Global Markets in CHAOS - What AIG, BAC, MER, LEH deals mean for you?
Posted by Jeff Wed, 17 Sep 2008 20:53:00 GMT
As you know, I really love the markets. In fact, before we started CLZ, I was ready to take a hedge fund job with $1B (that was 9 months ago, lol - it may be $100M now).
What in the world is going to happen and what should you do?
Well - I’m not a financial advisor, and I don’t manage anyone else’s money except my own. But I look at the books of these major banks and ask myself…gee…there’s no way for me to value how much these ‘toxic’ assets are worth. Could they be in fact worth 0? Yes. What about negative value? Yes.
Now - I use a pragmatic method of evaluating companies. Basically a reasonable PE ration and reasonable asset liquidation value. The key in these values is to get comfortable with thinking that you are going to buy the entire business and treat it like a cash flow company. For example, a company that is trading 10X earnings today means that if you were to own this company, you’d get about 10% return / year, assuming no growth in earnings (buy the company for $1, every year you make $.10 cents) –> assume you reinvest correctly, you can do the same next year). Now if the earnings will double in 10 years, then you will get 15%. (approx. numbers here guys)
Both of these are not easy metrics, but let’s address earning power - I look at the company and ask 1) is the business stable? 2) can it do a couple of times more business 5-10 years from now as it is doing today? That’s it - I don’t bother reading analyst reports on future earnings. Who are they to know what is going to happen in business??? Truthfully, no one really knows what’s going to happen in business and earnings metrics are mainly bogus.
Now the asset parts of the equation usually is much simpler, you look at the balance sheet and say…OK…I get it. BUT THIS IS THE EXACT PROBLEM TODAY!!! I look at the balance sheets of MER,MS,AIG, etc, and although I feel like I can see that the firms will be profitable in the future in their ‘normal operations’ (such as underwriting, etc) I have no idea how to value the TENS of BILLIONS of derivative positions. For all I know (although unlikely) these positions can turn out to be very profitable.
Conclusions - everyone is trading on rumors and whims and ‘herd mentality’ expect even greater swings in the coming days.
WHAT DOES THIS MEAN FOR YOU? OK - let’s forget about the market in general. Does this affect the average american consumer? You bet. I recently brushed up some reading on the Great Depression, and it looks like people are going to be doing exactly like the government says - keep spending, and be assured that everything will be fine. Guess what? It’s NOT.
I’d start saving and cut down costs. Maybe move to a smaller apartment, instead of going to the gym - just workout outside (SF is beautiful, that helps), cook at home more. Build a nest egg of tens of thousands of dollars and wait. There’s no reason why the world wouldn’t recover in 12 months, but there’s no telling how painful the de-leveraging of these opaque assets is going to be.
In short - make sure you will be OK without a job for 24 months.