In what will most likely be a landmark ruling, Australia’s federal court has ruled that one of the world’s leading credit ratings agencies Standard & Poor’s (S&P) misled investors by issuing a AAA rating, its safest rating, to securities that were extremely complex and risky, and that ultimately lost most of their value.
One of the biggest problems following the crash is that investor sentiment has soured on the financial industry. Many people have the market view that the game has been rigged against the retail investor. During the bubble prior to the crash, rating agencies like S&P continually slapped AAA on risky investments. The entire system was built on generating revenue and commissions by packaging products that could be sold to people who should not have been buying them in the first place. By creating a false market view, investors who normally wouldn’t buy risky assets were tricked into believing that they were safe. This blatant misrepresentation has led to a lack of positive investor sentiment across many facets of the financial system.
Investor sentiment can be extremely fragile. Rulings such as this finally capture the anger that many have felt over the past few years. While investors have lost untold amounts of money, the rating agencies that people and institutions have relied upon have gotten off without any liability. The market view was that rating agencies could do whatever they wanted without repercussions. This appears to be changing.
Justice Jayne Jagot of Australia’s federal court stated that S&P was “misleading and deceptive” when it came to rating structured debt instruments during 2006. The debt instruments themselves were grotesquely … Read More
The latest quarterly report from Research In Motion Limited (NASDAQ/RIMM; TSX/RIM) was a positive surprise, which resulted in the shares moving up strongly following the news. Yes, Research In Motion (RIM) has had one of the sharpest declines in recent memory among technology stocks, but some investors are stepping in thinking that perhaps the worst is over and the market view has become overly bearish.
The important thing to note when investing is whether a company can beat expectations. The market view is what drives prices in any market. The more popular something is, the higher the demand and, thus, the higher the price. RIM’s stock has been beaten up with extremely poor sales results, therefore the market view was negative, and rightly so. However, this quarter the company exceeded estimates, which admittedly were low, for both revenue and the number of devices shipped. The CEO also stated that the company’s customer base also went up, from approximately 78 million users to 80 million.
RIM has failed to evolve and innovate against competing technology stocks, and this has meant that in a sector in which tastes change rapidly, it has fallen out of favor with the market view. This has not yet changed, as the company has yet to release its new operating system, due out in early 2013, so it has not yet made any significant gains in market share. Make no mistake, RIM is far from safe, but the key metric I was looking for was its cash levels.
Cost cutting was extremely important, as revenue, we knew, was going to be down. If costs could not be … Read More
The recent developments in Asia are a good lesson in showing investors that the task of making investment decisions is not an easy one. The cross-current of multiple variables can result in shifts in investor sentiment that are not obvious, at least initially. Let’s take a look at several events that have just occurred in both Japan and China.
The market view regarding Japan has been consistent for many years—the country has basically economically flat-lined. The decrease in the population is severely hampering the economy’s ability to grow. On top of that structural problem, the crisis in Europe is actually causing a flight into the Japanese Yen, causing it to be seen favorably in terms of investor sentiment as a “safe” currency (which is ridiculous when one considers their sky-high debt/gross domestic product, or GDP), and this rise in the yen has hurt the country’s export sector. All of these factors and many more, including their need for energy use, has put pressure on the Bank of Japan to help the economy.
Last week, the Bank of Japan expanded its monetary stimulus program to 10 trillion yen ($124 billion), bringing the total to 80 trillion yen. The initial market view in terms of investor sentiment was a decrease in the value of the yen, which makes sense. However, shortly following this initial move, the yen began to strengthen, contrary to what the common market view would be in this case.
In my opinion, this is resulting from rising tensions between Japan and China. For many of us in North America, we’re unaware of how long and deep the complicated relationship … Read More
Research In Motion Limited (NASDAQ/RIMM; TSX/RIM) has been one of the worst-performing technology stocks in recent memory. As the mobile environment has continued to evolve, Research In Motion (RIM) has failed to keep up with other technology stocks that were developing new and innovative products. This is clear from the current market view, as represented by the huge decline in RIM’s stock price and the massive decline of its market share. While at one time RIM had over 40% market share in the smartphone segment, it’s currently in the low single digits—a huge decline in a short period of time.
Some investors are hoping that the current price level is a bottom for the share price. With other technology stocks in the sector soaring to new heights, namely Apple Inc. (NASDAQ/AAPL), everything for RIM rests on the view platform called “BB10.”
To start with, RIM once again disappointed the market earlier this year when it announced the delay in the release of its new operating system and hardware until early 2013. This is a very long delay for technology stocks in this fast-moving sector. This also resulted in a further negative market view, as shares did indeed sell off at the point.
However, there are now reports that the existing BlackBerry Enterprise Server (BES) infrastructure will not be compatible with the new BB10 software. Essentially, RIM is forcing all businesses to upgrade their hardware and software to the new BB10 platform. While technology stocks do need companies to upgrade in order to generate revenue, I’m not sure this heavy-handed approach is smart. The market view, as seen by the stock’s … Read More
The market view for gold has varied substantially this past year. This shift in the market view has also led to substantial volatility in the price of gold. Coming in at the lows of December 2011, gold was approximately $1,525 per ounce, rising in late February to just short of $1,800. That kind of volatility in a short period of time can be quite unsettling for gold investors.
Following this rapid move, the market view of gold subsided into a tighter, range-bound market. From May until the middle of August, the price of gold essentially traded sideways. This coincided with a market view in which geopolitical events complicated forecasting efforts by analysts and investors in the gold market. There was much concern that the Federal Reserve might withhold additional monetary stimulus, which kept a lid on the price of gold. With recent economic data and additional comments by the Federal Reserve, the market view has become decidedly bullish in the gold market over the past month.
Several important points are evident in the charts for gold that indicate a dramatic shift in the market view by investors. First was a break of the downtrend in late July, which was then successfully tested in early August. Essentially, the market view has shifted from bearish, in which any rally was used to sell into, to a bullish bias, in which any pullback in gold is being used as a buying opportunity.
Chart courtesy of www.StockCharts.com
This bullish market view is also evident in larger volumes on up days, as well as higher highs and lows. The next test was the 200-day moving … Read More
Just when you think it couldn’t get any worse for Research In Motion Limited (NASDAQ/RIMM), the company seems to find a way to disappoint. In addition to a poor quarterly earnings report and a gloomy forecast, the company now has been found liable for $147.2 million for patent infringements against Mformation Technologies Inc.
With the market view for Research In Motion (RIM) being so poor to begin with, one possible positive was its number of patents, which might be the saving grace for the firm. However, it appears its patent portfolio isn’t as strong as the market view had initially thought. The goal of technology stocks is differentiation through innovation. It appears that RIM’s software, “BlackBerry Enterprise Server,” has been infringing on existing patents. This puts an even gloomier market view on what its patent portfolio is really worth.
It appears that during negotiations for licensing, Mformation alleged that RIM simply turned down the licensing agreements and went ahead incorporating patented software into its own Enterprise software. Apparently the jurors agreed with Mformation, which leads me to wonder how RIM thought it could get away with such a blatant disregard for the legal system. It will also raise doubts in the general market view of how much of its technology is truly built in-house. Technology stocks that have a market view that doubts the true level of innovation will struggle, as investors frown upon such questionable investments.
The market view might not fully encapsulate the true extent of the costs, as this total of $147.2 million does not include future sales outside the U.S. or for government customers. Early estimates … Read More
Natural gas prices are notoriously volatile. From approximately $4.50 per one million British thermal units (MMBtu) last year to a low near $1.90 MMBtu in April, this represents a huge swing with massively divergent market views. Natural gas has become a great asset for the U.S. America is able to produce natural gas at a significantly lower cost than anywhere else in the world. This has led to a large increase in the supply, leading to a negative market view on price. The reason for the negative market view on the price of natural gas is a lack of storage facilities and an inability to ship the commodity overseas.
The storage facilities for natural gas earlier this year were on pace to be completely filled. If that were the case, the price for natural gas would have collapsed completely. If oil producers that also have natural gas being pumped out of wells have nowhere to store it, they would have no choice but to burn it up or flare it. However, Mother Nature has come to the rescue for natural gas prices, as the high temperatures across the nation have increased natural gas consumption for electricity use to generate air conditioning, improving the market view.
Much of the market view for natural gas is based on external factors, such as weather, and this can be extremely difficult to predict. We all know how difficult it is for the weatherman to be accurate; now you have to combine supply and demand dynamics with Mother Nature. As Texas accounts for a large portion of natural gas electricity generation, the weather in the … Read More
As the year continues, we are hearing more discussion regarding the upcoming fiscal cliff. The fiscal cliff is the automatic cuts that will be enacted unless the politicians agree to fix the situation.
While we can talk about general themes, I think it’s instructive to look at a real world example of the market view for this serious issue. The CEO of Lockheed Martin Corporation (NYSE/LMT), Robert Stevens went to Washington to inform politicians of the gravity of the situation. If nothing is done, the spending cuts will be enacted at the beginning of 2013. Stevens predicts massive layoffs, a drop in corporate earnings, and an extreme disruption throughout the entire defense sector. If that’s not a negative market view, I don’t know what is. This is obviously impacting analysts as they generate estimates for corporate earnings over the next several years. This becomes increasingly difficult as much rests on political maneuvering.
The cost, though, is very real. Stevens estimates of the total $38.0 billion in government contracts Lockheed earns, $3.8 billion would be lost due to the upcoming government cuts. This will trigger not only job cuts within the firm, but also down the supply chain as Lockheed Martin deals with approximately 43,000 suppliers that then see less revenue and significantly lower corporate earnings.
Stevens raises an interesting issue. On top of the hit to corporate earnings, the savings are not going to be as significant as some people think. Because many of these contracts with suppliers are fixed, Lockheed will bring any losses associated with breaking the contracts or renegotiating them to the Pentagon. He estimates this will … Read More