Through the looking glass

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

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

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

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

Goldman Sachs ans dollar-cost averaging

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

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

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

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

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

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

Exploit the election rally

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

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

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

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

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

JPMorganChase's buy list

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

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

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

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

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

Buffett writes

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

Nothing lasts forever even cold November rain

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

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

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

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

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

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

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

Jim Cramer's dramatic statement

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

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

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

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