The current economic recession is expected to have a major impact on the way that Americans live for at least a generation. A fundamental shift appears to be underway with individuals seeking to reduce leverage and consume less. 70% of our economy is based upon consumption. For as long as I can remember we have always spent freely and saved very little. Debt was used to finance all major and most minor purchases. Young and old alike both levered up to enjoy the good life. This philosophy worked until the bubble burst in the fall of 2008. The psychological impact of the recession cannot be underestimated. This recession has changed many consumers spending habits forever. Most Americans believe that this economic downturn will have an effect on their quality of life for the foreseeable future.
The people most effected by the financial crisis are senior citizens. Senior citizens rely upon a fixed income to manage their finances and pay their bills. Senior citizens are hurt the most by rising costs because there income doesn’t tend to rise with inflation as wages do. Rising medical costs and shrinking retirement plans are creating problems for seniors. The stock market crash of 2008 has forced many senior citizens to reduce their standard of living. Some have resorted to homesharing by taking in roommates to split costs. Many seniors have been forced to come out of retirement and go back to work.
This problem is not just specific to the US alone. “In England a staggering one in five seniors - 2 million people - are now living below the poverty line. An alarming 22per cent of seniors are skipping meals, and as many as 25 per cent are cutting back on food. In addition, a further 42 per cent are struggling to afford essential items, 41 per cent are reducing the amount of electricity used and 38 per cent are minimising gas consumption. As the rest of the nation struggles with debt during the economic downturn, senior citizens are struggling to maintain basic living conditions.” Senior citizens are forced to work longer for survival. In Japan senior citizens are being enticed to return to the workforce as well.
Some financial experts are saying that the new retirement age will be 70 in the future. Due to this economic setback many people will struggle to have a qualitative retirement that retire at 65. Trillions of dollars of wealth was lost due to the financial meltdowns. IRA’s and 401(k)’s saw their value drop in half. Now there is even talk of raising the age to 70 in order to qualify to get social security. Seniors may have to consider a partial retirement in the future where they work a part time job to supplement their income.
Finance senior citizens
Over the past 3 weeks the general direction of the market has been downward. There has been 1 or 2 huge down days each week that has offset any advances that the market is making. I don’t think the market will crash as it did last fall but it does appear to be drifting lower. I am finally starting to see buying opportunities again. I picked up some shares of Supervalu (SVU) between $12.70 and $13. The grocery chain owns Save-A-Lot, Shoppers, Shop n Save, Acme, Bristol Farm, Farm Fresh, Hornbacher’s, Jewel, Osco, Sav-On, Shaw’s, Bigg’s, Star Markets, Cub,and Lucky. Supervalu owns over 2400 stores nationwide including Albertson’s.
The stock is way down because of a recent profit warning due to heavy promotional advertising and lowered prices to stay competitive with competitors. The negative about the company is the huge 9 billion dollar debt burden that Supervalu took on when the company purchased Albertson’s. Supervalu has been working hard to reduce its debt level and become a more efficient grocery store operator. This is important in the retail grocery business where profit margins are especially thin. At a time when companies are diluting shares, Supervalu is rewarding owners by buying back shares. This is a sign that even management believes the shares are undervalued. Supervalu generates significant free cash flow and expects to pay down over 1 billion dollars in debt over the next few years. The company recently raised it’s dividend and is currently yielding a hefty 5.30%.
I like the grocery store business because it is pretty reliable even during periods of economic contraction. People may trade higher end groceries for lower end ones but they still have to buy groceries.
Finance grocery business, Supervalu
Sold FAZ at $5.03 for a 6% profit in 2 days.
Sold SDS at $57 for a small gain.
Finance
I was reading 2 different analyst opinions of Bank of America on CNBC.com. One analyst stated that Bank of America had seen a tremendous run up and would languish between $5 and $10 for the next few years. Another analyst stated that he thinks that BOA’s stock will double over the next year and triple over the next 2 years. Both of these analysts cannot be correct So who is right?
Noted analyst Dick Bove stated that Bank of America’s can earn $3 per share in a normalized earnings environment. I believe that Bove is correct with his assessment of the earnings power of Bank of America. Bank of America now owns the largest mortgage provider in Countrywide and one of the premier brokerage firms in Merrill Lynch. These brands should generate significant revenue when the economy rebounds. But I do think that Bove’s timing may be off. The key question is when will Bank of America operate in a normalized earnings environment?
I think it will take much longer then a year or two for Bank of America to see normalized earnings. The economy has not yet bottomed and Bank of America is still facing issues with rising credit card loan delinquencies and mortgage foreclosures. The banking giant may face an additional $50 billion in losses over the next few years. B of A also still has to repay $45 billion in TARP commitments. As much of B of A says that it wants to pay back the TARP money as soon as possible; I think it says a lot that the bank did not repay the money when other financial institutions did. Bank of America’s 33 billion dollar equity offering will dilute earnings for the foreseeable future.
While I don’t believe that Bank of America will languish in the single digits for years; I do think that the stock will take longer then 2 years to realize the price appreciation that some analysts are expecting. It appears that while analysts were way too pessimistic when it appeared that the great depression 2 was occurring; analysts are way too optimistic now that the economy has not fallen off a cliff.
Finance Bank of America
According to a report by CNN Money, lending is still down at the nation’s largest banks. There has already been a significant decrease in residential borrowing as banks have tightened credit standards and loan demand has decreased. Residential borrowers are overextended and have found it near impossible to get financing without a very good credit score and significant capital reserves. Loan demand has dropped and the personal savings rate has skyrocketed to 6.9%. Now that the residential side appears to be stabilizing, commercial real estate is showing weakness. Commercial and industrial lending has seen a precipitous decline as businesses are looking to get leaner and borrow less money.
Lending activity has been curtailed due to lender concerns over economic stability, involuntary unemployment and credit borrowers defaulting on credit agreements. Many consumers who have defaulted on loans during the economic downturn will find it more difficult to borrow in the future due to having an adverse credit rating. Adverse credit means that a consumer is unlikely to be able to gain access to traditional lines of credit for the purpose of debt consolidation, particularly if a tenant or homeowner has little equity.
Banks are lending less and they have a good reason for it. Many economists estimate that banks are only halfway through the losses that they will suffer over the next few years. While most subprime loans and residential loans have already been accounted for, many commercial loans are just starting to show weakness. Many commercial borrowers are looking to refinance loans that have interest rates that are resetting. These borrowers are unable to obtain financing because the value of their commercial properties has dropped below the principal owed on the property. Even M & A activity has seen a severe decline as banks are looking to lend less.
So what is the next shoe to drop? Credit cards.We are just beginning to see weakness in the credit card market. Credit card lenders American Express and Capital One are seeing increased delinquencies. The monthly charge off rate rose to a record high of 10.6% as consumers continue to grapple with the debt problem. Moody’s expects charge offs to peak at 12% meaning more losses for financial stalwarts such as JP Morgan, Bank of America and Citigroup. Many borrowers, who pay their bills on time, have seen their credit terms changed to cover the growing deficit from increasing charge offs. Individuals with good credit have seen their credit limits slashed and interest rates rise.
While the speed of the economic slowdown is declining; the economy cannot heal until unemployment, foreclosures and defaults stop cascading downward.
Finance bad loans, charge offs, debt, loans
I added shares of FAZ again at $4.70. This ETF has worked pretty well for me as a trade. I buy when it drops to the mid 4’s and sell it over 5 dollars. I am still not seeing too many buying opportunites for stocks yet.
Finance FAZ
This market has been pretty erratic over the past week. I have heard various commentators speculate as to why the market is up or down on a given day. At best these are simply guesses. It appears that the market is searching for direction. Stocks are nowhere near their highs of a year ago and are well off their lows from March of this year. While there are some examples of stocks that are trading too high and some are too low; Could it be that most stocks are not overvalued or undervalued but are at their appropriate valuations? This is truly a stock pickers market because there just aren’t that too many screaming buys out there. It is difficult to find many stocks that appear to be undervalued on their current earnings basis.
Finance Dow Jones, NYSE
Another drug stock that I really like is Endo Pharmaceuticals (ENDP). Endo Pharmaceuticals is a midcap biotechnology company that is know for developing and selling pain management drugs and therapies. This company may be a good investment as a play on an aging baby boomer population. The generic pharmaceutical market is a highly profitable market as drug patents expire from bigger name players. Endo also has a strong drug development division along with established money makers Percocet, Percodan and Endocent.
Endo currently trades at just over $17 per share. Based on the average earnings estimates of $2.64 for the current fiscal year the stock has a PE of 6.4. EPS has grown at an impressive rate of 18.63% over the last five years. EPS should grow at about 10% for the next 5 years. Endo has a ROE of 20.78% and a ROA of 14.20% over te past 5 years. Endo recently used its strong cash position to acquire Indevus Pharmaceuticals. Since the acquisition Endo has less cash and more debt but the company still has a solid balance sheet with almost 400 million in cash alone. This is a sizable amount for a company with a 2 billion dollar market cap.
I have recently started buying shares of Endo in the $16’s. The company’s long term prospects appear bright with many of their drugs in Phase III trials and existing cash cow drugs not expiring till 2019. Many analysts also deem the company to be a good takeover candidate. If earnings growth remains strong this stock could easily see the mid 20’s over the course of the next year.
Finance biotechnology, ENDP
I have sold all of my short term positions in Charles Schwab (SCH), Manitowoc (MTW), United States Oil ETF (USO) and the ProShares UltraCrude ETF (UCO). I think that the long expected reversal is finally under way.
Finance
I sold all of FAZ today at $5.30. It had a nice gain over 12% today. I am looking at two small pharmaceutical companies. One is Cubist Pharmaceuticals (CBST) and the other is Endo Pharmaceuticals (ENDP). BP (BP) is also starting to look attractive. i am looking at adding more shares for my long term portfolio. The stock has dropped to the mid $40’s and I love the dividend.
I bought a few more shares of the UltraShort S&P500 (SDS) at $58.30.
Finance
