His “On Borrowed Time” article described the wrenching adjustments being made in the subprime mortgage industry as even the good players find themselves forced to the edge of solvency, and possibly over it, as the capital markets reject an entire industry. He borrows his description from an un-named hedge fund who describes the financial alchemy used to magically convert junk bond low-quality investments into something AAA rated, and available for sale to, according to that writer, Asian, German, French and U.K. banks who are running massive trade surpluses with the US. This is no way to treat your lenders, on whose kindness your national solvency depends.
The letter writer concluded “This will go down as one of the biggest financial illusions the world has EVER seen.” Forsyth adds, and “to think it’s all played out is even more laughable. Borrowers in Grand Junction, Colorado are having difficulty getting their loans approved because of the madness perpetrated by these Wall Street Masters of the Universe in their never ending quest for a bigger year-end bonus.
Barron’s also wrote about “A Gusher of Opportunities” in the energy service sector, highlighting Nabors Industries (NBR) in particular, a stock which Scout Partners custom wealth (individual stock) clients currently own. Though the offshore drillers like Diamond Offshore (another Scout Partners’ long position) have performed reasonably well, the dry land rig renters like Nabors have seen more pricing pressure and concerns mount about the sustainability of their earnings stream, estimated at $3.45 in 2007 and $4.01 in 2008. The stock trades at only 8 times earnings, for an inflation protected return of over 12% on investment.
The nay-sayers on Nabors worry that the industry boom will go bust, but global industrial production is on the rise, which typically requires a corresponding boom in oil production. Instead, oil production has flat-lined, despite increasingly frenetic attempts to find the liquid gold (i.e. higher and higher drilling rig counts). Until we start turning up more of the oil we need, as long as the global economic boom lasts, we would expect the energy service industry to continue to have pricing power and robust top line growth. We’re glad to see Barron’s profile this company.
Finally, Barron’s weekly Mutual Fund Cash Track continues to show strong inflows into equity mutual funds. More typically, this is the time of year when fund flows turn negative. Year-end bonuses have all been paid, tax refunds are all back in the market, and Summer vacationers are selling investments in order to pay off travel and lodging expenses on their credit cards. August and September are typically months where there are net outflows from mutual funds, but the AMG data in Barron’s is reporting strong inflows instead. This was a bit of a surprise because last Thursday the TrimTabs mutual fund cash flow tracking reported a swing to the negative on equity fund flows. In fact, the market acted like it was funding $19 billlion in outflows, as TrimTabs reported, rather than receiving $4.9 billion in inflows, as AMG reported.
This discrepancy bears watching, and my guess is that the TrimTabs reports are right. I don’t see retail investors buying back into this market. This recent bubble was financed by brain-dead pension fund fiduciaries who were too stupid to see the garbage that passes for a hedge fund manager these days. When all is said and done, it will be pension funds that pay the price for most of the subprime and leveraged buyout stupidity that has sent the market reeling in recent weeks. Look for corporate profits and defined benefit plan retirees to pay the price for these less-than-wise investment decisions.
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