Stocks for All Seasons

We're moving!

2009-10-06T18:59:00.002-04:00

The new URL for this blog will be www.stocksforallseasons.com. I've launched a new Wordpress blog. This is the first step in a complete re-design.

A few interesting links

2009-10-01T16:29:00.005-04:00

Is the market going to re-test the March lows?

Jack Hough let us know Where to look for a clue on earnings .

Are the bears turning bullish?

Did the Thin White Duke cause the crash?

Everyone's talking about the New Normal.

Marc Faber is at it again.

Do you have the stones to buy value this deep?

Are you okay with volatility? Really? You sure?

2009-09-29T16:55:00.003-04:00

One of the things that bedevils all investors is volatility. Usually, we are trying to figure out how to take advantage of it. Investors, particularly value investors, are always claiming to not care about it. It's casually dismissed as noise. It usually is. Still, it's hard to call it noise when your portfolio drops 20%.

I hate volatility. I dread it except when I'm long and it's to the upside. I think that there are a lot out people out there who would agree with me. I expect volatility, and try to use it get lower my cost basis. I also use it to get out of positions, losing and winning ones.

What to do when you see a list of hurting companies

2009-09-28T08:56:00.005-04:00

The Business Insider recently posted a list of 10 big companies veering towards bankruptcy. Not surprisingly consumer discretionary companies dominate the list. Without a doubt, all of these companies have serious problems. Should you go out and short these companies? No. Absolutely not.

I'm not saying that none of these companies will file for bankruptcy, but I suspect that more will avoid that fate than suffer it. I think that a lot of these companies would make solid takeover targets. I'm pretty sure that someone would want to buy Sprint-Nextel or Interpublic Group. These companies have large customer bases and brands that have real value. While someone could let them fall into bankruptcy and then harvest the good organs, I think that doing that would cause undue harm to the brand.

So should you do with a list like this? I recommend that you use it as an opportunity to learn more about why businesses rise and fall. Try to find out what you could have noticed months ago and would've allowed you to short the stock months ago. You can also use lists like this to find good companies. Find out who these companies' competitors are. Maybe they've taken market share from the companies teetering on the brink of bankruptcy. They might be good investments.

A more speculative approach would be to examine each company and determine which one would most likely survive and then go long. The stock is probably trading at or near its 52-week low. Don't commit too much of your capital to the position, after all, this company might go bankrupt.

Revisiting E-Trade

2009-09-25T13:39:00.004-04:00

As readers of this blog know, I've been stalking E*Trade for some time. I first wrote about this stock back in November of 2007. It looked like a baby being thrown out with the bathwater. By my reckoning, there was still a vibrant brokerage business underneath the mortgage missteps. The stock has been a lot of places since then, all of them much lower than when I first started establishing a position.

It now seems that others have rallied to my cause. There are articles all over the web that E*Trade is going to get a bid from one of it's healthier competitors like Schwab or TD Ameritrade. Why? The same reasons I outlined nearly two years ago. The brokerage business is really sound(over 2 million accounts) and growing. They are slowly but steadily reigning in the mortgage mess at E*Trade Bank. Some are predicting that by year's end, someone will buy it. I can't dictate a timeline like that, but I would have to agree. Why wouldn't you want to acquire on the cheap (people have speculated a price of $3 or $4 per share) one of the most recognizable names in online stock brokerages?

This morning, I took a position in the October 2 calls. I got in a a price of 10 cents per call. At one point this morning, it was 5 cents. At another point, they were going for 15 cents. The volume in these calls has exploded recently, so a lot of people are expecting something to happen soon.

My plan for this trade is simple. I'm going to cash out as soon as the call is in the money. That means I'm betting that within the next 3 1/2 weeks, the stock will pick up about a quarter.

Only time will tell.

Still more on CCTR

2009-09-24T19:59:00.003-04:00

China Crescent Enterprises is like a girl I dated that hurt me, but I'm still fascinated by her. I can't help but be astonished by how cheap the company's being valued. I read the press releases and I'm leery. They're just way too positive. I am willing to miss out on a 100+ bagger here until I get a better sense of the company. I'm waiting for signs that an uplisting is afoot. What are those signs?

One, in order to list on the AMEX or NASDAQ, you need a share price of $3 and $4 respectively. So OTC companies will usually do a reverse split in order to meet those thresholds. Secondly, if the company incorporates in the U.S., that's a pretty good indicator that they're considering an uplisting. Third, are they going to be presenting at major investment conferences like Rodman & Renshaw? Once plans have been announced, follow along to make sure that the plan is executed. It's actually very rare for a stock to go from the OTC or OTCBB to one of the big exchanges. Lots of companies claim that it's going to happen, but it usually doesn't materialize.

Invest like it's 1966

2009-09-23T08:54:00.002-04:00

I'm currently reading F Wall Street by Joe Ponzio. I high recommend this book, especially to those who are interested in learning more about value investing. The book is dedicated to teaching readers to value the underlying business that a stock represents.

I just finished a chapter called "Invest Like It's 1966." The chapter focuses on the story of Rose, a client of Mr. Ponzio's who became widowed in 1966 and had to feed herself and put her son through medical school. She started with a $10,000 insurance check. She lived on the income from her investments, but was still able to amass a portfolio worth $1.5 million by 2008. How did she do it? Well, she had help from her brother who ran his own business. No doubt, his guidance on which stocks to buy and what prices to pay was helpful. In fact, she claims that she didn't know very much about investing. I think that it was her ignorance that was her saving grace.

Rose didn't have the Internet when she started investing. She got her prices from the newspaper the next day. She wasn't bombarded with a lot of information and noise about the stock market. There was no CNBC or Bloomberg. Instead, she focused on what was most important: safety and buying great businesses at good prices.

This is one aspect of investing with which I struggle. I don't ignore the noise as much as I should. In fact, I probably generate noise with this blog. I'm going to commit myself to paying less attention to the financial media. I think that it'll be good for my mind and my portfolio.

Marc Faber: Long-term Bear, short-term bull

2009-09-22T16:28:00.003-04:00

Marc Faber isn't the first person to trash the greenback. Interestingly enough, he still likes U.S. stocks, however. He particularly likes commodity stocks. I agree with him that the FCX, NEM, and XOM are good values. I can't say that I have his same tolerance for risk regarding buying the airlines.

I agree with him wholeheartedly that Ken Fisher is wrong in saying that the U.S. isn't carrying enough debt.

I'm looking elsewhere for value

2009-09-21T09:57:00.004-04:00

Right now, I don't see a lot of value in the U.S. market. The S & P 500 is up over 50% from the March 9th low. Many people are clamoring that the a new bull market is afoot. As regular readers of this blog know, I don't believe that. To this end, I've been stockpiling cash, waiting for another downturn. I haven't liquidated any positions, I'm just going to add to them.

I'm starting to look to other markets for values. This is difficult as many major markets have rebounded nicely this year. One of the websites that's been very helpful is ADR Universe. ADR Universe has a good overview of foreign stocks trading in the U.S., as well as closed-end funds. The information is tagged by both country and industry, so finding what your looking for is very simple.

If you would prefer to buy stocks directly rather than go the ADR route, then I suggest that you read, The World is Your Oyster by Jeff Opdyke of the Wall Street Journal. Mr. Opdyke has written a very personable book about his experience investing in international markets. He maintains several brokerage accounts in markets spanning the globe. He makes very solid recommendations about choosing a broker and what to expect. I recommend that you read it prior to committing any of your money.

Another author that I would recommend is Jim Rogers. His books, Investment Biker, Adventure Capitalist, and A Bull in China are fun reads that also give you a hands-on perspective on the perils and pleasures of investing outside the United States.

Also, check out the Emerging Markets Century by Antoine Van Agtmael. Mr. Van Agtmael gives a good overview of the tremendous growth and increasing sophistication of emerging markets. He also provides detailed information about the new class of blue chip companies.

I'm not cashing out, but I'm not buying either

2009-09-18T16:14:00.002-04:00

I've written about how I think that this is a sucker's rally several times. I'm stacking cash and waiting for some new bargains to emerge. When I look 52-week lows, there's not a whole to show for it. In fact, I ran MSN's 52-week low power search and two names came up, Tamura Corp.(TMURF) and Volkswagen AG (VLKAF). Neither of these companies interests me. In the meatime, I'll be happy to pile up some cash. In fact, I may take a break from following the market for a few days. That way, I won't be tempted to do something stupid out of boredom.

Is it too late to buy CMTP?

2009-09-17T10:03:00.007-04:00

I first wrote about China Digital Communications back on July 20th, 2009. Back then it was trading at ridiculously cheap valuations at a price $2.85 per share. It's still pretty cheap. Check out this piece from TheStreet.com by Rick Pearson. He went to Shenzen and interviewed management and came away convinced that the stock is still trading at a major discount.
The stock has appreciated by nearly 2/3 since I recommended it. As was the case with MNI, I am contemplating taking the money and running.

I agree with Pearson that the company is still undervalued. They are doing everything they can to attract institutional investors and that will be very good for the stock. Still, why not take a little off the table? This is the tug of war that everyone goes through with deciding whether or not to sell a stock. You can follow rules like those suggested in this Kiplinger's article.

They are helpful, but very general. However, if they were specific, that wouldn't work either. The bottom line is that you really have to know what you own and what your risk tolerance is. Neither of these tasks is nearly as simple as it sounds,

Lot of people thought that they had a good handle on Enron, Fannie Mae,Citigroup and lots of other companies that seemed like one-decision, solid blue chip stocks. Even when they acknowledge that they didn't know (remember how people used to say that Goldman was one big hedge fund), they had blind faith as long as the numbers continued to look good.

Risk tolerance is no easier to get a grip on as it has a tendency to mirror market fluctuations. When the market is in an upswing, most people say that they are very risk tolerant. However, during a bear market, most people (including institutional investors who ought to know better) run for the hills.

So what am I going to do? I'm going to hold on to CMTP. Why? I look at it as a long-term holding. Once I double my money, I'll sell half and play with house money the rest of the way. Until then, I'll let it ride.

I'm getting nervous about this rally

2009-09-16T13:46:00.003-04:00

I wrote about how to play this rally by buying junk stocks. I specifically mentioned McClatchy (MNI). When I recommend the stock back on August 11th, the stock finished that day at $2.06. It's up about 33% since then. The stock has worked well as a trade, but I would suggest exiting it now. The company has had a nice earnings surprise and has aggressively cut costs, but the song remains the same. Unless you know something novel about the newspaper business in general and McClatchy specifically, you should be happy with a sizable gain that you can now put into cash. Enough is enough. I'm pushing away from the table. There's probably still money to be made in this stock, but I'm fine with it going to someone else.

MNI is a good metaphor for the market's performance YTD. The stock bottomed in March and has been on a tear ever since. However, if you look at the fundamentals, there has been very little in the sense of real change or improvement in the company. I realize that the stock market is a leading indicator, but the market must be looking a decade forward in order to justify the performance of McClatchy and other similarly challenged businesses.

I just don't feel comfortable holding this stock anymore. I've made my money and now I'm moving on to something safer.

Barry Ritholtz knows what he's talking about

2009-09-15T11:56:00.004-04:00

Barry Ritholtz gave a very solid interview to TechTicker recently. It is very reasonable and incorporates a long-term view of the markets. Among other things, he cautions against declaring the death of buy and hold investing.

The market hasn't moved in eight years. That means that you might have another chance to buy great companies for the same fire sale prices they had right after 9/11. That sounds pretty good to me.

Take advantage of this opportunity. It won't come around again for a while, if ever. Look at the 52-week lows list.

Bet on Oil?

2009-09-14T09:59:00.002-04:00

In the October 2009 issue of Esquire includes some stock tips from Ken Kurson. Off and on throughout the years, Mr. Kurson has written a column called "The Portfoilo" in which he shares his thinking about the markets and he usually gives you a few ticker symbols to consider.
This month, Mr. Kurson focused on oil stocks and how to place your bets on the future on energy. He referenced a small global macro hedge fund called CommonWealth Opportunity capital. Here's a copy of their August letter to shareholders.
Ken Kurson sees oil going higher. He recommends a diversified approach to cashing in on this. He wants you to buy a basket featuring low risk, medium, high risk, and downright speculative stocks that will benefit from oil's upward move. I happen to agree with him so I'm recommending some picks that fit this category.

Low Risk (integrated oil giants): XOM or BP. He recommends them in the article and I agree. No one executes better. These guys don't make too many costly mistakes (see COP and CHK's bad natural gas bets). They're not going to make you rich, but there will be steady capital appreciation and a hearty dividend paid over the next few years.

Medium Risk( oil services): He likes RIG or OIH. I like Noble (NE) better because their cheaper on a PEG basis. I also like HAL or SLB. They are the consummate oil middlemen.

Higher Risk (oil sands explorers): Suncor (SU) is his pick. I'll take Canadian Natural Resources (CNQ). They smartly reduced their exposure to natural gas in 2008. It's cheaper and so I think will benefit more from the rise in the price of traditional crude. Plus, I think that PetroChina's (PTR) recent M & A activity makes it a potential target. Also, Nexen (NXY) might be a possibility.

Highest Risk (Russian ETFs): I can think of something much riskier. It's not really an appropriate long term selection, but more appropriate as a trade. If you really want to make a fortune, play the leveraged ETFs. Try ERX on for size. It's the Energy Bull 3x ETF. Need more risk, than trade the options.

As you can see, there are many ways to skin the oil bull cat.

By the way, I loved Kanye West's outburst at last night's Video Music Awards. I wish that more people in the financial world, say regulators and members of the media, has stones like his.

10 Bubbles?

2009-09-11T12:54:00.003-04:00

Clutterstock has named these areas a bubbles in the making. Are they right? What bubbles other than the ten mentioned here, do you think are forming or about to burst? Let me offer my own ten suggestions.

1. The Treasury Bubble

2. The outrage at the evils of corporate America Bubble

3. The Social Media Bubble

4. The Meredith Whitney Bubble.

5. The Dollar Bubble

6. The Blog Bubble

7. The Return of Deflation Bubble

8. The private equity/hedge fund bubble

9. The Obama as Savior Bubble

10. The China is a Bubble Bubble

There's no direct way to short most of these things on my list, but you can still profit from just avoiding them.

Meet the Dumbest Dot-com in the World

2009-09-10T10:10:00.003-04:00

This post is a follow up to yesterday's about the early stages of the Internet bubble collapse. Meet the Dumbest Dot-com in the World is both sad and hilarious. It should make you pause before you even think about investing in a company with no revenues or an "innovative" business model that seems way too smart for the little people.

AllAdvantage billed itself as an "infomediary"(by the way, I would also be leery of made up words like that). It's easy to dismiss the company now, but back in the day, it had really smart VCs like Softbank ponying up big money in order to fund it. The IPO was one of the last Internet highfliers of Frank Quattrone, then probably the brightest star in technology investment banking at Credit Suisse First Boston.

AllAdvantage wasn't a complete disaster though. They were an early creator of viral marketing campaigns. They were a behavioral marketing pioneer.

If you've got a lot of time on your hands and want to marvel and how naive people were at the turn of the century, then read this business description taken from it IPO filing.

The Dot.con Era

2009-09-09T08:28:00.005-04:00

It may seem pretty strange that so many years after the fact, I'm sifting through the wreckage of the dot-com era for lessons. It's largely because of the Michael Lewis-edited volume, Panic. The writings in this volume are so so prescient and smart. Two pieces that I've recently read are an excerpt from Dot.con: The Greatest Story Ever Sold by John Cassidy and "Meet the Dumbest Dot-Com in the World" by Mark Gimein. Even though these pieces were written back in the early part of the decade, they hold timeless wisdom about evaluating business models and much-needed perspective. Don't assume that we've learned everything that we could from this era. In fact, I assume we haven't. If we had, then we wouldn't be in the current mess.

The Dot Con excerpt recounts the early months of the bursting of the Internet bubble: March and April 2000. Reading books or magazine stories from this era is like walking through a cemetery or looking at a class photo from elementary school.
You either are feeling saddened and/or validated by a demise or just simply wondering what the hell happened to that kid from the back row.

It's amazing and almost laughable that companies like eToys, drkoop.com and women.com were considered viable businesses. Some of these companies did survive, mainly by being bought by stronger companies. For instance, women.com got folded into iVillage.com. It's not just the companies that seem like apparitions from the past. Do you remember Albert Vilar? He has a great quote in the book regarding a negative piece in which a Barron's writer claims that many of the top Internet names are running out of cash. He says, "I didn't set my performance record, which is about the best in the business, with any help from Barron's." I shall refrain from making a joke about this.

The real lesson I got from this piece is that it's very hard to call a crash, even when it's happening. Of course people were starting to throw in the towel, most people weren't. Many people thought that the market was going to bounce back and that this was simply a correction. This may seem like naivete, but it's exactly the sort of complacency and overconfidence that sets in when stock prices have climbed for so long. Besides if you remember correctly, in October 1998, the market experienced a correction and then bounced back to continue its ascent. Why on earth wouldn't people believe that the same thing was happening?

In tomorrow's post, I'll discuss the lessons learned from Mark Gimein's story on downfall of AllAdvantage.

Craigslist

2009-09-08T08:35:00.003-04:00

Over the weekend, I read this excellent profile of Craig's List by Wired writer Gary Wolf. It's amazing just how powerful the site is despite its resistance to innovation. I don't think that there is any obvious investing lesson here. It is interesting to note how the site continues to be the leader in so many categories while steadfastly refusal to incorporate many of the innovations of the web that surfaced in the last ten years. What really sticks out to me about the company is that they are very much in touch with what their users want. Apparently, their users don't want all the bells and whistles. I think that giving customers what they want, while seemingly obvious, is actually a point that needs constant emphasis.

You cannot invest like Harvard and Yale: Part II

2009-09-04T09:15:00.003-04:00

I wrote about this back in 2007 after I read a Smart Money article ( written by James B. Stewart) about copying the investment methods of these two endowments. I'm bringing it up again because Kiplinger's is now pushing the same naive advice. I thought that I would re-examine the idea and give it a bit more attention than I did two years ago.

To be completely fair, the Kiplinger's article does acknowledge that an individual cannot completely duplicate the strategies of these two endowments. The author, Andrew Tanzer, notes

Unlike the rest of us, the funds pay no taxes and never perish. Moreover, the endowments have huge staffs and access to investments, such as private-equity partnerships and hedge funds, that are unavailable to the common folk.

These are two really big differences. Taxes significantly eat into investment returns. Mortality and life expectancy play a big part in asset allocation, risk tolerance, and the investment instruments.

Furthermore, let's look at some of the ETFs that the Kiplinger's article recommends you use in order to replicate the strategies of Harvard and Yale. First of all, an ETF or a stock is not the same as investing in the physical asset. Investing in a REIT or REIT ETF is not the same as owning real estate. Owning a commodity ETF is not the same as owning an oil& & gas partnership in Oklahoma or a grain elevator in Iowa.

If you haven't read Pioneering Portfolio Management or Unconventional Success by David Swensen, please do. These books illustrate well the tremendous advantages that major institutional investors like big college endowments enjoy. Harvard and Yale have access to the creme de la creme of alternative investments. They can pick and choose exactly where they place their money. Their staffs have incredible access to the top managers as well as knowledge of their strategies. They can perform the type of due dilligence that you and I can only dream of. Harvard invests a good amount of money in timberland. They also have a lumberjack on staff.Hell, David Swensen even turned down Eddie Lampert years ago. Why? He wasn't forthcoming enough about how he was going to invest their money. That's how picky they can be.

Let's say that you did qualify as an accredited investor and could technically invest alongside Harvard and Yale. Many of the biggest and best venture capital, hedge, and private equity funds are closed to new investors. That is, unless you have a relationship that can get you in the door.

However, let's not diminish the importance of size and reputation. Yale and Harvard have billions to throw around. They also have two of the most impressive brands on the earth. They can give instantly credibility to any manager out there. You don't think they use this leverage to secure the most favorable terms that they can?

Think about it like this. Harvard and Yale are like a rich, handsome, well-endowed, smart tycoon that all the prettiest women in the world want to date. He can perform complete background checks, DNA, and psychological testing on any potential beaus. He literally has to have bodyguards in order to fight off these women. It must be nice.

So don't worry about trying to copy Harvard of Yale. You can't. You have to find an investment approach that works well for your personality,financial situation, and goals.

10 More Investment Mistakes

2009-09-03T09:41:00.007-04:00

Back in 2007, I wrote a post about the top 10 investing mistakes that I've made. I'm happy to admit that I've stopped making some of them, but I still make far more of them than I'd like. It's important to remember that investing is a process that involves not only learning new lessons, but re-learning old one. With that in mind, I took a hard look at myself and determined costly mistakes that I still make. Hopefully I can eliminate one or two of these habits and raise my returns by a percentage or two.

1. Using a market instead of a limit order. I usually do this because I'm overeager to establish a position. I need to learn patience.

2. Not scaling into a position, either when buying or selling. This is form the same reasons mentioned above.

3. Selling winners and keeping losers. Wishful thinking doesn't produce winning investments.

4. Investing without a goal or plan. The way you invest for a taxable account should be different than how you approach growing your 401(k).

5. Ignoring asset allocation. Stocks have outperformed bonds over the last 200 years, but bonds have outperformed stocks for some really long periods during that time. While I feel that your portfolio should have an equity bias, don't ignore bonds, especially when they're cheap relative to stocks. Valuation is really important. Also, don't forget to re-evaluate and re-balance your portfolio periodically.

6. Not having a plan for selling. I know that Buffett says that his ideal holding time for a stock is forever. It just isn't mine.

7. Buying on a hunch or impulse. In my experience, this ends in losses more often than not. Then again, it could be that my hunches are generally terrible.

8. Expecting an immediate gain from a purchase. It can take a while for the rest of the market to come to the same conclusion as you. Give them a little time.

9. Comparing your results to those of others. Comparisons are never kind. Don't do it.

10. Not stepping away from the market periodically. There are a lot of things that become clearer once you get some distance between you and the ticker.

Most of these erros are the result of a lack of discipline and a lack of patience. These are two of the hardest things to develop, but getting better at them will yield significant gains for your portfolio.

10 investing lessons from Michael Lewis

2009-09-02T09:02:00.007-04:00

I've recently started reading Panic: The Story of Modern Financial Insanity. Michael Lewis has edited a compilation of magazine pieces about various financial meltdowns, from the crash of '87 to our present subprime fiasco.

There are a lot of good pieces in the book, but I gravitated to the pieces by Lewis himself. In particular, I loved a piece he did for the New York Times Magazine back in October 2002. It's called "In Defense of the Boom." Before you dismiss it as glib sophistry, please read it. It might be the most dispassionate, well-reasoned, even-handed summary of the benefits and deficiencies of the Internet Bubble. Even though it was written nearly six years ago, it's still a really relevant piece, actually, it's more prophetic than relevant.

The same boosterism and asleep-at-the-wheel regulatory bodies and media were just as present in 1997 as they were in 2007. Though the Internet boom had it's poster boy in the form of Henry Blodget, this era has yet to name one (Bernie Madoff and Angelo Mozillo are probably ranked 1 and 2 for this dubious honor). In hindsight, we often pillory booms as some sort of amorphous collective haze that obscured everyone's vision. Lewis paints a different, more nuanced picture. Booms are a byproduct of an intensely competitive, self-interested people and system (capitalism). He accurately points out that wealth is not so much destroyed as transferred (I think Gordon Gekko, made a similar point in Wall Street, but I digress).

Anyway, read the piece and make your own calls about it. However, I took away five points from it that I think could benefit every investor. These points aren't necessarily new or original, but they are easily forgotten.

1. Booms and busts have always been with us and always will be with us. You can't repeal the law of supply and demand or eliminate the business cycle.

2. Booms produce benefits that can't accurately be quantified and who's beneficial nature may not be apparent for years.

3. Brokerage analysts are useless.

4. The people who ought to know better(institutional investors and smart financial journalists for example) are no better equipped emotionally than retail investors to recognize and/or avoid a bubble.

5. The media is very adept and creating heroes and than tearing them down. Jeff Bezos was Time's Person of the Year in 1999.

6. The Internet is a new technology, but is still like all other previously new technologies. It's pros and cons will be overstated.

7. Human nature will never change.

8. Good or bad, even profitable, depends largely upon perspective. As Obi-Wan Kenobi famously said, "many of the truths we cling to depend greatly on our point of view”

9. Failure is useful. Even if you don't learn from it, someone will.

10. The business of America is business. As Michael Lewis, so eloquently points out in the article:

There's plenty to criticize about American financial life, but the problems are less with rule-breaking than with the game itself. Even in the most fastidious of times it is boorishly single-minded. It elevates the desire to make money over other, nobler desires. It's more than a little nuts for a man who has a billion dollars to devote his life to making another billion, but that's what some of our most exalted citizens do, over and over again. That's who we are; that's how we seem to like to spend our time. Americans are incapable of hating the rich; certainly they will always prefer them to the poor. The boom and everything that went with it -- the hype, the hope, the mad scramble for a piece of the action, the ever escalating definition of ''rich,'' the grotesque ratcheting up of executive pay -- is much closer to our hearts than the bust and everything that goes with it.

These are all great lessons that will hopefully allow to keep your head during the next boom. They might not be able to keep you from being swept up in it, but they might help you bail with some money in your pocket before the ride comes to its inevitable end.

China Crescent Enterprises earnings announcement

2009-09-01T08:33:00.004-04:00

Yesterday, CCTR announced that a record $1.1 million in earnings on revenue of $17 million for the first 6 months of this year. Today and tomorrow, they will broadcast two webcast detailing their expansion into Africa and information about a new business totalling $30 million.

I'm still investigating the implications of Newmarket Technology's (NWMT.PK) majority ownership of CCTR. I gleaned this bit of information from a letter to NWMT shareholders written by CEO Philip Verges:

China Crescent Enterprises, Inc., a regional subsidiary in which NewMarket is the majority shareholder, recently filed a preliminary information statement. The purpose of the information statement was to inform China Crescent shareholders of a planned recapitalization. NewMarket plans to reverse split the common stock of China Crescent in addition to the possible conversion of a portion of NewMarket’s preferred China Crescent stock into China Crescent common stock.

One objective of the planned recapitalization is to support a dividend distribution of China Crescent stock to the shareholders of NewMarket. NewMarket management is currently working with China Crescent management to develop a plan that would include the conversion of a portion of NewMarket’s preferred ownership into common stock and the dividend of that common stock to the shareholders of NewMarket. Such a dividend distribution might require an increase of authorized China Crescent stock, and as such, the preliminary information statement included a plan to increase the authorized stock.

The rough translation of those two paragraphs is "we really want to give our shareholders a dividend in the form of CCTR stock. To this end, we're going to dilute the hell out of CCTR."

Given this, I would recommend that you keep your money on the sidelines for now. It's still unclear what the intentions of Newmarket Technology towards China Crescent.

Do you still think that the market is efficient?

2009-08-31T10:51:00.007-04:00

If so, then please read this AP story from last Thursday. Fannie Mae, Freddie Mac, and AIG shsres have been on fire, even though they are worthless? Why? Speculation, momentum investing, hope, stupidity,and any number of other reasons have had a hand in this madness.

Or can you tell me why Motors Liquidation Company (MTLQQ.PK) can trade 51 million shares a day on average? For those of you not in the know, Motors Liquidation Company is the dregs that was left over from GM. It's what the government didn't want. The government took control of the good assets.

If some proponent of the Efficient Market Hypothesis can explain this to me, then please leave me a comment. My guess is that they would claim that the market is only efficient in the very long term. Well, what is the long-term? Wasn't Enron perpetrating a fraud for most of the 1990s? Wasn't Bernie Madoff able to fool investors and the SEC for decades?

Fraud is an extreme case though. No theory can adequately account for it. What about a situation where investors simply ignore the facts. Take for instance, the analyst scandals of the Internet boom era and the recent ratings agencies problems. These two groups have pretty thoroughly been proven to be conflicted, conformist, and inaccurate. Yet billions of dollars is still deployed based upon their recommendations. An analyst upgrade or downgrade can still move a stock or bond. Is this a case of collective insanity or just plain laziness? What would it take for equity analysts and the ratings agencies to hurt their credibility?

What about the SEC? Can an agency with limited funds and jurisdiction really police a Wall Street that is truly global-spanning and has billions if not trillions of dollars invested in technology and political influence?

I think that Michael Lewis and David Einhorn said it best in their New York Times op-ed piece from January of this year. It effectively demonstrates how greed, a base human emotion, often distorts market fundamentals. They also touch upon the agency problems that exist within the ranks of the ratings agencies and the SEC.

It seems to me that the EMH overlooks the humans' capacity to deceive themselves and others.

I'm holding my nose and buying Hampton Roads Bankshares

2009-08-28T09:32:00.006-04:00

Hampton Roads Bankshares (HMPR) is a microcap bank holding company that operates community banks in southern Virginia and North Carolina. It is also a debt ridden carcass. It recently cut its dividend and cancelled a 32.5 million share stock offering without giving any reason. They swung to a loss in the most recent quarter, losing $42.6 million in the second quarter. If you look at the summary of risk factors from the August 10th 10Q, you will be positively frightened. This company is facing a number of difficulties. Loans and deposits are decreasing. The asset base is eroding. There have been significant changes in senior management. Non-performing loans increased over 50% from last quarter. The stock has basically been cut by 2/3 since the beginning of the year. So why do I like it?

Well, it's extremely cheap. It's trading at a 52-week low. It's trading at about 1/3 of book value. It's heavily shorted(10%), so there could be a short-covering pop coming soon. I like that they suspended the dividend. They need the cash. It's a responsible move by management.

This is basically betting that the company can get the capital it needs to ride out the storm.

In short, I don't think that thing can get much worse for the company. This is a classic point of maximum pessimism call. This is speculative and I'm not going to use just a tiny sliver of my portfolio in order to stake out this position. also, I'm going to slowly build a position, buying in chunks and using tight limit orders.

Heads, I win big, Tails, I don't lose much. That's my approach to speculation.

Money Honeys is back!!!

2009-08-27T13:29:00.003-04:00

It's been awhile since I compiled this list. Here's who's heating up the screen.

1. Erin Burnett
2. Trish Regan
3. Liz Claman
4. Jenna Lee
5. Alexis Glick
6. Margaret Brennan
7. Courtney Reagan
8. Michelle Caruso-Cabrera
9. Shibani Joshi
10. Dagen McDowell

Indian Stock Community

2009-08-26T15:47:00.003-04:00

MoneyVidya.com is like an Indian CAPS. It looks like a great resource for learning about Indian stocks. Small Stock Tips is also focused on Indian equities.

China Crescent Enterprises and Enterprise Value Multiples

2009-08-26T09:32:00.010-04:00

We shall continue with evaluating China Crescent Technologies (CCTR). Is the stock really as dirt cheap as it appears? Today, I'm going to examine CCTR's enterprise value in relation to revenue, EBITDA, and earnings.

Enterprise-Value-to-Sales (EV/Sales) measures how much you are paying for sales. Generally, the lower the number, the better. The formula for EV/Sales is simple; it's the enterprise value divided by revenue. Based upon the past year, the EV/Sales ratio for CCTR is 0.036. That seems extremely cheap, but we won't know for sure unless we compare it with other companies in this space.

According to Yahoo! Finance, Ingram Micro (IM) and Tech Data Corp (TECD) are competitors. These companies are much, much bigger than China Crescent, so this is not an apples to apples comparison. Still, it might shine some light on a best case scenario for CCTR. Both of their EV/Sales for the trailing twelve months is 0.06.

The Enterprise multiple is calculated by dividing the enterprise value by EBITDA. You can find EBITDA on the income statement. EV/EBITDA tells you roughly how long it would take to pay back the investment. For CCTR, it would be

$1,482,058/$1,330,000=1.11. The investment pays off in a year.

The enterprise multiple for both IM and TECD is around 4.

Finally, let's calculate the return on investment. That's done by dividing earnings by Enterprise value, a slight variation on calculating earnings yield. For CCTR, the return on investment would be 0.44. In other words, if you bought the company outright and retired the debts, 44% of your investment would be in earned income.

TECD's is 0.12 and IM lost money so this metric doesn't really apply.

So what we have here is a stock that is cheap based upon P/E, P/B, P/S, P/CF, P/FCF, EV/S, EV/EBITDA. Where are the flaws? I shall have to keep searching. My next stop is investor relations.

The enterprise value of China Crescent Enterprises

2009-08-25T08:41:00.007-04:00

China Crescent Enterprises released their Q2 earnings last Friday. They also released a webcast. I've written previously about whether or not this stock is too good to be true. I mean, on the surface, it seems incredibly cheap. So now, I'm going to apply another valuation metric: enterprise value. Enterprise value gives you a better idea of the total cost of control of a company than simply using market capitalization. Market capitalization only measures equity, while enterprise value includes debt. After all, isn't a house worth the equity you've accumulated plus the mortgage? The same is true with a company. When you buy one you either assume its debts or retire them.

Figures were obtained from recent SEC filings for Q2 2009 and Yahoo! Finance.

China Crescent Technologies' enterprise value is approximately $1,482,058. How did I get that? I took the market cap ($305,691)- cash ($2,259,195) + total liabilities ($3,435,565)

Okay, so now we know how much the whole shebang costs. That's probably of very little use to you unless you are a corporate raider or looking to acquire the entire company for some reason.

In tomorrow's post, we'll learn how to properly apply this number in order to yield meaningful metrics.

OTC stocks

2009-08-24T14:43:00.005-04:00

Sometimes on this blog, I talk about OTC stocks. I know that this isn't recommended. I know that there are a lot of scams and market manipulation. I know that many lack lengthy operating histories or significant share liquidity. The bid-ask spread can be a chasm. Still, there are also some really good, fast-growing under followed companies here. For instance, there are many legitimate, money-making Chinese stocks that are dipping their toes in a Western listing via the Over the Counter Bulletin Board and the Pink Sheets.

It is important to draw a distinction between the OTCBB and the Pink Sheets. The Bulletin Board generally has two types of companies listed on it.
Sometimes a stock has been delisted from a major exchange and is doing time down there until it gets its act together. In this way, the OTCBB can be a way station for companies on the way up or the way down. Other times, the a company just can't meet the strenuous listing requirements of the Big Board or NASDAQ. All companies on the OTCBB are still required to file all SEC and industry regulatory filings. Other than that, there are no listing requirements.

The Pink Sheets also have no minimum listing requirements. However, unlike the OTCBB, they do not require the filings with the SEC and other regulatory bodies. This can make next to impossible to find reliable information about companies listed here. However, there are some legitimate enterprises on the Pink Sheets. There are quite a few ADRs. For instance, BMW Group and Volkswagen both trade on the pink sheets. In recent years, new management has introduced a tiered system that it hopes will help distinguish the good from the bad.

Let me offer 5 guidelines that will help you when investing and trading these companies.

1. Do your homework. This is not as obvious a point as it seems. Do not follow tips you find on stock promotion websites. Look for SEC filings. Call their investor relations department. Google them. If you can't find reliable information, don't invest a single penny.

2. Don't trade stocks with average daily volumes of under 50,000 shares. Liquidity is an important factor, especially if you're trading. You want to be able to get in and out of a stock, especially out.

3. Look for stocks with narrower ask-bid spreads. This will be a big part of your costs. The bigger the spread, the more you'll pay.

4. Know why you're placing the order. Is this an investment or a trade? Do you have a price target? If it is a trade, don't get greedy and over stay your welcome. Get in, get out, and move on.

5. Don't forget about asset allocation. Don't go for broke trying to make a killing. Never risk more than 5% of your portfolio on a penny stock position. Speculation doesn't have to mean pushing all your chips into the middle of the table. You want to be able to walk away, whether it pays off or not.

Liz Claman gives us the scoop on FICO changes

2009-08-22T14:05:00.005-04:00

I love Liz Claman. I think that she's the hottest anchor on television. I try to work her into a blog post whenever I can. This just happens to be a time when it's pertinent.
On Tuesday, she spoke with FICO CEO Mark Greene. Not only are they changing the ticker symbol from FIC to FICO, but they're also changing how they calculate FICO scores.
This video also contains some important information on banks. He explains why banks aren't lending money and their preparations for the coming storm in credit card delinquencies.

Jon Markman is right

2009-08-21T16:29:00.002-04:00

Markman's latest piece for MSN Money is excellent. However, I do agree that fear is playing a major role in the market right now. Fear truly is the enemy of great returns. It's not just about fear of loss. It includes fear of straying from the crowd

ProShares launches a new inverse ETF

2009-08-21T10:42:00.003-04:00

ProShares is launching a new ETF that will allow you to short the long-term Treasury bonds. The ticker symbol will be TBF. Keep in mind, this is a new product and trades a small volume.

ProShares Short 20+ Year Treasury (TBF) is built to produce 100% of the inverse performance of the Barclays Capital 20+ Year U.S. Treasury Index for a single day, excluding fees and expenses.

Check out this bit of fine print from the ProShares website:

This ETF seeks a return that is either 300%, 200%, -100%, -200% or -300% of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus

.

You can click here to read the prospectus.

Great investing sites

2009-08-20T17:20:00.003-04:00

You should check these out. The writing is great and the reasoning is sound.

Old School Value
Stingy Investor
The Graham Investor
Shadow Stock
Bear Market Central
iTulip.com
Safehaven

There are plenty more than this, but I felt that these don't get nearly as much pub in the blogosphere.

American Axle: the best house in a bad neighborhood?

2009-08-19T10:42:00.005-04:00

I've been watching this company since May when it was trading in the low $3s. It's been a roller coaster ride since the spring. It was trading at $1.13 (this stock got as low as 29 cents in March!). Now it's well over $6. I've missed a huge gain by watching from the sidelines, but I still think that there's money to be made, if not in this stock, but the sector in general

A lot of good things have gone right for AXL in the last three months. They got a credit reprieve and GM is going to give them $210 million. Credit Suisse just upgraded them.
I know that auto manufacturing in this severely crippled, but it's not going to die.
DAN, ARM, and TEN deserve a second look. Beware, these companies have huge losses, little cash flow, and balance sheets that are still evolving. Still, all these companies are trading at fraction of sales.

Profits will not determine the short-term viability of these companies. Profits are a distant dream for these firms. Only one thing will move these stocks: restructuring. Positive news of covenants and credit facility extensions will lead to analyst upgrades and an uptick in investor sentiment. Monitor the price of credit default swaps.

This is a test with a huge curve; a 60% will get you a B+.

New 13-F Filing for Berkshire Hathaway

2009-08-18T13:14:00.004-04:00

BRK-A released their 13-F detailing stock holdings.

Look, but don't touch. These securities may or may not be appropriate investments for you. Remember that Buffet bought these for Berkshire Hathaway, an insurance company, not for his personal portfolio. Even if he did buy these for himself, he probably has a different time horizon and financial goals than you do.

If you want to really get something out of reading a 13F, then try to put yourself in the shoes of the person who bought the securities. Here are a few helpful questions to ask yourself when looking at 13Fs.

What information was available at the time?
Would you have made the same purchase?
Which of these holdings would you sell if a better opportunity surfaced?
Which positions are new additions?
Which ones have been increased or reduced? Why?

When examining individual companies in the portfolio, don't just look at the how much the share price has appreciated. There are other metrics that matter. Has the book value increased?
What's happening with the margins? Are their seasonal patterns in the business cycle that are about to emerge? Is there a preponderance of one sector represented.

13Fs can be great tools for teaching you how to think about investments. You first have to get beyond the ticker symbols and start thinking about the motivation(s) of the investor.

Great day for investing

2009-08-17T15:33:00.002-04:00

Indexes all over the world all down. The S&P 500 is off 2.25%. The FTSE is off 1.5%. The Shanghai Composite Index is down nearly 6%. The Nikkei is down over 3%. In fact, I can't find a major market index that is up today. I love it! This gives me a great opportunity to get in at really attractive prices. I'm going to stock up on Chinese stocks. I'm going to shove banks and insurance companies into my shopping cart. I feel like Nic Cage when he's shopping for liquor in Leaving Las Vegas.

It's days like these when real money is made. You won't know it until year down the road, but you'll be so grateful if you just made into the mass and start buying. I like CAF, CNO, and C at these prices.

Panic is an opportunity.

More on China Crescent Enterprises

2009-08-15T10:23:00.006-04:00

I first wrote about CCTR back on July 25th, 2009. The stock has more than doubled since then. I suspected that the company was too good to be true, but I didn't have time to really dig down and research. This post is a follow up. There will be more as I accumulate information.

Stockpreacher.com just released a "trading outlook" for CCTR.

http://stockpreacher.com/trading-outlook-for-china-crescent-enterprises-inc-cctr/#more-2433

Please read Stockpreacher.com's disclaimer/warning:

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report. Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

They are stock promoters. Sometimes stock promoters are pushing legitimate issues, sometimes they aren't. Stockpreacher.com is run by a guy named Paul A. Ebeling, Jr. I shall do some research to try and figure out if he ha owns any CCTR shares.

China Crescent might be a legitimate find, but the jury is still out.

Are you really a contrarian?

2009-08-13T11:20:00.003-04:00

Contrarian is probably one of the most overused labels in investing. Just about everyone likes to brag about how they went against the grain and made the call of the year or a lifetime. I think that there are probably significantly fewer real contrarians out there though. First of all, it's extremely hard to go against the crowd, in fact, it's against human nature. There are significant real and psychological rewards to going with the crowd. Secondly, going against the crowd often doesn't work out for the better. After all, you're betting against the the great mass of investors that move the market. Remember, John Maynard Keynes' famous line about the market can remain irrational longer than you can remain solvent? Raise your hand if you've lost money shorting a stock because your timing was just a bit off.

I'm going to list some of the great contrarian calls of the last decade. If you were in on them, than you're a far better (and richer)person than me.

Buying commodities in 1999.
Shorting tech stocks in 2000.
Buying AAPL in 2002.
Buying Chinese stocks in 2000.
Shorting Enron in 1999.
Shorting Lehman in 2008.
Shorting financials in 2007.
Buying the market in March of 2009.

Interestingly enough, Jim Rogers did three of these things. In fact, he was saying to short the money center banks back in 2006! That had to be painful, but ultimately very rewarding.

It's not easy being a contrarian. Think a little before you throw the term around loosely.

Take a look at Russia

2009-08-12T12:11:00.005-04:00

Remember when the acronym BRIC had cache? That was before last year when emerging markets tanked even more than American and European indices. However, BRIC is back this year, none more so than Mother Russia.
Russian stocks have been seriously beaten down in the last year. Bad loans, low oil and natural gas prices, plus unemployment have seriously hurt the economy. Now is the time to start sorting through the wreckage. It's up about 60% YTD, but I think that will go higher as I predict commodity prices will firm up by the end of the year. Additionally, Russia is throwing as much money at the problem as possible.

One of the safest, easiest, and best ways to invest in Russia equities is through the Market Vectors Russia ETF (RSX). The ETF is highly weighted towards energy and raw materials. I don't mind that since I still believe in the secular commodities bull. Even if you don't this ETF is cheap. It's trading for 30%under book value, a 0.24 P/S, and a P/CF of 1.41.

Another way that will give you exposure to Russia is the Templeton Russia & Eastern Europe Fund (TRF). It's a closed-end fund with greater geographic diversity and less exposure to commodities. It's primarily (about 31%) invested in telecom. I would stay away from the fund however. It's trading at a huge premium (39%) to it's NAV. Plus the expense ratio is 1.82%, too rich for my blood.

What you should do if you think this rally is real?

2009-08-11T15:02:00.003-04:00

This advice applies if you just think that there's a few tickets on the clock before it hits midnight. Personally, I think that what we've seen recently has been a sucker's rally. However, even if I'm right, it doesn't mean that someone can't make good or even great money in the short-term taking the other side of my trades.

If you think that the jig isn't up, I suggest stocking up on small cap crap stocks. Craps stocks come hurtling out of their bottoms during rallies like this. Take a look at two homebuilders who many thought would go under, Beazer Homes (BZH) and Orleans Homebuilders (OHB). Both these stocks were and still are heavily shorted and deservedly so. Look at a YTD chart of these stocks compareing with the S & P 500 and the ETF based on the homebuilder's index. While the former have been flat, OHB is up about 300% and the BZH is up about 150%.

Be careful, after all, you're going to be looking for crappy stocks, so don't be surprised if awful little banks and biotechs with no drugs that burn through cash pop up on the screen. A stock like that I think fits this bill perfectly is McClatchy (MNI). It's trading around $2. McClatchy used to be one the premier newspaper chains in this country. You can probably fill in the rest of the story.
Anyway, it has a terrifying debt to equity ratio of 25 and lost 22 cents a share last quarter, yet it is up 193% in the last six months! This is an extremely volatile stock, but I think it's got the legs for another big move up.

More on China Education Alliance

2009-08-06T08:41:00.003-04:00

RedChip.com is really promoting this stock. Check out this post. I really think that this is a chance to get in on Apollo or Career Education before they amassed a huge following.

Cashing in on online learning in China

2009-08-04T10:24:00.004-04:00

China Education Alliance (CEU)is an online education and onsite training company based in the People's Republic of China. This is a market that is growing by about 20% a year. They make test materials and study guides, while also providing vocational and certification training. Right now, it has a P/E of 10.7 and an annual EPS growth rate of 54%. That's an astounding PEG ratio of 0.20! Insiders own over half the stock. It has no long-term debt.

Let me mention a few caveats. It is a microcap stock that trades on average 13K shares per day. It has a beta of 2.17. Please build a position in this stock slowly and use limit orders.

Is the S&P 500 breaking 1000 really important?

2009-08-03T16:23:00.003-04:00

What about the Nasdaq breaking 2000? Yawn. It is non-stories like these that make me shake my head. It almost makes me want to learn more about the weird, sad end to Michael Jackson's life than read about what a milestone this is. Is it psychologically important? I don't really know what that means. I suppose it means that people are very attached to round numbers and get happy when you pass a big one. These stories always include an optimistic quote from a fund manager or two. This is a great example of Mr. Market changing his mind. Why? I don't know. People will point to stronger growth overseas or a boost from the manufacturing sector, but no one really knows exactly why. They just know that the bulls won today. Don't believe the hype. Use days like these to exit positions you no longer like on more favorable terms.

Bank Bonuses

2009-07-31T10:17:00.005-04:00

Yesterday New York Attorney General Andrew Cuomo released some fairly damning numbers concerning $1 million bonuses handed out at banks that received TARP (your hard-earned) money. Here's a short synopsis of some of the bigger pigs. MS, GS, and JPM paid out bonuses that were greater than their profits for 2008!

Bank of America: 172

Bank of New York Mellon: 74

Citigroup: 738

Goldman Sachs: 953

JPMorgan Chase: 1,626

Merrill Lynch: 696

Morgan Stanley: 428

State Street: 44

Wells Fargo: 62

Check out this particularly troubling exerpt from the New York Times article:

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Yet we still regard these banks as sophisticated investors? Hardly, they are big compensation schemes. I am aginst completely setting aside hundreds of years of contract law in order to claw back money, but this is obnoxious, tone deaf behavior. I have no problem with a self-supporting organization paying its employees whatever they'd like, but if Uncle Sam owns you, than that's different. You should at least pretend that you care about how this will look. The goverment owns a third fo Citigroup. Shouldn't it flex its muscles just a bit.

Allied Irish Bank

2009-07-30T11:46:00.004-04:00

Allied Irish Bank (AIB) is one of the big boys of Irish banking. They pretty much do it all: corporate banking, retail banking, investment banking, asset management,etc. This company got killed in the last year, losing about 80% of it's value. It reached a 52-week low of 72 cents back in March. It's yielding 40% and is still cheap on a P/BV basis. It's selling for 0.16 of price to book! It's also selling for far less than the cash on the books.

What are the risks? Well this company was involved in pretty much every frothy real estate market in the West, especially Ireland. It's still unclear if the all the damage has been done. Their Tier 1 capital ratio is about 7%, which indicates that it's wouldn't be in a great position to sustain further massive losses. For instance, a conservatively-financed bank like State Street (STT) has a tier 1 capital ratio of 13.5%. I would say that you ideally would want the bank to be 10% or above in this environment. Still, it all depends on your loan portfolio. They also need to raise a significant amount of money next year in order to further solidify their balance sheet. They may sell some American and Polish assets in order to do this.

The bottom line is that this is a speculative pick in the short-term, but long-term, unless you think that the Irish growth story is dead, should pay off handsomely for the patient investor.

Insurance is still attractive

2009-07-29T14:53:00.002-04:00

"You know what's worse than taxes?
What's worse than tax is insurance.
You got to have some insurance.
They shouldn't even call it insurance.
They just should call it ''in case shit.''
l give a company some money
in case shit happens.
Now, if shit don't happen,
shouldn't l get my money back?"
-- Chris Rock, "Bigger & Blacker"

I know that many insurance stocks have rallied off their 52-week lows, but they are still attractive. Take for instance, Conseco (CNO) which is up sizably today on better than expected earnings. It's still selling for P/S, P/B, and PEG ratios that at best would be described as meager. It's trading for about half the cash on the balance sheet.
If a money loser like Conseco scares you, then consider Unum (UNM). It's not as cheap, but still cheap. Plus, it has a positive P/E.

Put Saks and Dillard's on your watchlist

2009-07-27T11:36:00.003-04:00

Saks Incorporated (SKS) is trading at two-thirds of its book value and half of EV/revenue. That's pretty damn cheap. Dillard's (DDS) is trading at three-tenths of book value and a quarter of P/S. It's EV/revenueis 0.26. Dillard's also pays a small dividend. Obviously, this is a play on the recovery of the consumer.

Is China Crescent Enterprises (CCTR) Too Good To Be True?

2009-07-25T22:08:00.003-04:00

Or is it 2 legit 2 quit? I shall try to answer that question.

As usual, I was screening for absurdly cheap stocks. I wanted a market cap of 1B or less, trading under book value, with a P/FCF of 10 or less. I also wanted a stock that trades on average at least 50K shares/day.

CCTR is a tiny stock trading on the OTCBB. They are in the software development outsourcing business. They are trying to become a player in the smartphone and mobile computing market. It has a market capitalization of 173K! That's right, 173,000 dollars. It trades for 3 cents a share. It has a P/E of 3.7 and trades at a P/FCF of 1.7. It has a minuscule amount of long-term debt. This is a value investor's wet dream.

It looks too good to be true. So I'm starting to dig.

They filed for bankruptcy (Chapter 11) in Colorado March of 2005. However, it was dismissed in April 2006. Dismissal is not the same as discharge. Dismissal means that something went wrong with the proceedings. There's where the trail goes cold for me. I'm going to dig a little deeper and find out what happened. They also changed their name. That always seems shifty to me. Stay tuned.

Junk Bond ETF

2009-07-24T16:38:00.004-04:00

I'm buying iShares High Yield Corporate Bond ETF (HYG). Why? The spreads are tightening and companies are happily issuing new junk bonds. It's got a still-ridiculous yield of 10.5%. This is a trade that i couldn't pull the trigger on earlier in the year. I've been thinking about it since March. I feel so stupid about it, but I'm not going to make that same mistake again. I'm going to start dollar-cost averaging into this ETF. It won't necessarily be a smooth ride. Some default could easily rock the entire market. At that point, I will take a deep breath, and pile more on my plate. This is the old "blood in the streets" approach to getting rich. It's very hard to buy value when people are screaming and running for the exits, but I'm a big believer in mean reversion. It will probably take more time that I'd like to spend waiting, but spreads will continue to narrow. As a matter of fact, I should be praying for defaults so that I can really get a good bargain.

American Railcar Industries (ARII)

2009-07-23T09:57:00.003-04:00

American Railcar Industries manufactues, manages, and repairs railcars. This stocks is like a pair of pants in the drawer in which you find $50 you didn't now that you had. It's trading for less than the cash/share it has on the books. It's trading for about half of book value and a quarter of sales. Insiders (including Carl Icahn) own over half the shares.

Let it $now

2009-07-22T11:03:00.003-04:00

A great value-investing website, The Graham Investor, has turned me on to this undervalued microcap, Arctic Cat (ACAT). This stock is trading at half of tangible book value, a seventh of sales, and a eighth of its enterprise value/revenue for the trailing twelve months. It has no long-term debt. Arctic Cat makes snowmobiles, ATVS, related accessories. Like everyone else in this category, they've been losing money. ACAT has responded by cutting jobs.
This is not a great business selling at a bargain price. They are a luxury item in a weak economy. Their international sales have been hit by a resurgent dollar. Still, there's a lot to like here. In addition to the wonderful things I wrote about above, the company is cash flow positive and has $9 of cash/share on the books. Moreover, insiders own more than half the company.
I think the stock is pretty much bottomed and is a double.

Don't chase the triple

2009-07-21T11:24:00.003-04:00

Yesterday, Human Genome Sciences (HGSI) more than tripled in value. Voume has increased by twice that. Thus far, today it is up another 10%. Don't chase performance. I know about the lupus trial. I know it's been upgraded. So does everybody. You missed your opportunity to buy this was days ago, before it took out its 52-week high. Don't rush into a money-losing biotech just because of momentum. Unless of course, you have a strong stomach.

China Digital Communications Group (CMTP)

2009-07-20T09:36:00.004-04:00

This is an example for growth at a ridiculous price. This company has a P/E of 2.6, a P/CF of 2.36, no long term debt. Based on earnings for the trailing twelve months, the PEG is 0.017! Where else are you going to find growth that cheap? Let me throw a couple of caveats out. This is Bulletin Boad stock. It has a market cap of only 13 million. The average volume is only 35,000 shares per day.

Patting myself on the back

2009-07-17T09:54:00.002-04:00

Back at the end of last year, I recommended buying Moody's (MCO). If you'd followed my advice, you would've made about 45%. I still like this stock. It's not nearly as cheap as it was 7 1/2 months ago, but it's still significantly off from it's 52-week high of $43.07. I'm going to put in on a watch list.
Despite the complete lack of credibility of this business, people still treat its pronouncements as the Gospel truth. That's a great moat for a business. Plus, look at the margins. in Q1, their revenues were down from $21.8 million, 19 of which was due to dollar gaining against the pound and the euro. Think about that, revenues were down only 5% despite the fact that the company's incompetence helped create and sustain our current financial crisis.

Nice numbers from JPMorgan Chase

2009-07-17T09:08:00.002-04:00

JPM posted some good numbers in Q2. Buoyed by trading and underwriting profits, they earned 27 cents per share, easily surpassing expectations. They even ponied up $27 billion of TARP money. That's the good news. The bad news was in commercial real estate and credit cards. CEO Jamie Dimon doesn't see the recession ending just yet, so they're upping their loan loss reserves.

So how do you play this? I'm looking hard at shorting the KBW Regional Banking ETF (KRE). Compare it the Financial Select Sector SPDR ETF (XLF). The former is off about 36%, while the later is only down 3%. KRE is also trading at a higher P/E than XLF. I would think that's going to change soon. The regional banks don't have the same wherewithal as the big banks to handle the commercial real estate and credit card meltdown that's underway.

Is it safe to go in the water?

2009-07-16T16:48:00.003-04:00

It seems that pundits are falling over each other in order to decree that the recession is over. Is Daniel Gross right? I don't know if Nouriel Roubini is right, but then again, I don't care either. All I know is that there are still stocks trading for meager multiples, many of them big caps with tons of cash on the balance sheet. Do not get caught up in timing the end of the recession. We won't know officially until well after it's over. Don't be discouraged that you missed the March bottom. After all, we may re-test it. Even if we don't, there are still great companies that are cheap, some justifiably, some not. In fact, stop reading this blog and start looking amongst the wreckage!

Were you buying in February, March, and April?

2009-07-16T15:25:00.003-04:00

I must admit that I wasn't. I was scared. I didn't have the cojones to be greedy when others were fearful. I'd been salivating over Goldman Sachs (GS) for months. I even wrote about how I was going to pounce all over it when it went below $140. I got my opportunity, but I didn't go near it when it was trading in the 40s and 50s. Why? Fear. Confusion. I felt that the government wouldn't let it go down, but I wasn't sure the common wouldn't be wiped out. I eyed C when it was around a dollar, but I couldn't pull the trigger on that one either. Or what about Freeport McMoran in the teens? I think that I've learned my lesson, but I won't be sure until the next shakeout.

What now?

2009-03-03T15:20:00.003-05:00

This is a question I've been asking myself over and over. I've talked about the wisdom of cash many times on this blog, so I won't beat that horse to death anymore. Everyone and their brother has piled into gold. While, I still think that gold is going higher, there's nothing particularly insightful about that call. When I say hide, what do I mean? Do I mean a place that will result in a)no losses or b)capital appreciation? That would be nice, but my crystal ball isn't that powerful. Should you go with the 6 stocks featured in this article or solid consumer staples? That might work, but the most probably scenario for that is losing less than the rest. That's not a bad ending to this nightmare of a market for sure, but you can do better. It may seem riskier, but it's not. I think that you need to look to the option markets, LEAPS specifically. Warning: this is a strategy for the patient.

Now I'm not recommending that you purchase options if you know nothing about them. Please spend the time and money to learn about some simple strategies first. Options are priced differently than stocks and a whole host of factors go into their price with which plain vanilla equity investors usually aren't familiar. There are many strategies. Don't feel that you need to master them all or even more than one. Find the one that you understand best and works best for your personality. Also, don't think that you are prepared to trade them once you've read a book, attended a seminar, or completed an online tutorial like the one the Options Industry Council(OIC) offers on CD. Instead, do some dummy trades via optionsXpress or some other site that allows virtual options trading.

Now, you're real education will begin. You're about to learn a lot about yourself. Committing real money is thrilling, scary, and hopefully educational. Start with a small percent(less than five percent) of your portfolio. Be prepared to lose it all. Establish clear rules about when you will enter and exit trades.

Why options? Well, I'm willing to put money at risk because I think that some very good companies are being given away for dirt cheap. Options allow me to participate in the upside, while restricting my losses on the downside in terms of total dollar commitment. I want to buy beaten down blue chips, stocks like PG and GE.

In my next post, I'll write about a trade possibility.

Fiddling while Rome is burning

2009-01-23T18:15:00.002-05:00

You're probably asking yourself how in the world could John Thain spend $1.2 million redecorating his office while the firm is going down in flames all around him? According to CNBC, Thain paid "$837,000 and his purchases included $87,000 for area rugs, $25,000 for a pedestal table and $68,000 for a 19th century credenza"
Mr. Thain is in good company. Michael Smith, the interior designer who Thain used, has also been hired by First Lady Michelle Obama to redecorate the White House.

When I heard about this story, I thought that it sounded very 1987 and that Darien Taylor, the Darryl Hannah character from Wall Street, was his designer.

Again, just like with the Madoff scandal, I am happy that things like this are coming to light, but not because I think that it will usher in a new era in corporate governance. Wasn't Sarbanes-Oxley supposed to do that? Hell, wasn't the creation of the SEC in 1934 supposed to do that? It's just yet another sign that we're working our way slowly through the muck.

Inauguration Day!

2009-01-20T09:34:00.003-05:00

What will Obama mean for my stocks? I don't know. I won't even venture a guess. That's been done already by more than enough people, including Jim Cramer.

I'm taking a few moments to think about the new business landscape that we have. Citigroup has finally thrown in the towel on the financial supermarket concept. Jim Jubak in his latest article opines that Bank of America is heading down that same road. What about JPMorgan Chase? CEO Jamie Dimon cut his teeth and Citigroup as Sandy Weil's right hand man. It doesn't appear that he's given up his former mentor's quest. Are he and Lewis engaged in reckless empire-building? Time will tell.

I would not be a buyer of common stock in Citigroup or Bank of America until the government signals that that the common won't be wiped out.

What is risk?

2009-01-06T13:13:00.003-05:00

Other than value, can you think of a more misapplied word in investing? Risk is either maligned or worshipped, not unlike volatility, depending on whether it worked out for you or not.

I've heard a lot of definitions for what risk is. The most common measure, beta, is really a measure of volatility vis a vis the market as whole. That seems lacking. Is VaR sufficient? It should go without saying that the ratings of brokerage firms and ratings agencies aren't worth much, but people still manage billions of dollars based on these complicated fictions.

Joe Nocera recently wrote a piece for The New York Times Sunday magazine about risk. It's a good, thought-provoking, well-reported piece, but it didn't help me invest my money better(I must admit that such a lofty goal probably wasn't Mr. Nocera's point).

My point is that risk is a highly personal topic, no matter how you quantify it. I know that it's easy to look to your mutual fund manager or financial advisor to handle risk management, but don't abdicate this important role. You might not like the job they do.

10 New Year's Investing Resolutions

2009-01-02T13:07:00.004-05:00

New Year's is a good time to take stock of your portfolio. If you can do 2 or 3 of things in the new year, than you'll be a much better investor than you were last year.

1. Don't buy a stock just because it's suggested in a magazine or on a blog.

2. Practice asset allocation; rebalance your poftfolio every quarter.

3. Turn off CNBC.

4. Pay attention to spreads, commissions, and account fees.

5. Meet with a financial planner.

6. Examine every holding in your portfolio and make sure that it meets with your larger investment goals.

7. Examine the performance of your mutual funds; consider switching to low-cost index-funds and/or ETFs.

8. File your brokerage statements from past years.

9. Learn a new stock valuation metric.

10. Stick to your investment plan.

Buy Moody's

2008-12-30T08:48:00.002-05:00

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.

More bad news is good news

2008-12-26T19:02:00.003-05:00

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.

The death of buy and hold? Bah, humbug!

2008-12-23T11:01:00.002-05:00

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.

A way to bet on the debt market recovering

2008-12-19T13:25:00.003-05:00

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.

Recession stocks

2008-12-16T14:20:00.002-05:00

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.

Bad news is good news

2008-12-12T09:27:00.003-05:00

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.

A must read from an unlikely source

2008-12-09T15:06:00.003-05:00

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.

It can always go lower

2008-12-05T12:55:00.003-05:00

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.

Should we spare a dime for Detroit? Part 3

2008-12-02T12:00:00.004-05:00

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.

Should we spare a dime for Detroit? Part 2

2008-11-28T11:02:00.005-05:00

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.

Should we spare a dime for Detroit? Part I

2008-11-25T13:31:00.006-05:00

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.

Top 10 stupid things you'll hear on CNBC

2008-11-21T08:30:00.004-05:00

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.

Through the looking glass

2008-11-14T17:08:00.003-05:00

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.

Goldman Sachs ans dollar-cost averaging

2008-11-11T13:03:00.003-05:00

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.

Exploit the election rally

2008-11-04T12:35:00.003-05:00

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.

JPMorganChase's buy list

2008-10-21T14:21:00.003-04:00

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.

Buffett writes

2008-10-17T09:44:00.003-04:00

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.

Nothing lasts forever even cold November rain

2008-10-10T12:20:00.003-04:00

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.

Jim Cramer's dramatic statement

2008-10-07T11:09:00.003-04:00

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.

Shame on you, CNBC

2008-09-30T13:52:00.004-04:00

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.

What now?

2008-09-19T11:12:00.003-04:00

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?

Thanks Hank

2008-09-09T19:37:00.002-04:00

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.

Robert Shiller has some answers

2008-09-05T10:02:00.002-04:00

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.

Not yet

2008-08-29T10:39:00.002-04:00

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.

Jim Rogers

2008-08-19T13:49:00.002-04:00

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.

Who to trust?

2008-08-12T15:54:00.003-04:00

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.

Not all the financials suck

2008-08-08T13:15:00.003-04:00

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.

Correction in Commodities?

2008-08-05T09:28:00.004-04:00

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.

Ignore talk of a bottom

2008-08-01T16:57:00.003-04:00

... 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.

Junk faxes

2008-07-22T09:56:00.004-04:00

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.

Bailout coming

2008-07-11T13:22:00.003-04:00

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.

Requiem

2008-07-08T13:32:00.003-04:00

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.

Is the sky falling...still?

2008-06-24T09:37:00.005-04:00

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.

It's good to be king

2008-06-13T13:58:00.003-04:00

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.

Plunging

2008-06-06T13:33:00.003-04:00

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."

Buffett's buys

2008-06-03T17:47:00.003-04:00

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.

What is Kerkorian up to?

2008-05-30T08:53:00.001-04:00

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.

How well do you know your stocks?

2008-05-27T08:04:00.001-04:00

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.