings. But that raises an interesting question. If the bank solvency is guaranteed, and we are not looking at a run-on-the-bank scenario, why would citizens be pulling out their money?
The answer is actually pretty simple, but you won't read about it anywhere in the press--at least, not yet. Suppose you are a Greek citizen, and you believe there is at least a possibility that Greece will suddenly decide that the demands for austerity cannot be met, and take the step that economists say makes the most sense: to drop out of the common European currency, perhaps over the Summer, perhaps later. They will close their banks for a couple of days, and begin to print drachmas once again, and suddenly everything in the country will be priced in drachmas.
You have probably read that this is considered a worst-case scenario, but in fact it may be the best option for a country whose citizens are in open revolt over the prospect of spending the next 20 years paying back their northern European creditors. The country would reclaim control over its monetary system, allow its new currency to drop like a stone, pay back all those various central bank loans with much cheaper money, and as a bonus, allow the cost of its exports to be half what they were before, compared with euro-denominated goods and services.
If you, here in the U.S., have read about this easy way out of the economic mess, then you can bet that ordinary Greek citizens are following the situation a heck of a lot more closely. And it's a fair bet that the first thing that would have caught their eye is that part about drachmas dropping like a stone in value. A recent report by Capital Economics provides a best guess that the drachma would fall to about 50% of the value of the euro.
The best course of action suddenly becomes obvious. Greek citizens who see this coming have the choice of potentially losing half their purchasing power relative to the rest of the continent (and the world), or take their money out of the bank before any surprise announcement and, after the dust has settled, use the Euros that they stashed in their mattresses to buy twice as many drachmas as they would otherwise have had.
In other words, this is not, as widely reported, a run-on-the-bank scenario. It might be an indication that sentiment on the streets of Greece has swung toward leaving the eurozone--which means they might know a lot more than the reporters and economists whose reports you may be reading. If Greece walks, and takes its .478% of the world's economy out of the Eurozone, one imagines that somehow the Eurozone--and the rest of us--will survive. Perhaps then we won't be reading about .165% of the world's population 100% of the time.
Global GDP figures: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Yet for some reason, we are not receiving daily reports about the economic situation in Columbia, the United Arab Emirates, or, really, any other country on a daily basis. What happens at the teller windows of banks in Singapore, Turkey or Sweden are not widely reported in the global press, and they do not drive the performance of U.S. stocks on a daily basis.
So you would be justified in wondering why global stocks have been falling on news that (as reported virtually every you look) Greek citizens took 1.2 billion Euros out of their banking system during a two-day period, at times causing those banks to run out of cash on hand before noon. And, of course, the answer is that we are all spooked when somebody panics in our midst. The lines at Greek teller windows have scared (this is a complex economic term) the bejeebers out of investors who imagine that the Greek banks are insolvent.
Actually, the opposite is true; Greek banks are about to regain access to loans from the European Central Bank, which has already lent 100 billion Euros under its European liquidity operations. Meanwhile, according to Capital Economics (based in Toronto, London and Singapore), Greece's central bank has a program in place called Emergency Liquidity Assistance (ELA) which functions much like America's Federal Reserve system. The Greek parliament has approved ELA of up to 90 billion Euros, and the troubled Greek banks apparently have plenty of collateral left to gain such funds.
Compared to all this, 1.2 billion Euros should not be too much of a shock to the system--even if people continue drawing out their savings. But that raises an interesting question. If the bank solvency is guaranteed, and we are not looking at a run-on-the-bank scenario, why would citizens be pulling out their money?
The answer is actually pretty simple, but you won't read about it anywhere in the press--at least, not yet. Suppose you are a Greek citizen, and you believe there is at least a possibility that Greece will suddenly decide that the demands for austerity cannot be met, and take the step that economists say makes the most sense: to drop out of the common European currency, perhaps over the Summer, perhaps later. They will close their banks for a couple of days, and begin to print drachmas once again, and suddenly everything in the country will be priced in drachmas.
You have probably read that this is considered a worst-case scenario, but in fact it may be the best option for a country whose citizens are in open revolt over the prospect of spending the next 20 years paying back their northern European creditors. The country would reclaim control over its monetary system, allow its new currency to drop like a stone, pay back all those various central bank loans with much cheaper money, and as a bonus, allow the cost of its exports to be half what they were before, compared with euro-denominated goods and services.
If you, here in the U.S., have read about this easy way out of the economic mess, then you can bet that ordinary Greek citizens are following the situation a heck of a lot more closely. And it's a fair bet that the first thing that would have caught their eye is that part about drachmas dropping like a stone in value. A recent report by Capital Economics provides a best guess that the drachma would fall to about 50% of the value of the euro.
The best course of action suddenly becomes obvious. Greek citizens who see this coming have the choice of potentially losing half their purchasing power relative to the rest of the continent (and the world), or take their money out of the bank before any surprise announcement and, after the dust has settled, use the Euros that they stashed in their mattresses to buy twice as many drachmas as they would otherwise have had.
In other words, this is not, as widely reported, a run-on-the-bank scenario. It might be an indication that sentiment on the streets of Greece has swung toward leaving the eurozone--which means they might know a lot more than the reporters and economists whose reports you may be reading. If Greece walks, and takes its .478% of the world's economy out of the Eurozone, one imagines that somehow the Eurozone--and the rest of us--will survive. Perhaps then we won't be reading about .165% of the world's population 100% of the time.
Global GDP figures: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Wednesday, May 16, 2012
AN IPO TO POST HOME ABOUT
We're hearing a lot about the Facebook initial public offering, so this might be a good time to experience a moment of laughter about our newest cultural phenomenon. Click this link for your own special guide to good Facebook manners: http://www.youtube.com/watch?v=iROYzrm5SBM.
Later this week, investors will have the opportunity to pay between $28 to $35 a share to own a piece of the addictive social networking service. People everywhere are clamoring to get at least a few of the 337.5 million shares that will be offered by Morgan Stanley and 30 other underwriters.
Most of you know that an initial public offering, or IPO, is the first time a company sells its stock to the public at large. "To the public" is something of a misnomer, however. Most of the time, the large brokerage firm that serves as the IPO underwriter will only make these new shares available to its largest institutional customers. The rest of us have to buy on the open market (Facebook shares will trade on the NASDAQ exchange), and therein lies the rub. In many cases, those initial buyers can make a significant profit simply by flipping their shares at much higher prices to people like you and me. All too often, this buying frenzy leads to long-term disappointment.
The numbers tell an interesting story. Research by University of Florida finance professor John Ritter shows that from 1980 through 2010, the three year performance of IPOs that had been bought on the first day has lagged the broad market by an average of 20%.
Recent social media IPOs have not even done this well. Yandex, Russia's most popular search engine company, is down 20.8% from its IPO price last May. Zynga, which raised $1 billion last December, is down 5%, while Renren ("the Facebook of China") has so far lost 76.4% of its IPO investors' initial outlay. Pandora Media is down 37.4% from its June 2011 IPO price. LinkedIn and Groupon are the exceptions to this depressing story; they are up 37.2% and 13.1% respectively since their IPOs.
But these figures only apply to those who were fortunate enough to buy at the initial price. Ritter has calculated that ordinary investors who aren't on the investment bank's speed dial have paid much higher prices for their shares--and, of course, suffered correspondingly higher losses. When institutions flipped their shares on the first day of trading for the 1,096 IPOs sold from 2001 to 2011, ordinary investors paid, on average, 11.7% more than the IPO price offered to institutions and friends of the brokerage underwriter. (11.7% in one trading day translates into roughly a 3,200% annual return.) In the frothy 1999-2000 period, ordinary shareholders had to pay an astonishing 64.5% premium to get in "on the ground floor." You don't even want to know what that would look like on an annualized basis. Going back a little further, from 1990 through 1998, the premium that mortals paid for IPO shares averaged 14.8% above the initial share price. This is not a short-term trend.
There are a few other warning signs to consider. If the Facebook IPO comes in at the widely-reported target price of $35 a share, those institutional investors will be paying a whopping 143.71 times the company's earnings per share, based on its 2011 net income of $668 million. If the share price bumps up, the aftermarket buyers might be paying closer to 200 times earnings per share--or about nine times the PE level of the stocks that make up the Standard & Poor's 500 index.
To put that price difference in perspective, consider whether you would go to the grocery store and buy any of the various cartons of eggs for 99 cents, or those cartons on the side that cost $8.91 apiece--or about 75 cents an egg. Would you buy a quart of your regular brand of milk for $1.50, or load up your shopping cart with the special new brand at $13.50 a quart? If its IPO goes well, Facebook, as a company, will be priced at a higher total market value than Visa, Inc., McDonald's, the Walt Disney Company, Home Depot or American Express. It would be worth more than Starbucks, Dow Chemical and Panasonic COMBINED.
Obviously, no company is worth this kind of valuation unless investors are pretty sure it will grow its revenues rapidly in the future, the way Amazon did after its IPO almost exactly 15 years ago. That's why it is so interesting to read in Facebook's most recent S-1 filing with the Securities and Exchange Commission that the company's income actually fell in the first quarter of 2011. Net income and earnings per share have also taken a tumble. This may be one more example of the truism among professional investors, that not all good or interesting companies are good or interesting investments. You won't get access to Facebook shares at the IPO price, but even if they were offered to you, you should probably take a pass. And then post your decision on the wall of some of your closest friends.
Market cap data: http://ycharts.com/rankings/market_cap
Facebook S-1 filing: http://news.cnet.com/8301-1023_3-57419311-93/facebooks-revenue-rises-in-first-quarter-but-profit-falls/?tag=mncol;txt
http://sec.gov/Archives/edgar/data/1326801/000119312512175673/d287954ds1a.htm
Reuters article: http://www.reuters.com/article/2012/05/11/us-column-wasik-facebook-idUSBRE84A12W20120511
Jay Ritter research: http://scholar.google.com/scholar_url?hl=en&q=http://inethub.olvi.net.ua/ftp/Library/DVD-013/Ritter_J.R._The_Long-Run_Performance_of_Initial_Public_Offerings_%281991%29%28en%29%2825s%29.pdf&sa=X&scisig=AAGBfm3eQ51iZfAXzP2FZmpPEDZB0aNI-w&oi=scholarr
IPO Performance over next three years: http://www.mariposacap.com/blog/ipo-performance-overview/
Renouncing citizenship: http://www.forbes.com/sites/timworstall/2012/05/12/saverins-citizenship-renunciation-before-facebook-ipo-will-increase-not-reduce-his-tax-bill/
Washington Post report: http://www.washingtonpost.com/business/technology/facebook-ipo-expectations-on-facebook-are-way-too-high/2012/05/11/gIQA5JrgIU_story.html
Social Media IPOs: http://www.socialnomics.net/2012/05/10/top-20-social-media-ipos-50-failure-rate/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Later this week, investors will have the opportunity to pay between $28 to $35 a share to own a piece of the addictive social networking service. People everywhere are clamoring to get at least a few of the 337.5 million shares that will be offered by Morgan Stanley and 30 other underwriters.
Most of you know that an initial public offering, or IPO, is the first time a company sells its stock to the public at large. "To the public" is something of a misnomer, however. Most of the time, the large brokerage firm that serves as the IPO underwriter will only make these new shares available to its largest institutional customers. The rest of us have to buy on the open market (Facebook shares will trade on the NASDAQ exchange), and therein lies the rub. In many cases, those initial buyers can make a significant profit simply by flipping their shares at much higher prices to people like you and me. All too often, this buying frenzy leads to long-term disappointment.
The numbers tell an interesting story. Research by University of Florida finance professor John Ritter shows that from 1980 through 2010, the three year performance of IPOs that had been bought on the first day has lagged the broad market by an average of 20%.
Recent social media IPOs have not even done this well. Yandex, Russia's most popular search engine company, is down 20.8% from its IPO price last May. Zynga, which raised $1 billion last December, is down 5%, while Renren ("the Facebook of China") has so far lost 76.4% of its IPO investors' initial outlay. Pandora Media is down 37.4% from its June 2011 IPO price. LinkedIn and Groupon are the exceptions to this depressing story; they are up 37.2% and 13.1% respectively since their IPOs.
But these figures only apply to those who were fortunate enough to buy at the initial price. Ritter has calculated that ordinary investors who aren't on the investment bank's speed dial have paid much higher prices for their shares--and, of course, suffered correspondingly higher losses. When institutions flipped their shares on the first day of trading for the 1,096 IPOs sold from 2001 to 2011, ordinary investors paid, on average, 11.7% more than the IPO price offered to institutions and friends of the brokerage underwriter. (11.7% in one trading day translates into roughly a 3,200% annual return.) In the frothy 1999-2000 period, ordinary shareholders had to pay an astonishing 64.5% premium to get in "on the ground floor." You don't even want to know what that would look like on an annualized basis. Going back a little further, from 1990 through 1998, the premium that mortals paid for IPO shares averaged 14.8% above the initial share price. This is not a short-term trend.
There are a few other warning signs to consider. If the Facebook IPO comes in at the widely-reported target price of $35 a share, those institutional investors will be paying a whopping 143.71 times the company's earnings per share, based on its 2011 net income of $668 million. If the share price bumps up, the aftermarket buyers might be paying closer to 200 times earnings per share--or about nine times the PE level of the stocks that make up the Standard & Poor's 500 index.
To put that price difference in perspective, consider whether you would go to the grocery store and buy any of the various cartons of eggs for 99 cents, or those cartons on the side that cost $8.91 apiece--or about 75 cents an egg. Would you buy a quart of your regular brand of milk for $1.50, or load up your shopping cart with the special new brand at $13.50 a quart? If its IPO goes well, Facebook, as a company, will be priced at a higher total market value than Visa, Inc., McDonald's, the Walt Disney Company, Home Depot or American Express. It would be worth more than Starbucks, Dow Chemical and Panasonic COMBINED.
Obviously, no company is worth this kind of valuation unless investors are pretty sure it will grow its revenues rapidly in the future, the way Amazon did after its IPO almost exactly 15 years ago. That's why it is so interesting to read in Facebook's most recent S-1 filing with the Securities and Exchange Commission that the company's income actually fell in the first quarter of 2011. Net income and earnings per share have also taken a tumble. This may be one more example of the truism among professional investors, that not all good or interesting companies are good or interesting investments. You won't get access to Facebook shares at the IPO price, but even if they were offered to you, you should probably take a pass. And then post your decision on the wall of some of your closest friends.
Market cap data: http://ycharts.com/rankings/market_cap
Facebook S-1 filing: http://news.cnet.com/8301-1023_3-57419311-93/facebooks-revenue-rises-in-first-quarter-but-profit-falls/?tag=mncol;txt
http://sec.gov/Archives/edgar/data/1326801/000119312512175673/d287954ds1a.htm
Reuters article: http://www.reuters.com/article/2012/05/11/us-column-wasik-facebook-idUSBRE84A12W20120511
Jay Ritter research: http://scholar.google.com/scholar_url?hl=en&q=http://inethub.olvi.net.ua/ftp/Library/DVD-013/Ritter_J.R._The_Long-Run_Performance_of_Initial_Public_Offerings_%281991%29%28en%29%2825s%29.pdf&sa=X&scisig=AAGBfm3eQ51iZfAXzP2FZmpPEDZB0aNI-w&oi=scholarr
IPO Performance over next three years: http://www.mariposacap.com/blog/ipo-performance-overview/
Renouncing citizenship: http://www.forbes.com/sites/timworstall/2012/05/12/saverins-citizenship-renunciation-before-facebook-ipo-will-increase-not-reduce-his-tax-bill/
Washington Post report: http://www.washingtonpost.com/business/technology/facebook-ipo-expectations-on-facebook-are-way-too-high/2012/05/11/gIQA5JrgIU_story.html
Social Media IPOs: http://www.socialnomics.net/2012/05/10/top-20-social-media-ipos-50-failure-rate/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Monday, May 14, 2012
WHALE-SIZED LOSSES
Large investment banks and brokerage firms are in the news again, with word that J.P. Morgan Chase suffered a $2 billion loss while trading for its own investment portfolio. If you're inclined to be amused by such things, word had apparently leaked out weeks before the losses were spotted that a mysterious individual dubbed "The London Whale"--who we now know is Bruno Michel Iksil--was taking strangely large positions in credit default swaps linked to corporate bonds. Other traders reported the unusual market activities to the Wall Street Journal, and four days after the article was published, on April 14, J.P. Morgan executives stepped in and stopped the trading activity. The story prompted some to speculate that the firm's crack risk management department stayed diligently on top of the firm's speculative trading activities by carefully reading the newspaper. But the lesson that was lost, amid the calls for new regulation and pronouncements that banks were too big to fail and too reliant on bailouts, is that once again a large brokerage firm was making huge bets and also advising customers on their investments. When a large institution trades into and out of the markets for its own profit, it sets up the most basic conflict of interest in its dealings with the investors who are receiving the advice of its brokers. If the firm made the mistake of investing in a dog stock that isn't likely to go up in value, or if the research department determines that a certain company whose stock the firm owns is about to report unfavorable news or deteriorating financials, then the brokers are told that what the company wants to unload is a wonderful "investment opportunity" for their customers. Some resist acting on these blatant attacks on their customers, but--as evidenced by the actual volume of trading for the brokerage community's own accounts--many do not. It's a little like the real estate broker who spots a nice piece of property selling at a terrific bargain. Is he more likely to call his customers, or find a way to buy the property for himself? Fortunately, registered investment advisors with the Securities and Exchange Commission--unlike brokerage firms--are strictly prohibited from these kinds of conflicts, and we embrace that position. It genuinely would not occur to most financial planning professionals to bet against clients or try to sell you something that we wanted to get rid of in our own portfolio, not because the regulators might find out, but because it is visibly the wrong way to serve the public and the community. When the 2008 meltdown swept through the financial world, former Federal Reserve Chairman Paul Volker proposed that brokerage firms and lending institutions be banned from trading in their own accounts, and the so-called "Volker Rule" bounced around Congress for a full year. Industry lobbyists finally convinced our elected representatives that it was a very bad idea to force brokers to stop speculating in exotic securities and simply give good investment advice to their customers, or to require banks to lend their money to businesses and consumers instead of making wild bets with it. What we didn't realize then, what J.P. Morgan's London Whale may have taught us, is that the consumer protections proposed in the Volker Rule might also be a great way to keep these large organizations solvent. The London Whale: http://www.ritholtz.com/blog/2012/05/understanding-j-p-morgans-loss-and-why-more-might-be-coming/?utm_source=dlvr.it&utm_medium=twitter Sincerely, William T. Morrissey and Tammy Prouty Sound Financial Planning Inc. wtmorrissey@soundfinancialplanning.net Primary Office 425 Commercial Street, Suite 203 Mount Vernon, WA 98273 Phone: (360) 336-6527 Secondary Office 650 Mullis St., Suite 101 Friday Harbor, WA 98250 (360) 378-3022 PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Tuesday, May 1, 2012
BROKERIZING FINANCIAL ADVICE
Under normal circumstances, we try not to burden our clients with the details of the regulatory issues we deal with, except periodically send you notification of our status and any changes in the way we do business. Our focus is on your financial well-being.
But recently, something has come up in the regulatory world that could directly impact your financial well-being--and not in a good way.
House Finance Committee Chairman Spencer Bachus, who has been under ethics investigation for insider trading, and Rep. Carolyn McCarthy have sponsored a piece of legislation called The Investment Oversight Act of 2012. It is being described as a better way to protect consumers. In fact, it is designed to put all registered investment advisors--that is, all advisors who are required to put the interests of their clients first when they give financial advice--under the regulatory authority of the regulator who controls wirehouse brokers.
This, of course, is the same regulatory organization--the Financial Industry Regulatory Authority (FINRA)--that failed to prevent Wall Street from selling toxic mortgage pools and derivatives into the financial system, leading up to the near-collapse of the economy in 2008. Bernie Madoff was regulated by FINRA from the day he opened his Ponzi scheme for business. Mr. Madoff actually served on the board of governors of this organization back when it was called the National Association of Securities Dealers.
The innocent-looking piece of legislation would actually give us a world where companies like ours would have a hard time existing. It would be a world where all financial advice would be given by brokers, or people forced to act like brokers.
Under normal circumstances, we might have confidence that our Congressional representatives will see through this ruse and do the right thing for their constituents. Unfortunately, a lot of lobbying money is being spent to brokerize the financial world. Among the top ten contributors to the lead sponsor of the bill--Rep. Bachus--are commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and "miscellaneous finance" companies ($89,250).
In the 2011-2012 election cycle, Rep. Bachus was the number one fundraiser from commercial banks, from finance/credit companies and from mortgage bankers and brokers. It is very very clear that his best efforts are not directed at protecting consumers from the people who are paying for his re-election.
Please view this article as a heads-up that the entire structure of our financial system may be about to change--we believe for the worse. If you are anywhere near as concerned (and angry) as we are about this naked effort to brokerize our financial system, then you might want to contact your elected officials, as we have. Our message is very simple, and I have included it here to make it easier for you to cut and paste and add your own thoughts:
I want to express my strong opposition to the recently proposed Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012.
This piece of legislation has the potential to do significant harm to your small business constituents by subjecting them to yet another layer of bureaucratic regulation. Worse, it would hand off regulation to an entity--FINRA--that has proven to be extremely ineffective at protecting consumers. FINRA is the organization that regulates Wall Street, which failed to prevent the 2008 scandals, including the sale of toxic investment products. Bernie Madoff was under FINRA regulatory jurisdiction for his entire career.
Please, if and when you have an opportunity to vote on this measure, vigorously oppose this effort to build yet another bloated regulatory bureaucracy in Washington. There are far better alternatives to enhancing consumer protection than allowing Wall Street's regulator to expand its authority over the many small businesses that provide fair and transparent advice to consumers.
You are important to us, as is your financial well-being. Whenever we see it threatened, we feel the need to take action, and please know that we are monitoring this situation with the full attention that it deserves.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
But recently, something has come up in the regulatory world that could directly impact your financial well-being--and not in a good way.
House Finance Committee Chairman Spencer Bachus, who has been under ethics investigation for insider trading, and Rep. Carolyn McCarthy have sponsored a piece of legislation called The Investment Oversight Act of 2012. It is being described as a better way to protect consumers. In fact, it is designed to put all registered investment advisors--that is, all advisors who are required to put the interests of their clients first when they give financial advice--under the regulatory authority of the regulator who controls wirehouse brokers.
This, of course, is the same regulatory organization--the Financial Industry Regulatory Authority (FINRA)--that failed to prevent Wall Street from selling toxic mortgage pools and derivatives into the financial system, leading up to the near-collapse of the economy in 2008. Bernie Madoff was regulated by FINRA from the day he opened his Ponzi scheme for business. Mr. Madoff actually served on the board of governors of this organization back when it was called the National Association of Securities Dealers.
The innocent-looking piece of legislation would actually give us a world where companies like ours would have a hard time existing. It would be a world where all financial advice would be given by brokers, or people forced to act like brokers.
Under normal circumstances, we might have confidence that our Congressional representatives will see through this ruse and do the right thing for their constituents. Unfortunately, a lot of lobbying money is being spent to brokerize the financial world. Among the top ten contributors to the lead sponsor of the bill--Rep. Bachus--are commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and "miscellaneous finance" companies ($89,250).
In the 2011-2012 election cycle, Rep. Bachus was the number one fundraiser from commercial banks, from finance/credit companies and from mortgage bankers and brokers. It is very very clear that his best efforts are not directed at protecting consumers from the people who are paying for his re-election.
Please view this article as a heads-up that the entire structure of our financial system may be about to change--we believe for the worse. If you are anywhere near as concerned (and angry) as we are about this naked effort to brokerize our financial system, then you might want to contact your elected officials, as we have. Our message is very simple, and I have included it here to make it easier for you to cut and paste and add your own thoughts:
I want to express my strong opposition to the recently proposed Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012.
This piece of legislation has the potential to do significant harm to your small business constituents by subjecting them to yet another layer of bureaucratic regulation. Worse, it would hand off regulation to an entity--FINRA--that has proven to be extremely ineffective at protecting consumers. FINRA is the organization that regulates Wall Street, which failed to prevent the 2008 scandals, including the sale of toxic investment products. Bernie Madoff was under FINRA regulatory jurisdiction for his entire career.
Please, if and when you have an opportunity to vote on this measure, vigorously oppose this effort to build yet another bloated regulatory bureaucracy in Washington. There are far better alternatives to enhancing consumer protection than allowing Wall Street's regulator to expand its authority over the many small businesses that provide fair and transparent advice to consumers.
You are important to us, as is your financial well-being. Whenever we see it threatened, we feel the need to take action, and please know that we are monitoring this situation with the full attention that it deserves.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
YOU CAN'T HIDE IN FIXED INCOME
Investing timidly may shield you against risk ... but not against inflation. When is being risk-averse too risky for the sake of your retirement? After you conclude your career or sell your company, you have a right to be financially cautious. At the same time, you can risk being a little too cautious - some retirees invest so timidly that their portfolios barely yield any return. For years, financial institutions pitched CDs, money market funds and interest checking accounts as risk-devoid places to put your dollars. That sounded good when interest rates were tangible. As the benchmark interest rate is now negligible, these conservative options offer minimal potential to grow your money. America saw 3.0% inflation in 2011; the annualized inflation rate was down to 2.7% in March. Today, the yield on many CDs, money market funds and interest checking accounts can’t even keep up with that. Moreover, the Consumer Price Index doesn’t tell the whole story of inflation pressures – retail gasoline prices rose 9.9% during 2011, for example.1,2 With the federal funds rate at 0%-0.25%, a short-term CD might earn 0.5% interest today. On average, those who put money in long-term CDs at the end of 2007 (the start of the Great Recession) saw the income off those CDs dwindle by two-thirds by the end of 2011.3 Retirees shouldn’t give up on growth investing. In the 1990s and 2000s, the common philosophy was to invest for growth in your thirties and forties and then focus on wealth preservation as you neared retirement. (Of course, another common belief back then was that you could pencil in stock market gains of 10% per year.) After the stock market malaise of the 2000s, attitudes changed – out of necessity. Many people in their fifties, sixties and seventies still need to accumulate wealth for retirement even as they need to withdraw retirement savings. Because of that reality, many retirees can’t refrain from growth investing. They need their portfolios to yield at least 3% and preferably much more. If their portfolios bring home an inadequate yield, they risk losing purchasing power as consumer prices increase at a faster rate than their incomes. Do you really want to live on yesterday’s money? Could you live today on the income you earned in 2004 or 1996? You wouldn’t dare try, right? Well, this is the essentially the dilemma many retirees find themselves in: they realize that a) their CDs and money market accounts are yielding almost nothing, b) they are withdrawing more than they are earning, c) their retirement fund is shrinking, d) they must live on less. In recent U.S. history, inflation has averaged 2-4%. What if that holds true for the next 20 years?4 For the sake of argument, let’s say that consumer prices rise 4% annually for the next 20 years. That doesn’t sound so bad – you can probably live with that. Or can you? At 4% inflation for 20 years, today’s dollar will be worth 44 cents in 2032. Today’s $1,000 king or queen bed will cost about $2,200 in 2032. Today’s $23,000 sedan will run more than $50,000.4 Beyond prices for durable goods, think of the cost of health care. Think of the income taxes you pay. When you add those factors into the mix, growth investing looks absolutely essential. There is certainly a role for fixed income investments in a diversified portfolio – you just don’t want to tilt your portfolio wholly away from risk. Accepting some risk may lead to greater reward. As many equities can potentially achieve greater returns than fixed income investments, they may prove less vulnerable to inflation. This is especially worth remembering given the history of the CPI and how jumps in the inflation rate come without much warning. From 1900-1970, inflation averaged about 2.5% in America. Starting in 1970, the annualized inflation rate began spiking toward 6% and by 1979 it was at 13.3%; it didn’t moderate until 1982, when it fell to 3.8%. U.S. consumer prices rose by an average of 7.4% annually in the 1970s and 5.1% annually in the 1980s compared to 2.2% in the 1950s and 2.5% in the 1960s.4,5 All this should tell you one thing: you can’t hide in fixed income. Inflation has a powerful cumulative affect no matter how conservatively or aggressively you invest – so you might as well strive to keep pace with it or outpace it altogether. Citations. 1 - money.cnn.com/2012/01/19/news/economy/inflation_cpi/index.htm [1/19/12} 2 - www.bls.gov/news.release/pdf/cpi.pdf [4/13/12] 3 - www.chicagotribune.com/business/sns-201203141400--tms--retiresmctnrs-a20120314mar14,0,1100086.story [3/14/12] 4 - www.axa-equitable.com/retirement/inflation-and-long-term-investing.html [2011] 5 - bls.gov/mlr/1990/08/art3full.pdf [8/90] Sincerely, William T. Morrissey and Tammy Prouty Sound Financial Planning Inc. wtmorrissey@soundfinancialplanning.net Primary Office 425 Commercial Street, Suite 203 Mount Vernon, WA 98273 Phone: (360) 336-6527 Secondary Office 650 Mullis St., Suite 101 Friday Harbor, WA 98250 (360) 378-3022 PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
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