Pick 1 Stock For 5 Years: Results

First off, sincere thanks to everyone who submitted a pick via the blog, our twitter page, or email. It was a great response as we received hundreds of replies and have been busy sorting through them. The question was simple: If you had to own only 1 stock for the next 5 years, what would it be? Since many of the hedge funds we track on the blog are centered around stockpicking, we thought it would be fun to see what readers had in mind for long-term picks of their own.

As you can imagine, we received the full gamut in terms of answers but definitely noticed a few themes in the responses. Firstly, when it comes to 'buy and hold,' blue chip stocks are the name of the game. By far and away, the largest amount of entries centered around well established blue chip companies that have a proven brand and often pay a dividend. Secondly, two sectors received the most votes and those were: technology and energy. Readers definitely see those two arenas as areas of long-term growth and sustainability it seems.

Without further ado, onto the results. We'd first like to toss out a few honorable mentions that received a lot of votes, but not quite enough to land in the top 10. Some of those stocks include: Cree (CREE), Exxon Mobil (XOM), Leucadia (LUK), Range Resources (RRC), Johnson & Johnson (JNJ), Monsanto (MON), Transocean (RIG), Berkshire Hathaway (BRK.B), FPL Group (FPL), and Verisk (VRSK).

And here are the TOP 10 PICKS, with the #1 pick being the stock that received the most entries:

10. A123 Systems (AONE)

9. BHP Billiton (BHP)

8. JPMorgan Chase (JPM)

7. Google (GOOG)

6. BYD Company (Hong Kong: 1211)

5. General Electric (GE)

4. Philip Morris International (PM)

3. Walmart (WMT)

2. Goldman Sachs (GS)

1. Apple (AAPL)


So there you have it, Apple easily had the most votes as many think this technology giant has become the next Microsoft (MSFT) in terms of dominance. Sticking with technology, there were also a lot of votes for Google (GOOG). The blue chip names that received a lot of entries as we referenced earlier were WMT, GE, and PM. It was also interesting to us to see heavy support for some recent IPO's in Verisk (VRSK) and A123 (AONE). Readers definitely think these freshly public companies have bright futures. Also, while energy was a strong theme with picks like RIG, XOM, we also saw strong voting for plays in the 'green' energy category like BYD and AONE. Lastly, the theme of financials was strong as many people decided that they wanted to own Goldman Sachs (GS) as they've emerged through the crisis as heavyweights, with votes also trickling in for JPM.

Overall, very interesting results and thanks again for participating! Hopefully in five years we'll be able to check back in on this post and see who had the magic crystal ball to pick the right stock. After all, the point of this exercise was stockpicking for the long-term. Who will win? We'll have to wait and see. In the mean time, make sure you check back with us for our constant coverage of hedge fund portfolios and the like.

What Stock Would You Buy For The Next 5 Years?

It's a simple question, yet it really takes a bit more thought if you're forced to pick just one. Over on our twitter account, we posed a question: If you had to buy and hold only one stock for the next 5 years, what would it be? We're talking individual companies here, not ETFs, not indices, just straight up stockpicking.

We thought it would be a fun exercise to gather everyone's responses and then compile the results in a post. So, out of sheer curiosity, let's have it. You can click the 'comments' link below this post, you can email us, or you can @marketfolly us if you're on Twitter. We'll keep track of all the answers and will reveal the results on Friday. You've got 2.5 days to come up with the perfect stock for the next 5 years. Go!

Hedge Fund News Summary: September Edition

Welcome to the latest iteration of our hedge fund and market guru news summary. We've made habit of compiling odds and ends in hedge fund land as of late in order to present them in easy to digest quick hits. You can check out our August hedge fund news here as well as our July update here. Moving on now to September, we see some interesting bits presented below.

Hedge funds: In general, we saw about $19 billion flow into hedge funds for the month of August. This is an increase of 2.56% as total hedge fund assets are now around $1.89 trillion. Also, according to hedge fund research, the number of liquidations declined in the second quarter, as only 292 funds closed (a decrease of 22%). It is cited that strong performance is a main contributor to this number dropping, which obviously makes sense. However, as evidenced with some other news items below, some funds are still having problems with redemptions. Some of the most notable closures include William von Mueffling's Cantillon Capital who will be converting to a long-only shop, Satellite Asset Management, as well as Art Samberg's Pequot Capital, all of whom we've covered on the blog before. Yet some of the major names have been receiving inflows including Steven Cohen's SAC Capital, Och-Ziff Capital Management, and Louis Bacon's Moore Capital Management. We also got word that Paul Tudor Jones' hedge fund Tudor Investment Corp has paid off some of its redeeming investors after suspending redemptions last year when they split the fund into two, to separate the illiquid assets. However, they still have more redemptions to meet. Lastly on the hedge fund news-front in terms of regulation, we see that the SEC will urge more public disclosure if Congress can push through plans to make sure all register with the regulatory body.

Peter Thiel's Clarium Capital: Tough times continue at this global macro hedge fund as we see they were down 8% for the month of September as of the first two weeks. Year to date as of that timeframe, Clarium has lost 15.6%. They recently cut leverage down from 4.2 : 1 to 1.4 : 1. We recently presented their August market commentary entitled, 'Save Now, Invest Later.' In that article we noted the continuing theme we see with Clarium: lack of performance. They have great research and seemingly interesting ideas, but they don't translate well into trading strategies. Their assets under management, which previously topped $6 billion, are now well below $2 billion. However, Clarium is still up 270% since inception. We'll continue to watch the developments with interest.

Goldman Sachs: They were out a bit ago with a report on possible strategies being used by hedge funds in this current market landscape. The report was dubbed 'best current long & short strategies' as they proposed shorting REIT equities, shorting the Japanese Yen, and shorting the crack spread amongst other ideas. We covered the entire set of strategies in our post on possible long & short strategies.

Sticking with Goldman for a second, they also released their hedge fund trend monitor report which examines the same thing we do here at Market Folly: hedge fund portfolios. They took a gander across hedge fund land and presented the most widely held stocks amongst hedge funds. A lot of the typical names like Apple (AAPL), Wyeth (WYE), Qualcomm (QCOM) appeared, but you'll be surprised at some of the other names that made the list. They also highlight the massive flux of hedge funds into financials over the second quarter, particularly into Bank of America (BAC).

Endowments: Big name endowments had a rough year as both Harvard and Yale reported losses over the past fiscal year. Harvard cited private equity and hedge fund problems as they lost 27.3% and now manage $26 billion. Yale lost almost 30% and now manages around $16 billion, as they were still finishing their tally. Harvard's decline is the biggest in 40 years and manager Jane Mendillo plans to use less outside managers and instead run more money internally. Matching up to their benchmarks, Harvard did well with their equity and real estate assets as those beat their benchmark. However, their allocations to private equity and hedge funds underperformed benchmarks significantly. University of Pennsylvania's endowment was down less than Harvard and Yale, but still lost 15.7%. While they have struggled like the majority of the market, endowments seemed to have outperformed over the long haul. As a primer on endowment investing, we highly recommend Mebane Faber's book, The Ivy Portfolio if you haven't yet checked it out.

Oaktree Capital Management: One of the widely monitored distressed debt firms out there previously sent out an investor letter in which they detailed their fondness for senior loans. Here is the letter embedded below:




Carl Icahn: We haven't covered him as much lately due to the influx of other activity we've seen so here's a good chance to take a brief look at recent moves. We see that Icahn has sold 12.7 million shares of Yahoo (YHOO) in the last few days of August and his ownership stake now sits at 4.5%. He sold the shares at prices of $14.74 and $14.93 and he originally bought his YHOO stake at around $25 per share. Icahn cited the sales as 'portfolio rebalancing' in terms of his technology holdings. He has also said that he remains optimistic about his YHOO position due to the Microsoft partnership and the managerial guidance of Ms. Bartz. For our previous coverage of Mr. Icahn, we've noted his purchase of Tropicana casino.

Third Avenue: Marty Whitman's firm is shifting its focus partially to the distressed arena as they look to open a Focused Credit Fund. The fund will focus on credit, as well as distressed and value equity investing and will be run by Jeff Gary (former head of high-yield and distressed investments at BlackRock). Additionally, we've embedded below Third Avenue's latest shareholder letter where Whitman addresses market outlook, lessons learned, as well as the best places to invest in 2009. Here is Third Avenue's latest letter:




Alternatively, you can download the .pdf of the letter here. Hat tip to Todd Sullivan's ValuePlays.net for bringing this to our attention. Additionally, you can see Third Avenue's previous letter here.

Bill Hwang's Tiger Asia: One of the 'Tiger Cub' funds has been facing some insider trading accusations according to a Hong Kong regulator back in late August. Bill Hwang's hedge fund Tiger Asia was accused of insider trading and market manipulation as the regulators sought to freeze 29.9 million HK Dollars worth ($3.9 million) of Tiger Asia's assets. This is the amount equivalent to their gains from trading shares of China Construction Bank Corp. Apparently Tiger Asia was notified about a planned sale of Construction Bank shares by Bank of America and were told the size and discount rage of the share offering. Tiger then shorted 93 million shares of Construction Bank before this placement occurred. The courts were seeking to freeze these assets of Tiger's and we'll continue to update as court hearings dictate. While we don't track Tiger Asia in particular, we do track numerous other of these funds on the blog and you can see a 'Tiger Cub' family tree here.

Vicis Capital: Ex-Lehman trader John Succo has had it rough recently. He has halted withdrawals from his $2.9 billion fund after they received more than $540 million in redemption requests. What's shocking is that this still comes after they've already seen $2.7 billion redeemed back in the hedge fund redemption crisis. They are down 12% year to date and focus on volatility strategies.

Touradji Capital: Here's something you don't see everyday. Hedge fund Amaranth has sued Paul Touradji's hedge fund for what they claim to be 'breath of contract and misappropriation of trade secrets.' Amaranth of course blew up 3 years ago after a massive trading loss on natural gas, losing well over $6 billion. You can see Amaranth's previous investor letter on the blog as well.

Och-Ziff Capital Management: As we mentioned above, Och-Ziff has begun receiving inflows this year. This also comes on the heels of the news that the $22 billion firm has surpassed their high water mark and can now start earning their performance fee again. As of the end of August, their Master Fund was up 17.6% for the year after finishing 2008 down 15.9%. They received $200 million in inflows in August and received praise last year for not halting redemptions like many of their colleagues were forced to. Och's European fund was up 11.78% for the year as of August and their Asian fund was up 24% over the same timeframe.

Rothschild: They are planning on raising a $700 million (500 million euros) investment fund that will be run by managing director Marc-Olivier Laurent. They will seek to invest in companies valued between 100-500 million euros.

Stephen Feinberg's Cerberus Capital Management: While this is slightly older news (end of August), we never touched on it on the blog and wanted to make sure we highlighted it. Cerberus saw massive redemption requests over the past few months as over 71% of their investors in 2 of their funds wanted their money moved to a new vehicle that could liquidate hard-to-sell positions as the market moves along. It is understood that the vast majority of these requests came from fund-of-funds. Cerberus was down 24.5% last year, most notably due to its position in Chrysler as they manage almost $20 billion and focus on distressed investments. Clients who keep money with Cerberus won't have to pay performance fees until all the losses are recouped.

Julian Robertson: The Tiger Management founder and hedge fund legend was back on TV for his once-a-year marquee appearance and he was out talking about inflation and curve steepeners again. However, this time around, he has tweaked his play to focus only on long-term rates as he sees curve caps as the best way to play this. This brief paragraph is obviously too short to detail the extent of the investment and as such we've done so in an entire post on Julian Robertson's play here.



That wraps up this September edition of our hedge fund news summary. Be sure to also take a glance at our other post today on some hedge fund performance numbers too. And as always, check back daily for our hedge fund portfolio tracking series.

Market Folly Interviewed By BehindTheSpread.com

We recently did an interview with Hiro, the author behind both BehindTheSpread.com and My $10000 Dollars and just wanted to let everyone know who might be interested in reading it. In it, we talk about our background, investment style, as well as the journey we've been on in creating Market Folly.

Check out our interview here, thanks!

Companies Most Likely To Declare Bankruptcy

In addition to the updated problem bank list we posted up the other day, we saw this and thought it would be worth flagging for those interested. Audit Integrity, an independent research firm, has highlighted the top 20 companies that they believe have the highest probability of filing for bankruptcy. They limited this specific list to publicly traded firms that have over $1 billion market capitalization. In no particular order:

• Advanced Micro Devices, Inc.
• Amkor Technology, Inc.
• AMR Corporation
• Apartment Investment and Management Co.
• CBS Corporation
• Continental Airlines, Inc.
• Federal-Mogul Corporation
• Hertz Global Holdings, Inc.
• Interpublic Group of Companies, Inc.
• Las Vegas Sands Corp.
• Liberty Media Corporation (Capital)
• Macy's, Inc.
• Mylan Inc.
• Oshkosh Corporation
• Redwood Trust, Inc.
• Rite Aid Corporation
• Sirius XM Radio Inc.
• Sprint Nextel Corporation
• Textron Inc.
• The Goodyear Tire & Rubber Company

They rate over 12,000 companies so as always take these with a grain of salt and obviously do the necessary due diligence on them. One particular company on the list is intriguing though: Textron (TXT). The private jet manufacturer has been on a volatile ride over the last year (to say the least) and our friends over at Zero Hedge have done some excellent sleuthing regarding various activities Textron has conducted with Goldman Sachs as of late.



Source: Reuters

Bill Gross September 2009 Commentary (PIMCO)

Here's the latest commentary from PIMCO's bond boss, Bill Gross. He entitles it, "On the 'course' to a new normal." In addition to the text below, you can also download it in .pdf version here.

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From PIMCO:

Analyzing why people play golf is like exploring the intricacies of string theory – there are so many permutations lacking scientific observation that physicists or golfers can pretty darn well say anything they like and the explanation might stick. When it comes to whacking that little white ball, the possibilities are nearly endless: People play to relax, to be with friends, to get close to Mother Nature, to enhance business connections, to compete and excel. Gosh, I don’t know, the Zen explanation for why we play golf could even resemble the old saw about climbing a mountain: People golf because it’s there. Whatever the reason, it is the most frustrating, damnable game ever conceived – alternately elevating and depressing you within the span of mere minutes. I love golf. No, I hate it.

Personally, the reason that golf draws me to its intricate web of psychological entrapment is epitomized by a simple six-inch trophy: a chartreuse ball resting on top of its ebony base, preening on a bookshelf in the family room at our desert home. Its inscription reads, “Hole in one, March 15^th, 1990, 14^th hole Desert Course, 155 yards.” Well and good, I suppose – the ace of my life – except it wasn’t. It was the ace of my wife. Above the inscription rests the name Sue – not Bill – Gross. It was a great shot but it wasn’t my shot, and I guess therein lies the explanation for why I continue to tee it up.

Actually, two years ago I did tee it up in the sweltering 105° June heat of the Palm Springs desert. No one, of course, was crazy enough to be with me including my “ace” role model wife who was sipping a cool lemonade in the comfort of our air-conditioned home. Now, there is an “unwritten” rule in golf that in order to be official, a hole-in-one has to be witnessed, and that you have to play a full 18 holes. Otherwise, I suppose, you could stand on the tee with a bucket of balls and hit hundreds or thousands until one of the little guys went in – whatever. The fact is, on this particular day, I was playing only one ball, but I was alone, and – good God! – it went in! The trophy with ebony base and spanking white Titleist ball would read: “Hole in one, June 7^th, 2007, 17^th hole, Mountain Course, 139 yards.” Or was it? Does a falling tree make a sound in the middle of a forest if no one’s there? Is a hole-in-one a hole-in-one if no one else saw it? I say emphatically – yes! That damn ball went in and later that day Sue agreed with me (although she had a funny look in her eye – especially since she didn’t know a thing about the rules of golf). No one else though. No one else agrees with me. Not a soul. I suspect they’re jealous and, in fact, I’ve seen a few of them hitting buckets of balls at dusk from that very same tee when they think nobody’s looking. I’m watching, though, which brings up a funny question. If they sunk one, would theirs be a hole-in-one because I was a witness? Like I said – a damnable game.

“Is a hole-in-one a hole-in-one” may not strike you as the most critical question of the hour, and I would readily agree. “Will we have a New Normal global economy (and investment market)?” would probably usurp it on even Tiger Woods’s top ten list. This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

This focus on the DDRs – delevering, deglobalization, and reregulation – may be conceptually understandable, but nevertheless still a little hard to get one’s arms around. Why would they necessarily lead to a new, slower growth normal? A little easier to grasp might be the following approach, which feeds off the same concept, but which extends it a little further by suggesting that DD and R lead to a number of broken business or economic models that may forever change the world we once knew and make even Barton Biggs a chastened adult. They are as follows:

1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
   
2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
   
3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
   
4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.
   
   Similarly, the financialization of assets via the shadow banking system led to an American era of consumerism because debt was available, interest rates were low, and the livin’ became easy. Savings rates plunged from 10% to -1%, as many (if not most) assumed there was no reason to save – the second mortgage would pay for everything. Now things have perhaps irreversibly changed. Savings rates are headed up, consumer spending growth rates moving down. Get ready for the New Normal.

I could go on, reintroducing the negatives of an aging boomer society not just in the U.S., but worldwide. Increased health care may be GDP positive, but it’s only a plus from a “broken window” point of view. Far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one. Same thing goes for energy. Far easier and more profitable to pump oil out of the Yates Field in Texas or even Prudhoe Bay than to spend trillions on a new “green” society. Our world, and the world’s world, is changing significantly, leading to slower growth accompanied by a redefined public/private partnership.

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.

Like playing in an Open Championship, future golfers/investors need to play conservatively and avoid critical mistakes. An “even par” scorecard (plus some hard earned alpha) may be enough to hoist the trophy in a New Normal world. Holes-in-one? Maybe if you’re lucky. But make sure someone’s watching, and that their eyes are focused on the New Normal. As for golf, even Sue, my only supporter, has asked me to move my ball, on its own ebony base, away from her more authentic and perhaps the still solitary ace made by Gross family golfers. What a damnable condition.

William H. Gross
Managing Director

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Make sure to also check out Bill Gross' August commentary as well if you're interested.

Free: Grant's Interest Rate Observer

If you haven't heard already, Grant's Interest Rate Observer has gone partially free. You can get their Summer Break 2009 Issue for free via .pdf here. It is 24 pages chalk full of great information. Definitely check it out as Grant's has great commentary. And hell, it's free.

Why Gold Prices Will Rise

Just yesterday, we posted up a technical analysis video that looked at what trading range gold is currently trading in. With so many hedge funds in the gold trade, it's always a topic worth monitoring. Below is a guest author piece entitled, "With Inflation on the Horizon, Gold Prices are Ready to Rally."

By Jason Simpkins

Managing Editor

Money Morning

With the global economy on the mend, could gold be gearing up for another record-setting run? It sure looks that way. After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world's largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar. Since that time, the global economic outlook - especially beyond U.S. borders - has improved, and gold prices have stabilized. The next step - many gold bulls say - is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce - down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November. Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June - a 38% jump from their November low. Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 - and possibly even higher - by the end of the year. There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong. But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that's spiraling out of control, the dollar is extremely vulnerable. The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for "an extended period." The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It's also created the Commercial Paper Funding Facility - which holds $109.2 billion in short-term IOUs issued by corporations - and the Term Asset-Backed Securities Loan Facility (TALF) - which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans. And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds. "In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base," said Money Morning Contributing Editor Peter Krauth. "That can only lead to serious inflation, perhapseven hyperinflation. This will cause the value of the U.S. dollar - which has been eroding since 2001 - to decline at an even-more-frenetic pace." In addition to the Fed's action, the United States' spiraling debt poses a significant threat to the dollar's value, as well. Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to the Congressional Budget Office (CBO). The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion - equivalent to 13% of the nation's gross domestic product (GDP), a level not seen since World War II - in fiscal 2009. And if the economy doesn't rebound soon, that number will very likely top $2 trillion by the end of September. The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit. Some of U.S. President Barack Obama's advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards. Laura Tyson, former chair of the U.S. President's Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was "a bit too small" and that more may be required. But if another stimulus is needed, how exactly does Washington plan on financing it? While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures. China - the largest holder of U.S. debt - is already losing its appetite for U.S. Treasuries. In fact, the world's fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March. That stands in stark contrast to the Treasury market of two years ago, when China's demand for U.S. securities actually exceeded the United States' own borrowing needs. Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes - those that mature in a year or less - while at the same time unwinding its position in Treasuries with longer maturities. "They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher," JPMorgan & Co. analyst Frank Gong told The Associated Press. "Inside China, there has been a lot of debate about whether they should continue to buy Treasuries." As Money Morning reported in June, Treasury Secretary Timothy F. Geithner traveled to China to reassure the nation about the value of its holdings. But not everyone was convinced. "I worry about details," said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Daily newspaper. "We will be watching you very carefully." Prior to Geithner's visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options. "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" said Yu. "The euro is an alternative. And there are lots of raw materials we can still buy." One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years. "Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest," said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG. "This shift is logical; gold remains the world's primary financial asset that is no one's liability." And China's not the only one loading up on the yellow metal. Whether it's through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar. Individuals' bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade's average quarterly volume. Of course, bullion isn't the most practical way to get in on gold's pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares. Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion. The fund's price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold. Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy. In this case, the Market Vectors Gold Miners ETF GDX - composed chiefly of major gold miners - offers both company and geographic diversification, while including substantial leverage to the price of gold. Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Gold Technical Analysis Video: Trading Range

This time around the guys at MarketClub have put up a video on the spot Gold price. They take a look at what the current technical analysis is telling them and point out Gold's current trading range. We keep covering Gold on the blog because there are literally a ton of hedge funds invested in gold right now. It is one of the highest confluences of 'smart money' we have seen in one play in some time. As such, we wanted to post up the technical analysis video on gold, so check it out.

Crude Oil - Interview With CME Group's Joseph Ria

The guys over at MarketClub have sat down and interviewed Joseph Ria of the CME Group regarding crude oil and energy. They aimed at putting out some educational and trading material regarding crude oil since it is such a hot topic & commodity these days. Here's a transcript of part of the first interview,

"Crude Oil & Energy Update - Interview with the CME Group's Joseph Ria

When you hear the news reporters talk about the price of
crude oil in the marketplace, they're generally talking about
WTI, which is West Texas Intermediate crude oil. It's a very
light, sweet crude oil and the highest grade that's out there.
Crude oil is based on and priced on the amount of sulfur that's
in the oil. It makes it easier or harder to refine base on the
amount of sulfur. WTI being the lightest and sweetest, is the
highest priced crude oil in the marketplace.

It is a benchmark delivered in Cushing, Oklahoma.

In benchmarks for crude oil and global pricing of crude oil, WTI
probably prices about 50% of the global pricing of crude oil.
Brent being basically the other pricing benchmark. There's two
out there, Brent being a little of a mixture of three different
grades of crude oil; BF&O, Brent 40 and Ossenberg. They're
all produced in the North Sea.

---

That's the first part of the work transcribed and you can view the rest of the stream here. Keep in mind you'll have to do a free sign-up with them to see the material. We like to focus on educational content every once in a while seeing how we have a diverse reader base on the site. And, after all, everyone is a beginner at some point and you can never cease learning. You can check out their video series here.

We also wanted to point out that we have numerous other resources on the topic of crude oil. Some of the most popular articles on Market Folly in the past have been 2 crude oil related pieces by author Tradefast. Firstly, he examined How Contango Affects Crude Oil ETFs. Then, in a follow-up piece, he also examined How to Play Crude Oil via ETFs & ETNs in an article that examines the various crude oil investment vehicles. We highly recommend these pieces as they have received much praise due to their in-depth analytical nature.

Also, for those of you more concerned about where crude oil is heading in the near-term, check out the recent crude oil technical analysis video.

Gold Technical Analysis Follow-Up Video

Last week we posted up a great video examining some technical analysis on Gold. The guys at MarketClub were checking out the charts again and they've now just posted a follow-up video on how Gold's chart is shaping up currently. Definitely check that out as they've provided some insightful analysis in the past.

Also, if you missed it, we posted their other recent technical analysis video on crude oil. Enjoy.

Morningstar Newsletters: Free 30 Day Trials

Wanted to give our readers a heads up that Morningstar is now offering a brand new collection of various newsletters all with free 30 day trials on different topics including:

Different investment styles:

• Fund Investor
• Stock Investor
• Dividend Investor
• Options Investor
  
• Opportunistic Investor
• ETF Investor
• Practical Finance

And analysis on the various retirement fund choices, dependent on where your 401k assets are kept:

• Vanguard Fund Family
• Fidelity Fund Family
• American Fund Family
  

All the separate links above take you to the specific newsletter where you can get the 30 day free trial on each of them. These are great resources, especially for those of you with assets/401k's at the specific funds, as they can help you analyze your choices. Head on over there to check out each of the free offerings while you can since we don't know how long this promotion lasts. While you're there, make sure to utilize their great portfolio x-ray tool too.

S&P500 Chart: Wild Market Swings 2007-2009

Great chart from The Chart Store that illustrates just how volatile and seesaw-ish this market has been over the past 2 years. There have been rapid, massive declines and equally massive rallies. The current rally from the lows in March 2009 extends over 39%. Maybe we should highlight contrarian signals more often, as we did back in early March. Those signals we highlighted turned out to be a great barometer for a short-term turn in the markets.

Buy when there is blood in the streets and pessimism abounds. Sell/short when everyone is plunking money down in the market thinking they're invincible.

The ultimate question now is, what's up with the current action? Typical bear market rally? Foundation for something constructive? Time will tell.

(click to enlarge)

Bloomberg Terminal: Command Shortcuts / Cheat Sheet

For those of you who have access to Bloomberg terminals or are trying to learn the ropes, we thought it would be good to post up this resource, courtesy of the Columbia Investment Management Association (CIMA) of the Columbia Business School.

They've gone through and put together a quick .pdf of some key shortcuts and keystrokes to use in a Bloomberg Terminal. This is definitely a great resource for people trying to learn the system or for people who get stuck and can't remember how to access something. Post this cheat sheet up right next to the terminal and you're good to go. (RSS & Email readers will need to come to the blog to view the .pdf).


Bloomberg Cheat Sheet -

Paolo Pellegrini Proposes Mortgage Solution

Over on Dealbook, there is a fascinating piece up by Paolo Pellegrini. "Who's that?" And, "why should I care?" you ask. Well, Pellegrini was previously a co-portfolio manager at John Paulson's hedge fund Paulson & Co. Pellegrini has since started his own fund, PSQR Management. Needless to say, he is very familiar with the housing and mortgage crisis, as he has been playing it from the investment side with precision. We thought that today would be the perfect day to post up Pellegrini's thoughts, as we've just covered Paulson & Co in our quarterly hedge fund portfolio tracking series.

Pelligrini proposes a market solution complete with bidding and aid from government financing, wherein homeowners and institutions alike can benefit. He writes,

"With more than a fifth of United States homes worth less than their mortgages, restructuring residential debt is the most important step to restore our country to prosperity and economic growth ... The government can assist struggling homeowners, remove bad loans from bank balance sheets and free up credit while utilizing a transparent, competitive process to minimize the taxpayer subside required."

His proposal is lucid and almost a no-brainer. However, such a simple system would ultimately require some complexities in its infancy. While the government searches for solutions, many close to the heart of the matter are voicing their opinion. Hopefully the government is listening. After all, if they should be listening to anyone regarding this matter, it's Pellegrini and Paulson. Those two have played the market pretty much perfectly thus far. And, suggesting an alternative mortgage solution in market form plays directly into their fortes.

Make sure you check out his entire proposal over at Dealbook.

Jeremy Grantham's First Quarter 2009 Letter

Below you'll find some absolutely required reading. Jeremy Grantham of GMO has published his thoughts for the first quarter of 2009. In the past, we've also posted up Grantham's March thoughts if you're interested. RSS & Email readers need to come to the blog to view the slide-deck.

Publish at Scribd or explore others: Finance Business & Law jeremy grantham gmo

Bank Stress Test Results

Drumroll.....

The eagerly awaited, somewhat informative, yet probably not completely accurate, overhyped and underdelivered, "it is what it is": Financials/Bank Stress Test Results.

(RSS & Email readers may need to come to the blog to view the presentation).


Bank Stress Test Results Overview - Free Legal Forms

Top 10 Highest Paid CEO's of 2008: A Closer Look

This post will surely outrage a few people. The Associated Press has gone through the various proxy statements filed from the first of the year until the end of April and has analyzed the highest paid CEO's in the S&P500. So, firstly, we'll present their list of raw data. Secondly, we'll also make a few calculations of our own below where we determine just how much each CEO was compensated for each percentage point their shares dropped over the course of 2008.

Without further ado:

Top 10 Highest Paid CEO's of 2008

1. Aubrey McClendon (Chesapeake Energy - CHK): $112.5 million

2. Sanjay Jha (Motorola - MOT): $104.4 million

3. Robert Iger (Walt Disney - DIS): $51.1 million

4. Lloyd Blankfein (Goldman Sachs - GS): $42.9 million

5. Kenneth Chenault (American Express - AXP): $42.9 million

6. Vikram Pandit (Citigroup - C): $38.2 million

7. Steven Farris (Apache Corp - APA): $37.2 million

8. Louis Camilleri (Philip Morris International - PM): $36.9 million

9. Kevin Johnson (Juniper Networks - JNPR): $36.1 million

10. Jamie Dimon (JPMorgan Chase - JPM): $35.7 million


Let the riots begin. First, let's start by examining the requisite financial company CEO's. It is obviously astonishing that Vikram Pandit of Citigroup, Lloyd Blankfein of Goldman Sachs, Ken Chenault of American Express, and Jamie Dimon of JPMorgan are even on this list at all whatsoever. Sure, their pay packages were most likely negotiated long before the financial crisis. But, even so, it is borderline ridiculous that they earned so much for causing shareholders so much pain. Vikram Pandit's Citigroup common stock lost almost 75% in 2008 and for that awesome accomplishment he was compensated over $38 million dollars. Sure, he has "righted a wrong" (and that is a stretch calling it that) by taking a $1 salary and no bonuses until Citi is profitable again. Yet, his appearance on this list will surely outrage many. Surprisingly (or unsurprisingly?) no one mentioned above graces Time's list of 25 people to blame for the financial crisis.

To take things a step further, we wanted to illustrate just how truly ridiculous things are by doing a quick calculation. Below, we came up with a rough estimate of how much each CEO was compensated for each percentage point their stock decreased over 2008. If you were angry before, you'll surely be outraged now:

CEO Compensation Per Percentage Point Decline in Their Company's Stock

1. Chesapeake Energy - CHK: Aubrey McClendon made around $2,008,928 for every 1% his stock dropped, giving him a total salary package of $112.5 million based on CHK shares being down around 56% for 2008.

2. Motorola - MOT: Sanjay Jha earned around $1,491,428 for every 1% his stock dropped, giving him a total salary package of $104.4 million based on MOT shares falling around 70% for 2008.

3. Walt Disney - DIS: Robert Iger earned around $1,965,384 for every 1% his stock dropped, giving him a total salary package of $51.1 million based on DIS shares declining 26% over the past year.

4. Goldman Sachs - GS: Lloyd Blankfein made around $726,379 for every 1% his stock dropped, giving him a total salary package of $42.9 million based on GS shares being down around 59% for 2008.

5. American Express - AXP: Ken Chenault made around $691,935 for every 1% his stock dropped, giving him a total salary package of $42.9 million based on AXP shares being down around 62% over the course of last year.

6. Citigroup - C: Vikram Pandit made around $509,333 for every 1% his stock dropped, giving him a total salary package of $38.2 million based on C shares being down around 75% over 2008.

7. Apache Corp - APA: Steven Farris earned around $1,377,777 for every 1% his stock dropped, giving him a total salary package of $37.2 million based on APA shares decreasing around 27% for the last year.

8. Louis Camilleri (Philip Morris International - PM: Louis Camilleri earned around $3,690,000 for every 1% his stock dropped, giving him a total salary package of $36.9 million based on PM shares sliding only around 10% in 2008.

9. Juniper Networks - JNPR: Kevin Johnson earned about $802,222 for every 1% his stock dropped, giving him a total salary package of $36.1 million based on JNPR shares sliding 45% over the last year.

10. JPMorgan Chase - JPM: Jamie Dimon made around $1,298,181 for every 1% his stock dropped, giving him a total salary package of $35.7 million based on JPM shares being down around 27.5% for 2008.


Please be aware that these are merely rough estimates made by using the compensation estimates provided by the AP and a rough gauge on how well each stock performed over the course of 1 year. We did not take into consideration any salary re-negotiations, give-backs, or other actions that might have been taken by CEO's in an effort to try and make their ludicrous pay seem "not as bad." So, while these numbers may be slightly crude, they will certainly energize angry shareholders that much more.

Let's dive into some of these numbers. Jamie Dimon's number seems artificially high mainly because his stock only fell 27.5% for 2008 compared to the catastrophic drops seen at Citigroup and other financial institutions. So, while he definitely earned a lot of money, his shares did outperform their financial peers. Louis Camilleri of PM also earned a hefty sum for each 1% decline in shares of his company. But, you also have to consider that PM shares only slipped around 10% in 2008. Sure, a loss is always a bad thing. But, all things considered, their shares were barely down at all compared to the S&P's monumental losses.

Lastly, we want to focus on Aubrey McClendon of Chesapeake Energy; he has a very interesting story, to say the least. He is number one on the compensation list and his guidance led to a 56% decrease in CHK shares over the course of 2008. And, better yet, he was even margin-called on his own company's shares, as he had been buying tons of CHK on the way up with leverage. As shares of CHK began to tank, the margin clerks forced McClendon to liquidate his shares in a capitulative sort of event. What is even more asinine about his particular situation is that the board of Chesapeake has essentially "rewarded" Aubrey in terms of compensation (no doubt as a means of helping him recover from his margin-call debacle).

That's borderline ridiculous. The man lost shareholders a ton of money and he himself felt the same pain the shareholders did. Yet, his company said "thank you" and essentially bailed him out of his mess, loosely speaking. Shareholders are undoubtedly wondering why they weren't bailed out by the board too. Don't get me wrong, McClendon is definitely top notch when it comes to management teams of public companies. But, does he deserve this kind of preferential treatment? I'm sure everyone out there (that is, except Chesapeake's board) shares the same opinion we do.

This list merely turns the spotlight (yet again) to executive pay. This has long been an issue on Wall Street and with companies in general. But, instead of making progress on the matter, we continue to drift along with no real change. We here at market folly are certainly left wondering what is taking so long. After all, this list is yet another piece of evidence that drastic change is needed in the realm of executive compensation as it relates to performance.

Underperform? No problem, here's a sh*tload of money for your time. Outperform? Great! Here's some money for your time, and here's even more money for doing what you were supposed to do in the first place. Great doing business with you, see you next year!


CEO pay source: AP via NYT

Meredith Whitney's Latest Comments

Here's the latest from noted banking analyst Meredith Whitney, who appeared on CNBC late yesterday if you missed it:



Also, due to its tie-in with Whitney's thoughts, make sure you also check out our piece on consumer credit.

AIG Counterparties

With all the hulabaloo surrounding AIG lately, we thought it would be fitting to post up the NYT's great graphic of the biggest AIG counterparties:

(click to enlarge)