AN earnings bubble is in the making and many companies will see earnings disappoint next year, warns Marc Faber, aka Dr Doom.
Dr Faber, who earned his nickname from his often contrarian approach to investing, was speaking at the OCBC Global Treasury Regional Economic and Business Forum yesterday.
‘I don’t think we have a valuation bubble at this point in time. Stocks have been reasonably valued,’ he said. He noted that between 1990 and 2007, corporate earnings grew rapidly as a result of speculative gains, leverage and interest rates, but that this trend has since reversed. ‘I think we have an earnings bubble in the world, and by next year, many companies will disappoint,’ he added.
While some analysts are still estimating real earnings per share of S&P companies next year to be US$110, Dr Faber sees EPS hovering around a lower US$70.
Once bullish on commodities, he has turned cautious and expects prices to correct further in the short term. He advises investors to hold cash, gold, or other physical assets such as silver. But he prefers to wait for a further correction in gold prices to US$600 an ounce before increasing his position in gold meaningfully. Dr Faber correctly predicted in March that commodity prices would fall in the second-half because of slowing global demand. But he believes the long-term secular uptrend in commodity prices remains intact.
He also reckons that commodity currencies have been oversold and the US dollar overbought amid the recent easing of oil prices. Over the next few months, commodity prices should rebound and lift commodity currencies such as the Australian and New Zealand dollars.
Along with rising commodity prices, Dr Faber expects inflation and interest rates to rise over the next few years. ‘In the next 20 years, inflation is more likely than deflation,’ he said.
While equities may see further downside, he is bullish about Singapore stocks such as CapitaLand, SPH and ST Engineering.
‘I own more Singapore shares than any other shares,’ he said.
‘I don’t think these stocks will go up. I think they will go down. But at least I get more yield from them than US treasury bonds.’
While the Singapore economy and asset prices may slow in the short term, he reckons it is unlikely that Singapore will suffer a deep recession given its sound infrastructure.
Dr Faber founded the investment, fund management and brokerage firm Marc Faber Ltd, and publishes the Gloom, Boom & Doom Report.
He has been a strong critic of the US Federal Reserve’s bailouts. Commenting on the latest rescue of Fannie Mae and Freddie Mac, he said: ‘I’m not sure it’s such a great plan. I think the best is to split them up into smaller units.’
But the Federal Reserve is likely to bail out any investment banks in trouble given the implications any collapse would have on the derivatives market, he added.
Lehman fate in balance as talks set to resume on Sunday
By Dan Wilchins and Glenn Somerville Sep 13, 2008
NEW YORK/WASHINGTON (Reuters) - Bankers and regulators held a second day of emergency talks to tackle the crisis at investment bank Lehman Brothers and soothe financial markets after Treasury and Fed officials urged Wall Street chiefs to come up with their own solution.
So far this year, the government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae .
But this time, Treasury Secretary Henry Paulson is adamant that federal funds not be used for a bailout, a source familiar with his thinking said on Friday.
The talks on Saturday ended without an announcement, but the final outcome could include hiving off Lehman's bad assets into a "bad bank", in which rival banks would acquire stakes, or even allowing it to file for bankruptcy, people briefed on the matter told Reuters earlier.
It's a fine balancing act for Paulson and the Federal Reserve.
They don't want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank. But they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis.
Lehman Chief Executive Dick Fuld has looked at selling the entire company to banks including Bank of America Corp, the No. 2 U.S. bank by assets, and Britain's Barclays, a person briefed in the matter said.
The banks are reluctant to buy the 158-year-old firm without government backing similar to that received by JPMorgan when it took over Bear Stearns in March, media reports said.
The Wall Street Journal reported that Bank of America was cooling on toward a Lehman deal.
NEXT VICTIMS?
Federal Reserve Bank of New York President Tim Geithner -- flanked by Paulson and Securities and Exchange Commission Chairman Christopher Cox -- told the banks their own firms could be the next victims of the credit crunch if they didn't work together on a Lehman solution, the New York Times said.
The CEOs of Goldman Sachs Group, Merrill Lynch & Co Inc, JPMorgan Chase, and Citigroup were all at Friday's and Saturday's meetings, in a scene reminiscent of the 1998 bailout of hedge fund Long-Term Capital Management (LTCM), two sources familiar with the situation said.
Late Saturday afternoon JPMorgan CEO Jamie Dimon, Merrill CEO John Thain and Citi CEO Vikram Pandit were seen leaving the New York Fed's headquarters in downtown Manhattan in separate cars within minutes of each other.
A spokesman for the New York Fed confirmed that the meeting had broken up and was to continue on Sunday.
Earlier, about 100 people from the regulator and several banks had been in the building, thrashing out possible solutions for Lehman.
The Financial Times, which said a final solution to the Lehman crisis was more likely to come together on Sunday, said many banks were resisting the idea of investing in Lehman's troubled assets.
Market participants are unclear about how traumatic a Lehman collapse would be. Some wonder if faith will erode in all broker-dealers, but others argue that traders have had months to reduce their exposure to Lehman and demand more collateral, and that any impact would be manageable.
Goldman Sachs, Citigroup, JPMorgan, Lehman, Merrill, and Morgan Stanley declined to comment.
'SHORT ON CAPITAL'
With LTCM, major banks each contributed to a $3.65 billion bailout of the hedge fund, allowing it to be wound down in an orderly way.
But this time may be different. The capital of many top banks is already strained by the credit crisis, making them reluctant to fork over funds to help Lehman, whose problems are largely a result of bad bets on the U.S. mortgage market.
"The big concern here is, that the system is short on capital in a big way," said Dan Alpert, banker at Westwood Capital in New York.
"That's a problem--there could be another half a trillion dollars in writedowns, and you have to find that somewhere."
Also, while LTCM was a client of most Wall Street firms, Lehman is a competitor.
"I'm not sure why Goldman Sachs would want to keep Lehman in business," said Charles Peabody, analyst at independent research firm Portales Partners in New York.
He called a "pre-packaged bankruptcy" the best possible scenario for Lehman since it would keep the bank's broker dealer operating subsidiary intact even if largely wiping out equity holders and hurting bondholders.
Lehman has hired law firm Weil Gotshal & Manges to prepare a potential bankruptcy filing, the Wall Street Journal reported, citing a person familiar with the matter.
Underscoring the markets' fragility, Merrill's shares tumbled 12 percent on Friday, while those of insurer American International Group Inc fell more than 30 percent.
Washington Mutual Inc, the largest savings and loan, lost 3.5 percent, bringing its decline so far this year to 80 percent.
COLLATERAL CALL
All three companies have varying degrees of exposure to the mortgages and other toxic assets that appear to have been Lehman's undoing.
Lehman has about $46 billion of commercial and residential real estate on its books.
Although the bank has reduced its leverage, or debt relative to assets, it still has about $600 billion of assets supported by some $30 billion of equity, meaning the value of its assets need only decline by 5 percent to make the company worthless.
In a world where financial institutions are reducing their leverage globally, prices for many different kinds of assets are falling.
One key source of pressure on Lehman is its debt ratings.
All three rating agencies said ratings cuts for Lehman were a possibility, as confidence in the firm erodes.
Moody's Investors Service said on Wednesday that Lehman must enter a "strategic transaction with a stronger financial partner" to avoid having its ratings cut to near-junk levels.
Such a ratings cut would make it difficult for Lehman to compete in businesses such as long-term interest-rate derivatives. Ratings downgrades could force the firm to post billions of dollars of additional collateral with its trading partners, further straining the bank's balance sheet.
Germany's finance minister said on Saturday he expected a solution for Lehman by Monday, as European policymakers worried about the market impact of the firm's woes.
Worries about Lehman were also heard on the presidential campaign trail, where top economic advisers to Democratic candidate Barack Obama and Republican candidate John McCain argued for a private solution to Lehman's problems.
2 comments:
Global earnings bubble is forming: Dr Doom
By LYNETTE KHOO
13 September 2008
AN earnings bubble is in the making and many companies will see earnings disappoint next year, warns Marc Faber, aka Dr Doom.
Dr Faber, who earned his nickname from his often contrarian approach to investing, was speaking at the OCBC Global Treasury Regional Economic and Business Forum yesterday.
‘I don’t think we have a valuation bubble at this point in time. Stocks have been reasonably valued,’ he said. He noted that between 1990 and 2007, corporate earnings grew rapidly as a result of speculative gains, leverage and interest rates, but that this trend has since reversed. ‘I think we have an earnings bubble in the world, and by next year, many companies will disappoint,’ he added.
While some analysts are still estimating real earnings per share of S&P companies next year to be US$110, Dr Faber sees EPS hovering around a lower US$70.
Once bullish on commodities, he has turned cautious and expects prices to correct further in the short term. He advises investors to hold cash, gold, or other physical assets such as silver. But he prefers to wait for a further correction in gold prices to US$600 an ounce before increasing his position in gold meaningfully. Dr Faber correctly predicted in March that commodity prices would fall in the second-half because of slowing global demand. But he believes the long-term secular uptrend in commodity prices remains intact.
He also reckons that commodity currencies have been oversold and the US dollar overbought amid the recent easing of oil prices. Over the next few months, commodity prices should rebound and lift commodity currencies such as the Australian and New Zealand dollars.
Along with rising commodity prices, Dr Faber expects inflation and interest rates to rise over the next few years. ‘In the next 20 years, inflation is more likely than deflation,’ he said.
While equities may see further downside, he is bullish about Singapore stocks such as CapitaLand, SPH and ST Engineering.
‘I own more Singapore shares than any other shares,’ he said.
‘I don’t think these stocks will go up. I think they will go down. But at least I get more yield from them than US treasury bonds.’
While the Singapore economy and asset prices may slow in the short term, he reckons it is unlikely that Singapore will suffer a deep recession given its sound infrastructure.
Dr Faber founded the investment, fund management and brokerage firm Marc Faber Ltd, and publishes the Gloom, Boom & Doom Report.
He has been a strong critic of the US Federal Reserve’s bailouts. Commenting on the latest rescue of Fannie Mae and Freddie Mac, he said: ‘I’m not sure it’s such a great plan. I think the best is to split them up into smaller units.’
But the Federal Reserve is likely to bail out any investment banks in trouble given the implications any collapse would have on the derivatives market, he added.
Lehman fate in balance as talks set to resume on Sunday
By Dan Wilchins and Glenn Somerville
Sep 13, 2008
NEW YORK/WASHINGTON (Reuters) - Bankers and regulators held a second day of emergency talks to tackle the crisis at investment bank Lehman Brothers and soothe financial markets after Treasury and Fed officials urged Wall Street chiefs to come up with their own solution.
So far this year, the government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae .
But this time, Treasury Secretary Henry Paulson is adamant that federal funds not be used for a bailout, a source familiar with his thinking said on Friday.
The talks on Saturday ended without an announcement, but the final outcome could include hiving off Lehman's bad assets into a "bad bank", in which rival banks would acquire stakes, or even allowing it to file for bankruptcy, people briefed on the matter told Reuters earlier.
It's a fine balancing act for Paulson and the Federal Reserve.
They don't want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank. But they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis.
Lehman Chief Executive Dick Fuld has looked at selling the entire company to banks including Bank of America Corp, the No. 2 U.S. bank by assets, and Britain's Barclays, a person briefed in the matter said.
The banks are reluctant to buy the 158-year-old firm without government backing similar to that received by JPMorgan when it took over Bear Stearns in March, media reports said.
The Wall Street Journal reported that Bank of America was cooling on toward a Lehman deal.
NEXT VICTIMS?
Federal Reserve Bank of New York President Tim Geithner -- flanked by Paulson and Securities and Exchange Commission Chairman Christopher Cox -- told the banks their own firms could be the next victims of the credit crunch if they didn't work together on a Lehman solution, the New York Times said.
The CEOs of Goldman Sachs Group, Merrill Lynch & Co Inc, JPMorgan Chase, and Citigroup were all at Friday's and Saturday's meetings, in a scene reminiscent of the 1998 bailout of hedge fund Long-Term Capital Management (LTCM), two sources familiar with the situation said.
Late Saturday afternoon JPMorgan CEO Jamie Dimon, Merrill CEO John Thain and Citi CEO Vikram Pandit were seen leaving the New York Fed's headquarters in downtown Manhattan in separate cars within minutes of each other.
A spokesman for the New York Fed confirmed that the meeting had broken up and was to continue on Sunday.
Earlier, about 100 people from the regulator and several banks had been in the building, thrashing out possible solutions for Lehman.
The Financial Times, which said a final solution to the Lehman crisis was more likely to come together on Sunday, said many banks were resisting the idea of investing in Lehman's troubled assets.
Market participants are unclear about how traumatic a Lehman collapse would be. Some wonder if faith will erode in all broker-dealers, but others argue that traders have had months to reduce their exposure to Lehman and demand more collateral, and that any impact would be manageable.
Goldman Sachs, Citigroup, JPMorgan, Lehman, Merrill, and Morgan Stanley declined to comment.
'SHORT ON CAPITAL'
With LTCM, major banks each contributed to a $3.65 billion bailout of the hedge fund, allowing it to be wound down in an orderly way.
But this time may be different. The capital of many top banks is already strained by the credit crisis, making them reluctant to fork over funds to help Lehman, whose problems are largely a result of bad bets on the U.S. mortgage market.
"The big concern here is, that the system is short on capital in a big way," said Dan Alpert, banker at Westwood Capital in New York.
"That's a problem--there could be another half a trillion dollars in writedowns, and you have to find that somewhere."
Also, while LTCM was a client of most Wall Street firms, Lehman is a competitor.
"I'm not sure why Goldman Sachs would want to keep Lehman in business," said Charles Peabody, analyst at independent research firm Portales Partners in New York.
He called a "pre-packaged bankruptcy" the best possible scenario for Lehman since it would keep the bank's broker dealer operating subsidiary intact even if largely wiping out equity holders and hurting bondholders.
Lehman has hired law firm Weil Gotshal & Manges to prepare a potential bankruptcy filing, the Wall Street Journal reported, citing a person familiar with the matter.
Underscoring the markets' fragility, Merrill's shares tumbled 12 percent on Friday, while those of insurer American International Group Inc fell more than 30 percent.
Washington Mutual Inc, the largest savings and loan, lost 3.5 percent, bringing its decline so far this year to 80 percent.
COLLATERAL CALL
All three companies have varying degrees of exposure to the mortgages and other toxic assets that appear to have been Lehman's undoing.
Lehman has about $46 billion of commercial and residential real estate on its books.
Although the bank has reduced its leverage, or debt relative to assets, it still has about $600 billion of assets supported by some $30 billion of equity, meaning the value of its assets need only decline by 5 percent to make the company worthless.
In a world where financial institutions are reducing their leverage globally, prices for many different kinds of assets are falling.
One key source of pressure on Lehman is its debt ratings.
All three rating agencies said ratings cuts for Lehman were a possibility, as confidence in the firm erodes.
Moody's Investors Service said on Wednesday that Lehman must enter a "strategic transaction with a stronger financial partner" to avoid having its ratings cut to near-junk levels.
Such a ratings cut would make it difficult for Lehman to compete in businesses such as long-term interest-rate derivatives. Ratings downgrades could force the firm to post billions of dollars of additional collateral with its trading partners, further straining the bank's balance sheet.
Germany's finance minister said on Saturday he expected a solution for Lehman by Monday, as European policymakers worried about the market impact of the firm's woes.
Worries about Lehman were also heard on the presidential campaign trail, where top economic advisers to Democratic candidate Barack Obama and Republican candidate John McCain argued for a private solution to Lehman's problems.
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