An financial crisis seems to occur with fairly regular intervals. Here you can read about the characteristics of an financial crisis and the reasons why such an event occurs.
Financial Crisis - Dynamics and Causes
By [http://ezinearticles.com/?expert=Knut_Holt]Knut Holt
A financial crisis has happened with regular intervals throughout the last century, it happens again in the year 2008, and probably will happen in the future in much the same way. There is no fundamental differences between such crises in our time and former crises, except perhaps that they occur faster, occur more frequently, but fortunately also heal faster.
THE TYPICAL SITUATION BEFORE THE CRISIS
The crisis often occurs after a long period of economic growth, high employment and high activity. The situation for companies and individuals are typically as follows:
- The economic activity in the whole society is very high after a long period of growth, but is beginning to decline.
- Stocks are traded for historically high quotes after a long period of rise of 300% or more, they have reached an all time high level, but they are beginning to decline again.
- The prizes of real estate properties are also high after a long period of growth, 300% or more, but they also are beginning to decline after an all time high level.
- Companies are often over-established after aggressive investments for borrowed money. The investments have not yet shown profitable, but the companies estimate great profits from the investments because they think the general growth will continue uninterruptedly.
- Also the average individuals have high debts after having invested massively in their homes and in luxury objects. They have some beginning problems with payment on their debts, but think these problems soon will go away with an anticipated further rises of personal income.
THE INITIAL STAGES OF THE CRISIS
The crisis usually has a slowly developing initial face. During this face the situation can reverse and the economy recover without great damages. In this initial period one can observe the following process:
- Steadily more companies realize that their massive investments do not pay back with the expected revenues and they have problems paying on their loans. They abruptly reduce further investments and begin selling off assets.
- Steadily more individuals also realize they have a too great debt to handle with their private income. They reduce their consume and sell off properties and luxury objects.
- Companies are getting steadily less orders, are selling less and have less to do because of reduced consume and investments.
- Earnings of companies and individuals are declining and many are downright loosing money.
- The stock market values are sharply declining, often 20-30%.
- The property prizes are sharply declining, often 20-30%.
THE FURTHER STAGES LEADING TO A FULL-BLOWN CRISIS
At some time there can be a critical turning point leading into the development of a full blown crisis that it is impossible to recover from in an easy way. This turning point occurs when a certain percentage, for example 10%, of individuals and companies realize that they do not have enough income to handle their debt, and that sell-off of properties and stocks will not nullify the debt. The full-blown crisis has these properties:
- The activity and earnings of companies are abruptly declining.
- Many companies experience massive losses.
- The number of companies and individuals with debt trouble is abruptly rising.
- The number of bankruptcies is abruptly rising.
- The unemployment level rises abruptly.
- Banks get into serious squeeze due to customers unable to pay on their debts and due to the decline in the value of properties serving as security for the loans.
- The troubled banks have to rise the interest rates by many percent to counteract the losses. But this act only increases the problems for other banks, individuals and companies and accelerates the crisis.
- A high percentage of the banks get nonfunctional and bankrupt.
- Now there will be massive sell-offs of properties and stocks. The sell-offs are exerted by individuals trying to free themselves from some of their debts and by banks trying to stop losses on loans.
- The stock market cracks down by an new 50% or more driven by the massive sell-offs.
- The real estate market also cracks down a new 50% or more due to massive sell-offs, but usually somewhat slower than the stock market.
THE CHARACTERISTICS OF AN ULTIMATE CRISIS
The ultimate stage of the crisis is seldom reached, because the governments will at some point take control of the financial systems and secure a minimum functionality.
In the ultimate crisis the production of goods and services in the society has fallen 30% or more and continue to fall. Investments or building activities have totally halted. There is mass unemployment, 30% or more.
The financial system has nearly totally collapsed, and is only able to support the daily payment for food, energy and other necessities. The production facilities and organizations of the society have fallen apart 30% or more due to lack of maintenance, which means that the society is not able to recover in a short time.
THE END OF THE CRISIS
Before the crisis can end, all sell-offs to pay back on loans must be fulfilled. Then every actor in the society has to accept their losses. Debts that actors are not able to pay back must in some way be nullified. Then all the pieces remaining of the former companies must be fixed together again into new functional units. Then the society can slowly rebuild its strength.
THE CAUSES OF THE CRISIS
An important cause of the crisis are over-optimistic companies and individuals during the foregoing period of economic growth. They tend to believe that the general growth will continue forever without interrupting periods of economic decline. They also tend to overestimate themselves and think they will be a winner in the competition against other companies or persons, not a looser, not an average performer, but the winner.
This optimism, which is a general human property, make all actors borrow massive amounts of capital and invest them in homes, luxury objects and expansion of their business. This expansive behaviour tend to accelerate for quite a long time until in meets the wall.
Another cause are executives in banking companies tempted to lend out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers, because this behaviour gives the executives an enormous short term personal gain.
HOW TO AVOID FINANCIAL CRISES
Future crises can only be prevented by hindering financial institution lending out more money to anyone that the borrowers can pay back in a comfortable way. This can only be done by governmental regulations that set clear criteria that must be fulfilled when a certain amount of money is lent out.
Also banks must be forbidden to establish employment contracts for their executives that reward them directly for the amount of mortgages they establish.
Knut Holt is an internet marketer and consultant focusing at technical, health and scientific items. To find items like car equipment, remote control models, airsoft guns, chemistry sets, electronic kits and components, microscopes, binoculars, night vision instruments, music instruments, computers, PDAs and more: --- http://www.mydeltapi.com
For health advices, body products, fitness products and products to treat diseases, please visit: http://www.abicana.com
Article Source: http://EzineArticles.com/?expert=Knut_Holt http://EzineArticles.com/?Financial-Crisis---Dynamics-and-Causes&id=1566728
Showing posts with label stock. Show all posts
Showing posts with label stock. Show all posts
Saturday, October 11, 2008
Friday, October 10, 2008
Why Warren Buffett is Betting on Banks Now
Bank stocks could be the buy of a lifetime right now. The bailout is moving forward, the markets have stabilized, and Warren Buffett has put up a $5 billion bet on Goldman Sachs (NYSE:GS) this week...
Why Warren Buffett is Betting on Banks Now
By [http://ezinearticles.com/?expert=Andrew_Mickey]Andrew Mickey
Bank stocks could be the buy of a lifetime right now. The bailout is moving forward, the markets have stabilized, and Warren Buffett has put up a $5 billion bet on Goldman Sachs (NYSE:GS) this week.
Is it time to follow Buffett's lead and go "all in" on banks now?
The answer is a simple no.
Buffett got a very sweet deal from Goldman that has reduced his risk, gave him a high degree of income, and didn't eliminate a single cent of the potential profits from the deal. And there's a little known way we get all that in our investments too. Let me explain.
There are a lot of reasons to like banks right now. Share values have been pummeled over the last year. If the bailout goes through, they're about to unload their mistakes onto everyone else. The ones that are left still generate high fees, margins, and profits for the services they provide. And the ones that manage to survive will be some of the biggest winners when the U.S. economy recovers.
Banks are an extreme value play that undoubtedly caught Buffett's eye. However, even he needed some enticing odds to make a bet this big.
As individual investors, we can't simply follow his lead here and buy Goldman Sachs. Buffett was afforded a few special advantages that aren't usually available to the rest of us. But as we'll see in a moment, occasionally we can get these advantages too.
You see, Warren Buffett didn't make a simple $5 billion investment into common shares of Goldman Sachs. Anyone can do that with a few mouse clicks or a quick phone call to his or her broker. He got a lot more for his $5 billion.
Berkshire Hathaway acquired special perpetual preferred shares of Goldman Sachs. These aren't the shares you can buy on the NYSE. The preferred shares Goldman issued to Berkshire have all kinds of special attributes usually reserved for high-net worth individuals.
Goldman's perpetual preferred shares carry a 10% annual yield. That's eight times higher than the meager (if sustainable) 1.1% yield offered by Goldman's common shares.
In addition, Goldman issued warrants as part of the deal. Warrants are similar to stock options. They give you the right to buy shares at a preset price, but not the obligation. In this case, Berkshire walked away with more than 43.4 million warrants to buy Goldman shares for $115 (currently trading at $132).
Now, there's usually a drawback to preferred shares. They have higher yields, but the upside is usually limited. They don't rise in value with common stock and they don't usually go down with it either.
Preferred shares are good investments if you're looking for high income. But they don't offer the growth upside of common stock. Sure a 10% yield is attractive, but it's not enough to offset the risks in this case. After all, if Goldman goes belly up the preferred shares will be worthless.
This structure of investment is a very good one from Buffett's perspective. It allows Buffett to collect 10% per year on his investment. Since the shares are preferred, there is little chance of them falling as long as the dividends are paid.
Most importantly, Buffet will make a killing if Goldman's shares rise. If they hit $230 (which is still 8% below the 52-week high), Berkshire will have turned a $5 billion profit on its investment all the while collecting $500 million a year in dividends. That's the beauty of an investment structured like this.
Quite frankly, there aren't many better deals than one that offers high income, reduced downside, and plenty of upside. As you can imagine, these types of deals are usually scooped up by big institutional investors. But you don't have to be Warren Buffett or an investment manager that can throw hundreds of millions of dollars at a company to get your hands on these types of opportunities that only convertible securities can offer.
All too often, I see individual investors simply pass on convertible securities. Sure they might be a little bit more complicated than simply buying and selling stocks, but they're some of the best investments you can make. In fact, their unique qualities make them even better during market downturns.
One of my favorite examples is Crown Castle International Convertible Preferred (OTCBB:CCIKO).
These are the preferred shares of Crown Castle International (NYSE:CCI) which can be converted into common shares.
Crown is one of the world's leading cell phone tower owners in the world. The company owns more than 22,000 towers in the United States and 1,400 towers in Australia. It leases and rents these towers to deep-pocketed customers like AT&T, Sprint, and Verizon. In fact, 66% of Crown Castle's cell towers are leased to AT&T and have towers in 91 of the top 100 U.S. markets. In a way Crown gets a small piece of the billions of dollars spent on cell phone usage each year. And the company is a veritable cash machine.
Cash flow from operations has been steadily climbing over the past couple of years as the company bought more and more towers and ratchets up the rent. The tower business has been a very good one.
But it's expensive. Crown has to pay to build all those towers. All of those big up-front costs soak up a lot of cash. As a result of that and a couple of takeovers over the years, Crown has had to turn to outside investors for additional capital. In Crown's case the additional capital was for justifiable expansion, not for life support. And Crown had to give the big money investors that could chip in a few million dollars what they wanted.
Crown Castle attracted capital by issuing these convertible preferred shares. These shares, which currently trade for around $48 a piece, pay out $3.14 in dividends per year (good for a yield of 6.5%), and can be converted into regular shares of Crown Castle at $36.87.
Crown Castle's common shares currently trade around $32, so the conversion option isn't worth much, but if they go for a run the preferred shares will run up right along with them. If not, you'll still get a 6.5% yield while you wait.
Of course there are a lot of other considerations to make with Crown Castle Preferred shares. These shares don't trade very much. And buying or selling a big position would have some impact on the market.
There are a lot of unanswered questions. What's the upside with the common shares? Will there be enough cash flow to cover the dividend five years from now? What will be the impact of an economic downturn on rental and lease revenues? And that's just to start off before we really started delving in.
However, we can take one valuable lesson away from all this. Convertible securities (preferred shares, bonds, debentures, etc.) can be some of the best investments you can make. In the right instances, they offer high income, less downside risk, and all the upside of a stock.
Convertible securities put the odds of success in your favor. At first glance, Warren Buffett might seem to be taking big swings here. But he's actually reducing the risk as much as possible and setting himself up for either a win...or a big win.
And that's how successful investors in invest.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Article Source: http://EzineArticles.com/?expert=Andrew_Mickey http://EzineArticles.com/?Why-Warren-Buffett-is-Betting-on-Banks-Now&id=1538833
Why Warren Buffett is Betting on Banks Now
By [http://ezinearticles.com/?expert=Andrew_Mickey]Andrew Mickey
Bank stocks could be the buy of a lifetime right now. The bailout is moving forward, the markets have stabilized, and Warren Buffett has put up a $5 billion bet on Goldman Sachs (NYSE:GS) this week.
Is it time to follow Buffett's lead and go "all in" on banks now?
The answer is a simple no.
Buffett got a very sweet deal from Goldman that has reduced his risk, gave him a high degree of income, and didn't eliminate a single cent of the potential profits from the deal. And there's a little known way we get all that in our investments too. Let me explain.
There are a lot of reasons to like banks right now. Share values have been pummeled over the last year. If the bailout goes through, they're about to unload their mistakes onto everyone else. The ones that are left still generate high fees, margins, and profits for the services they provide. And the ones that manage to survive will be some of the biggest winners when the U.S. economy recovers.
Banks are an extreme value play that undoubtedly caught Buffett's eye. However, even he needed some enticing odds to make a bet this big.
As individual investors, we can't simply follow his lead here and buy Goldman Sachs. Buffett was afforded a few special advantages that aren't usually available to the rest of us. But as we'll see in a moment, occasionally we can get these advantages too.
You see, Warren Buffett didn't make a simple $5 billion investment into common shares of Goldman Sachs. Anyone can do that with a few mouse clicks or a quick phone call to his or her broker. He got a lot more for his $5 billion.
Berkshire Hathaway acquired special perpetual preferred shares of Goldman Sachs. These aren't the shares you can buy on the NYSE. The preferred shares Goldman issued to Berkshire have all kinds of special attributes usually reserved for high-net worth individuals.
Goldman's perpetual preferred shares carry a 10% annual yield. That's eight times higher than the meager (if sustainable) 1.1% yield offered by Goldman's common shares.
In addition, Goldman issued warrants as part of the deal. Warrants are similar to stock options. They give you the right to buy shares at a preset price, but not the obligation. In this case, Berkshire walked away with more than 43.4 million warrants to buy Goldman shares for $115 (currently trading at $132).
Now, there's usually a drawback to preferred shares. They have higher yields, but the upside is usually limited. They don't rise in value with common stock and they don't usually go down with it either.
Preferred shares are good investments if you're looking for high income. But they don't offer the growth upside of common stock. Sure a 10% yield is attractive, but it's not enough to offset the risks in this case. After all, if Goldman goes belly up the preferred shares will be worthless.
This structure of investment is a very good one from Buffett's perspective. It allows Buffett to collect 10% per year on his investment. Since the shares are preferred, there is little chance of them falling as long as the dividends are paid.
Most importantly, Buffet will make a killing if Goldman's shares rise. If they hit $230 (which is still 8% below the 52-week high), Berkshire will have turned a $5 billion profit on its investment all the while collecting $500 million a year in dividends. That's the beauty of an investment structured like this.
Quite frankly, there aren't many better deals than one that offers high income, reduced downside, and plenty of upside. As you can imagine, these types of deals are usually scooped up by big institutional investors. But you don't have to be Warren Buffett or an investment manager that can throw hundreds of millions of dollars at a company to get your hands on these types of opportunities that only convertible securities can offer.
All too often, I see individual investors simply pass on convertible securities. Sure they might be a little bit more complicated than simply buying and selling stocks, but they're some of the best investments you can make. In fact, their unique qualities make them even better during market downturns.
One of my favorite examples is Crown Castle International Convertible Preferred (OTCBB:CCIKO).
These are the preferred shares of Crown Castle International (NYSE:CCI) which can be converted into common shares.
Crown is one of the world's leading cell phone tower owners in the world. The company owns more than 22,000 towers in the United States and 1,400 towers in Australia. It leases and rents these towers to deep-pocketed customers like AT&T, Sprint, and Verizon. In fact, 66% of Crown Castle's cell towers are leased to AT&T and have towers in 91 of the top 100 U.S. markets. In a way Crown gets a small piece of the billions of dollars spent on cell phone usage each year. And the company is a veritable cash machine.
Cash flow from operations has been steadily climbing over the past couple of years as the company bought more and more towers and ratchets up the rent. The tower business has been a very good one.
But it's expensive. Crown has to pay to build all those towers. All of those big up-front costs soak up a lot of cash. As a result of that and a couple of takeovers over the years, Crown has had to turn to outside investors for additional capital. In Crown's case the additional capital was for justifiable expansion, not for life support. And Crown had to give the big money investors that could chip in a few million dollars what they wanted.
Crown Castle attracted capital by issuing these convertible preferred shares. These shares, which currently trade for around $48 a piece, pay out $3.14 in dividends per year (good for a yield of 6.5%), and can be converted into regular shares of Crown Castle at $36.87.
Crown Castle's common shares currently trade around $32, so the conversion option isn't worth much, but if they go for a run the preferred shares will run up right along with them. If not, you'll still get a 6.5% yield while you wait.
Of course there are a lot of other considerations to make with Crown Castle Preferred shares. These shares don't trade very much. And buying or selling a big position would have some impact on the market.
There are a lot of unanswered questions. What's the upside with the common shares? Will there be enough cash flow to cover the dividend five years from now? What will be the impact of an economic downturn on rental and lease revenues? And that's just to start off before we really started delving in.
However, we can take one valuable lesson away from all this. Convertible securities (preferred shares, bonds, debentures, etc.) can be some of the best investments you can make. In the right instances, they offer high income, less downside risk, and all the upside of a stock.
Convertible securities put the odds of success in your favor. At first glance, Warren Buffett might seem to be taking big swings here. But he's actually reducing the risk as much as possible and setting himself up for either a win...or a big win.
And that's how successful investors in invest.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Article Source: http://EzineArticles.com/?expert=Andrew_Mickey http://EzineArticles.com/?Why-Warren-Buffett-is-Betting-on-Banks-Now&id=1538833
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