 | | The Daily Reckoning | Friday, June 17, 2011 |
- Crisis vacationing and what to do about Greece's financial tragedy,
- Chris Mayer on why profit margins are soon likely to head south,
- Plus, Bill Bonner on why we should be welcoming Europe's impending "Lehman moment" and plenty more...
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|  | | | Destination Greece | | Debunking the Myths About Crisis Vacationing | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Ahh...we can almost feel the sweet Mediterranean waters lapping at our feet, the white sand of the Naxos beaches between our toes...the taste of kleftiko on our tongue, washed down with a liberal helping of ouzo, Attika beer and perhaps a sneaky baklava for desert.
Greece is in trouble, Fellow Reckoner...which means it's almost time for the crisis vacationer to book a few weeks lounging on her splendid islands. More on that thought below. But first...
Yields on 2-year Greek bonds retreated below 30% overnight on news the Germans had softened their position on the welfare-obsessed olive traders. The move came after Chancellor Merkel said that a Vienna Initiative, used to assist Eastern European banks during the 2009 crisis, would be a "good basis" for lining up existing bond holders to voluntarily help Greece through its fiscal crisis. We had counted on Merkel to toe a harder line. So much for "brinksmanship."
Still, the Hellenic finances are in the toilet...and will eventually be flushed, one way or another. The Olympians run debt-to-GDP ratios similar to that of...gulp...the US! But this is hardly breaking news. In fact, it was hardly breaking news when we first wrote about it way back in 2009.
"That the Greeks are in trouble is hardly breaking news," we opined in this article, "Heck, even those geniuses at the ratings agencies had time to figure it out! Fitch, one of the agencies NOT responsible for forecasting the biggest economic tsunami since (at least) the Great Depression, just downgraded Greece's sovereign rating from a single-A- minus to BBB+. So NOW investors run for the hills?"
The slow-motion calamity that is modern day Greek finance continued unraveling over the ensuing twenty or so months, and continues to this very day. But is such a lamentable fiscal trajectory really so astounding? Hardly. Again, from that same 2009 column:
"The only thing really surprising about all this brouhaha is that investors should find it at all surprising in the first place. Did they think Dubai was going to be a one off occurrence? That the same immutable laws of nature would not also apply to other overleveraged, undercapitalized economies? Not likely! If the agencies are crying wolf, dear reader, your lamb dinner is likely already minced meat."
Yes, predictably, there's carnage in Athens, where protestors clash daily with police, who in turn fire tear gas on the hapless, misguided crowds as they attempt to surround the Parliament building. Indeed, the news reports make the place sound like a complete hellhole...exactly the sort of coverage that ought to ward off unwanted hordes of British bachelor party revelers and drunken, antipodean beachgoers. Which brings us back to our thoughts above...
The concept of "crisis vacationing" may sit a little uneasily with some folk. These would be the same people who steered clear of Balinese beaches after the 2004 tsunami, who avoided Thailand after last year's protests and who gave Mumbai a wide berth after the 2008 terrorist attacks. Heading to these places so soon after either man- or Mother Nature-made disasters strike is just cold-hearted, they contend, a slap in the face for those innocents suffering under the weight of the misery visited upon them. Here's why they're wrong...
While it's true that you'll get cheaper accommodation packages and enjoy less-crowded beaches and other attractions, that's only one very small, relatively insignificant part of the story. Your editor is here reminded of a trip he took to Mumbai in late 2008, a short while after the terrorist attack there. We happened into Café Leopold one sunny afternoon, a favorite expat haunt on the Colaba Causeway, and one of the targets of those terrible sieges. There were still bullet holes in the walls, as if they had been carved out the day before, and the broken windows upstairs were yet to be fixed. Many of the staff had lost friends and family in the assault, when thugs opened fire in the main restaurant downstairs, spraying bullets from floor to ceiling.
Though we didn't know it at the time, it was actually the one-month anniversary of the shooting that very day, Boxing Day, 2008. After having spent the afternoon chatting with the locals about their experience and sharing a couple of beers with them, we noticed a strange calm fall on the place. Reporters from the local and national papers arrived outside and crept, somewhat reverently, especially for reporters, indoors. The staff proceeded to dim the lights and to bring out candles to honor those who were so brutally slain. A moment's silence was offered in their memory. A few relatives gave speeches. Some raised their glasses. Others simply sat motionless, their heads bowed, teary-eyed and silent.
After the short ceremony had concluded, we got to chatting again with a few of the regulars and a couple of staff members. Your editor and his girlfriend were two of only four or five foreigners in the place, a gesture the locals seemed to very much appreciate. A few reporters asked us how we liked India and about our impressions of Mumbai. We responded honestly: that it was one of the most amazing places we'd ever experienced; vibrant, kind and brimming with Rushdie-esque mystique and the winding, intangible poetry of life. They asked us to tell the cameras that we were having a good time, that it was safe for tourists to come back, and that the hospitality so characteristic of the city was eagerly awaiting their return.
We made some good friends that night, a couple of whom we are still in contact with, two and a half years later.
Feeling guilty or offended on other people's behalf is a favorite pastime of middle class westerners everywhere. It helps us feel like we're caring, empathetic people when, really, we're not. Feeling bad from a distance doesn't help others pay their bills. It doesn't fill their restaurants and hotels. We offer prayers or make donations to assuage our ownfeelings of guilt and ineptitude - because we aren't suffering alongside these people or because we couldn't help prevent the disaster in the first place - not to make them feel any better. We like to feel bad for people we hope never to have to meet, living in countries to which we wish never to travel, suffering through situations we hope always to avoid.
If politicians really want to help the downtrodden of the world, they should stop giving their rulers cash bailouts, rendering them forever dependent on foreign welfare programs and the degrading, hand-to-mouth living it invariably nurtures. Stop papering over their financial potholes with crippling bridge loans and other unserviceable obligations to be foisted upon future generations. Stop, as Doug Casey so perceptively put it, "the transfer of money from poor people in rich nations to rich people in poor nations."
As for us as individuals, we can help by eschewing the lure of conscience-cleansing charity and lip-service prayers to the heavens. Our deeds, after all, are performed here on earth. Instead, go and enjoy a beer with those you care to help, both near and far. Stay in their hotels, listen to their stories, visit their cities and enjoy their restaurants and bars...and don't forget to leave a good, well- deserved, honestly-earned tip.
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| | The Daily Reckoning Presents | | The Danger of Peak Profits | |  | | Chris Mayer |
One of the vulnerabilities in today's market is that profit margins are near peaks. Investors tend to like companies with fat profit margins, but high profit margins are like honey pots that attract competitors. They are rarely sustainable for long.
But what is more important for stock prices is not the profit margin itself, but the direction they move. Rising profit margins goose stock prices in wonderful ways, but declining profit margins are a tough anchor to overcome.
The problem today is that most of the big blue chips report record profit margins, as Horizon Management pointed out in a recent research note.
Here is a list of the profit margins of the top 10 technology stocks of the NASDAQ 100 by market cap. They represent more than 40% of the NASDAQ 100.
"The average net profit margin is roughly 25%," Horizon observes, "which is without any historical precedent whatsoever."
This, then, is the Achilles' heel of the market as far as the fundamentals go. Profit margins are extremely high and unlikely to stay there, which ought to lead to earnings disappointments down the road. It was no surprise that Cisco Systems fell 16% in a day after the market fretted over weakening profit margins at the tech giant. The following chart puts today's profit margins in the context of the last decade. You can see that margins of the CBOE Technology Index are very close to record highs.
This phenomenon extends well beyond just the tech set. As Horizon points out, the same thing is in evidence in the S&P 500, which is a broad measure of the overall market. Let's look at the top 50 market caps in the index. This includes a mix of companies such as Chevron, GE and DuPont.
What do we find?
Horizon notes:
"There are quite a few companies with very high absolute profit margins. For example, Apple, Coca-Cola, Oracle, Schlumberger, McDonald's, Occidental Petroleum and Freeport-McMoRan Copper & Gold all have the common feature of after-tax net profit margins well in excess of 20%... In general, a 20% profit margin for any company is a historical rarity."
This is important because many investors seem to be banking on the idea that such companies will enjoy fat margins in perpetuity.
In some ways, the surge in profit margins is what you would expect to see in the early phases of a recovery. Companies cut costs going in a downturn. Then, as sales rise, there is a big boost to the bottom line, as costs have yet to catch up.
Today, though, I doubt many of these firms have much more to cut. Instead, the focus is now growing sales and taking business from competitors or defending an existing business. The focus, too, is how to deal with rising raw material costs. All of these put enormous pressure on margins. We should expect to see them fall.
So perhaps the valuations of many of these stocks - often with price- to-earnings ratios between 12-16 - are more spot on than they appear if you assume falling profit margins, falling returns on equity and the like.
As an investor, I think it is better to focus less on what profit margins are today and more on where they will go in the future.
Titanium Metals (NYSE:TIE), Methanex (NASDAQ:MEOH) and Chart Industries (NASDAQ:GTLS), to name three stocks I recommended in my investment letter,Capital & Crisis, all had reported profit margins on the very low end of their historic ranges when I recommended them. But profit margins have since rebounded greatly, and each of these stocks has more than doubled. Even now, profit margins have room to grow and are nowhere near peaks.
Of course, each of these stocks rose for reasons other than just improving profit margins. The stock market overall has gone up quite a bit, lifting all boats to some extent. It is hard to isolate any single factor. Nonetheless, I think the point is that where profit margins are headed is more important than where they are. It's like hockey great Wayne Gretzky's advice: "Go where the puck is going to be, not where it is."
For the market overall, profit margins are likely headed south. Those that can maintain or increase their profit margins will be the exceptions. Finding them, though, could mean the difference between a winning investment and a losing one.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S.: I have provided my subscribers to Capital & Crisis with a number of plays that I think can maintain and increase their profit margins. Find them here.
| | | | | | | Bill Bonner | | Embracing Catastrophe: Why You Shouldn’t Fear the Markets’ Next “Lehman Moment” | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
The financial press is enjoying itself.
With words!
One headline says the atmosphere is "toxic." Another warns of "contagion."
"Politicians fiddle while Athens burns," says The Wall Street Journal.
They all agree: Europe is going to Hell...just as soon as it can find a handcart!
But you remember our comments yesterday? Got a catastrophe? Great!
The authorities have tried to avoid disaster. They've done a good job of it. That is, they've avoided small disasters. And they've laid the foundation for a big one. So, bring it on!
According to one press report, "Europe is waiting for its Lehman moment." Get it? It's that moment when all Hell seems to break loose in the financial markets - like September '08, after Lehman Bros went broke. Bloomberg:
The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won't pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November. On the streets of Athens, riot police armed with clubs swing at protesters, also armed with clubs. "Greece was plunged into political turmoil..." began the report in The Financial Times.
But what is really going on?
Greece, a small country with a small GDP and no oil...whose strategic export is olives...and whose last real military victory was the Battle of Jhelum in 326 BC, in which Alexander the Great defeated an Indian Rajah named Porus. But Greece is also as deep in debt as the US. But unlike the US, lenders don't want to lend Greece money. They've read the history books. They know what happens when you lend Greeks money. You don't get it back.
On the other hand, they also know that the European Central Bank and the financial authorities worldwide are afraid of a "Lehman moment." They fear disaster. They hate catastrophes. They think their job descriptions include avoiding calamities of all sorts.
Investors don't know quite what to think. The danger is high. But there are rewards too. Greek debt with a 3-year maturity is yielding 28%. If the authorities pull off another bailout, speculators stand to make a lot of money on the long side of Greek debt.
But as we said earlier, it is because officials are so good at avoiding calamities that we find ourselves confronted with so many of them now. If they'd let Greece go broke 3 years ago, the problem would be behind us instead of in front of us.
Avoiding disasters hasn't worked. At least, not avoiding debt disasters. No matter what tricks the authorities do - monetary, fiscal, or unconventional - the debt is still there. And since all those tricks cost money...it gets bigger and bigger.
So how about this: Give disaster a chance to show its stuff. Let calamity have a go at the problem. Let's all put our hands together and welcome catastrophe.
It's coming, whether we like it or not.
So why not like it? Look, who really cares if a few big banks go broke? Who cares if Greece, Portugal and Spain - if it comes to that - are forced out of the EU? Who cares if the bankers don't get their bonuses...or the speculators don't get their pay-offs...or pompous officials don't get to claim they 'saved the world economy'?
Not us.
Of course, we don't really know what would happen if disaster were allowed to settle up things on its own. If the EU doesn't come through with another bailout, Greek banks - including its central bank - will be insolvent. And the European Central Bank may be insolvent too. It has an outstanding loan for $49 billion to Greece. It has a lot of other debt on its books too - from Spain, Portugal and Ireland. What that debt is worth today, you can find out by looking in the financial pages. What it will be worth after Greece defaults is unknown...but surely a lot less. And when the losses are toted up, they are likely to be more than the ECB's capital.
Then, the scheisse will really hit the fan.
What will happen? No one does. But we want to find out.
And more thoughts...
Here's the report from The Telegraph in London:
EU commissioners have a "profound sense of foreboding" about Greece and the future of the eurozone, a leaked account of a meeting has suggested.
The account, seen by BBC News, said this was in reaction to the "damning failure" of eurozone ministers to agree a new bail-out for Greece last night.
It was written by an official who attended Wednesday's gathering of commissioners in Brussels.
The author warned that the markets would now "smell blood". *** Remember what a bad bet mortgage debt was? But in 2005, the more mortgage debt you had the smarter you thought you were. Mortgage debt meant you were making a leveraged be on the housing market. As house prices rose, you multiplied your money.
The New York Times reports that another group of dumb-dumbs is making a similar mistake:
Debt has become a way of life for American college students. The average student loan debt among graduating college seniors was more than $23,000 in 2008, according to FinAid.org. In addition, the student lender Sallie Mae says the average graduating senior with at least one credit card had $4,138 in debt on the card.
Yet, instead of feeling stressed about owing all that money, many students actually feel "empowered," says a new study from Ohio State University, based on data collected for the federal Bureau of Labor Statistics. The study, published in the journal Social Science Research, surveyed 3,079 students, the majority of whom were in their early- to mid-20s.
That's right. The more college loans and credit card debt that young adults age 18 to 27 have, the higher their self esteem - and the more control they feel they have over their lives. They tend to view debt positively, rather than as a burden.
Come again?
Rachel Dwyer, an assistant professor of sociology at Ohio State and the study's lead author, says it's not entirely clear why debt seems to have that effect. But the finding is consistent with earlier research suggesting that student loans, in particular, represent the cost of opportunity for some students, and so can be seen in a positive light. "Educational debt can represent an investment in the future," she said.
There are signs, though, that the glow wears off as the students put more distance between themselves and their college days - perhaps because they are starting to make payments on the loans and may be beginning to realize that their salary doesn't go as far as they may have thought. The oldest of those studied - ages 28 to 34 - began showing signs of stress about the money they owed.
"They're experiencing the burden of repayment," Professor Dwyer said, "versus the pleasure of going to college." Regards,
Bill Bonner
for The Daily Reckoning |
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