Showing posts with label stock markets. Show all posts
Showing posts with label stock markets. Show all posts
Monday, October 22, 2007
Recent market trends
My interpretation of these three indexes is that many investors shifted cash from credit markets to equities due to the crunch and now are recognizing that equities will suffer due to economic slowing in the US and the effects of tighter credit on net income for public companies. Also, even though foreign buyers may be reducing their purchases of Treasuries, domestic demand for same has increased due to the desire to shift cash to the least risky investment.
Thursday, August 02, 2007
S&P, Nasdaq 3 month charts as of today
Although there has been a bit of a bounce the last two days, said bounce has been insignificant compared with the overall downtrend. It appears that more of the buyout premium was priced into the Nasdaq Composite, which would make sense as the proportion of stocks in the S & P that have been considered buyout candidates would have been relatively smaller.
Thursday, July 26, 2007
Thursday, June 21, 2007
Blackstone IPO a smashing success
Reuters reports today that
Interest Rate Roundup posted back in November of last year that
The high demand for the shares indicates to me that they are literally capitalizing on their brand name...
"Private equity firm Blackstone Group's initial public offering was about seven times subscribed, boosted by demand from Asia, the Middle East and Europe, the Financial Times reported on Thursday...The flotation on the New York Stock Exchange, worth up to $4.75 billion and underwritten by Morgan Stanley and Citigroup, is set to be priced later on Thursday. Blackstone earlier said it expects to sell 133.3 million common units at $29 to $31 each. The banks will be permitted to sell an additional 20 million shares to meet excess demand"...I think that purchasing shares of Blackstone would be very unwise...here is one reason why:
Interest Rate Roundup posted back in November of last year that
"I wondered out loud the other day about whether Sam Zell's deal to sell Equity Office Properties to private equity buyer Blackstone Group was the mother of all bells signaling a top for REIT shares. Lo and behold, the iShares Dow Jones U.S. Real Estate Index Fund (IYR) closed down 2.59% today. That's the worst one-day percentage decline going all the way back to August 2005, and twice the decline in the Dow. Maybe investors are slowly regaining their sanity ... or maybe it's just a blip. You never know. What I BELIEVE, however, is that ...and then Interest Rate Roundup posted today that
* Real Estate Investment Trusts are wildly overvalued by a wide variety of measures (including price-to-earnings and price-to-Funds From Operations (FFO) ratios)
* A weaker economy will crimp rent growth in the office and retail markets. And in the apartment market, you have a very large (and growing) supply of "shadow rentals" from stuck house flippers who can't sell and are trying to rent instead. That will likely throttle down the rent growth we've seen at key apartment REITs.
* Lastly, REIT yields are far below what you can earn on risk-free Treasuries, much less other fixed income investments. The IYR has an indicated yield of a whopping 3.38%, for instance, versus 5.13% on a 6-month T-bill"...
"I have gone on record in numerous venues (here's a post from May 2 ... and here's a longer story from around that same time) claiming that commercial REITs could be in trouble. I pointed out that valuations were extremely stretched, that tighter credit conditions and rising interest rates could cause them problems, and that the apartment sector in particular faced significant headwinds due to the supply overhang of former-flips-turned-rentals.In any case what you would be buying is essentially a chance get some of the lucrative fees that the firm's management charge to investors for managing "private equity" investments. But by going public, I would think that would put some limitations on what a private equity firm could do relative to non-public private equity firms due to SEC/Sarbanes-Oxley reporting requirements. So it looks to me like Blackstone's people are thinking that their returns are going to shrink so they get some extra cash now by selling shares to offset what they expect their shrinkage in future fees will be.Today, the Dow Jones U.S. Real Estate Index Fund is breaking down from critical support, continuing a sell-off that has stretched back several weeks. Yep -- looks like Sam Zell sold out at the top to the geniuses at the Blackstone Group, as I mused back in November"...
The high demand for the shares indicates to me that they are literally capitalizing on their brand name...
Thursday, March 22, 2007
Followup on Blackstone IPO coverage
In an earlier post, I commented negatively on the prospect of an IPO by Blackstone Group. It seems I'm not the only one who has questions about this deal. David Weidner at Marketwatch has a lot of questions. He says
"Since the news broke late last week, journalists, analysts and bankers have been trying to justify why Blackstone would need or want public ownership in any form. The consistent explanations are that stock would allow executives to "cash out," would provide another means of compensation and would give the firm another currency to use in deals. Sounds pretty weak. Even if one accepts those justifications, public ownership will bring a lot of anguish to the firm: disclosure of financials, earnings expectations for a business where returns are known to be uneven and the prospect that a once-autonomous management that did what it pleased, when it pleased will now have to answer to the hoi polloi of outside investors."
Allowing the executives to cash out just means that they are looking for some chump to trade cash for paper. Plus, the points that Weidner makes about the limitations that come from public ownership show that a public "private equity" firm would have its flexibility and opportunities for exploiting market inefficiencies eviscerated.
The big kicker is this: "The firm's plan for public ownership also smells of hypocrisy. Schwarzman and Blackstone executives have been wooing small- to medium-sized public companies like Montecito, Tragus, Center Parcs and TeamHealth into the private fold by telling CEOs and managers that by going private they would throw off the shackles of shareholders, regulatory filings and Sarbanes-Oxley compliance." Avoiding the tightened regulatory environment has been a primary rationale for going private. I agree with Weidner 100% here.
Update: found some more commentary by Roger Ehrenberg at SeekingAlpha: A couple of his comments, which I agree with, include
"In my earlier posts on Blackstone and KKR, I made it pretty clear that their steps - going public and creating lower risk, lower return investments - are a foreshadowing of what's to come: namely, a much tougher environment for private equity.
"Since the news broke late last week, journalists, analysts and bankers have been trying to justify why Blackstone would need or want public ownership in any form. The consistent explanations are that stock would allow executives to "cash out," would provide another means of compensation and would give the firm another currency to use in deals. Sounds pretty weak. Even if one accepts those justifications, public ownership will bring a lot of anguish to the firm: disclosure of financials, earnings expectations for a business where returns are known to be uneven and the prospect that a once-autonomous management that did what it pleased, when it pleased will now have to answer to the hoi polloi of outside investors."
Allowing the executives to cash out just means that they are looking for some chump to trade cash for paper. Plus, the points that Weidner makes about the limitations that come from public ownership show that a public "private equity" firm would have its flexibility and opportunities for exploiting market inefficiencies eviscerated.
The big kicker is this: "The firm's plan for public ownership also smells of hypocrisy. Schwarzman and Blackstone executives have been wooing small- to medium-sized public companies like Montecito, Tragus, Center Parcs and TeamHealth into the private fold by telling CEOs and managers that by going private they would throw off the shackles of shareholders, regulatory filings and Sarbanes-Oxley compliance." Avoiding the tightened regulatory environment has been a primary rationale for going private. I agree with Weidner 100% here.
Update: found some more commentary by Roger Ehrenberg at SeekingAlpha: A couple of his comments, which I agree with, include
"In my earlier posts on Blackstone and KKR, I made it pretty clear that their steps - going public and creating lower risk, lower return investments - are a foreshadowing of what's to come: namely, a much tougher environment for private equity.
These difficulties will emanate from several sources, principally:
and "Too much liquidity can cause perverse decision-making, and the brash and brainy private equity financiers are only too willing to take advantage of this market anomaly (that is, the inadequately-priced risk that is willingly underwritten by sheep-like investors awash in cash)." Amen, brother...Less friendly debt markets (both higher rates and tougher terms); Fewer attractive buy-out candidates; Too much liquidity across the alternative investment landscape (PE, HF and large VCs); and Greater regulatory scrutiny"
Tuesday, March 20, 2007
Margin debt and the stock market
Barry Ritholtz mentions over at SeekingAlpha that "NYSE Margin Hits All Time High" and comments that "It's borrowed money - not margin data - that matters" in reference to the fact that borrowing of stock for shorting purposes is not included in the number he is referring to. A linked chart of margin debt looks like this:
One item from the Wikipedia entry on the stock market crash of 1929 states "The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying." Granted, conditions now are not precisely the same as in 1929, but I agree that we are in "uh-oh" territory.
TheStreet.com has some commentary on margin debt. A good statement is this: "One of the things that margin does is accelerate moves in the market in either direction. When the level of margin swells, as it did late last year and early this year, the market is getting a huge dose of liquidity. Usually that makes for a higher stock market. And when margin goes down, that liquidity is being taken away." It is fairly obvious that margin would accelerate market moves because as prices go up an investor has more collateral to borrow against and can so borrow more to purchase more stock. Conversely, as prices drop, the stock collateral shrinks, margin calls are made, and the investor must sell stock to meet the margin calls.
A counterintuitive statement to me is the idea that "margin...over the long term tends to trend up." After considering it, it makes sense in that the money supply increases over time and therefore investment banks have more to lend as margin.
Finally "Margin, then, tells us not just how enthused or unenthused investors are, but something about the kind of capital constraints they're facing. When margin contracts, it indicates that people are feeling pinched, and that there is not as much money in general coming into the market." So margin levels could be a useful indicator to examine when considering where the market is going. Here is a chart that TheStreet.com provided:
The year on year growth levels in margin debt are remarkable. It seems to suggest that a large chunk of the stock market's valuation is being supported by borrowed funds. If there had been significant margin calls, one would expect to see some years where there were significant negative growth in margin debt. Seems like we're still building a house of cards.
One item from the Wikipedia entry on the stock market crash of 1929 states "The crash followed a speculative boom that had taken hold in the late 1920s, which had led millions of Americans to invest heavily in the stock market, a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying." Granted, conditions now are not precisely the same as in 1929, but I agree that we are in "uh-oh" territory.
TheStreet.com has some commentary on margin debt. A good statement is this: "One of the things that margin does is accelerate moves in the market in either direction. When the level of margin swells, as it did late last year and early this year, the market is getting a huge dose of liquidity. Usually that makes for a higher stock market. And when margin goes down, that liquidity is being taken away." It is fairly obvious that margin would accelerate market moves because as prices go up an investor has more collateral to borrow against and can so borrow more to purchase more stock. Conversely, as prices drop, the stock collateral shrinks, margin calls are made, and the investor must sell stock to meet the margin calls.
A counterintuitive statement to me is the idea that "margin...over the long term tends to trend up." After considering it, it makes sense in that the money supply increases over time and therefore investment banks have more to lend as margin.
Finally "Margin, then, tells us not just how enthused or unenthused investors are, but something about the kind of capital constraints they're facing. When margin contracts, it indicates that people are feeling pinched, and that there is not as much money in general coming into the market." So margin levels could be a useful indicator to examine when considering where the market is going. Here is a chart that TheStreet.com provided:
The year on year growth levels in margin debt are remarkable. It seems to suggest that a large chunk of the stock market's valuation is being supported by borrowed funds. If there had been significant margin calls, one would expect to see some years where there were significant negative growth in margin debt. Seems like we're still building a house of cards.
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