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Investing Ideas U.S. Subprime Woes -- End of the Line for The Global Equity Rally?
Investing Ideas U.S. Subprime Woes -- End of the Line for The Global Equity Rally? 
Market Watch
| So far, 2008 has been the worst start for global markets in recent financial history. As I scanned the stock markets' page of The Economist last week, a single stock market in the world ended the week in the black: Taiwan, itself off more than 25% from its November peak. Last week was particularly brutal. | |
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| U.S. Subprime Woes -- End of the Line for The Global Equity Rally? |
| Wednesday, 01 August 2007 | ||||||||
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Add weak U.S. housing data and poor results for U.S. home builders, D.R. Horton and Beazer Homes, and the backdrop for a global sell off was set. Equally important was the knock on effects of the market's mood swing. Nearly a quarter of a trillion dollars of subprime loans were in the pipeline during the last six to nine months. But it looks like more and more buyout financings are being postponed or canceled this month in the face of weak demand. The market's newfound aversion to risk sent the average interest rate on an index of 16 junk bonds soaring Thursday to 8.71% -- a four-year high. Yet even as the crisis is hitting headlines, there are signs that the subprime setbacks already are filtering through the system. The Wall Street Journal reported that HSBC, one of the first big financial firms to spot problems in the U.S. subprime market, incurred $760 million in loan-impairment costs for its U.S. mortgage-services business during the first half of this year -- less than the $1.8 billion the bank recorded for the second half of 2006.
It turns out that HSBC is making progress on refinancing troubled loans to help borrowers work through cash-flow problems. In Florida, HSBC set up a call center to phone customers who could face cash crunches and may not be able to make interest payments. Since late 2006, the bank has contacted 19,000 customers and modified the loan terms for 5,000 borrowers. The bottom line? Banks are fully aware of the subprime problem and are actively addressing it. And the size of the problem is disproportionate to the headlines that it is garnering. Fed Chairman Ben Bernanke suggested that the losses from subprime may hit $50 billion to $100 billion. That's a drop in the bucket for a $14+ trillion economy. And even the high-end of Bernanke's estimate barely equals the write-down of assets from the AOL Time Warner merger in 2002. With global growth as robust as it has been in many years, global stock markets should recover strongly. After a choppy summer, I expect a strong fourth quarter rally. THE GURU'S INTERESTING FACT OF THE WEEK: RUSSIA VS. TEXASAnxious to bring Russia back the prestige it lost after the disintegration of the Soviet Union, Vladimir Putin has taken to strutting his mafia-style government to the world stage with unprecedented bluster and chutzpah. Yet if not for its grip on natural resources (and its nuclear arsenal), Russia would carry much less weight on the global stage. Why? Despite seven consecutive years of 6%+ annual economic growth, Russia's economy today still is only about 85% the size of the former Soviet Union 20 years ago. Put another way, Russia's Gross Domestic Product (GDP), in real terms, is barely equivalent to the Gross State Product (GSP) of George Bush's Texas. But that's a strong recovery from 2002, when Russia, the rump state of the Soviet Union, shrunk to the size of Florida -- a single U.S. state with 1/10th of its population. THE INVESTMENT SECRET SHARED BY PETER LYNCH AND SILICON VALLEY VENTURE CAPITALISTSOnce you understand this secret, you'll understand how both Peter Lynch -- the legendary manager of the Fidelity Magellan Fund -- and top Silicon Valley venture capitalists investing in start-up companies think about their portfolios. You'll also see how you can apply this thinking to improve your own trading and investing. Peter Lynch learned at Magellan that if you pick stocks in five different companies: * Three will perform as expected * One will run into unexpected problems and disappoint * One will do better than you could have ever imagined And even Peter Lynch -- one of the top professional stock investors in history -- couldn't tell you ahead of time which company among the five would prove to be the big winner. Venture capitalists share the same insight. Picture yourself as a successful investor in Silicon Valley start-ups back in 1997. You make a small investment in a little search company named Google. The search engine space is dominated by giants like Yahoo, Excite, and Alta Vista. And Sergey Brin and Larry Page seem pretty much like all of the other smart guys from Stanford whose business plans come across your desk. But Google does seem to have a search algorithm that sets them apart from the others out there. You decide it's worth a small bet. After all, one of the dominant search engines might just buy Google out to give you a big return. That same year, you also invested in Pets.com. You're actually more excited by the Pets.com idea than Google. After all, everyone has a pet. There is next to no competition. And that sock puppet mascot is very cute. But the truth is, at the time you made the investment, you didn't know Google would turn out to be "Google", and Pets.com, well, would become the iconic Internet blow up. Venture capitalists -- more so than portfolio managers -- know that both winning and losing is part of the game. They also know that a few big winners will account for the bulk of their profits. Back in business school, venture capitalists learn that for every 10 investments, two of them will go badly wrong ("Pets.com"), five or six will be the "living dead," and one or two will be big winners. And the one or two winners (the "Googles") will account for virtually all of their profits. Peter Lynch was one of the few portfolio managers to understand this situation intuitively and apply it to his management of Fidelity Magellan. Take away Peter Lynch's big profits from his bet on Lee Iaccoca and Chrysler, and Magellan quickly becomes an average mutual fund. That's why Lynch was constantly on the hunt for his "ten baggers." Once you understand this secret, you start managing your own portfolio for maximum profits: First, you cut out of bad investments more quickly. Second, you know that you must hold on to your winners. Third, you understand why it is crucial to add to your winning positions. After all, if they only hit big time once or twice out of 10 times, you should ride the winners for all they're worth. Cut out all of the ideas that (inevitably) don't pan out, keep the winners -- adding to them systematically -- and you've mastered one of the great secrets of successful investing.  Sincerely, Nicholas A. Vardy Editor, The Global Guru P.S. My elite trading service, Global Bull Market Alert , has allowed its subscribers to rack up big gains even in the midst of last week's sell off in global markets. My subscribers have booked not one, not two, but three 50%+ gains... just today! To find out the names of our current big winners, sign up for your 60-day trial subscription to Global Bull Market Alert today. Source : The Article is an Excerpt from the Global Guru News Letter
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