The End of an Era? Europe’s Sovereign Debt Problem
Posted by Jody Eisenman | Filed under Uncategorized
As history has shown us beyond a shadow of a doubt, no empire, no matter how great, will last forever. We have seen the collapse of the once great Egyptian, Persian, Greek, and Roman dynasties. More recently, we have seen the collapse of the British, Ottoman and Russian empires. Although all these countries (Persia is basically Iran and Iraq, and the Ottomans survive via Turkey) still exist, they are only a fraction of their former size and glory. Meanwhile, the continent of Europe has dominated the world for the past two thousand years. During the vast majority of this time, countries were at war with each other, jockeying for wealth and power. Finally, after two catastrophic world wars, the European Union was formed. In 1999, a uniform currency called the Euro was created. Although the Euro currency initially trade weakly in the foreign exchange markets (it traded as low as $.81 in January 2002), the euro then climbed rapidly and actually reached a peak of almost $1.60 in the summer of 2008. However, due the current economic problems in Europe, the euro has dropped rapidly. From a high of $1.48 last January, it has now plunged to $1.26. The problem, as usual, is debt.
On Friday, S & P downgraded nine countries sovereign debt, with France and Austria being the most prominent. Today, S & P further downgraded the ESFS (European Financial Stability Facility) to AA+. The ESFS is the primary lending arm for euro zone countries in trouble. As such, this will probably lead to a cost increase in the bonds they issue. In some perverse way it may not matter. If Italy or Spain will actually require a bailout, the amount of money required is perhaps as much as one trillion euros (that’s a 1 with nine zeros!), which is far beyond their current capability. However, even this problem is dwarfed by the sovereign default protection issue. It is believed that the largest European banks have hundreds of millions of dollars in sovereign risk exposure. In order to somewhat mitigate these risks, banks have purchased credit default swaps, which are insurance policies should a country default. However, many of these banks have sold these swaps to each other. In the case of the Italian and French banks (the largest exposure believed to be issued by UniCredit and Credit Agricole), it is difficult to see how they could possibly pay off these policies, as their balance sheets are already highly leveraged. Thus, should some of the PIGS (Portugal, Ireland, Greece and Spain and perhaps Italy) actually default; it could lead to a domino effect that might leave Europe devastated. I don’t see how the countries could possibly bail out these banks in the case of failure. The next few months will be telling.
2011 Wrap Up
Posted by Jody Eisenman | Filed under Uncategorized
Although it would seem that 2011 was basically a non-event for stocks, it would seem that the swings really hurt many professional investors. Returns for a few key indexes were as follows:
DJIA +5.5%
NASDAQ -1.8%
S & P FLAT
Russell 2000 -5.5%
Anecdotal stories among brokers and investors indicate to me that most people lost money. I believe the reason why was because the market was sort of trendless. Just when you thought we were in an uptrend, we would selloff. Then, when it looked like the market was falling apart, we would rally. I think a lot of people got whipsawed in and out and it cost them plenty of money. According to Hedge Fund Research most funds lost money, including some notable names like Bill Gross and John Paulson. On the plus side, James Simons from Renaissance and Ray Dalio from Bridgewater had excellent years. Speaking of Bridgewater (which manages over $120BB); they remain quite bearish for 2012. They have done well for investors by maintaining a bearish stance on the global economy. On the other hand, Citicorp believes that we are now in a ten year secular bull market. Opinions are like brains, everyone’s got some.
Finally, in a sign of the times, it seems that 131 year old Eastman Kodak may be on the verge on bankruptcy. EK launched its’ first camera at the end of the nineteenth century and went on to dominate the film industry. As late as 1997, shares traded as high as $90/share. Today, will everything moving to digital film, EK no longer has much of a business. EK shares closed yesterday at 47 cents. This is the nature of the world, with new industries being created to replace obsolete ones. However, there is no question that change is accelerating at a rapid rate. I like to tell my employees that virtually everything I use in my office (wireless, fax, personal computer, email, digital TV, etc) barely existed 20 years ago. If you want to read an excellent book on this trend, please read (maybe on your Kindle!) Future Shock by Alvin Toffler. The book was originally written in 1984, and it is all the more true today. I highly recommend it!
The State of the New York Mets
Posted by Jody Eisenman | Filed under Uncategorized
With the markets being driven almost entirely by the news out of Europe, I have decided to devote a column to the financial state of my beloved NY Mets. I first became a Mets fan in 1964, when I was 6 years old. For a long time, the team was the laughing stock of baseball, having finished last or next to last every year of their existence from 1962-1968. However, in 1969, the Mets shocked the baseball world by winning 100 games and taking the World Series over the heavily favored Baltimore Orioles. Although they had some success through the years, the Mets did not win another championship until 1986, when they won 108 games and beat Boston in a thrilling seven game series. In the early part of the new millennium, the Mets were rebuilding, and by 2006, they finally had an excellent team again. However, three straight disappointing seasons left the Mets fans frustrated. Around this time, the current owners decided to build a new stadium (name Citi Field after Citicorp bought the naming rights) which opened in 2010. Unfortunately for the Wilpons (the current owners), they were hit with several financial setbacks. First came the recession, which hurt ticket sales. At the same time, the real estate market fell apart, which severely hurt their principal line of business. However, what really catapulted them into the front pages was the Madoff Ponzi scheme. The Wilpons invested hundreds of millions with Madoff, and apparently directed others to invest with him as well. Currently, they are being sued by trustee Irving Picard for over a billion dollars. In addition, as the team has hit hard times, they are continuing to try and raise money to keep their majority ownership intact. It is believed that the team lost around $70mm this past year. Meanwhile, the Mets are in debt for hundreds of millions of dollars, perhaps as much as $650mm. Although it is believed that the Mets would fetch in excess of a billion in at outright sale, the owners are at least this far refusing to consider this, opting instead to sell small units to various parties. Earlier this year, the Mets had an agreement to sell 1/3 of the team to hedge fund guru David Einhorn, but the deal fell through. This leaves the Mets with mounting losses, an expensive ballpark, and a lousy team.
Compounding the Mets’ problems is that they are trying to shrink their payroll at a time when they have unperformed on the field. In 2010, the Mets spent about $140mm. This year, they are expected to come in around $100m, perhaps even less. However, $57mm is already guaranteed to just three players! One of whom is Johan Santana, who underwent shoulder surgery and may not even to able to pitch. They lost three of the best players (Closer Rodriguez, CF Beltran to trades, and superstar SS Reyes to free agency) and have made little effort to replace them. In addition to the $57mm, they are committed to another $22mm to 6 other players. That leaves the Mets with almost $80mm committed to nine players, which means they have, at most, $20mm to spend on the other 28 guys on their 40 man roster. The team has finished under .500 for the past three years, and attendance has plunged from over $4mm in 2008 to around $2.3mm last year, despite the fact they are in a brand new ballpark. Based on their current roster, its’ a good bet they will finish near the bottom of the league in 2012.
It is incredible to me that the current owners refuse to sell a majority interest in a business that continues to lose money every year. Until the Wilpons sell the team, it looks like a lot more misery for us fans. One can only hope that the mounting losses will eventually cause the owners to sell out and begin a new era.
