Goldman Sachs Rakes In Profit in Credit Crisis
But for Goldman’s chief executive, Lloyd C. Blankfein, this is turning out to be a very good year. He will surely earn more than the $54.3 million he made last year. If he gets a 20 percent raise – in line with the growth of Goldman’s compensation pool – he will take home at least $65 million. Some expect his pay, which is directly tied to the firm’s performance, to climb as high as $75 million.
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This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust. In turn, Goldman’s stock has significantly outperformed its peers. At the end of last week it was up about 13 percent for the year, compared with a drop of almost 14 percent for the XBD, the broker-dealer index that includes the leading Wall Street banks. Merrill Lynch, Bear Stearns and Citigroup are down almost 40 percent this year.
Interesting story with at least a couple of good points to remember. First it does make a difference what company you chose. There are many market conditions where anyone can make money, but those conditions will change. Also look at the type of pay these people get. The CEO’s take huge risks to possibly get even more obscenely paid. It is absolutely no surprise to me the companies write off hundreds of millions in losses. It happens constantly. Executives are paid ludicrous salaries. In order to try and justify them they take huge risks. When the gambles pay off they pocket even huger bonuses. When they fail they pocket huge severance packages. Who wouldn’t bet the future of the company for that kind of money. Some people wouldn’t but not many that fight there way to the top of the corporate world. Right now it is banks writing off hundreds of millions but just watch every year companies do it. It is not some isolated rare event – it is predictable, common happening.
And third the financal markets are much riskier than people think. Combine that with leverage and you get huge swings – huge profits and huge losses. I suppose some company may be able to guess just write about when to leverage and make the changes at just the right time – but I doubt it. A few great investors might be able too much of the time.
MIT launches initiatives in innovation and India
Since 2002, The Deshpande Center has funded 64 projects with over $7 M in grants. 11 projects have spun out of the center into commercial ventures, having collectively raised over $88 M in outside financing. Twelve venture capital firms have invested in these ventures. The Center supports a wide range of emerging technologies including biotechnology, biomedical devices, information technology, new materials, tiny tech, and energy innovations.
Related: India related posts from our management blog – Educating Engineering Geeks – What Kids can Learn – The Future is Engineering
The Motely Fool is one of the best web sites for learning about investing (it is one of the sites included in our investing links – on the left column of this page). A recent article on the site is worth reading – Ways to Retire Sooner:
Embrace stocks Saving more is great, but there’s only so much you’ll be able to put aside. You have to make the most of what you have. People are often too conservative in their retirement investments. Despite the sometimes-violent ups and downs of the stock market, the long-term return on stocks far exceeds that of less risky investments like bonds and bank savings accounts.
These are not exactly earth shattering recommendation but so many people fail to take even the most basic steps to assure a economically viable retirement the simple advice needs to be re-enforced. No one piece of advice can assure success but by educating yourself about investing and retirement planning and taking steps when you are in your 20s, 30s and 40s you can succeed. You can also succeed without doing anything in your 20s it just means you have to do more work later. Those that get started earlier get a huge advantage.
Related: Saving for Retirement – Retirement Tips from TIAA CREF – Retiring Later, Out of Necessity – investment risks – IRA (Individual Retirement Accounts)
The World Bank compiles a ranking of the easiest countries from which to run a business. The rank counties on categories such as: protecting investors (New Zealand is #1), enforcing contracts (Hong Kong is #1), employing workers (USA and Singapore tied for #1). The overall ranking for 2007:
- Singapore – 2006 #2
- New Zealand – 2006 #1
- United States – 2006 #3
- Hong Kong, China – 2006 #7
- Denmark – 2006 #8
- United Kingdom – 2006 #9
- Canada – 2006 #4
- Ireland
- Australia – 2006 #6
- Iceland
Related: Countries Which are Easiest for Doing Business 2006 – Top 10 Manufacturing Countries – Farming Without Subsidies in New Zealand – Growing Size of non-USA Economies
I originally setup the 10 stocks for 10 years portfolio in April of 2005. At this time the stocks in the sleep well portfolio in order of returns -
| Stock | Current Return | % of sleep well portfolio now | % of the portfolio if I were buying today | |
|---|---|---|---|---|
| PetroChina – PTR | 298% | 11% | 7% | |
| Google – GOOG | 210% | 17% | 13% | |
| Amazon – AMZN | 173% | 7.5% | 7% | |
| Templeton Dragon Fund – TDF | 116% | 17% | 13% | |
| Cisco – CSCO | 67% | 6.5% | 8% | |
| Templeton Emerging Market Fund – EMF | 67% | 3.5% | 5% | |
| Toyota – TM | 48% | 7% | 10% | |
| Tesco – TSCDY | 25% | 0% | 10% | |
| Intel – INTC | 18% | 4% | 8% | |
| Yahoo – YHOO | -2% | 4% | 5% | |
| Pfizer – PFE | -9% | 5% | 8% | |
| Dell | -16% | 7% | 10% |
In order to track performance I setup a marketocracy portfolio but had to make some adjustment to comply with the diversification rules. In December of 2006 I announced a new 11 stocks for the next 10 years (9 are the same, I dropped First Data Corporation, which had split into 2 companies and added Tesco and Yahoo). Earlier this year I added Templeton Emerging Market Fund (EMF) and reduced the TDF portion. Tesco also pays a dividend which I am not including in the calculation – that is one reason marketocracy is so nice it keeps track of all those details for you.
I have orders in to sell some of the PTR and TDF if the prices rises a bit more. In the marketocracy portfolio I have several smaller positions. I do this to comply with marketocracy’s diversity rules – I also have about 8% in cash (they still won’t let me buy Tesco). Google, PetroChina and Amazon have had an incredible few months. I am getting a little tired of Yahoo’s failure to deliver. I also think Amazon’s price has gotten a bit ahead of the performance but I think the performance is great and the long term looks strong.
The current marketocracy calculated annualized rate or return (which excludes Tesco – reducing the return, and has a significant cash position reducing the return) is 20% (the S&P 500 annualized return for the period is 13.4% – in addition to the other reductions in the return, marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund). View the current marketocracy Sleep Well portfolio page.
Related: 12 Stocks for 10 Years Update (Jun 2007) – 10 Stocks for 10 Years Update (Feb 2007) – 10 Stocks for 10 Years Update (Dec 2005)
Double-digit home price drops coming
The survey attempted to identify the high and low points of housing prices in each of the markets, some of which started declining from their peak in the third quarter of 2005. All are median prices for single-family houses. Nationally, Moody’s is projecting an average price decline of 7.7 percent. That’s a jump from the 6.6 percent total price drop that the company was forecasting in June and more than twice that of last October’s forecast of a 3.6 percent price decrease.
This forecast appears to me to be from the absolute top to the bottom over the course of several years. That decline is now estimated to be over 10% for nearly 23% of the markets. The remaining 67% will decline less than 10% from the peaks or increase. There average price decline prediction (again from the top of the market to the bottom) nationwide is now 7.7% up from an estimate of 3.6% last year.
Some pretty amazing statistics are in this article – Homes entering foreclosure at record:
Serious delinquencies, those 90 days or more late, jumped to 1.11 percent of all loans, from 0.98 percent in the first quarter. The loans actually entering foreclosure proceedings stood at 0.65 percent, a rise from 0.58 percent in the first three months – and the highest rate in the MBA’s 55-year history.
This quote however is a bit misguided I think:
Stagnant home prices have not taken a toll on housing affordability. Yes people that put nothing down and took out mortgage where they could not pay the monthly payments and planned to just borrow even more from the house if the house price went up can’t afford it – but they couldn’t afford it in the first place.
Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – Ignorance of Many Mortgage Holders – Median Housing Prices Down 1.5% in the Last Year – How Not to Convert Equity
A few months ago we posted on the effect your FICO (“credit”) score would have on your mortgage payment. Given turmoil in the credit markets we though it would be interesting to revisit that post.
Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):
| FICO score | APR May | APR Aug | payment/mo May | payment/mo Aug |
|---|---|---|---|---|
| 760-850 | 5.86% | 6.27% | $2,362 | $2,467 |
| 700-759 | 6.08% | 6.49% | $2,419 | $2,525 |
| 660-699 | 6.37% | 6.77% | $2,493 | $2,600 |
| 620-659 | 7.18% | 7.58% | $2,709 | $2,819 |
| 580-619 | 8.82% | 9.32% | $3,167 | $3,311 |
| 500-579 | 9.68% | 10.31% | $3,416 | $3,603 |
Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.
Frankly I was expecting the rates to show the widely reported expanding of the risk premium (charging increasingly higher rates for riskier borrowers). For example, in May the difference was 382 basis points (9.68% for the lowest FICO range and 5.86% for the highest. However the current difference is just 404 basis points – hardly a big increase. The reason must be that the MyFICO page shows rates for homes with 20% down at the high end of scores and 20-40% down below there.
Related: 30 Year Fixed Rate Mortgage Rates – Learning About Mortgages
The quantitative schools of investing rely on very high powered mathematics (often drawing on physics and engineering graduate students). They tread on very dangerous ground (often engaging in complex and highly leveraged speculation) and make errors in assumptions about the market conditions upon which the mathematical models they use to invest are based. Fat Tails and Limitations of Normal Distributions describes one common mistake:
Stock market data clearly shows that a normal distribution does not provide a good model of the market. Not every system is defined by a normal distribution – it is common for distributions to be close to normal but there is no reason any system need be. Many statistical tools have as an underlying assumption that the system in question is a normal distribution (therefore to use the tools you need to determine if the system can be classified that way – if not some tools can’t be used).
Crazy as it seems, very smart people continually forget that the markets often experience panics, euphoria, behave in ways that models do not predict, seize up and fail to function… Against the Gods by Peter Bernstein provides a good picture of the chaotic nature of financial market risks. A good book on an example of a mathematical model failure, Long Term Capital Management: When Genius Failed. Another excellent book on financial market chaos is: Manias, Panics, and Crashes: A History of Financial Crises.
I keep thinking people will learn but so far the faith in numbers seems to outweigh the past examples of overconfident failures.
Related: Data doesn’t lie but you can be fooled – investment risk – Statistics for Experimenters
Home prices drop for fourth straight quarter. Wow – that sounds bad.
Wow, that doesn’t sound bad. For comparison the NASDAQ index was down 1.6% today. In addition, always remember median prices are not as straight forward as it might seem. The mix of housing that sells changes between the periods being compared. Often (though maybe not this time) as the housing speculation subsides the mix of houses shifts as fewer expensive houses are bought which would tend to mean even if prices for identical houses stayed the same the median price (of houses actually sold) would decline.
There are real changes taking place in the real estate market but the big changes are increased inventories, increased mortgage defaults and a credit crunch – not declining prices. My prediction of price drops was as small as any almost any I saw over the last few years. And so far, the declines are even less than I thought we would see. The biggest factor for the depth of the pricing declines is going to be how many houses are forced into foreclosure (which is unfortunately possibly going to be high due to adjustable rate mortgages being adjusted up and requiring higher mortgage payments).
In the short term, the credit crunch is having an impact and that may increase if the jumbo loans (for those with significant down payment and good credit) continue to be hard to finance. But I don’t expect that to be the situation even 3 months from now – of course I could be wrong. The real estate situation (pricing, inventory…), as often is the case, is hugely impacted by the location. Some areas, like Arizona and Florida, are being hardest hit now.
Related: Real estate articles – Beginning of the End of Housing Bubble? (2004) – Homebuilders’ confidence at 16-year low – mortgage information