bizzXceleration: Performance, Value and Profit

Interestingly Warren Buffett's last stockholders letter waxes on about long-term returns a bit and one of the MSN Money columnists has an interesting take on it (8 investing keys from Buffett's latest letter) that might be worth your time. Take a close look at the chart where, we admit, a bunch of "tricks" were performed.First off the SP index was normalized to 1995 = 100 so we could look at relative long-term performance and compare it to other stocks using the same trick. Next we inflation-adjusted it and in the graph it's on a log scale as well. The dark blue line is unadjusted and the light adjusted. We'd ask you to notice a couple or three things.

First, the headlines were running around that the 10year return on the markets was ~ 0% a couple of weeks ago. Notice that when you look at the adj. number actually is actually down - approx. -27% !!! Next take a look at l.t. performance from 1950-1995 where essentially the market's real performance cycled around a flat trend. If want to see it on a normal scale try clicking here.

Then notice that it jumped up tremendously over that trend in '95. And that even with the recent downturn we haven't broken the adj. l.t. trend yet (the light-blue dotted line) which would seem to make some sense. In other words is it really a correction if we haven't even gotten below the l.t. and bubbled up l.t. trend ? We obviously wonder.

Now here's the $64 question...no strike that....here's the $6.4T question: what happened in '95 to change the fundamental structure of the world that the market, and the underlying economy, is on a permanent new positive trend ? What happens to the markets if all this economic doom and gloom, short- and long-term, we've been arm-waving about around here turns out to have some truth to it ? Interesting questions, eh ? Whatduya think ? :)

And oh yeah, sleep well tonight and for the next ten years of course.

Markets & Investing

 Recession? Think Stocks for Recovery While Friday's weak employment report seems to confirm the economy is in the early stages of recession, investors looking at the longer term are thinking already about which stocks will work best in an eventual recovery. Many say the future might be brightest for one of the worst-performing sectors this year (technology) and one of the best (energy). And despite election-year uncertainty, they are finding things to like among health-care stocks. There is a common theme here: In a slow economy, investors are willing to pay for earnings growth, and they see it in these sectors. There still is a market for good technology, energy companies can benefit from the search for new supply and aging baby boomers will need health care, they say. The next month could be challenging for stocks as companies report first-quarter earnings and issue their expectations for the rest of the year. Many on Wall Street believe earnings expectations for the second half of 2008, with forecasts of double-digit percentage growth, are too high. While some were looking for shares of financial companies to lead the stock market out of its downturn, the earnings growth that powered big returns on financials in recent years now appears to have been driven by borrowing and moving certain assets off their balance sheets. It isn't likely to return soon.

35 signs the market hasn't hit bottom They say time heals all wounds. For investors around the world, they hope that time has arrived. On the back of massive government intervention and JP Morgan's federally orchestrated takeover of Bear Stearns -- not to mention the 1,000-point rally off the lows -- the question everyone wants to know is whether the worst is behind us. Is the incessant supply that dominated the last six months simply taking a breather or will we look back at March, much as we did in 2003, wishing we had the wisdom to identify the classic signs of a meaningful bottom? It's within the probability spectrum that we've turned the corner and the market will climb the wall of worry. To truly appreciate that potential reward, however, we must understand the magnitude of the attendant risk.  In our never-ending effort to provoke thought and provide smiles, we offer 35 reasons why the March lows were an excellent trading opportunity but not the ultimate bottom.

Credit crunch winding down? Morgan Stanley Chief Executive John Mack said Tuesday that Wall Street is facing the most difficult conditions that he has seen in 40 years, but he feels the global credit crisis might be "in the final innings." "We're keeping powder dry," he said. "We feel the risks on the market, the run on Bear Stearns, and we think it is important to have very liquid positions and we're working toward that." He expects more bad news will come out as the world's banks recover from the subprime mortgage crisis, particularly from "overseas and some small retail banks in this country." However, Mack said he thinks the market is turning and that could provide opportunity.

Citigroup Holds Talks to Sell $12 Billion of Leveraged Loans, Person Says Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said. A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets. The company's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A ``well-capitalized'' bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank.

Citi may write down another $17 billion for Q1, research firm says Banks’ first-quarter earnings will deliver more bad news, reflecting higher loan loss provisions and lower revenue from fees. “Back in January 2008, there still seemed to be hope that the economy would avoid a recession and that the second half of 2008 would bring a turnaround for banks,” said independent research agency CreditSights in a report published Tuesday. “However, since that time, the first quarter brought another leg down in housing prices and equity market averages.” CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally. The bulk of write-downs would still be in collateralized debt obligations made of asset-backed securities. CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion. Nevertheless, credit quality remains a concern. For instance, J.P. Morgan indicated at its February investor day that the outlook for residential real estate is still weak. Executives at the bank stated they would build reserves in the first quarter to reflect substantially higher losses in home equity. Fifth Third also cited weakness in its home equity portfolio. Other areas within consumer lending will also show more signs of softness. Both Capital One and Wachovia, for instance, have indicated that losses on auto loans are rising. Commercial real estate looks set to worsen too, said CreditSights. KeyCorp and Wachovia have recently reported problems selling down their commercial real estate securitization holdings.

Another Flavor of Bonds Threatens to Turn Sour: Mark Gilbert Just when you thought it was safe to head back into the financial water, another market threatens to go sour, potentially leaving investors holding the bag for more than $9 billion of tarnished European bank debt. Once again, the landmine is in a sleepy corner of the global debt markets. Once again, things that never happen are happening. And, once again, those lovely mathematical models used to measure risk may turn out to be as useful as chocolate teapots. European banks raised a bunch of money in the past decade by selling callable notes, known as LT2s. The clue to their ability to turn toxic is the word ``callable,'' meaning borrowers have the option to repay the bonds early, on preset dates. Because investors expect to get their money back on the earliest call date, they treat the securities as less risky than if they had to wait until the later maturity date. Moreover, there's an alternative flavor of these bonds called perpetuals that don't even have maturity dates -- if the borrowers choose not to exercise the call options, investors never get repaid, instead receiving interest in perpetuity. The market is at risk because one borrower has broken ranks. Credito Valtellinese Scrl ignored the April 30 call date on its 150 million euros ($236 million) of notes. As a result, the bank will pay a penalty interest rate of 160 basis points more than money-market rates -- higher than the 100-basis-point premium it paid for the past five years, though still lower than it would probably pay to refinance. The financial community is in denial about the implications of this never-happened-before event, much like it has tried to ignore the parade of unprecedented black swans landing on the lake of finance for the past year. One borrower missing its call option is a one-time event; two begins to look like a trend, in which case the herd mentality of financial markets might kick in. If enlightened self-interest among banks is all that stands between investors and another debt tsunami, the track record of recent months suggests bondholders should prepare to batten down the hatches for another battering in this credit-market storm.

Money markets signal fears over banks Money markets in the US and Europe are signalling renewed fears about the financial strength of banks, with key confidence barometers almost returning to the levels that preceded the collapse of Bear Stearns. The concerns are being highlighted by the difference between overnight lending rates set by central banks and three-month Libor, the rate at which banks lend to each other. This spread, known as the overnight index swap rate, has been rising in the US and remains elevated in Europe, indicating that banks are reluctant to lend to each other. The difference between the overnight central bank rates and three-month Libor was typically about 12 basis points before global credit turmoil grew worse last summer. In the US on Wednesday, that spread rose 2bp to 77.5bp. The difference had climbed above 80bp on concerns about Bear, then fell back to 60bp in mid-March after the investment bank was sold to JPMorgan Chase. In the UK, the swap rate gained 2.45bp to 95.45bp on Wednesday. In Europe, the swap rate was up 1.29bp at 74.68bp. It had been 67bp after the Bear sale. Investors also sought the safety of government debt on Wednesday, pushing the yield on the two-year Treasury down 12bp to 1.75 per cent. Tensions are rising in the money markets in spite of the injection of huge amounts of liquidity into the banking system by central banks. Traders say market conditions suggest the Bear rescue has not completely alleviated worries about counterparty risks. Until confidence is restored, the availability of credit to investors and companies will be restricted, potentially hurting the broader economy.TED spread,