Tuesday, December 30, 2008

Buy Moody's

This is not a call based on the fact that the stock is cheap(it is) or that it operates in what is basically an duopoly with S & P. It's not about the 0.76 PEG ratio or the grotesque short ratio that will trigger a pop once everyone covers. No, this is about us, as investors, and our very short memories. Right now, all we can talk about in reference to the ratins agencies is their massive failure, their conflicts of interests. I'm sure books will be written about them, just as analysts were burned at the stake after the Internet bubble burst. I think that people will forget these facts within a year. Businesses will continue to look for Moody's despite the fact that they dropped the ball and enabled the catastrophe that has been the last year. There will be calls to change their models and new players will emerge in the space, but in the end Moody's will remain one of the big boys.

Friday, December 26, 2008

More bad news is good news

I know it's hard to believe that sad saga of Bernie Madoff is a sign of good things to come, but it is. Fraud goes part and parcel with the bursting of any bubble and the hedge fund industry had definitely entered bubble territory. Years ago, Jim Rogers said in an interview "we have 25 000 or 30 000 hedge funds around the world. We don't have that many smart 29 year-olds in the world." Hedge funds are not a different asset class. If you believe that anyone can post positive or market-beating returns every year, regardless of market conditions, you aren't a sophisticated investor. You're either naive, stupid, or greedy.

Don't for one minute think that this is the end, though Madoff might go down as the poster boy of this era of financial tomfoolery/skulduggery. We've only begun to look for malfeasance. Think for a moment about everyone that was getting rich this decade. So far the real estate and financial realms have been carpet bombed, but what about the private equity guys? Are you telling me that there isn't one major fraudster out there amongst the Web 2.0 set? The resource industry is rife with slippery snake oil salesmen. I'm sure the alternative energy biz will produce a Madoff or two.

We just haven't had a perp walk yet.

I digress. These revelations, while painful, embarrassing, and criminal, are an important signal that excesses are being rung out of the system. We're starting to get our act together. Healing requires puss, bruising, scarring, and pain. We should want to hear as many of these stories as possible, get them priced into the market, so that we can move on.

Tuesday, December 23, 2008

The death of buy and hold? Bah, humbug!

Many would-be Cassandras, CNBC included, have been beating their breasts about this topic. Fast Money's Jeff Macke has pronounced the long-term investor dead. Is this true? If not, why would smart guys like Jeff Macke say things like that? Let's think about it.

The market's down a lot.
Many industries are on the verge of bankruptcy.
Some companies are at decades low valuations. The government is printing dollars at a record pace.
The rules of the game seem to be changing on a daily basis.

It looks really bleak doesn't it?

That's why this is the best time to be a long-term investor. You're probably not going to see such pessimism about the global financial system for many years. While I still think the S & P 500 is not historically cheap, there are several large cap companies that are on sale. I'm loading up on GE, GS, JNJ, KO, and other big names.

It doesn't matter if you're in the value or growth camp, there are enormous bargains out there. It's almost like money lying in the street if you're patient. In 5-10 years, some of these companies will have failed, but many more will have recovered and making money hand over fist.

I plan on being first in line when they start handing out the cash.

This is not to say that we've hit a bottom. I don't know. I'm buying now regardless. My local Linens N' Things is having a closeout sale. Every week the deals get better, but there's less of the good stuff. Don't ignore 50% off stocks because you think that next week, stocks will be 75%. They might be, but probably not the good ones.

Friday, December 19, 2008

A way to bet on the debt market recovering

As anyone who has followed the financial crisis knows, the debt markets are currently "challenged." No one trust each others paper, spreads are cavernous, and volume is low.

The Managed High-Yield Plus Fund(HYF) is a good way to play the eventual recovery.

The Managed High Yield Plus Fund is a diversified, closed-end management investment company. The Fund's primary investment objective is to seek high income. Its secondary investment objective is to seek capital appreciation. The Fund will primarily invest in a diversified portfolio of lower-rated, income-producing debt and related equity securities.

These guys are more comfortable with junk than Fred Sanford. They have holdings in gaming, wireless, and publishing, some of the more distressed industries out there.

Sure, there are safer ways, but the risk reward ratio is much higher here. Nonetheless, be warned. This is a tiny closed-end fund with a yield of over 20%. That might make it seem speculative, but it's not. It, like a lot of things right now, is just mispriced.

I think that there's too much fear in these prices. When the market turns it the most marginal businesses that get the biggest pop. As regular readers of this blog know, I like to invest when things look really bad. Right now, we've got a record number of junk bond defaults. Yes, the market can get worse, but probably not much worse. Since I don't know when things are going to turn around, I'm buying know and waiting for the recovery.

Tuesday, December 16, 2008

Recession stocks

Consumers don't stop buying when economies go through down cycles. They look harder for value." The job of the survival marketer in '08 will be to identify that value, proclaim it loudly, and go after the thinning customer herd where others show fear and give up. To keep the sports analogy alive, now is the time to know the playbook and never, never take your eyes off the ball. -Kevin Roberts of Saatchi & Saatchi

Kevin Roberts is telling the truth. People don't stop spending money during a recession, they just spend less of it. Companies just have to fight harder for fewer dollars. What companies are positioned to take advantage of these lean times?

WMT
MCD
FDO
DLTR

All these companies' stocks have risen substantially over the last year. What are they selling? Value.

Friday, December 12, 2008

Bad news is good news

When I see that the market is plunging on the news of the stalled auto bailout, then I get happy. Yes, that's perverse, but it's true. It means that it's closer to the point of maximum pessimism that Sir John Templeton liked so much. The whole world is swooning! That's great! Bargains for everyone.

I'm not calling a bottom. I have no idea if we're close, but things are starting to look better, that is people are getting more pessimistic. I won't even think of considering a bottom until the the market is trading at a single-digit P/E and many more firms have gone belly up.

Tuesday, December 9, 2008

A must read from an unlikely source


Eliot Spitzer isn't so dumb after all. Read his recent piece for Slate. It is well-reasoned, evenhanded, and shows an imagination that you wouldn't expect from a politican. Unlike most of the pieces that I've read concerning the litany of bailouts U.S. taxpayers are financing, Spitzer's aaks if we're merely rebuilding flawed institutions in the same manner and hoping that the same thing doesn't happen again. In the following paragraphs, he neatly sums up the existential crisis threatening the U.S. financial system.

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.


I don't think that there has ever been a more eloquent refutation of the financial supermarket every written.

Friday, December 5, 2008

It can always go lower


This might seem obvious, but it's a good thing to keep in mind, especially as a value investor. It can always get worse. Just look at the disastrous investments that "sophisticated" investors like Temasek and Cerberus made in companies last spring. Stocks can and do go to zero. You should at least learn that lesson from the current financial crisis.

So when you hear about the market possibly re-testing lows or capitulation, please ignore it. I'm not saying those people are stupid. They may in fact be 100% right, but their message is beside the point. As a value investor, you are trying to find a bargain, not the absolute best bargain or the bottom.

So what should you do when you buy a stock and it takes a hit. You should re-evaluate. Has anything material changed about the company or its prospects? Is the market just punishing stocks in general as it was in October? If it has, then please, by all means, sell and live to fight another day. If it hasn't, then maybe you want to buy more, maybe not. That depends upon your appetite for risk, available cash, etc.

You should also ask yourself, "how much am I willing to lose in the short-term?" I know that long-term investors are supposed to be immune to short-term developments, but we're not. We watch CNBC, read the financial press, and read message boards(much to my own dismay). We do not live on islands enjoying a monk-like existence allocating capital. Again, you know yourself better than I do. What kind of losses can you live with? Buffett thinks that anyone who can't take a 50% loss shouldn't be in the equity markets, but that's an unfair standard. Buffett after all is a billionaire buying for an insurance conglomerate. He can afford such a luxury. You, on the other hand, might need that money sometime within the next five years for retirement, paying for college, a down payment, etc.

So be honest with yourself. When it hits your pain threshold, sell. You can always re-establish the position. Don't try to be a hero and prove how smart and disciplined you are. It's good to acknowledge mistakes and learn from them.

Tuesday, December 2, 2008

Should we spare a dime for Detroit? Part 3

The first time around went poorly. Gettelfinger couldn't do much better. So now the Big Three are back. Last time they were given the homework assignment to come up with a plan to become viable. That seemed like a tall order to me. They've been struggling with such an assignment off and on for the last seven or eight years. What sort of brilliance was Congress expecting them to produce during this cram session?
Rick Wagoner has said that bankruptcy isn't an option. Congress is acting like the Jesuits in Portrait of the Artist as a Young Man. I think that Congress is going to give them the money they need and that this is theatrics. However, let's assume that all the options are on the table.

1. Bankruptcy: No one wants to push the red button. It symbolizes the abject failure of what was once a source of pride for this country. Despite the fact that it would probably allow the Big Three to get the necessary concessions from the UAW they need, no one knows just what it would mean cost-wise to the government. If you think that this is likely, then short the shares, the debts, their suppliers, and the Dow.

2. Bridge Loan to a Democratic Congress & President: This seems the most likely scenario to me. Again, the political fallout is too great for this not to happen. This is speculation pure and simple. Buy the common stock or LEAPS.

3. No Money, Big Problems: Let's say they get nothing,but still refuse to declare bankruptcy. This is highly unlikely, but since this is an academic exercise, let's think about it. Ford is the company best positioned to attempt such a far-fetched strategy as it has more cash. As in the bankruptcy scenario, short everything.

Friday, November 28, 2008

Should we spare a dime for Detroit? Part 2


No one becomes overweight overnight, and the Big Three weren't always in critical condition. It's hard to believe, but these companies were once world leaders and innovators to boot. Where once they were the exemplars of American industrial might and prosperity, they are now regarded as bloated, expensive, slothful anachronisms. So what happened?

Have you ever heard that admonition, "you have to be able to handle success?" Well the Big Three failed to do that. They had a comfy oligopoly on the North American market. It's hard to remember this, but GM once had 50% of the North American market. They got fat and lazy. They handed out contracts that they shouldn't have. Quality began to suffer. If you want to read a good tale about Detroit's fall from grace, than read The Reckoning by David Halberstam. It was published in 1986, but the Big Three are no more fit to compete than they were then against foreign car companies.

To use a crude analogy, the Big Three are like a professional athlete or musician who was a superstar who supported his extended family and an enormous entourage as well. He is now no longer making millions of dollars, but it doing pretty well as an announcer. The problem is, he's still supporting a small army.

GM is the product of a bygone era defined by corporate paternalism and defined benefit plans. Instead of riding the bull of globalization, the bullis goring them.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan is rather morose on the topic of specifically GM's prospects for survival. "Every one of the Big Three faces a problem right now of about $2,000 to $2,500 per vehicle produced cost disadvantage. If that plays out over time, they're all dead," says Cole. "It's change or die. Everything is driven by a profitable business. If you can't be profitable, you can't be in business. That is, I think, recognition that everybody is aware of."

Asked two years ago on 60 Minutes, how this happened CEO Rick Wagoner said:

"We have a long history, almost 100 years. We have a lot of employees. We have a lot of retirees, a lot of dependents. … Promises were made about benefits to those people that weren't very expensive when they were made. And it's really given us some financial challenges."

Some have gone so far as to say that GM's health care costs are higher than those for steel and glass. If that's true, than they are in the wrong business.

Have you heard of the Jobs Bank? Read and weep. I hate to use this word, but this is downright un-American. Hopefully, this sort of largess will be cut in order to save the industry.

There's also the fact that they don't make cars that Americans want to buy. In most Americans minds, foreign cars represent greater value, both in terms of reliability and the secondary(used car) market. However, there's a cognitive dissonance at work here. Despite the continuing improvement of American cars in quality surveys, Americans' just don't want to eat the home cooking.

So does that mean if Detroit got its cost structure under control and started making cars that people wanted, that there problems would be solved. No. The business landscape isn't static. The Japanese, Koreans, and Europeans won't go down without a fight. Furthermore, the Big Three would still face nascent and potentially lethal threats from China, Brazil, and India. All these actors have the implicit backing of their governments who will spend whatever it takes to create and expand their domestic auto industry.

In part 3, I'll discuss the various options on the table, their likelihood, and investing strategies.

Tuesday, November 25, 2008

Should we spare a dime for Detroit? Part I




Sal: "Tom, can you get me off the hook? For old times' sake?"
Tom: "Can't do it Sally"

Tessio and Tom, The Godfather

I don't know where I stand on this, so I'm going to try to think about it as I write. There will be times where I might contradict myself, so please forgive me ahead of time. First of all, let me say that my brother is an autoworker, so I'm not completely impartial.

I shall try to ignore their three private jets, or their false concerns about safety(who would recognize these men that would want to kill them), or the alarmist tenor of their rhetoric. Try as hard as you can to stomach the fact, that only Nardelli would work for $1 a year.

To quote Tom Hagen from The Godfather yet again, "don't get personal. Keep it business."By the way, this is great stock picking advice.

I think that anyone who saw last week's testimony in front of Congress, came away with little sympathy for the automakers. I came away not only unsympathetic, but slightly incredulous. Rick Wagoner claimed that their current woes were not "our product lineup, or our business plan, or our long-term strategy. What exposes us to failure now is the global financial crisis, which has severely restricted credit availability, and reduced industry sales to the lowest per-capita level since World War II." This was not an unsubstantiated claim. He provided numerous supporting facts in his statement. I just don't buy it though. I feel that he was offering convenient facts and half-truths in attempt to lessen his audience's anger. This is the crux of the argument though, at least for me. If you believe that this is a temporary measure needed to help the Big Three get through a tough time, then by all means, giving them this money and averting the loss of 3 million jobs is an easy decision. If, however, and this is the side of the fence where I currently stand, you think this is nothing short of throwing good money after bad, then there's no way you give them one red cent.

As is usual in Washington, this has become a partisan political football. Republicans hate the idea. Democrats, although critical of the automakers, seem far more open to the bailout. In fact, Chris Dodd(D., Ct.), called the industry's wounds "largely self-inflicted."

Richard Shelby(R., Ky.)asked the question that is probably most on people's minds. "Is this the end, or just the beginning?"

Congress wants a plan for how to turn thsse business around. Have they not been paying attention to the last thirty years? The automakers haven't lacked for plans. Maybe they are playing a game at which they can't win? Maybe it's a fool's errand. No one in that room was willing to even contemplate that. I think that's a problem.

On Friday, I'll talk more about their problems and how this all happened.

Friday, November 21, 2008

Top 10 stupid things you'll hear on CNBC

Let me first acknowledge a debt that investors owe to CNBC. Since it's launch in 1989, it has provided up to the minute business news and commentary. It has several international versions if you want to follow markets outside the United States. It provides a valuable service that makes following the market easier. That said...

The financial media might be the most biased, most dependent on the industry it covers, of all media. Consequently, their coverage of business is rarely if at all hard-hitting or critical. It is only after the fact, that they become incensed, as if they were betrayed(by their masters).

1. This is a stockpicker's market.
2. Are we seeing capitulation?
3. This stock has a great chart.
4. Don't fight the tape.
5. There's a lot cash on the sidelines.
6. Is now a good time to put money to work?
7. This market is looking for leadership.
8. The market rose on bargain-hunting/The market fell on profit-taking.
9. We may retest the ______ lows
10. _________ is being caused by the selling or buying of big hedge fund X.

Friday, November 14, 2008

Through the looking glass


No, not because,as Lindsay Lohan recently said, we've elected the first colored president. America has gotten away from its roots. I'm not talking about our Christian roots or manufacturing roots. I'm not talking about America descending into communism a la Red Dawn(don't worry, we're not). I'm talking about how we've become hostile to success and coddling of failure.

Parading rich hedge fund managers before Congress will not solve our current problems. Why only the top five moneymakers? Why not the top ten? I can see wagging your finger at Dick Fuld(who feels so sorry for helping destroy the company, but think that he shouldn't have to give back any of the $384 million in compensation he raked in), but Soros had been talking about this before it happened. Soros doesn't even really trade anymore, he just collects fees and manages his philanthropic enterprises.

Does anyone feel better if a rich person gets shamed for a few hours before their limo takes them to their Gulfstream and back to their pile of money? More importantly, there used to be a time in the country when we venerated people who made money honestly. Now we look at them with suspicion. Nowadays, we hand out billions to failures, hoping to prop up sad companies that should go bankrupt. I am all for a perp walk, just let it be the right guys not the most obvious targets. It's funny how for years hedge funds were supposed to be the danger to the financial system, but in the end, it was the "respectable" institutions like Citi, Lehman, WaMu, Merrill, etc.

I guess you can get an STD from an All-American cheerleader.

Tuesday, November 11, 2008

Goldman Sachs ans dollar-cost averaging


Readers of this blog know that I've been salivating over Goldman Sachs for about a year. The stock was over $200/share back then. I wasn't buying then, but I was eyeing it, waiting for it to get below $140. As I write this, it's trading at roughly $69 a share. Shouldn't I be ecstatic? I'm not.

Why? Fear plain and simple. Every investment book that I've read has spread the gospel of dollar-cost averaging and how simple, yet powerful a technique it is. The books never mention that it's much easier to do when the stock is appreciating.

I'm not scared so much by the falling stock price, but because I'm not sure how to evaluate this company anymore. Earnings don't work because I don't know if they'll be around next quarter. Normally, I would rely on book value, but that could be equally ephemeral.

Book value is the net asset value of a company, the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. It's a good metric to compare against the market value. If you really want to be a stickler, than you can use the tangible book value, which takes out the value of intangible assets. Be careful though when doing this. Some companies, such as tech companies, are built on intellectual property and so have a lot of intangible assets. Book value wouldn't be a good metric for measuring them.

Furthermore, think about the assets the company holds; just because it's a physical asset doesn't mean that it's liquid. Have you ever tried to sell an outdated automobile factory in Gary, IN? Another thing with assts, pay attention to the quality of the asset(s). Look at the housing and banking sectors. They still can't bring themselves to properly impair bad loans and distressed land.

I refuse to buy the stock on my faith in the Goldman franchise alone, so why should I buy? I should only add to my holdings if I believe that the government will do whatever it takes to keep the bank afloat and I can stomach another 50% haircut.

Tuesday, November 4, 2008

Exploit the election rally


The market has been rallying recently. There's been a lot of talk about whether or not the market has hit a bottom. The C-word(capitulation, not the other one) is on everyone's lips. Perma bears are turning bullish. In boardrooms across America, the phrases "inflection point" and "paradigm" shift are being bandied about like a volleyball by people paid enormous sums and venerated for occasionally outperforming the indexes. As a little red-haired orphan once said, "the sun'll come out tomorrow."

I see the rally and don't believe my lying eyes. I think it's an election-related and typical bear market sucker rally. Still, I'm participating. I'm not smart or agile enough to buy the SPY for a quick gain. I'm also not confident enough that this is a sucker rally to go short the market in any meaningful size. So what am I doing? I'm using the rally to raise cash, rebalance, and reasses.

Speaking of that last verb, I specifically mean E*Trade. I first started touting E*Trade in the low 2s back in November. It went as high as 5 and change, then settled into a a range of the high 2s and low 3s. As I write this, ETFC is trading at $1.95 and is down 50% YTD. It still lessing for less than book value and now for less than the cash on the balance sheet as well.

I'm debating whether or not to buy more. I would like to, but there are less risky bets out there that I'm eyeing. Excel Maritime Parners(EXM)is still selling for 1x earnings with a 14% yield. Altria and Philip Morris has single digit P/Es and juicy yields as well. Rick's Cabaret(RICK), which I think has on the best business models around period, is selling for under book value. The oil services sector has never looked so good. For a long-term value investor, this is better than being a kid in a candy shop. This is like being put in charge of Mars or Hershey.

Decisions. Decisions. I've got a lot to think about.

Tuesday, October 21, 2008

JPMorganChase's buy list


Last Friday,JPMorganChase published a list of sixteen stocks that they feel will outperform the general market in a global recession. The stocks were:

3M Co.
Baxter International Inc.
Colgate-Palmolive Co.
CA Inc.
Devon Energy Corp.
General Mills Inc.
Gilead Sciences Inc.
Google Inc.
Hewlett-Packard Co.
McDonald's Corp.
Merck & Co.
Monsanto Co.
Nucor Corp.
Philip Morris International Inc.
Union Pacific Corp.
Visa Inc

There isn't much surprising about this list. They are all megacap stocks with tons of cash on their balance sheets. It features defensive healthcare and consumer staples companies, some energy plays which will act as an inflation hedge, and commodities stocks that have recently hit 52-week lows.

Do not go out and immediately buy these stocks. They are fine candidates for a watchlist, but don't plunk down your hard-earned cash just yet. It's almost certainly too late for any short-term gain from this list. Besides, this is aimed at institutional investors, many of whom have to be fully invested due to the language in their charters. "outperform" is a relative term and not a guarantee of positive returns.

If you're dollar cost averaging into an index fund or a stock that's already on this list, then buy all means, continue to buy and lower your cost basis. However, please don't feel that you have to open a new position in a stock due to the gravity of this flimsy list.

Friday, October 17, 2008

Buffett writes


In today's New York Times Op-Ed page, Warren Buffett has confessed that he is buying U.S. stocks for his personal account. Again, this is his personal account, not the Berkshire Hathaway portfolio, so he's not getting great deals on preferred shares that pay onerous interest rates. As usual Buffett encourages to take a long-term approach to investing and not be scared by short-term fluctuations. Warning: Buffett is a value investor. He is often early, remember he told people to buy equities back in 1979, three years before the last massive bull market began. Being early can be painful, so don't follow this advice and expect that the bottom is in. Buffett doesn't call bottoms. He doesn't call tops. He just buys when he thinks he's getting a deal and sells when people start getting greedy. The economy is still functioning. The rapture is not on the horizon. Don't let yourself be scared out of stocks. Now is a great time to rebalance. Make a plan, revisit your asset allocation, and stay the course.

Friday, October 10, 2008

Nothing lasts forever even cold November rain


September was awful and October is looking worse. Everywhere I look I see stories about the financial crisis and people wondering if we're going to see another Great Depression. I keep hearing people on CNBC talking about defensive sectors and stocks. This is a totally academic exercise when all equities are getting punished.

There is enough pessimism in the market to choke a horse. So have we reached a point of capitulation? I don't know. I don't care. I'm not a trader.

I've been preach for the last year or so that cash, gold, and Treasuries are fine, so I won't repeat those screeds. Today's post is going to be about psychology. The way to survive this market is change your attitude towards it. Start looking for bargains. Goldman Sachs is trading in the low 80s at slightly under book value. When do you think that will happen again? They are not going down. The Fed and the Treasury have decided that they will "bear any burden, pay any price" to keep the remaining big banks alive. Could it go down further from here? Certainly, maybe even probably, but I'll snap up more shares and wait for the storm to pass.

Another name that I'm looking at is Altria. MO is selling at 4x earnings and under a 1 PEG. This is one of the greatest stocks of all time just being given away. It's also got a 7.1% yield. That's a nice chunk of change while you wait for the market to rebound.

GE is selling at single-digit multiples with a 6% yield. SunTrust Bank is selling under book value. In fact, right now, the cash on the balance sheet exceeds the market cap! It's yielding 7.4%. XOM is in the low 60s. FCX has a forward P/E of 3 and has PEG, P/S, and P/B all under 1. I could go on and on.

I can't guarantee that these stocks won't get cheaper or that ten years from now they will have fully recovered. Anyone who bought GM in the 80s when things really started to look bad has been spent twenty years watching things get worse. So there's always risk, but the risk reward ratio is in your favor when you buy blue chips like these that (unlike GM in the 80s) and hold them until the market comes to its senses.

This financial system is battered right now, but we aren't going back to bartering.

Tuesday, October 7, 2008

Jim Cramer's dramatic statement



These are the times that try men's souls--Thomas Paine

Amy Winehouse is turning to Scientology. Previously unknown Jim Petruzelli TKOs Kimbo Slice. The most shocking event of all though: Jim Cramer is dissing the stock market.

Jim Cramer went on the Today Show yesterday and advised people to take any money out of the stock market that they will need in the next five years. Why? He sees the possibility of a 20% decline in the Dow and wants to help the little guy get out of the way of a runaway train. I admire his sense of noblesse oblige. It is also refreshing to see a money manager that it's okay to raise cash.

Some will see this as a sign of capitulation, not unlike that famously contrarian indicator "The Death of Equities" BusinessWeek cover from August 13th, 1979. Still, I don't think that Cramer is consistent enough to serve as a contrary indicator. He is of the school of whatever's working. Cramer throwing in the towel is him saying, "If I can't figure this out, I doubt if you can." He's just being honest in his exaggerated manner. Most people should not be trying to time the market. They should ride out the markets short-term fluctuations. He just made a compelling case for investing in low-cost index funds, much better than Buffett did with his bet against Protégé Partners LLC.

Tuesday, September 30, 2008

Shame on you, CNBC


The last year of coverage on CNBC has featured relentless cheerleading. With every downward thrust of the market, we find a CNBC reporter or anchor talking about the wonderful values being created in the wake of volatility. Well, the bargains kept coming. When they weren't encouraging you to snap up wonderful banks at fire sale prices, they were kvetching about the need for a rate cut or anything that might stave off the impending recession. I turned especially negative on the network in the last month, when they could offer nothing but parroting the breast-beating and wailing of their business friends and sources. The media is supposed to be in impartial conduit, not an unofficial mouthpiece. Were you watching the day Lehman went down? It was funereal. Now that they are past the depression phase of grieving, they have moved on to anger.

The vitriol at Congress for not passing the bailout almost comes through the screen. The Democrats could've passed this bill by themselves, but 90 of them voted against it. Americans overwhelmingly hate this deal. Do we need the $700 billion bailout? Yes. Will we get a deal done? Yes. My problem with CNBC is that they have led the charge in panic-mongering and rapping the knuckles of Main Street Americans for opposing the deal. They are doing Wall Street's light work.

Wall Street is like a panhandler who wants to dictate to you how much you should give him and in what denominations. They're going to get their money. They should try to at least appear grateful.

Friday, September 19, 2008

What now?



Uncle Sam is being especially generous. He has tried thrice to throw money at the problem(Bear Stearns, Fannie Mae/Freddie Mac, AIG) and failed. Now he is going to buy any and everything just about. Chairman Cox of the SEC has suspended shortselling in stocks. Of course, the stock market is eating it up. The question you must ask yourself is, "is it over?"

I don't think it is, but I am often wrong. I venture to guess that you are often wrong as well. So what do you do when your investment outlook is ambivalent? Put on some hedges. Raise some cash. I think that gold is great place to be right now. Or take a look at parking your cash in a more stable currency like the Swiss Franc. There are ETFs that allow you do both of these.

In yesterday's Washington Post, columnist Steve Pearlstein wrote that finally the U.S. was being forced by its foreign creditors to live within its means. Today's actions by the government would suggest otherwise. While, I am not as hawkish as Ann Woolner on this issue, I do want to see some bodies strung up. If you're not going to give me any money personally, can't I at least get a fall guy to tar and feather?

Tuesday, September 9, 2008

Thanks Hank

I needed the Fannie/Freddie bailout during the last week of August, not yesterday. I shorted FNM at $3.99 on 8/21 and ended up covering at $6.18 on 8/27. I shorted FRE at $2.96 on 8/21 and threw in the towel on 8/27, covering at $4.54, They both climbed higher still that week before cratering yesterday.

I knew a government bailout was coming, so why didn't I stick with the trade? It came down to money. First of all, this wasn't my money; it was my girlfriends and I wouldn't have slept well knowing that I'd lost a large chunk of her account on these two trades. Secondly, I was unwilling to sell other positions in order to meet the margin call. That was really, really stupid in retrospect, I have no idea what I was thinking. Shorting takes a different mindset, one that I'm learning to embrace, especially in this market.

Friday, September 5, 2008

Robert Shiller has some answers

Yale economist Robert Shiller gives his take on how to solve the subprime mess. He argues for more short-term help for consumers along with further innovation in the mortgage products space.

Friday, August 29, 2008

Not yet


Real estate hasn't yet turned the corner. The top five states for mortgage fraud for the first three months of 2008 according to the Mortgage Asset Research Institute:

1. Florida
2. California
3. Illinois
4. Maryland
5. Michigan

The last three are actually in a three-way tie. The report went on to say.

The first quarter data reveals that loan application misrepresentation continues to plague the industry. According to the FBI’s 2007 Mortgage Fraud Report, “the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market.” 4 Simply stated, mortgage fraud will not disappear — in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.

Do you really want to dip your toes in financials still? For more information about mortgage fraud, check out attorney and mortgage banker Rachel Dollar's Mortgage Fraud Blog.

Tuesday, August 19, 2008

Jim Rogers


This is a condensed version of a speech he recently gave in Vancouver. He can be a bit repetitive if you've heard him speak previously or read his books. Still, he makes a valid point.



The commodity bull market has a long way to go. This bull market is not magic. It’s not some crazy “cycle theory” I have. It does not fall out of the sky. It’s supply and demand. It’s simple stuff.

In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. “Let’s invest in a sugar plantation.” No one called and said, “Let’s invest in a lead mine.” Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they’ve never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor’s note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 1/20th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same
.

Tuesday, August 12, 2008

Who to trust?


Things are hard all over the place. The market rallies, then declines, then rallies, then declines. It's positively Sisyphean. The banks keep on saying the worst is over. The homebuilders keep saying the worst is over. Pundits and permabears live in fear of the dreaded "r" word(recession). So who can you trust, when no one will tell the truth?

The debt collectors. These guys are on the front lines. They've heard every excuse in the book and they know what's going on with the American consumer. Read this quote Asset Acceptance Capital Corp.'s CEO:

Looking ahead to the remainder of 2008, we are encouraged by the opportunities presented in the current economic climate particularly with regard to both the supply and pricing of charge-offs.

He is encouraged. Remember, this guy's business is to buy debt on the cheap and then collect on it. He sees a lot more bad debt in the future.

Asta Funding, another publicly-traded debt collector had a terrible Q2. They all did actually. Anyway, it said they were going to be careful about purchases and focus on retiring debt. These guys are vultures and if the carrion doesn't look all that great to them,that should give all of us pause.

This tells me a lot about the consumer. While lower gas prices are helping, people still aren't paying their debts. They're using that money to eat.

Friday, August 8, 2008

Not all the financials suck


If you've own BAC, C, AIG, LEH, or heaven forbid,BSC, you've taken quite a bath. The money center banks, the regional banks, the savings and loans, insurance, investment banks, brokerages, pretty much have all gotten hammered( notable exception, Hudson City Bancorp-HCBK. However, on group within financials have actually done well over the last year: asset managers. The worst haven't suffered as much and the best have far outpaced the sector and the general market.

I've put together a small watchlist of names that I plan to buy on a pullback:

EPHC
BLK
TROW
GROW*
JNS
IAAC
EV
WHC
VALU
BEN
IVZ


* This mutual fund company is wedded to commodities and emerging markets. YOu might want to wait for the current correction in these markets to end before buying.

Tuesday, August 5, 2008

Correction in Commodities?


Yes. It's hear. It's not the first and it wont' be the last. The secular bull market isn't over though. How will we know when it's over? When everyone believes that commodities are the place to put your money. Try to remember back to 1999, 2000, and even 2001. Everyone still thought names like JDSU, CSCO,and MSFT would go up forever. We aren't close to that yet when it comes to commodities. I'm going to take this opportunity to pick up some great stocks at great prices. This is what my watchlist looks like right now.

RIG: P/E of 7
XOM: P/E of 10
EXM: P/E of 5
FCX: P/E of 10
COP: P/E of 7

Two names that are non-commodity related that I'm buying are MO and its spinoff PM. The former has a P/E of 4 while the over is trading at a P/E of 1. Yes, 1!. Philip Morris has been on the greatest American stocks of all time and I can't get it for next to nothing.

Friday, August 1, 2008

Ignore talk of a bottom


... in financials, in housing, in the market as a whole. Does this statement mean that I am Nostradamous of the Amazing Kreskin and know where the bottom is? No. In addition to not being either of those guys, I'm also NOT a technician.

I am basing my pessimism on the lack of pessimism on Wall Street. Take Yahoo! for example. Chairman Roy Bostock has the stones to defend his actions in the proposed merger with Microsoft. He claims that $30 a share wasn't a "compelling offer." Yahoo! just doesn't get it. Tney are are puzzle at a yard sale with a couple of pieces missing. This is not the Yahoo! of 1997 that ruled the search roost.

GM lost $15 billion in the second quarter, nearly twice as much as Ford... and still they won't throw in the towel and declare bankruptcy. Bankruptcy could give them the breathing room they need to take the drastic measures that they need to take in order to survive.

The peso is gaining strength against the dollar. Oil is at $125.10/bbl and people are relieved.

My point is that the market is delusional. Wave after wave of bad news hits the wires and the markets shrugs it off. Supposedly, it's all been priced into stocks. If the four horsemen of the Apocalypse descended, the talking heads would claim that this was priced in. Note: I would myself call such an event the bottom.

There will be no bottom until the optimism has been killed. When Cramer turns bearish, that might be a good indicator of the bottom. Or maybe not. The famous BusinessWeek cover, "The Death of Equities" came in 1979, three years before the '82 bull market began.

Tuesday, July 22, 2008

Junk faxes


This morning at 5:48, a fax touting a company called Superlattice Power, Inc. came across my office fax machine. The fax came from The Energy Bull which is in the business of "providing bullish picks in the energy and alt-fuel sectors." According to the fax, Superlattice Power Inc.(SLAT) "is an emerging leader in the development and marketing of the next generation of lithium-powered batteries worldwide."
SLAT is much better than the usual junk penny stocks that cram fax machines. It's got actual SEC filings and a market cap north of $200M. There's still no earnings though(it lost a penny per share last quarter). Plus, there's barely any cash in the bank(just under 19K).

Who is The Energy Bull? My Google search turns up nothing. I can only assume that they are a penny stock promotion service. They're not even a good one, as their fax contains spelling errors and language that is evasive and overly enthusiastic.

Let's look at the fine print on the fax for some clues:

The Energy Bull is an independent marketing firm...This report is based on The Energy Bull's independent analysis, and may, or may not be the opinion of The Energy Bull...The Energy Bull has been compensated twenty thousand dollars by a third party for the dissemination of this report.

However, the company published this disclaimer on its website:

Unauthorized Fax Disclaimer
It has come to our attention that unsolicited faxes concerning Superlattice are being sent out by Alternative Energy Advisor, The Energy Bull, and other companies. Management strongly recommends that you disregard these communications from Alternative Energy Advisor, The Energy Bull or any other purported companies; Superlattice has not authorized and does not condone them. Management is attempting to locate Alternative Energy Advisor and The Energy Bull to request them to cease and desist from sending any communications of any type whatsoever concerning Superlattice.


I'm willing to bet the the disclaimer is part of the scam.

Google "stock promotion" and you'll get thousands of companies that make a nice chunk of change touting stocks about which they know nothing. I'm surprised that The Energy Bull was honest enough to fess up to being paid by a third party.

I'm not saying that there aren't viable, investment worthy companies trading on the OTCBB or Pink Sheets. They just don't use promotional services to pump up their share prices. That's what their products and earnings are for.

Friday, July 11, 2008

Bailout coming


Ignore the government right now. Paulson is speaking in both Wall Street and Washington gibberish. Bush said the mortgage giants are “very important institutions.” That's all I need to know. Despite its claims, this President is ot a conservative. He loves government interventions. Plus, he wants his party to win the next election. Bush is already being compared with Herbert Hoover and if he doesn't do something to try and save the housing market and the economy, they'll be linked as twins.

The Dow is under 11,000. Remember Dow 14,000? That's about where it was a year ago when I began this blog. The housing market is tumbling and might need another 25% shave in order to adjust to reasonable levels. Oil has hit yet another record high. The dollar is getting its ass handed to it. Unemployment is up.

Can we finally use the recession word?

The GE earnings release told me everything that I need to know about this economy. One of the best-run companies in the world which is a master of managing earnings, reached into it's hat and didn't pull out a rabbit. Earnings were flat.

Read this statement from CEO, Jeff Immelt:

"Led by double-digit segment profit growth in our industrial businesses and a strong relative performance in our financial services businesses, we delivered a solid quarter in a volatile environment," GE Chairman and CEO Jeff Immelt said.


"Many markets and industries remain healthy, while the U.S. economy is challenged," Immelt said. "Opportunities in emerging markets, infrastructure, commodities and global healthcare are creating demand for our businesses, while we fight through the difficulties of a burdened U.S. consumer, a tough housing market, inflation and volatile capital markets. Even with all this uncertainty, we still see growth opportunities ahead."

That's a nice summary of what's been working in the market and what hasn't. Simply put, if you live in an emerging market, then it's Everybody Wang Chung Tonight. If you live in the good ol' US of A, the song playing on your stereo is Drive by The Cars.

I think that Fannie and Freddie will rally on Monday. Some people with short this rally. I am not that brave. I am going to buy this bottom and wait for the cavalry.

Tuesday, July 8, 2008

Requiem




Noted value investor, Sir John Templeton is dead. Pneumonia struck him down at the ripe age of 95. Sir John is famous for having founded Templeton Growth back in the 1950s and making early bets on the rebound in Japan. Sir John was buying international equities long before Long before Mark Mobius or Jim Rogers trading securities. Sir John was not just about money however. Through his foundation, he gave away $60 million a year for research into religion and science.

For insight into his investment methodology, take a look at Investing the Templeton Way: The Market-Beating Strategies of Value Investing's Legendary Bargain Hunter by Lauren C. Templeton, his niece. It's a remarkable story of the value of thrift, patience, and truly being a contrarian.

Tuesday, June 24, 2008

Is the sky falling...still?


Home prices are falling. Oil is trading north of $138/bbl. Banks are hard up for cash. Has the financial world been on a repeating loop for the last year? Weren't we supposed to be past ugly things like writedowns, dilutive offerings, shareholder lawsuits and arrests? Maybe we've fired up the DeLorean and no one told me. Let's see, the Celtics were playing the Lakers, that would indicate that it was the 80s. Donald Trump is ubiquitous and annoying. However, George Michael is out of the closet and I don't hear "Walk Like an Egyptian" everywhere I go. Alright, I've got my bearings now. It's still 2008.

So now I need to gauge how things are going in America. Luckily, Darden Restaurants, Kroger, Remy Cointreau, and Sonic are reporting today. That should give me a good sense of whether or not Americans feel rich or poor. After all, when you don't have money to eat out, but you just want a sip of Cognac to get you through the night?

My guess is that things are bad, but not quite this bad. Certainly, not Mad Max bad or Waterworld bad.

Unfortunately, this is how it's going to be for at least the next two years. It took a while for the excesses to build up and it will take a good while for them to be siphoned off. There is no miracle weight-loss cure for the American economy. Instead, we're going to get a steady regimen of rice cakes and exercise.

Friday, June 13, 2008

It's good to be king


It's good to be king and have your own way.- Tom Petty

Not only is Dick Fuld a billionaire who runs the 4th largest investment bank in the U.S., but he can also throw underlings under the bus when he screws the pooch. It's good work if you can get it. Don't tell me that Erin Callan wasn't doing her master's bidding while she was deliberately misleading investors about Lehman. Don't worry though, this is Wall Street. They're not being shown the door for leading the bank to a 3 billion dollar quarterly loss. They're just being reassigned, sort of like the Seinfeld episode where Elaine keeps promotes the crazed Vietnam veteran in the mailroom at J. Peterman because he's doing such a bad job. Where is the chorus calling for Fuld's head? Isn't the board supposedly looking out for shareholders?

Hollywood got it right about Wall Street 20 years ago.

Gordon Gekko: [at the Teldar Paper stockholder's meeting] Well, I appreciate the opportunity you're giving me Mr. Cromwell as the single largest shareholder in Teldar Paper, to speak. Well, ladies and gentlemen we're not here to indulge in fantasy but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.

Cromwell: This is an outrage! You're out of line Gekko!

Gordon Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.

Dick Fuld owns about 2 million shares; LEH has a float of over 500 million shares. In total insiders control about 3.6% of the shares outstanding. Do you honestly think these guys are working for the shareholder?

Maybe ol' Gordon was right.

Friday, June 6, 2008

Plunging


The market is taking a beating today. Why? The jobs report and oil. Let's ask ourselves, are these new phenomena? Hasn't news like this been reported for the last twelve to eighteen months? Just about everybody is taking a beating, but especially financials. Isn''t this also an old story? You mean there are still lots of bad loans out there and people who won't be able to pay their credit card bills, and this matters?

It seems that we priced so much optimism into the market that reality is getting it killed. It's like admitting that your kid is ugly after all. It's embarrassing and it hurts.

What is working right now? Energy. Should you rush there? Maybe. Now would be a good time to review your asset allocation. What's your exposure to energy already, not just in individual stocks, but via ETFs and mutual funds. Include your retirement accounts in this calculation. Do you need to rebalance?

As always, you should always look for bargains. The news often is as bad as the market would have you believe. Review the 52-week lows list. Try to identify beaten down industries. Set some price targets for favorite stocks.

As Gordon Gekko said to Bud Fox, "go to work."

Tuesday, June 3, 2008

Buffett's buys


These lists appear every quarter on investing websites, no doubt culled a lowly staffer burning the midnight oil, scouring the EDGAR database. Despite how much you might appreciate their efforts, ignore the info. It's not that helpful to know what Berkshire Hathaway bought after the fact. You'd want to know beforehand. What would be even more exciting would be knowing what is Mr Buffett's personal brokerage account, outside of Berkshire shares. I know that 99% of his networth is in Berkshire shares, but I imagine that he invests somewhat differently for just himself than for his shareholders. After all, he's dealing with a smaller sum, so he can buy all sorts of interesting, smaller stocks that he can't for Berkshire.

In others news, I was in the elevator at work and this index, the Tomo 300 flashed on the screen. It's an index that attempts to capture the value of intellectual property. Has anyone ever heard it referred to previously? I know that it's very new(it debuted in mid-December '06), but I can't think of ever hearing about it on Bloomberg or CNBC. There apparently are a few Claymore ETFs that license it and trade on the AMEX. The holdings are really all over the place: energy, telco, materials, consumer staples.

Friday, May 30, 2008

What is Kerkorian up to?


He's upped his stake in Ford. He's wiling to pay $8.50 a share. Either he is going to slash and burn the company to profitability(harder than it sounds) or he's going to flip it to another buyer like the Chinese or Indians. Interesting thing about Ford, their problems are only in North America. Unfortunately, that's the biggest car market as of today. If you read their last earnings release they doubled their income in Europe and south America. They even earned a profit in Asia.

Ford's biggest strength is that they get more of their earnings from overseas than Chrysler or GM. Like everyone else, they're going to have to kill several brands while creating new cars that can deal with the reality of higher fuel prices, This doesn't mean manufacturing rectangles with wheels. Inexpensive and reliable don't equal boring. Unfortunately, this whole industry is bereft of ideas. The last game-changing one they had was the minivan. That was back in the 80s.

Tuesday, May 27, 2008

How well do you know your stocks?


Seems like a stupid question, doesn't it? I'm being totally serious though. Maybe you can know ROA and ROE and other profitability rations, but do you know how the company makes those numbers?

Actually what I'm asking is how well you know the company's represented by the stocks you own? If you're a technician or a momentum investor, feel free to tune me out. This may begin to sound an awful lot like the teacher from "Peanuts."

Have you done more than read the Yahoo! Finance summary? Have you even checked out their website? You need to know more than "they're a Chinese telecom company."

Who are the top management? Who's on the board? What sort of experience do they have?

Do you know how they make money? No, really I'm serious. This is a more complicated question than what do they sell? For instance, General Motors makes most of its money from financing the sale of cars. What are their best-selling products? What are their margins? What's the five-year trend? Are they growing or shrinking?

What's the business model? What are its strengths and weaknesses? Who are the competitors? What're they doing that's different? Who are the customers? Are they dependent on a small number of key companies or segments? What about suppliers? Does your company depend on one source for a key component? Is its supply tight?

These questions are all great starting points for understanding the business that you now own.

Friday, May 23, 2008

What did I tell you about Ford?


Last quarter, they were so happy to announce that they turned a surprise profit. I wrote about it last month. Now it seems that they are going back on their pledge to be profitable in 2009, much to everyone but my own surprise. I guess high gas prices do matter after all.

"In a statement, Ford said rising prices for commodities, particularly steel, and an accelerating consumer shift from larger trucks and sport-utility vehicles would make it impossible to meet a key milestone in its efforts to turn around its money-losing North American operations."

Weren't higher commodity price forseeable? Don't they have economists and purchase agents who help them figure this stuff out? We're they the last people to know that steel has gotten more expensive, and that high gas prices were causing people to shift away from the SUVs and large trucks that are the only things that Americans still want to buy from Ford? How many restructuring plans will there be? It seems that every 18 months, they're going back to the drawing board.

Still, some observers still think that Ford is the best off of the Big Three. In a sense, he's right. Ford is the least tied to North America of the big Three. Their dealer network is the smaller than the other two.

Is it a bird? Is it a plane? No. It's Kirk Kerkorian upping his stake in Ford.

Tuesday, May 20, 2008

Can the Fed prevent bubbles?


This is the hope of Federal Reserve Chairman Benjamin Bernanke. He has hired some old chums of his from Princeton to study the matter. Bubbles are inevitable and like the Bible says of the poor, will always be with us.

If I had to guess as to why a supposedly free-market economist would have an interest in acquiring such powers I would venture two guesses. One, Bernanke is a student of The Great Depression. This is the basis of his fervent anti-deflation bias, and the reason for his famous helicopter speech from 2002. For Bernanke, deflation is the anti-Christ. The second reason for this thinly-veiled power grab is that no matter how much economists believe in free markets, they are also humans who enjoy power and prestige. I have never known a government official to dislike power or influence(George Washington is the lone example I can think of).

Bernanke has not been alone in pursuing more power for The Fed. He has had helps from the highest office in the land. At the end of March, President Bush outlined a plan that would significantly overhaul the financial regulatory apparatus of the country, "the Fed would sit at the top with expanded responsibilities as the 'market stability regulator.' But the Fed would lose its current powers over bank holding companies."

Such a broad description as "market stability regulator" reminds me of the old Roman title of dictator. We shall see whether or not Bernanke is Caesar or Cincinnatus.

Friday, May 16, 2008

Yahoo!, Microsoft, Carl Icahn, and letters


I've never been that impressed with Carl Icahn. Well, at least not as impressed as one normally would be by a man worth many billions. I find his greenmail and activist shareholder ploys mere bullying. Pressuring companies into asset sales and/or buybacks is not as romantic and going in, rolling up your sleeves, and reversing a decline. Then came the coup de grace; I learned that he and his wife sing showtunes together. Unforgiveable.

His full frontal assault on Yahoo! is starting to change my opinion. Yahoo! has just the sort of self-satisfied, entrenched management that his Icahn avatar Gordon Gekko rails against in Wall Street. Yahoo!(YHOO) was trading at around $19/share before Microsoft(MSFT) made their offer(their finally offer of $33/share represented a 72% premium). Was Yahoo! negotiating in good faith? Jim Cramer thinks not. Icahn is very smart and tenacious. He has brought along heavyweights like Mark Cuban and John Paulson, fresh from his huge subprime score. He is hoping to throw out the board, get his slate of ten directors elected, and then lure back Microsoft.

This is like having the high school quarterback asking a not so popular girl to prom, her giving him the cold shoulder, then having her mom swoop in and try to make the date happen anyway.

One of the sillier aspects of the whole thing has been the absurdly polite/passive-aggressive letters that have been exchanged. Why in 2008 do investors issue these things? This is not business, not a Jane Austen novel. Here is the text of Ballmer's we're no longer interested in Yahoo! letter that he sent to Jerry Yang. I can almost hear Roxette's "It Must've Been Love" playing in the background. His outlining of just how silly it would be for Yahoo! to seek "strategic alternatives" with Google makes sense.

How about Icahn's letter to the Yahoo! Chairman Roy Bostock? I love that he says a number of shareholders have asked him to lead a proxy fight. Ah, Carl Icahn, the reluctant warrior. He's like Aragorn, he never wanted to be king, but fate had other plans.

This letter reminds of that early in The Godfather: Part II, when Connie comes to Michael for money when she wants to marry Merle Johnson. After basically calling her an unfit mother and a whore, he offers her a place in the compound and whatever she wants. Then he chilling says, "Connie, if you don't listen to me, and marry this man, you'll disappoint me."

Do you think Yahoo! will disappoint Icahn? They just might. Read the Yahoo! response to his letter.

Tuesday, May 13, 2008

Radio One


This is a bad company in a miserable industry. There is no turnaround plan. It's been run like a feudal enterprise by the founder and her son(they remind me of the Dillons, the mother and son conmen in The Grifters). It's not even worth a takeover bid.

Radio One(ROIA) is now trading for about $1. I went negative on the stock in August at $4. This company is the worst house in a bad neighborhood . It has been steadily mismanaged, yet all along the way, management has been very generous in granting themselves raises and bonuses despite poor execution.

They only add insult to injury when the CFO says, " Liggins's increased compensation reflects the fact that he has diversified the company's media portfolio... the package would provide incentive for Liggins to "maximize shareholder value."

Shouldn't the CEO of a company that his mother founded and of which he owns with her 7/8ths of the outstanding stock have more than enough reason to maximize shareholder value? When you're issuing a press release in order to explain away stock sales that make you look like rats fleeing a sinking ship, you've got problems.

Friday, May 9, 2008

Richard Russell


Richard Russell has been publishing The Dow Theory Letters since 1958 and is one of the dean's of sage investment advice. Some time ago, he wrote a great piece about the role compounding plays in the creation of wealth, acquiring wealth, the difference between the rich and the poor man, and the importance of action.

"For the average investor, you and me, we’re not geniuses so we have to have a financial plan. In view of this, I offer below a few rules and a few thoughts on investing that we must be aware of if we are serious about making money.

I. The Power of Compounding

Rule 1: Compounding. One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation — and money. When I taught my kids about money, the first thing I taught them was the use of the "money bible." What’s the money bible? Simple, it’s a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. You need knowledge of the mathematical tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious — compounding may involve sacrifice (you can’t spend it and still save it). Second, compounding is boring – b-o-r-i-n-g. Or I should say it’s boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including the following extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306.

In this study we assume that investor B opens an IRA at age 19. For seven consecutive periods he puts $2,000 into his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he’s finished.

A second investor, A, makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he’s 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.

This is a study that I suggest you show to your kids. It’s a study I’ve lived by, and I can tell you, "It works." You can work your compounding with muni-bonds, with a good money market fund, with T-bills, or say with five-year T-notes.


RULE 2: Don’t Lose Money.This may sound naive, but believe me it isn’t. If you want to be wealthy, you must not lose money; or I should say, you must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big-time — in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own businesses.

Rule 3: Rich Man, Poor Man.In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur, and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS. I can’t begin to tell you what a difference that makes, both in one’s mental attitude and in the way one actually handles one’s money.

The wealthy investor doesn’t need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money-market funds, stocks, and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "giveaway" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn’t mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to "make money." And in return he’s always pressuring the market to "do something" for him. But sadly, the market isn’t interested. When the little guy isn’t buying stocks offering 1% or 2% yields, he’s off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he’s spending 20 bucks a week on lottery tickets, or he’s "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he’s a guaranteed loser. The little guy doesn’t understand values, so he constantly overpays. He doesn’t comprehend the power of compounding, and he doesn’t understand money. He’s never heard the adage, "He who understands interest, earns it. He who doesn’t understand interest, pays it." The little guy is the typical American, and he’s deeply in debt.

The little guy is in hock up to his ears. As a result, he’s always sweating — sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He’s impatient, and he feels perpetually put upon. He tells himself that he has to make money — fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down escalator.

But here’s the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he’d have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.

Rule 4: Values. The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety, (b) an attractive return, and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.

II. Time

TIME: Here’s something they won’t tell you at your local brokerage office or in the "How to Beat the Market" books. All investing and speculation is basically an exercise in attempting to beat time.

"Russell, what are you talking about?"

Just what I said — when you try to pick the winning stock or when you try to sell out near the top of a bull market or when you try in-and-out trading, you may not realize it but what you’re doing is trying to beat time.

Time is the single most valuable asset you can ever have in your investment arsenal. The problem is that none of us has enough of it.

But let’s indulge in a bit of fantasy. Let’s say you have 200 years to live, 200 years in which to invest. Here’s what you could do. You could buy $20,000 worth of municipal bonds yielding, say, 5.5%.

At 5.5% money doubles in 13 years. So here’s your plan: each time your money doubles you add another $10,000. So at the end of 13 years you have $40,000 plus the $10,000 you’ve added, meaning that at the end of 13 years you have $50,000.

At the end of the next 13 years you have $100,000, you add $10,000, and then you have $110,000. You reinvest it all in 5.5% munis, and at the end of the next 13 years you have $220,000 and you add $10,000, making it $230,000.

At the end of the next 13 years you have $460,000 and you add $10,000, making it $470,000.

In 200 years there are 15.3 doubles. You do the math. By the end of the 200th year you wouldn’t know what to do with all your money. It would be coming out of your ears. And all with minimum risk.

So with enough time, you would be rich — guaranteed. You wouldn’t have to waste any time picking the right stock or the right group or the right mutual fund. You would just compound your way to riches, using your greatest asset: time.

There’s only one problem: in the real world you’re not going to live 200 years. But if you start young enough or if you start your kids early, you or they might have anywhere from 30 to 60 years of time ahead of you.

Because most people have run out of time, they spend endless hours and nervous energy trying to beat time, which, by the way, is really what investing is all about. Pick a stock that advances from 3 to 100, and if you’ve put enough money in that stock you’ll have beaten time. Or join a company that gives you a million options, and your option moves up from 3 to 25 and again you’ve beaten time.

How about this real example of beating time. John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter "lacked intellectual leadership." Walter got $26 million for that little stint in a severance package. That’s what you call really beating time. Of course, a few of us might have another word for it — and for AT&T.

III. Hope

HOPE: It’s human nature to be optimistic. It’s human nature to hope. Furthermore, hope is a component of a healthy state of mind. Hope is the opposite of negativity. Negativity in life can lead to anger, disappointment, and depression. After all, if the world is a negative place, what’s the point of living in it? To be negative is to be anti-life.

Ironically, it doesn’t work that way in the stock market. In the stock market hope is a hindrence, not a help. Once you take a position in a stock, you obviously want that stock to advance. But if the stock you bought is a real value, and you bought it right, you should be content to sit with that stock in the knowledge that over time its value will out without your help, without your hoping.

So in the case of this stock, you have value on your side — and all you need is patience. In the end, your patience will pay off with a higher price for your stock. Hope shouldn’t play any part in this process. You don’t need hope, because you bought the stock when it was a great value, and you bought it at the right time.

Any time you find yourself hoping in this business, the odds are that you are on the wrong path — or that you did something stupid that should be corrected.

Unfortunately, hope is a money-loser in the investment business. This is counterintuitive but true. Hope will keep you riding a stock that is headed down. Hope will keep you from taking a small loss and, instead, allow that small loss to develop into a large loss.

In the stock market hope gets in the way of reality, hope gets in the way of common sense. One of the first rules in investing is "don’t take the big loss." In order to do that, you’ve got to be willing to take a small loss.

If the stock market turns bearish, and you’re staying put with your whole position, and you’re HOPING that what you see is not really happening — then welcome to poverty city. In this situation, all your hoping isn’t going to save you or make you a penny. In fact, in this situation hope is the devil that bids you to sit — while your portfolio of stocks goes down the drain.

In the investing business my suggestion is that you avoid hope. Forget the siren, hope; instead, embrace cold, clear reality.

IV. Acting

ACTING: A few days ago a young subscriber asked me, "Russell, you’ve been dealing with the markets since the late 1940s. This is a strange question, but what is the most important lesson you’ve learned in all that time?"

I didn’t have to think too long. I told him, "The most important lesson I’ve learned comes from something Freud said. He said, ‘Thinking is rehearsing.’ What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action."

This brings up another story which illustrates the same theme. J.P. Morgan was "Master of the Universe" back in the 1920s. One day a young man came up to Morgan and said, "Mr. Morgan, I’m sorry to bother you, but I own some stocks that have been acting poorly, and I’m very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It’s a terrible dilemma. What do you think I should do, sir?"

Without hesitating Morgan said, "Young man, sell to the sleeping point."

The lesson is the same. There’s no substitute for acting. In the business of investing or the business of life, thinking is not going to do it for you. Thinking is just rehearsing. You must learn to act.

That’s the single most important lesson that I’ve learned in this business.

Again, and I’ve written about this episode before, a very wealthy and successful investor once said to me, "Russell, do you know why stockbrokers never become rich in this business?"

I confessed that I didn’t know. He explained, "They don’t get rich because they never believe their own bullshit."

Again, it’s the same lesson. If you want to make money (or get rich) in a bull market, thinking and talking isn’t going to do it. You’ve got to buy stocks. Brokers never do that. Do you know one broker who has?

A painful lesson: Back in 1991 when we had a perfect opportunity, we could have ended Saddam Hussein’s career, and we could have done it with ease. But those in command, for political reasons, didn’t want to face the adverse publicity of taking additional US casualties. So we stopped short, and Saddam was home free. We were afraid to act. And now we’re dealing with that failure to act with another and messier war.

In my own life many of the mistakes I’ve made have come because I forgot or ignored the "acting lesson." Thinking is rehearsing, and I was rehearsing instead of acting. Bad marriages, bad investments, lost opportunities, bad business decisions — all made worse because we fail for any number of reasons to act.

The reasons to act are almost always better than the reasons you can think up not to act. If you, my dear readers, can understand the meaning of what is expressed in this one sentence, then believe me, you’ve learned a most valuable lesson. It’s a lesson that has saved my life many times. And I mean literally, it’s a lesson that has saved my life."