Here is a link to an article that does a great job explaining credit default swaps:
http://biz.yahoo.com/zacks/080924/14884.html?.v=1
Read at your own risk. Ignorance is bliss!
Saturday, October 11, 2008
Friday, October 10, 2008
How Fearful is the Market?
Here is a great example of how fearful the market is right now. Now I am writing the post before the opening of the market Friday, October 10.Stock: LCA-Vision (LCAV)
Total Cash LCAV Has: $62.15 Million
Total Debt LCAV Has: $24.58 Million
That leaves $37.57 Million in Cash after subtracting the debt.
Total Shares Outstanding: 18.53 Million
Total Cash per share after taking into account debt: $2.03 per share
Current Market Price: $2.63 per share
So, after taking into account the amount of cash this company has and all of its debt you are essentially paying $0.60 per share for a company that is earning $1.08 per share, trailing twelve months. The key here of course being the trailing twelve months, nobody knows what the future 12 have in store.
But to put this in perspective, that is like going to buy a house for $263,000 and the realtor says, "And one of the nice things about this house is that there is a safe in the master bedroom with $203,000 in cash inside of it that comes with the house." Do you think you might buy that house?
Keep an eye on this stock today. If it drops below $2.03, you would be getting paid to buy this company! Now that's a fearful market.
Sunday, October 5, 2008
The Bailout and Creative Destruction
One of the most interesting articles I read about America's current financial situation was in last week's Economist. (see article here: http://www.economist.com/finance/displaystory.cfm?story_id=12306060 )
The article was about the economy's need to deleverage. The graph to the right illustrates US total debt as a percentage of GDP. As you can see we are at the highest level of all time, the previous high being just before the Great Depression. There it is plain as day for anybody to see, American is carrying too much debt!
My question is how is the Bailout plan going to help America deleverage this overwhelming amount of debt it is currently carrying? Is this not a time for Creative Destruction? I hear people claim that if the Bailout plan were not in put in place people wouldn't be able to get loans for cars, education, starting or growing a business. (Learn more about creative destruction here: http://en.wikipedia.org/wiki/Creative_destruction )
Perhaps this is where creative destruction will come into play. Maybe people's inability to get a college loan will force universities to reign in their costs. Or perhaps they won't reign in their costs and it will give further rise to online universities. As attendance drops at campuses and increases online, perhaps they will be able to compete for better professor's giving more prestige to online degrees.
Maybe people's inability to purchase cars will spur the demand for public transportation and increased demand for effective rail systems. Instead of giving $700 billion to failed banks money could go towards infrastructure to create jobs and cheap efficient transportation. Which may also help to bring down energy costs.
Perhaps allowing more banks to fail can help reign in CEO pay. When you see these multi-billion dollar companies fail can we not see that CEOs shouldn't be rewarded for short term gains. I fear that this bailout package just continues to promote irresponsible corporate behaviour. Why shouldn't a CEO risk over leveraging a company for short term gains if he or she can still walk away with multi million dollar severance packages?
( http://gregmankiw.blogspot.com/2008/10/wanted-good-bernanke-speech.html )
I'd love to hear your comments on where you think I'm totally off base, what you agree with, or links to articles that better explain the Fed and Treasury's end game plan. Thanks for reading!
The article was about the economy's need to deleverage. The graph to the right illustrates US total debt as a percentage of GDP. As you can see we are at the highest level of all time, the previous high being just before the Great Depression. There it is plain as day for anybody to see, American is carrying too much debt!
My question is how is the Bailout plan going to help America deleverage this overwhelming amount of debt it is currently carrying? Is this not a time for Creative Destruction? I hear people claim that if the Bailout plan were not in put in place people wouldn't be able to get loans for cars, education, starting or growing a business. (Learn more about creative destruction here: http://en.wikipedia.org/wiki/Creative_destruction )
Perhaps this is where creative destruction will come into play. Maybe people's inability to get a college loan will force universities to reign in their costs. Or perhaps they won't reign in their costs and it will give further rise to online universities. As attendance drops at campuses and increases online, perhaps they will be able to compete for better professor's giving more prestige to online degrees.
Maybe people's inability to purchase cars will spur the demand for public transportation and increased demand for effective rail systems. Instead of giving $700 billion to failed banks money could go towards infrastructure to create jobs and cheap efficient transportation. Which may also help to bring down energy costs.
Perhaps allowing more banks to fail can help reign in CEO pay. When you see these multi-billion dollar companies fail can we not see that CEOs shouldn't be rewarded for short term gains. I fear that this bailout package just continues to promote irresponsible corporate behaviour. Why shouldn't a CEO risk over leveraging a company for short term gains if he or she can still walk away with multi million dollar severance packages?
I'm not pretending like going into a severe recession will be a good thing, just that there will be some good things that will come of it from necessity. Rather my fear is more that the bailout is a waste. To use an analogy, I fear there is a giant financial storm coming, and I have a home in New Orleans that would be ruined if the levees broke. And I see on the news the storm is coming. I think to myself, well I'll quickly board up the house and use my emergency fund to move the family out of town until the storm passes. But I get home only to find out that my wife has spent all our money on sand bags. And I ask, "Why did you buy sand bags, and how much money did it cost?" And she says, "I got sand bags so that if the levee breaks the water will stay away from the house for an extra half hour. And I spent all our money plus I got a loan." To which I ask, "How much was the loan?" And she says matter of factly, "$700 billion!"
I don't know what the answer is to the current financial crisis, but I do know that the bailout plan has not been sufficiently explained to the American people. I think Greg Mankiw was right on the money with his blog about the need for a Good Ben Bernanke speech. Read here:( http://gregmankiw.blogspot.com/2008/10/wanted-good-bernanke-speech.html )
I'd love to hear your comments on where you think I'm totally off base, what you agree with, or links to articles that better explain the Fed and Treasury's end game plan. Thanks for reading!
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