Chris Lau - Seeking Alpha

Google+ Followers

Friday, February 27, 2009

Citigroup Effectively Nationalized...but Not...Really...Yet

Reviewing the time line of events for Citibank over the last few months would illustrate that the government ownership (nationaliazation) of Citibank is not surprising:
  • Citibank sold its prized posession, Smith Barney brokerage, to Morgan Stanley, much to the surprise of the market
  • Received $25 billion of bailout funds in October
  • Received $20 billion of bailout funds in November
  • Today, the conversion of preferred shares to common will cut existing shareholders’ stake in the company by 74 percent
Quotes of the day from Bloomberg.Com:

On Rules (What Rules?):
“It’s just unbelievable,” said David Rovelli, managing director of U.S. equity trading at Canaccord Adams Inc. in New York, in a Bloomberg Television interview. “The government is making up the rules as they go. A continued breakup is probably in the cards.”
On Nationalization:
“This is another step toward creeping nationalization,” Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said in an interview on Bloomberg Radio. “This country is going through no less than an economic revolution,” said Levitt, a board member of Bloomberg LP, the parent company of Bloomberg News.

Comments on Preferred Shares
Investors ought to be wary of preferred shares. In Canada, Royal Bank, TD, CIBC, and Manulife all issued preferred shares paying a dividend of at least 6.5%. The appetite was overwhelming. Investors gobbled these issues like candy.

Followers of 'Intelligent Investing' (over 140 members strong) would shun the purchase of preferred shares.

Preferred shares are neither here nor there. Bond holders are the first in line to get their money back, should the company declare bankrupcy. Common shareholders benefit from capital appreciation. In fact, common shareholders will have a higher dividend payout than the preferreds, in some cases (see CIBC).

Beware. Do your homework for the Canadian banks: Analyze the cash flow, capital tier ratios, and do not ignore the outlook for both the global and specifically the Canadian economy. These factors will certainly impact your investment in what is perceived to be issues promising a high yield return.

Subscribe to My Blog Here.

Wednesday, February 25, 2009

My First Publications: BCE, RTP, MSFT

My Recent Publications:
  1. BCE Offers Compelling Value
  2. Microsoft: Phenomenal Value for a Tech Stock
  3. Debt Keeps Weighing Down Rio Tinto

Notes from John Mauldin's Newsletter


"In the 103 years from 1900 through 2002, the annual change for the Dow Jones Industrial Average reflects a simple average gain of 7.2% per year. During that time, 63% of the years reflect positive returns, and 37% were negative. Only five of the years ended with changes between +5% and +10% -- that's less than 5% of the time. Most of the years were far from average -- many were sufficiently dramatic to drive an investor's pulse into lethal territory!

Almost 70% of the years were "double-digit years," when the stock market either rose or fell by more than 10%. To move out of "most" territory, the threshold increases to 16% -- half of the past 103 years end with the stock market index either up or down more than 16%!

Read those last two paragraphs again.The simple fact is that the stock market rarely gives you an average year. The wild ride makes for those emotional investment experiences which are a primary cause of investment pain.

The stock market can be a very risky place to invest. The returns are highly erratic; the gains and losses are often inconsistent and unpredictable. The emotional responses to stock market volatility mean that most investors do not achieve the average stock market gains, as numerous studies clearly illustrate."
Mauldin then makes a very important point about valuation:

"My contention is that we should not look at price, but at valuations. That is the true measure of the probability of success if we are talking long-term investing.

...

If you start in a period of high valuations, you are NOT going to get 8-9-10% a year for the next 30 years; I don't care what their "scientific studies" say. And yet there are salespeople (I will not grace them with the title of investment advisors) who suggest that if you buy their product and hold for the long term you will get your 10%, regardless of valuations. Again, go to the Crestmont web site, mentioned above. Spend some time really studying it. And then decide what your long-term horizon is."

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp


Mauldin's newsletter in its entirety is here. Note that details on his viewpoint for European banks was omitted in my summary notes.

More 'Must' Reads:

The word 'must' is a very pushy word. The title should read "More [Why not put in the time and the energy because it is significant] Reads."

Monday, February 23, 2009

Notes from TechTalk: A Bottom to the Endless Pit?

Don Vialoux is a Chartered Market Technician who runs TimingTheMarket.ca. He received an interesting question on his daily blog.

From http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/

Question from Mike:
So it looks like the DOW will break the inter-day low set in November, a new low. I was wondering how does volume come into play in defining a bottom? I believe Don mentioned that the official “bottom” was set in October when the volume reached 10 Billion shares on the S&P. I am confused with all these bottoms, the market keeps sinking. Can anyone present some clarity?

Hi Mike from Winnipeg:
A lot depends on the benchmark that is used when looking at a market. For example, an overview of all stocks listed on U.S. exchanges indicates that most stocks hit their low on October 10th.

The Wilshire 5000 Index and the Russell 3000 Index (i.e. indices based on stocks that are part of the broadly based U.S. equities market) reached their low on November 20th. The S&P 500 Index, an index that tracks 500 big cap stocks in the U.S. reached a low on November 20th.

The Dow Jones Industrial Average, an index that tracks 30 of the largest U.S. based companies in the world broke to an inter-day low on Friday. Of all the indices, the Dow Jones Industrial Average as a price weighted index is the least reliable benchmark: It is narrowly focused and its computation leaves much to be desired. For example, if Citigroup doubled, it would have the same impact on the Average as 2.5% increase in IBM.

The top 10 high priced stocks in the Dow dominate the performance of the Average. Performance of the top 10 Dow Industrial stocks is not a very good benchmark for the U.S. equity market.

Why mention the Dow Jones Industrial Average in Tech Talk reports? Because it’s the most frequently quoted benchmark quoted by the media.


Don also commented on the credit freeze. Investors can watch bank stocks rise and fall, but the two figures he mentioned are all that matter right now:

No progress was made last week to alleviate the U.S. credit freeze
  • The yields on one month, three month, two year, five year, ten year and thirty year treasuries were virtually unchanged
  • The TED spread and LIBOR were virtually unchanged.
Don's Market Summary:

Chances of a recover by North American equity markets into spring from current oversold levels are good. However, upside potential probably is limited to highs reached early in January. Ultimately, the next upside move into spring will prove to be a rally in a bear market. Selected sectors with favourable technical, fundamental and seasonal prospects remain attractive.

Full Article here: http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/

Sunday, February 22, 2009

Mr. $62B's Company

Warren Buffett's Berkshire Hathaway
Is Warren Buffett losing his touch? Investors and the media have started to take notice of Buffett's performance for his holding company. CNN Money noted that the company is at a 5 1/2 year low.

One investment mantra advocated by Buffett is to "buy and hold...and hold forever." I do believe this attitude is required for intelligent investors, but am strongly against it for the time being. The enomity of problems in de-leveraging still has not played out, the investment rules governing valuation have been temporarily irrelevant (due to the monetary intervention to the markets), and there is little ability for anyone to remotely attempt any form of forecasting.

History: During the Internet bubble mania in 1999-2000, many investors (sounded loudly through professional analysts and the media) questioned Buffett's investment "old" style. They ignored the risks of high valuation and thought Buffett's rules (Benjamin Graham's teachings are discussed in his books "Security Analysis" and "The Intelligent Investor.")

Berkshire has some similarities to GE, in that it has exposure to both the insurance and the banking sector.

From CNN Money:
  • "Much of the worry over Berkshire stems from derivative contracts that could force it to make big payments if the Standard & Poor's 500 and three other stock indexes were to be lower at various times between 2019 and 2027. Berkshire has said it could owe as much as $37.04 billion, in the unlikely event that the indexes were to fall to zero."
  • Exposure to Wells Fargo & Co, where it is the largest investor, American Express Co and U.S. Bancorp - fall in value of financials would justify a fall in Berkshire
Analysis:
I created a group called "Intelligent Investing" on kaChing.com. The group's purpose is to apply and to discuss the investment method from Benjamin Graham's "The Intelligent Investor." It now has over 120 members. It might seem odd to be critical of Buffett, a disciple of Graham and the second richest person in the world.

Questioning Buffett's investment positions and actions is akin to a grasshopper teaching its master. Is one right to wonder if Buffett is losing his touch this time around?

I believe that investors reject the buy and hold approach at this time, because a defensive position is required. Defense is best obtained by preserving assets through a high cash position. Buffett hates cash. Graham did too. Cash rots with inflation. Yet, a high cash position would enable the investor to seize great opportunities.

I also believe that the financial sector is too dangerous to hold right now.

Opportunities have continued to present themselves each time the stock market declines. The investor just ought not to confuse opportunities in great companies with opportunities filled with risk.

On kaChing

kaChing hosted an "API" (technical jargon that is an abbreviation to "Application Programming Interface") Garage Event on Saturday. Slide Show on Technical Developments at kaChing:
kaChing's API garage event
What do these slides mean? kaChing has built a decisively large user base. It has 363,318 users. As such, it is embracing the social networking structure and "web 2.0." How? It is reaching beyond its stock trading application as a stand-alone website or as an application within facebook.

In plain English, it means that kaChing has expanded its reach to grow far larger than where it is at now.

Saturday, February 21, 2009

Citi and Bank of America Nationalization?

I have repeatedly speculated that CitiGroup and Bank of America would need to be nationalized. The rationale was simple: Liabilities exceed assets, and the continued decline in home prices and the increasing rate of foreclosures would continue to stress the balance sheet.

In Friday's trading:
CITIGROUP INC 1.95 -$0.56 Down 22.31%
BK OF AMERICA CP 3.79 -$0.14 Down 3.56% (day's low was $2.53)

Investors need to be more concerned than the above possible fallout (a Government takeover of these banks will not likely be welcomed with any "relief rally." Instead, the S&P 500 @770, for example will have a reason to fall to 625-675 failing which, 459 is not impossible). The greater concern should be that the White House is sending mixed messages:

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I think there's a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.

Take over the banks, then sell it back to Wall Street? That would mean existing shareholders get wiped out.

Conversely, Timothy Geithner was silent on the matter. Robert Gibbs said that privately held banking system was the correct way to go.

Analysis:
Sending mixed messages is almost never a good thing. Interpreting it is not required, because the market has spoken. Continue to keep an eye on what really matters: unemployment rates, the price of gold (it is $1000 and is starting to be in a bubble), and the Case-Shiller Home index.

Thursday, February 19, 2009

Market Bottom? Ask the Questions

3 Questions:

Answers can be given, but the real answers lie in asking the right questions.

1. Do you honestly believe the capital system will be allowed by our leaders to collapse?

The de-leveraging of loans/bank assets for Eastern Europe have not yet been priced into the shares of Western European Banks. It is known that European banks are under worse strains than American banks.

Investors must ask the question: will leaders allow the global capital banking system to simply collapse because banks in aggregate are essentially insolvent? While I maintain 1 or 2 U.S. banks will be nationalized, I would not bet against the Fed.

Does following a billionaire count for anything? Warren Buffett maintained his holdings on 290.2 million shares of Wells Fargo & Co (its value declined 22 percent in the quarter to $8.55 billion), 151.6 million in American Express Co (its value fell 48 percent to $2.81 billion. Berkshire's stake in U.S. Bancorp fell 7 percent to 67.6 million shares. (Source: Bloomberg.com) In addition, Buffett's company acted as banker to Harley Davidson, GE, and Goldman Sachs. These are tremendous losses. It's a paper loss, but at some time in the future, banks will recover.

2. What about a 4 Day work week (more life but reduced pay) to reduce the excess "human capital" resource?

Europeans enjoy life more so than North Americans. Life is defined by leisure, family, and free time. North Americans are more focused on climbing the ladder. If that ladder has reached a ceiling (for now), what would happen if more companies adapted a 4-day work week? Fewer layoffs would mean fewer foreclosures. People who had more free time would be inclined to go out more and to spend (not excessively but savings would not climb to a projected 9% in the U.S. by the second half of this year).

3. Can you really believe "This recession will last 3 years?" If the economy cannot be forecast for 6 months, how can anyone dare predict 3 years into the future?

If blue-chip corporations dare not forecast the economy for the next six months, then why would anyone listen to the "experts?"

Readers of Nassim Nicholas Taleb's "The Black Swan" would appreciate that anyone declaring themselves as experts are anything but. The same applies for "forecasters."

Essential Videos
BNN speaks to Robert "Hap" Sneddon, portfolio manager & technical analyst, CastleMoore Inc.

Wednesday, February 18, 2009

Give a Mouse a Cheese He'll Come back for Crackers and Wine

The problem with the rescue package is that it is trying to solve too many things. This idea is better articulated in the column with Jack and Suzy Welch in Business Week magazine. In late summer, financial institutions required money to get credit flowing again. Then the auto sector climbed on board for assistance.

Here is the latest news on GM:
  • 47,000 jobs globally
  • closing five more U.S. factories
  • GM said it could need up to $30 billion from the Treasury Department, up from a previous estimate of $18 billion. That includes $13.4 billion the company has already received (Net addition is $16.6B in assistance)
  • Company could run out of money by March without new funds - needs $2 billion next month and another $2.6 billion in April.
Chrysler:
  • Chrysler LLC said it will cut 3,000 more jobs
Judging from the market's trading action today (DOW down 3.79% and S&P 500 down 4.56%) in reaction to Obama's rescue package, the market will likely test the low reached on November 2008. At that time, markets priced in a sizable rescue package that would work quickly. It is becoming apparent that the package will need to be much larger and must work in a way that gets the financial lending system liquid again.

On a Brighter Note:
KaChing, located in Redwood City, California, will be releasing v1.0 of the kaChing API. This is a piece of history. It's web 2.0 and it is embracing the world of stocks and finance with social networking.

If you live near KaChing HQ, I encourage you to attend.

http://www.facebook.com/home.php?#/event.php?eid=47817039087

Tuesday, February 17, 2009

China by the Numbers

Investor Summary Notes from John Mauldin's Front Line Thoughts Newsletter

Article Title: Time for a Reality Check

  • China has seen its year-over-year exports drop by 17.5% and imports by 43%. These are not signs of a healthy economy. That being said, China is massively increasing bank loans and other stimulus-type spending to try and offset the effects of the global downturn. But putting 20 million people back to work in a short time is a daunting task
  • Japanese GDP was down by 9% (!) last quarter. Many of the largest corporations are seeing exports drop by 20-30% and are engaged in massive layoffs, larger proportionally than in the US.
  • Write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars!
  • The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.

Mauldin Concludes that:

..."I don’t think we know the real extent of what it is going to cost to shore up the banking system. But the consensus among the financial leadership is that we have to fix the credit system no matter what
the costs, or risk a repeat of the Great Depression. That is the essence of what Irving Fisher taught us some 75 years ago, when faced with a deflationary debt crisis."

...But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of money to take over very large insolvent banks.

For S&P 500 Targets:

  • David Rosenberg of Merrill Lynch forecasts a 20% drop from today’s close of 829
  • 40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today’s level. This is just far too precarious an economic and earnings environment

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 
To subscribe to John Mauldin's E-Letter please click here: 
http://www.frontlinethoughts.com/subscribe.asp 

To change your email address please click here:
http://www.frontlinethoughts.com/change.asp 

If you would ALSO like changes applied to the Accredited Investor E- Letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to wave@frontlinethoughts.com 

To unsubscribe please refer to the bottom of the email. 

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. 

John Mauldin is also president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of John Mauldin. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Thoughts from the Frontline may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273. 


Sunday, February 15, 2009

Focus on the Numbers, not the U.S. $787B Rescue Package

Below is a summary of the key economic numbers released last week. Yesterday details for the U.S. economic stimulus bill was provided.

On closer observation, actual spending will not be $787 Billion: a large portion will be for tax cuts. Some U.S. States may not pass on the tax savings to its people, because they are in a deficit. This reminds me of the (recent) time interest rates were cut to almost 0%, but not so for consumer mortgage rates.

As "Market Monitor" -Elaine Garzarelli, President of Garzarelli Capital said on Nightly Business Report:

"GARZARELLI: Well, I think it's a little late. I think it's more of a 2010 deal than it is 2009. In both years it will be about 2 to 3 percent of GDP. But 38 percent of it is a tax cut and consumers right now, with the unemployment rate probably getting up to 10 percent, are more likely to save than to spend that money. And the other spending has to do with infrastructure projects. A lot of it goes to state and local governments and their budgets are so bad, they're likely to keep it rather than spend it. "

I continue to believe additional jaw-dropping rescue packages will be required.

U.S. Real Estate:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aY8hiszeIlbU&refer=home

  • Median price of a U.S. home declined 12 percent to $180,100 from a year earlier and sales of properties with mortgages in default accounted for 45 percent of all transactions
  • Price declines of 30 percent or more were found in much of California, plus parts of Michigan, Florida, Arizona and Nevada. The biggest drop, of more than 50 percent, was in Fort Myers, Fla.

Image source: Washington Post

This current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.


Canada Real Estate:
  • National average prices declined 11.3 per cent year-over-year, according to Canadian Real Estate Association data
  • The national seasonally adjusted dollar volume of $7.4 billion was the lowest since May 2003.

Recall also that Statistics Canada reported 129,000 jobs were lost in December. Unemployment is at a four-year high of 7.2 per cent. This will likely add to downward pressure in the Canadian housing market.


US $787 Billion Stimulus

This Bill is of Concern for Canadians: 'Buy American' clause stays
http://www.cbc.ca/world/story/2009/02/13/us-stimulus.html

The bill still contains the "Buy American" policy that spurred international concerns of protectionism that could trigger trade wars.

The provision requires public works projects receiving money from the federal stimulus package to use U.S.-made iron, steel and manufactured goods.

After fierce pressure from Canada, the European Union and several prominent U.S. corporations, lawmakers in Washington added a caveat to the provision to clarify "Buy American" must not violate international trade agreements.

Analysis: Not only does Canada need to brace for low commodity prices and a weakening auto industry, it now needs to worry about protectionist policy with its largest and most important trading partner.

Wednesday, February 11, 2009

Notes from Frontline Weekly Newsletter

"$3 trillion! -- Senate, Fed, Treasury attack crisis
Tuesday February 10, 9:41 pm ET
By David Espo, AP Special Correspondent
Senate, Fed, Obama administration team up for unprecedented $3 trillion attack on recession"

3 Trillion dollars? This is even bigger than a recent post I had made, again from John Mauldin's newsletter. Please see here.

Below are points I have taken from John Mauldin's February 6, 2009 newsletter. Link is at the bottom for those who wish to read his complete newsletter.

  • The US stock market drops by an average of 43% in recessions. I saw no reason to be in the stock market, as there was just too much risk of a serious bear market. Further, since international markets now have close to a full correlation with the US markets, foreign stock indexes would be in trouble as well. I also said interest rates would be coming down and deflation would be a problem before we got through this recession.
  • (As an aside, there are a lot of very well-known perma-bearish analysts who called the recession, but were very bearish on the US dollar and positioned their clients in emerging-market stocks or other markets. Their clients have been mauled. Just because you get the economy call right doesn't necessarily mean you can call the right investment shots. Before you invest with a manager because he seems to have been right about something, look to see what his actual investment strategy has done. And that includes me or my partners.)
  • As I wrote last month, we will probably be in recession for the full calendar year 2009, with the same lengthy multi-year Muddle Through Economy I originally envisioned, albeit from a lower base. So, what does that look like? Let's look at a likely set of facts, in no particular order.
  1. Consumers are going to save more and spend less.
  2. The stimulus package is simply a pork-laden, misguided piece of legislation
  3. There is way too much spending on items that have very little current effect on the economy. ... Hopefully, they will not put into service the notion of a large "bad bank," but rather go ahead and put the zombie banks to sleep and help the healthy ones survive. But if US taxpayer money is involved, then shareholders should be wiped out first. If the rest of us have to lose on our stock investments, then bank investors should not be in a special protected class.
  4. As I have noted for almost two years, it will take until at least 2011 for the housing market in the US (and bubbles elsewhere, as in England and Spain, etc.) to stabilize. It will take several years for the creation of a new credit system to rationally replace the old "shadow banking system." This is why the recovery will take so long.
  5. The US government will run multi-trillion-dollar deficits for at least two years.
  6. The main driver in the economic world is deflation ... Commodities are likely to rise in price again, but not in the near future.
Mauldin's Conclusions:
  • We are going to some new lower level of GDP and consumer spending, maybe as much as 5% lower, which is a serious recession. And the "recovery" is going to be slow. We don't get back to 3% GDP growth in 2010.
  • [For] businesses which are dependent on the US consumer, their world is going to be smaller for a long time. We are in a period where the economy is going through what economists call rationalization. We are going to have to reduce the number of retail stores, coffee shops, automobile plants, fast food restaurants, car dealerships, etc., until we get to a level that makes rational sense for the size of the economy.
  • Now is still a time for absolute returns and active management. You want to arrive at the dawn of the next bull with as much of your assets as possible. How will we know when we are there? Because valuations will be low.
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

S&P 500 Earnings Forecast
There are many value investors who have been bottom fishing, using P/E as a guide for low valuation. The risk associated with this investment strategy is that if projected trailing earnings for the S&P 500 for 2009 falls to $15.90 ending June 30, the P/E would be 54.7. In short, if earnings don't improve in the summer, the stock market will continue to trade downwards in the summer.

My Analysis and Conclusions:
Even though one may make the right call, it is the action we take that is the only thing that matters for investing. It sounds to me that Mauldin was referring to Peter Schiff on the first two bullet points...what do you think?

My own assessment of the stock market's behavior has been on the right track. I believed the rally in December was too unconvincing to be sustainable. The most recent rally appears to be unconvincing as well. Fundamentally, the stock market was trading on very high hopes that the stimulus package would quickly fix the market's problem.

As illustrated by Mauldin, that fix will not be a quick one. The most appropriate investment will be a defensive one and an active one. It is not a good time to "buy and hold" but it is a time to build a watch list of companies that are inexpensive (low P/E), high cash flow, and low debt/equity. As illustrated in my kaChing account (it also has the attention of 150 followers), it would be prudent to continue to build on a cash position, but to still be invested.

We may have been scared off by the bear, but over-analyzing and over-watching the markets can leave a long term investor paralyzed, unable to step it up when it will matter. Let us all not be one of them.

Monday, February 09, 2009

Assessing Impact of Proposed U.S. Stimulus Package

The unemployment figures for January in the U.S. was startling. Despite these figures, the stock market rallied. From past patterns in stock activity, this is a bullish signal, to a limited degree. The bullishness last week signals that a "bottom" may have been reached.

I would contend that a market bottom won't be known yet, because it cannot ever be predicted. Bottoms are only known after the fact. It would also be more prudent for the investor to wait for a S&P 500 re-test of the bottom @ 741.02 reached last November.

This current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.



The market is pricing in the stimulus package. It is almost impossible for the market to refuse to rally, since both the allure and the injection of a massive amount of money into the economy will necessarily result in a higher market index. Investors would be wise to remember that when money is printed, U.S. debt must be sold. There must be a buyer. That buyer is China and Japan, along with other foreign countries.

Being bearish on TLT would be one of many investment ideas I have discussed in past entries.

Is the Stimulus Package Enough?

The stimulus spending bill in Congress is supposed to create 3.7 million new jobs. However, the assumption is that each new dollar of government spending will generate $1.50 to the economy. This calculation is made with a GDP multiplier of 1.5. This multiplier was estimated by the Federal Reserve’s FRB/US model.

See this article.

To paraphrase:
"Production and work create GDP, so it is more accurate to say that 1 million more jobs produce 1 percent more GDP.”

If a GDP multiplier of 1.5 is a constant for all government spending, then why don’t they propose spending $10 trillion to make us $15 trillion richer?"

Analysis:

The stock market is assuming that the flow of funds from the stimulus package will result in an increase of 150% in economic output.

The market fails to do is recognize:

1) Who is consuming the added debt
2) The funds will not result in 1.5x, because the funds are being used for an assortment of investments that will not impact GDP output (example: covering bank losses)

Calculation of Lost Wages


Below is a line table of lost income based on total and monthly unemployment of 7.6% in the U.S. Assume the figures provided by Bloomberg are appropriate, in that average wage would most accurately represent lost annual wages.

Note:
- Severance has not been factored in.
- Cost reductions for companies have not been factored in.

Title:
Item Number)
Value
Details

1)
3,570,000
Total Unemployment, U.S.

2)
$614.72
Weekly Average Wage, @39.8/hrs

3)
598,000
January Unemployment, U.S.

4) $114,116,620,800 - ie $114B/yr
Total lost income
(annualized) @7.6%

5) $19,115,333,120 - ie $19B/yr
Total lost income (annualized) for jobs lost in January 2009


6)
Spending Multiplier = GDP / Change in Investment - What good is this? There are too many unknown variables!

7) 6,570,000 Unemployment, Dec 2009 (estimate, based on Bloomberg.com article)

8) $210,012,940,800 i.e. $210B / yr
Total lost income if 6,570,000 jobs are lost by December 2009

I haven't applied a GDP spending multiplier to it yet, for the reasons mentioned previously. There are too many assumptions that will make economic cost estimates accurate. In addition, the impact on GDP will be higher since income has a direct impact on the economy. This will make any impact estimates very inaccurate.

So, in the above I used only the calculation, annualized over 12 months:

# Unemployed x Average U.S. Income x 52 weeks

...and for item #8, calculated the cost to the economy by December 2009.

The point of this calculation is to illustrate that investors must monitor the unemployment rate in the coming months. Investors must then weigh it against current and future stimulus policies. Investors must not look at US$827B and assume that amount will result in US$827B consumption. The banks remain the known unknown "black hole" in this equation. Just how much government money is still required to shore up bank balance sheets remains largely unknown.


Blog Site Update and Creation of kaChing Discussion Groups

First, I have created two groups to help readers become better investors.

  • Intelligent Investing - Benjamin Graham taught Warren Buffett how to invest. He was worth $62B as of December 2008. While he employs a "buy and hold forever" approach, this group will focus on the securities analysis approach for holdings worth to make that list. The goal for members here will be to make the elite list and to perform above the average user on kaChing. Concept and practice is based on the book "The Intelligent Investor" by Benjamin Graham.
kaChing has created an API (Application Programming Interface) to allow bloggers and sites to link their portfolio. See top of page. This will give more freedom and transparency to not only the users on kaChing, but for bloggers such as myself. With 145 followers, users will want openness in the rationale between an evolving investment thesis and the actions taken to achieve an investment goal.

Friday, February 06, 2009

Bye Bye, Bank of America?

Business Week magazine wrote an article questioning the survival of Bank of America. It, like Citigroup has a negative balance sheet. Its assets are greater than its liabilities.

With home prices falling, asset values will continue to fall. An intelligent investor would avoid this stock on those merits alone. But
TARP and other extraordinary bailout measures are keeping this stock, and the allure for "value investors" to go long on Bank of America, alive.

When media says we are chartering to the unknown, this is in fact nothing new. The only thing new is that the unknown is different.



More from Peter Schiff:



Eye on the (Right) Ball: Job Figures

From the Bureau of Labor Statistics @ BLS:
"Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors."

Analysis:

When it rains, it pours.

The investment thesis has always been that job losses would be weakest in banking, automobile, manufacturing, and to some extent, consumer goods (shopping and retail). This suggests that job losses will continue to spread throughout the economy.

This also means that any stock market rally will be subject to a grim correction. Still, TARP is an unknown variable for the market. Any large and costly package will necessarily result in a rise in the stock market. How long the market will sustain the rise is, however, questionable.

Wednesday, February 04, 2009

Don't ... Be ... Fooled ...

Over the past three days, the market has been trading unconvincingly on the upside. This is in contrast to late-December, when most positive momentum was attributable to low volumes (people were on vacation) and "Obamarama" (TARP and other massive relief programs).

There is only one similarity to positive trading in the past few days to the positive late-December trading: both appear to be bullish "head fakes."

Why is that said?

Unemployment.

Let's take a step back and look at non-manufacturing activity. The Institute for Supply Management said its non-manufacturing index came in at 42.9 in January compared with 40.1 in December. This activity feeds into employment requirements in the economy. It shrank.

It is not known how many more fake rallies the markets will encounter in the near-term. What the investor will certainly encounter are headline stories and claims for what the "market bottom" will be. While a bottom by definition can never be predicted, it may only be revealed in 20/20 hindsight.

How Does the Investor Avoid the Head-Fake?

From this Reuter's article:
"To me the key is really the employment report. We have to have at least three months of increases in non-farm payrolls to be able to say that we have the economy bottoming."
- Sung Won Sohn, professor of economics at California State University in Camarillo, California.

Some Job Cut Headlines (Feb 1st - 4th)
Pennsylvania State - 3000 jobs
Panasonic - 15000 jobs (worldwide)
Hudson Bay - 1000 jobs (Canada)
Macy's - 7000 jobs
Glaxo - 6000 jobs (worldwide)
PNC Financial Services Group Inc - 5,800 jobs

Nightly Business Report reported the real unemployment rate - U6 - that which includes people who stopped looking for work - at 13.5% as of December 2008 (compared to 8.5% in January 1998 when U6 started getting tracked). Again, the number is not the only thing that is important. It is the direction that it is/has heading, and right now unemployment is growing.

Tuesday, February 03, 2009

Local Stock broker shares trading ideas, expertise online

The Time is Now...More About Me and the Blog's First Sponsor

As you may have noticed, some of my notes on the stock market were sponsored by a new business, Professional Stock Traders Live. Link is here.

Subscribers can log into the site to watch unlimited live webcasts of Brian Paragamian making an assortment of trades. Paragamian uses charts and discusses stock-trading opportunities.

For $10.99 per month, users learn about day trading and "swing" trading, just to name a few trading methods and styles.

How I Know Patrick

I became acquainted with co-partner (
of Professional Stock Traders Live) Patrick O’Brien, while competing against him (and now with over 360,000 other users) on kaChing, a stock game that has been hosted on facebook since mid-2008. KaChing was called FSX (Fantasy Stock Exchange) Player when it was launched.

Patrick was one of the more spectacular traders who made very big trades on the KaChing game.

Below is the first press coverage for Brian and Patrick's endeavour.


http://www.journaltimes.com/articles/2009/01/30/money/doc49837fec4de0f690194516.txt

Congratulations on your launch!

Monday, February 02, 2009

Peter Schiff Responds

Mish wrote a piece entitled "Schiff was Wrong." Schiff responded.

The full response is here.

I have taken parts of his response, below. In bold are points that are pertinent for investors.

<... ... >

"First of all, the hyper inflation issue is a straw man at best. While I often talk about the possibility of hyper inflation, I have always said that it would be a worse-case scenario that would play out over many years. The fact that it did not appear in the first year of the economic crash (2008) does not invalidate my position. I have always maintained that this worst-case scenario will likely be avoided by what will ultimately be a dramatic shift in policy once our leaders come to their senses. However, until then the dollar will likely lose a substantial portion of its value."

..."My actual forecast in my book "Crash Proof" was that the Dollar Index would fall to 40 (currently about 85), with a realistic worst case scenario, assuming very high but not hyper inflation, of 20 or lower."

"Third, the blogger points out that because the decoupling theory (foreign economies improving while the U.S. falters) that I wrote about in "Crash Proof" has yet to occur, that the theory itself was ridiculous. In my book I wrote that this process would not occur overnight, that initially our creditors would come to our aid, and in so doing our problems would become manifest abroad. I wrote that it would take time for the world to realize that what had been decoupled from the economic train was not the engine but the caboose. In fact, that is precisely the way it is playing out."

..."Central to the argument that my investment thesis is wrong is the belief that the crisis is over or that the recent trends will continue until it is. But the crisis is just beginning and the movements thus far in the dollar, commodities, and foreign stocks, are mere head fakes. "

..."to look only at the performance of foreign stocks, while ignoring other aspects of my investment strategy only tells part of the story. What about gold, foreign bonds, short positions in financials, home builders and subprime mortgages (or merely avoiding long exposure to those sectors), or other investments people have made, either at Euro Pacific or elsewhere based on my insights? What about dividends earned, or gains realized on closed positions?

Mainstream economists, journalists, and investment professionals have never liked my message and have never resisted the temptation to shoot the messenger. When my investment strategies were performing well, I got little credit for it. Instead, all the attention was focused on the apparent failure of my dire economic predictions to materialize. Now that the economy is collapsing along the lines that I correctly forecast, criticism is being focused on the recent poor performance of my investment strategy (a fact that I have never tried to hide). Of course by the time my investment strategy is once again in step with my economic forecasts, an event that I believe will occur sooner than most people think, it will likely be too late for most people to do adopt it."

Comments and Additional Notes:

US Bonds & US Dollar
So far, the US dollar has shown remarkable resilience. Why? The currency is simply more attractive than the other currencies, most notably the Euro and the British pound. On a relative basis, however, the massive money flow from Asia to US is showing up in the currency market. The US dollar has weakened against the Yen since the numerous bailouts have been announced since August. One trend that can be forecast with confidence is that the size of the US debt (and especially debt as a percentage of GDP) will continue to balloon.

Investors may benefit from this by buying TBT or short selling TLT.

Commodities
Many traders have been calling for a "bottom" for this sector, but it has not happened yet. Investors should know that such calls are impossible, for a bottom won't be known until after it has occurred. One might want to use the currency market as a guide of any sort in this matter. The US/Canadian exchange rate has favored the US currency. Remember, the world sees Canada as a resource market. Fundamentally, the sector should be avoided. More specifically, certain companies should be avoided for now, especially those who made massive purchases based on higher commodity prices. Rio Tinto, for example, purchased Alcan Aluminum, and has lost 80% of its value from its peak.

Even without the weight of expensive takeovers, the commodity prices have hampered earnings. Aloca, for example, reported poor earnings due to a 35% decline in the price of aluminium in the past quarter.

General Investing Strategy
I have written frequently that a defensive strategy involves actively doing nothing. There will be nice trading days due to "Obamerama," but if the value of assets is shrinking, investors still need to put in the work to determine the best sectors, and stocks, to invest in.