JP Morgan's Debt Offering, Goldman still makes me nervous

As I have reflected on the last week, one news item really sticks out in my mind. JP Morgan raised $10 billion in debt the day they announced earnings, but they did it without the FDIC backing that is available for large financial institutions right now. I don't follow the debt markets closely enough to know if other firms have raised similar amounts without a government backstop for investors, but I don't remember hearing about it. I think this is yet another very good datapoint. The debt markets are starting to function without the need for government help. The cynics will argue that I shouldn't be excited about the strongest bank in the country being able to raise some debt financing; of course they should be able to. They would say that my excitement only proves how bad things are. My point is simply that I don't expect JPM to be the last bank to be able to do this. The trend is bullish.

There were also a string of better than expected earnings from Wells Fargo, Goldman, JP Morgan and Citigroup. As I have said before, things get less bad before they really get better. Despite my bullishness, I as still a skeptic on Goldman Sachs. Don't misunderstand me, I admire their culture and the caliber of the the people they attract. These are very good things. But as an investor I am staying away. At the end of the day, this is still a highly leveraged company that makes money in a very opaque way. People who buy this stock (I fell into this mindset in the past so this is also a confession) will shrug their shoulders and say "Yes, but these guys are REALLY smart and will figure out how to make money like they always have." That's right; very highly paid investment professionals will use this as their investment thesis.

I have learned quite a few things over the last three years and here is one; if the business model is flawed, whole industries can be wiped out. It wasn't that long ago that mortgage originators were darlings of the investment community. They are simply gone now. The leveraged investment bank industry almost followed suite; we lost Bear and Lehman, Merrill was forced to sell, UBS is still in trouble, Goldman and Morgan had to convert to bank holding companies so the Fed could keep them from the same fate. My point is that Goldman may be full of smart people, but I can't even begin to predict how much money they will make next year and I no longer think the business model is attractive. And yet the stock was at $130 the other day. This is a cult stock and I'm going to find better models to invest my money in. For the sake of the broader market, I hope Goldman does very well but I'm willing to miss that gain.

Market in Transition and Equity Raises

I have been thinking and realizing over the last week that the market is at a tough spot. For some perspective, I remember hearing a lot of investors say things like the following: "I can't call the bottom so I won't try. I'm willing to miss the first 15-20% of the next bull market so that I have confirmation that it IS a bull market." My conversations with people lead me to believe that these same people are now very uncertain about what to do. They had the 20% rally off a bottom, but they are still hesitant. I have noticed my own tendencies are to want to buy on a pull-back when the markets are going up, but being afraid to buy when the pull-back is actually occurring. If I am bold enough to extrapolate my tendencies on the market, it implies that there are still a lot of potential buyers that are still waiting to buy. All this to say, we just had a rally but I don't think investors are convinced we are in a bull market, despite their comments prior to the rally. And for those who bought on the way up, or are just still holding old positions, it is tempting to lock in some of the recent gains. I still think we are in a new bull market, but these pauses make sense to me.

What I was really excited to see was some equity raises. Everyone saw that Goldman Sachs raised $5 billion yesterday, but unless you cover the financial sector you may easily have missed three other equity raises (First Niagara and Fidelity National yesterday and Chimera today). Seeing four financial sector equity raises in two days was a bit of a surprise; in the pleasant sense. The capital markets are normalizing under our noses. I'm still leery of Goldman's business model, but from a broader perspective, I'm very happy that other investors are willing to give them more capital.

And finally, I little aside. I was thinking about one of my favorite internet ideas again yesterday; Prosper.com. They are currently in a quiet period while they go through a registration process to sell promissory notes, but this is fine because I wouldn't lend money through Prosper.com quite yet. This website allows people to borrow and lend from each other through Prosper.com. As a lender, you are making an unsecured loan to a stranger based on their write up and some standardized data they have to provide. When the US economy loses less than 75k jobs in a month, I think it will be time to put some money to work here, based on the assumption that the most likely reason the loans won't be repaid is loss of income. At about -75k jobs, I expect loan performance going forward to be good, but interest rates still attractive.