Chris Lau - Seeking Alpha

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Thursday, April 30, 2009

Interview of Seth Klarman

Seth Klarman is a true value investor. A true value investor is risk-averse. Therefore there is a greater desire to protect on the downside than to make a lot but which runs an enormous risk.

Here is the link:
http://valueplays.blogspot.com/2009/04/seth-klarman-video.html

Today's Economic Results:
From Bloomberg:
  • A record 19.1 million homes stood unoccupied in the first quarter and the U.S. homeownership rate fell as the recession sapped demand for real estate
  • The number of vacant homes, including foreclosures, properties for sale and vacation properties, jumped from 18.6 million a year earlier, the U.S. Census Bureau said in a report today.

Wednesday, April 29, 2009

My Underperformance

I have been on KaChing.Com for a year now. There are now 3just over 300 followers for this portfolio. That might dilate anyone's pupils. My Beginner's Guide has 145 members, and Intelligent Investing has 314 members.

The portfolio has underperformed the S&P 500 by over 2000 basis points (20%):



Explaining is easier than predicting.

Here are some reasons for the under-performance of this portfolio:

No major big long positions, except for Activision and Biovail.

* SRS - Inverse to REITs. Big loss because companies like SPG are able to take full advantage of rising markets (by issuing shares or debt to raise cash).

* AA sold, MSFT position reduced just when markets rose. The reason MSFT was reduced was because it did not make sense to own more Micrsoft shares than Activision.

Forecast:
Portfolio will continue to underperform as long as rally continues. Losses will be actively minimized because a defensive stance is required (stubborn investors will be ultimately punished).

I do question this rally, for the following reasons:

* GDP was -6.1%
* Housing figures weak, but less weak than expected ("less weak" was a reason for "Mr Market" to be optimistic)
* Any profit taking won't come unless there is a reason for it i.e. GM job loss more massive, bigger job losses, weaker housing figures in the months (3-6) ahead
* Bank sector lead the rally with results that were simply too good to be true (the devil is in the details)
* Technical reasons cannot be ignored: lack of volume

On a positive side of things, earnings were not as poor as expected and inventory levels are declining (means suppliers will need to increase production even to meet lowered levels of demand).

Here are the Risk Metrics for my portfolio. Log on to KaChing, hover your mouse over the "?" for a detailed explanation of each metric.

To put it quite simply, green generally means good (lower risk, lower probability gains were made by luck alone), and red means bad (higher risk-taker, speculator, trader and not investor). In defense of my high turnover, active management is a must: one must realize losses early, especially when a decision turned out to be wrong.

Tuesday, April 28, 2009

Reject the Gaussian Curve (Notes from John Mauldin's Newsletter)

I am having difficulty accepting conventional wisdom in managing a portfolio. The reasons could not be better explained by Mauldin in his 'Thoughts from the Frontline' newsletter. The market is still in turmoil. We know that. This means that anything relating to "modeling," "forecasting," and "predicting" will have a far greater margin of error than we have ever seen.

There are many reasons for this, but the main one is because we are at the mercy of great economic experiments. It is simply not known which experiments will work out, but investors must embrace the unknown and be willing to adapt. In effect, investors must not hold too strongly to the established conventional wisdom.

My highlights are in bold:
  • We are in the middle of a Great Experiment, the one truly great experiment of this time; so the economists are fascinated. We have Keynes versus von Mises versus Irving Fisher versus Friedman, and they all have theories about what you should do after depressions and what works. Someone commenting on Keynes said, "In a world organized in accordance with Keynesian specifications there would be a constant race between the printing press and the business agents of the trade unions. With the problem of unemployment largely solved, the printing press could maintain a constant lead."

  • Let's get back to our discussion of the Great Experiment. Von Mises said there is nothing you can do about a deleveraging cycle, you basically just let it all go to hell and then pick up the pieces. The hair-shirt economists, I call the Austrians: just let it drop, take your medicine, take your 15-20% unemployment, and just deal with it, because you'll be able to come back faster from the lower base. By the way, to von Mises, the velocity of money was a meaningless concept. Gold was where you should have had your money to begin with.
  • Then there is Friedman, who produced his great work that says inflation is always and everywhere a monetary phenomenon. He had his studies to prove it. But when he did his studies, in the 30 years that he analyzed, the velocity of money was remarkably stable. So of course, inflation had a 1-to-1 correlation with money supply.
  • Fisher says, "The velocity of money is important." For Fisher, debt deflation controlled all other economic variables. It was the driving economic force. You're going to have to rationalize all your debts. There's nothing you can do about it; but what you do is, do as much as you can to provide a soft landing for the people who lose their jobs. Do whatever you can to get them along and to keep the system working, but you are still going to have to go through a credit reorganization. We are going to find out in 5-6 years who was right. That is the experiment we are living through. My bet's on Fisher, just for the record.

How Did We Get It So Wrong?

  • So how did we get it so wrong? How did we get here? Let's go back to first principles: Ideas have consequences. And bad ideas tend to have bad consequences. We've taught two generations of financial managers theories that were patently absurd. Rob Arnott is going to be here later with us for the panel discussion. Rob recalls standing in front of 200 academics, professors in schools that teach economics. He asked them, "How many of you believe in the efficient market hypothesis?" Something like two or three raised their hands. "How many of you teach it?" All of them raised their hands.
  • We have been teaching generations of MBA students economic garbage. Gaussian curves and things you could model. The classic line is from Ibbitson, is a brilliant professor and a brilliant mind, who said economics is a science. No it's not. It's barely an art form. It's voodoo. That's what we practice. We look at the entrails of the Wall Street Journal and try to predict the future. Sometimes it's about as bloody as sheep entrails. CAPM... poor Harry Markowitz's Modern Portfolio Theory got so twisted beyond recognition. I remember being with Harry Markowitz. I gave a speech at a big hedge fund conference about five years ago, talking about why Modern Portfolio Theory was not going to work. The next year it was the 50th anniversary of Modern Portfolio Theory, and they brought Harry out to speak. He of course talked about why it was. I remember meeting him in the hall of this big hotel. And I asked him a couple of questions; I forget what they were because he so staggered me with, "Oh, you missed the whole concept of correlation and assets. Correlations change."

Comments: Reject the Gaussian curve. Know that it is less likely to apply now because the markets are still at the boundaries of non-linear patterns. Three things arise from Mauldin's points. First, correlations are no longer linear. Second, accept that markets do not operate under Efficient Market Hypothesis (yet know your enemy...the other traders...do believe in this which puts you at an advantage). Third, Modern Portfolio Theory is less likely to be a successful approach the next few years because of point one (correlation).

...

  • The future is going to look different, yet we think we can model it. The models are bullshit. (That's a technical economics term that requires advanced degrees to use.) They just are. Now you can take some comfort from them, and you have to try and figure stuff out, and you look for correlations. That's what I do, and we all do that. I confess I use models every day.
  • The model has a huge asterisk beside it. You just can't bet the farm on it. And God, have I learned that the hard way. I've got bruises on my back from making assumptions. That's why I don't go around half-naked, because it would just look ugly.

...

  • Stocks go from high valuations to low valuations to high valuations. They've done it in US markets and world markets, and we are halfway through the trip in a secular bear market. We haven't gotten to low valuations yet, I don't care what they say. The P to E at the end of July was something like 289 on the S&P. You can go to the S&P website and you can see that. Now you smooth it with five-year curves and performance, and it goes to 20. 20 is not cheap. But it's going to get cheap -- at least that's what history tells us.

  • Now maybe history is wrong, because past performance is not indicative of future results;
  • I think we are going to lower valuations, and when that happens we will have compressed price to earnings ratios just like we did in 1982. The world will be coming to an end and we'll be moaning and groaning. We haven't gotten as bad as we were in '82 -- whoever pointed that out is correct.
  • But what will happen? The stock market will be a coiled spring and we'll have a bull market and we'll get to have fun in the stock market again. Until then, be careful.

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



Notes on Inflation

From Matt Blackman's Newsletter.
Source:
http://tradesystemguru.com/content/blogcategory/34/68/


TIC flows have averaged $57.3 billion per month since January 2005. This latest estimate of $2.4 trillion for 2009 means that Treasury sales will have to increase more than 300% to foreigners to cover the gap or this shortfall will have to be made up through domestic sales.

...

What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.

Comments: There is going to be extensive arguments about what will happen next: inflation or deflation. I argue that the world will necessarily need to have inflation. In fact, this is probably the best outcome. The alternative is massive deflation a la Japan 1990.

The truth of the matter is that my argument will not be known to be right or wrong right now. The best thing to do is to monitor what the market is telling us. Watch TLT - this ETF tracks the 30-year U.S. Treasury.



Sunday, April 26, 2009

Actions Speak Louder than Words

Reasons This is a Bear Market Rally:

Insiders know more than we do. It's simple. They are on the front-lines of the business. Actions speak louder than words. Much louder. Look at April Insider trading activity:
  • Insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992
  • “We’re quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.
  • And just as they wouldn’t be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they’d be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.”
Source: http://online.barrons.com/article/SB124061355986854673.html
Highlights from: http://www.ritholtz.com/blog/2009/04/beware-insider-selling/

When Microsoft reported earnings, the company did not give any forecasts for the next quarter. If Microsoft does not give forecasts, how are any of us qualified to do so?

In the stock market, the value of uncertainty is usually a negative one.

Notable: Commercial Real Estate
Based on the U.S. "Stress Tests" coming to a market near you: 240B bank losses.


On Commercial Real Estate:
The One Trillion Commercial Real Estate Bomb
http://zerohedge.blogspot.com/2009/04/one-trillion-commercial-real-estate.html

In this article, $700B in commercial loan defaults sounds irrelevant. But "Banks have $1.1 trillion in core commercial real estate loans on their books according to the FDIC, another $590 billion in construction loans, $205 billion in multifamily loans and $63 billion in farm loans."

"Total maturities by 2018 are approximately $2 trillion, with $1.4 trillion maturing through 2013."

Author's conclusion:

"And, at last, there is the view that the refi problem could fix itself, based on the argument that CRE cash flows are likely to rebound quickly as the economy begins to improve due to pent-up demand.

This argument is nonsense: even if cash flows recover to their peak 2007 levels, values would still be down 30% as a result of the shift in financing terms. Ironically, it would require cash flows rebounding far beyond their peak levels to push values up sufficiently to overcome the steep declines. This is equivalent to predicting (as the administration is implicity doing) that the market will be saved by the next rent and real estate bubble, which the U.S. government is currently attempting to generate."


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Thursday, April 23, 2009

On Housing

Having too much news bombarded at you is a bad thing. One gets confused, paralized, and unable to act. So, let us focus on the one of the three most important factors that matter: U.S. Housing (the two other factors are: unemployment and LIBOR).

Facts:
  • Existing-home sales fell 7.1% from March 2008
  • Since February 2009, they fell 3% (seasonally adjusted annual rate of 4.57 million units).
Details:
  • “Distressed” properties accounted for over half of all transactions in March
  • Discounts on distressed property averaged 20% or more versus traditional homes
Source: http://www.ritholtz.com/blog/2009/04/existing-home-prices-fall-124-sales-drop-71/

More Reading:
http://www.ritholtz.com/blog/2009/04/total-housing-starts-1959-2009/
http://www.calculatedriskblog.com/2009/04/more-on-office-vacancy-rates-and-new.html

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My light-hearted comments on:
Apple Results
EBay - Craigslist and Amazon competition a worry
Google Photo Search

Repeat and Say it Again

I have written numerous times on My Notes on the Stock Market to avoid financials and to avoid real estate stocks. Does it make sense to say it again? I think it does. Say something once, and you hear, say it a second and third time and then you listen.

In Ken Norquay's column in TimingtheMarket.ca, Ken advises investors to simply avoid the financial services sector. In fact, his team has not touched this sector for two years. That viewpoint does not change today.

Here are the highlights:

  • Profits recently announced by Citibank have confirmed to many investors the “springing” to life of the financial sector. The sector had certainly been depressed—rather, compressed—more or less up until the time the Obama administration announced it would acquire bad debts from banks’ balance sheet
  • that Citibank’s surge in operating profit (which was instrumental in tripling its share price which had been under a buck) was largely due to the adaptation of an accounting standard that allows a company to book profits based on its ability to buy back its own debt at prices that is significantly lower those current reflected on their balance sheets.
  • Citi doesn't actually have to buy back their debt. They just have to be able to
  • Bank of America did essentially the same thing, only in it’s case its doubtful debt came over in the acquisition of Merrill Lynch. Separately, B of A booked at profit from its sale of a subsidiary, China Construction Bank.
  • All of these events are non-repetitive and hence are not indicative of any sustainable return-to-health of the banking sector, and, by extension, the economy.
  • Have you read any reports lately predicting an earlier-than-anticipated end to this recession, or of any upward revisions of economic activity?

Comments: I don't complain about much, but did so after reading about allowances in the changes of accounting rules to reduce transparency. The logic is correct, but the means is not. After all, It was the lack of transparency that was one of the many reasons this sector landed itself in trouble.

Sunday, April 19, 2009

The Trend is Your Friend

Notes from Frontline Weekly Newsletter

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



My comments are below.
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The Trend Is Your Friend Until the End of the Trend

Stability, though, as we were taught by Hyman Minsky, leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits, because we human beings learned to trade and invest by dodging lions and chasing antelopes on the African savannah. We now chase momentum and dodge bear markets. We are hard-wired to look around at our circumstances and predict trends far into the future.

We take the current trend and we project it forever. But the one thing we know about trends is that they are eventually going to end. The trend is only your friend until it ends. Trends are notoriously fickle. That stability breeds instability.

...

We have two trillion dollars of actual cash propping up $50 trillion in credit. If we all decided to settle and pay off everything, we couldn't do it because there is not enough cash. There would be massive asset deflation. We, as a nation, are levered 25 to 1, or we were. Now, that $50 trillion is in a real sense the money supply because that is what we are all pretending is real money. I lend you money and you pretend you are going to pay me back. Then you pretend he [pointing at another attendee] is not going to call your debt for cash, and we are all going to keep the system going. Because if we all try to pay each other back at once, we are all collectively -- and this is a technical economic term -- screwed.

So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today.

...

This is not just in the US, but all over the world. Because when you start adding European cash-to-credit, and Japanese cash-to-credit, and Indonesian and Chinese cash-to-credit, it becomes multiple tens of trillions, and we are watching a goodly portion of that credit be vaporized. So we -- individuals and businesses -- are trying to find that $2 trillion in real cash and get some of it to pay down our debts.


My Comments:

There is no better word to describe the situation. As Mauldin puts it...we are all screwed.

One best not lose sight of the sell-off proceeding the stock market recovery. The key word is de-leveraging. The money created may necessarily require stocks in finance and real estate to rise, but the real factors governing current economic health - employment and housing - will need to be priced in the market.

$300 billion is just a down payment on the "quantitative easing" they will eventually need to do. They can't announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion, another $500 billion.

When we first started out with TALF and everything, it was a couple hundred billion here and there, and now we throw the word trillions around and it just drips off of our tongues and we don't even think about it. A trillion is a lot. It's a big number. And the total guarantees and back-ups and all this stuff we are into -- I saw an estimate of $10-12 trillion. That's a lot of money.

Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don't know what that number is, I'm guessing $2 trillion. I've seen some studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some big number, some number way beyond $300 billion, and they are going to keep at it until we get inflation.

My Comments:

A big debate going on right now is whether we will face inflation or deflation. Knowing which way it will go will alter the allocation of resource holdings in a portfolio. The rule "Don't Fight the Fed" still applies.

Will it create an asset bubble in stocks again? I don't know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets, both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn't have as many good opportunities, and basically he's scared of being short with so much stimulus coming in. So it's going to work, at least in terms of reflation, but the question is when. A year? Two years?
My Comments:

With so much money added to the market, investors have already seen its positive impact on stocks in consumer goods, financials, and in real estate. Since it is not known just how much more money will be added to the system, short-selling is dangerous. Hedge ETFs are safer in the sense that losses are capped. Many of them are still good to hold in small amounts to manage portfolio risks against long positions.

About Growth in China

One note from today's data on deflation. The headline in the Wall Street Journal says China grew at 6.1% last quarter. That doesn't sound bad. But what was not in the story is that nominal growth was just 3.7%. The other 2.4% was because of deflation. To get real (after-inflation) growth you subtract inflation and/or add deflation. Growth in China is slowing down more than the headlines suggest.


My Comments:
It is good to know now that deflationary forces add to reported growth, even though this growth isn't "real."


On Creativity.

This is completely unrelated to finance.
Elizabeth Gilbert speaks about creative genius.



Link: http://www.ted.com/talks/view/id/453

Tuesday, April 14, 2009

Good Bank Results?

Goldman Sachs:
Link: http://finance.yahoo.com/news/Goldman-reports-profit-to-rb-14915517.html

But Goldman's report was not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, prompting some to question whether the change in financial years had allowed Goldman to dump much of its bad news into that one-off period and start afresh in the first quarter.



Wells Fargo:
http://www.housingwire.com/2009/04/13/wells-fargo-q1-profits-packed-with-accounting-gain/

That gain comes as the result of WFC’s controlling interest in a legacy joint venture with Prudential Financial; the joint venture was acquired when Wells took over Wachovia last fall. Prudential currently holds a 23 percent non-controlling interest in the venture, as well as a put option on its interest in the venture; according to government filings, Prudential intends to exercise such an option “at a date in the future.”

Analysts are aware of this change, but say that a lack of transparency from Wells is making it difficult to see just how much of the bank’s jump in quarterly earnings is due to this ‘liability into asset’ transformation. And, of course, this one-time non-cash event happens to occur in a quarter where Wells needs a boost in earnings in order to bring up its lagging stock price, and ostensibly to set up any future capital raises.

Monday, April 13, 2009

Slow Recovery


Source: http://www.chartoftheday.com/20090409.htm?T

Comments:

The chart above is illustrating the severity of the current earnings contraction in comparison to earnings betwen 1936 - 2006. It could also infer that a slow recovery pattern might take place, similar to the past. It would take at least two years before earnings stopped shrinking.

A more likely possibility could be that company earnings recover as quickly as it declined, due to the extreme and decisive actions taken by the government.

This does not inherently suggest that a prolonged recovery is sustainable.

(Still) Keep Your Eye on the Ball

Highlights From Matt Blackman's Newsletter:
  • 3-month London Interbank Offered Rate (LIBOR*) slipped to 1.13125% (from 1.16094% last week and 1.22% two weeks ago). This compares to LIBOR 52-week high of 4.81875% last October. [Remember: a wider spread means that banks are less willing to lend to each other]
  • Market Volatility Index (VIX) dropped to levels not seen since September 2008 as it fell to end the week at 36.53. It shows that investors are getting more complacent about stock values.
  • Earnings Digest is no longer published by either WSJ.com or the Wall Street Journal Print Edition [What the?!!! ...]
Other Points:
  • Still bullish on oil
  • Gold may correct lower

Wednesday, April 08, 2009

Notes from John Mauldin's "Outside the Box"

Excerpts from Fighting Recklessness with Recklessness
By John P. Hussman, Ph.D


Look. You can play hot potato with the toxic assets all day long, and only outcome will be that the public will suffer the losses that would otherwise have been properly taken by the banks' own bondholders. You can tinker with the accounting rules all you want, and it won't make the banks solvent.

It may improve "reported" earnings for a spell, but as investors who care about
the stream of future cash flows that will actually be delivered to us over time, it is clear that modifying the accounting rules doesn't create value. It simply increases the likelihood that financial institutions will quietly go insolvent.

I recognize that the accounting changes may reduce the immediate need for regulatory action, since banks will be able to pad their Tier 1 capital with false hope. But we have done nothing to abate foreclosures, and we are just about to begin a huge reset cycle for Alt-A's and option-ARMs. As the underlying mortgages go into foreclosure, it will ultimately become impossible to argue that the toxic assets would be worth much even in an "orderly transaction."
Comments:
The reset cycle for Alt-A and option-ARMs (Adjustable Rate Mortgages) might be the next storm to hit the stock market, on the downside.

S&P Targets:
if I were to make a guess, it would be that the potential downside in the S&P 500 from these levels could approach 30-40%. That is not a typo, and it is not a possibility that should be ruled out.
Source:
Reproductions. If you would like to reproduce any of John Mauldin's E-Letters or commentary, you must include the source of your quote and the following email address: JohnMauldin@InvestorsInsight.com.

Tuesday, April 07, 2009

Tips on Writing From the Late Richard Russell

How to Succeed at Writing

"I've been asked a thousand times, 'What's the secret of success in the advisory business?'

(1) You've got to be an obsessive nut to start with.

(2) You have to be able to write in a way that people understand and like to read.

(3) You can't come across as a phony who knows it all. Readers know that nobody knows it all.

(4) It helps if you have a long life and don't want to retire.

(5) You need a wife who can put up with a husband whose head is full of the markets 24 hours, day and night.

(6) Woody Allen said the 90% of success in life is just showing up. If you can show up for the markets 250 days a year, you're ready to start an advisory service (but I wouldn't wish this business on my worst enemy -- it's the closest thing to absolute madness. No wonder nobody else has lasted in the business 50 years).

(7) This is a lonely business. So be prepared. Need a friend? Get a dog. Need two friends? Get two dogs.

(8) One last thing -- you must have thick skin, because no matter what you write, some subscriber will send an e-mail calling you a moron or brain-damaged, and the scary thing is, that makes you think, because they may be right."

Source: John Mauldin's Newsletter

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

Sunday, April 05, 2009

My True Colors

The rapid reversal in sentiment in the past month is breathtaking.

It is really difficult to keep your head about you, when everyone around you is losing theirs and blaming it on you. Rudyard Kipling may not have referred to the stock market in his poem, “If,” but those who still doubt the sustainability of the market will not have been loudly heard in March.


The S&P rose almost 20% in March. This, by historical standards, is the biggest 4-week rally since 1933. Note the key word in this sentence is "historical." Yet unemployment grew at levels not ever recorded since being tracked. The Intelligent Investor is a value investor. Historical events and market patterns play little to no role in the valuation of a company. In effect, "Efficient Market Hypothesis" would need to be rejected, and the work involved to value a company is "bottom up" not "top down."

I have written and analyzed the market from a top-down perspective. Why? The broken banking system (failure of banks to lend) has affected companies in their ability to finance. This means that companies that were running on weak balance sheets will rally along with the other good companies investors should be holding.

Beware of those companies. It is still possible that the banking system is not fixed, and these companies will ultimately fail. Notice that HSBC sold 18 Billion dollars worth of “rights." This will improve the company’s balance sheet, but the buyers of this issue will probably suffer a paper loss if the market reverses in the weeks ahead.


The 20% increase has also made good companies more expensive. This will reduce your margin of safety, but in the long run it will not matter.

Differentiating good and bad companies will be important in the weeks and months ahead, as the market may move up more of implode because assumptions from a macro-economic level do not play out.

Highlights from Matt Blackman’s newsletter

(http://tradesystemguru.com/content/blogcategory/34/68/) , there are a number of factors that remain troubling:

  • Unemployment rose less than expected, but rose nonetheless. That’s like coming home and being content with scoring a D+ instead of a D-
  • Conviction was lacking: every week that went by was met with lower trading volume, even though the market rose
Coming this Week! The Real Report Card

Companies will start reporting earnings this week. It would not make sense that they would be reporting strong earnings, given the continued economic weakness between January and March of this year. I do suspect some technology stocks will do well this quarter. RIMM, for example, already reported very good earnings.

My True Colors:


When does one's true colors reveal themselves? When under duress? When one is at his/her most calm state? That is, in good times or in bad?


I have been reviewing my investment strategy in light of viewing the recent events made by Congress. Keeping a high cash position when the market rallies 20% is a difficult thing to do. However, the phrase "easy come, easy go" comes to mind. it is preferable to position a portfolio to take advantage of real opportunities: one based on fundamentals and not based merely on market fluctuations.

It has been my experience that anything - not just stocks - built on a solid foundation will last longer than profits that come easily.

The same cannot be said for triggering losses.

When the dust settles, companies with solid fundamentals will be the ones left standing.

Two amazing readings that I would strongly recommended are Seth Klarman’s “Margin of Safety” and Nicolas Taleb’s “The Black Swan.”

Nassim Taleb Says Geithner’s Bank Plan Will Fail

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Thursday, April 02, 2009

Rules Keep Changing: Mark to Market


... The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. FASB approved the changes during a meeting in Norwalk, Connecticut.


Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=agfrKseJ94jc

Comments:

I have stated frequently that the Government (Congress) keeps changing the rules. This time, the board that governs accounting rules (Financial Accounting Standards Board or FASB) has changed the Mark-to-Market Rules.

It will take effect as early as 2Q/2009, it will give more flexibility on valuations, and it will use cash flows and not distressed markets.

This "solves" the question of "how do you value assets that are unmarketable. This benefits the banking sector.

This now means more work for you and I as an investor. We now need to do even more homework in assessing the health of a bank.

Other Notes:
On a positive note Changyou.com issued an IPO and rose 25%. This illustrates that
1) the market has an appetite for new issues, and the market is depressed partially on the bank lending problems.
2) if the banking system resumed lending, innovative companies in a healthy industry will be able to tap the debt market.

Long GME. Long ATVI.

Long RIMM (No position). Here was my writeup on RIMM before earnings were released, and before RIMM rose +20% in after hours trade.

Wednesday, April 01, 2009

Reasons to be a Growling Bear

The Numbers:
  1. 742,000 jobs were lost in the U.S. on a seasonally adjusted basis in March, up 36,000 from last month's revised figure of 706,000
  2. January 2009 housing prices fell 19% (this negates the positive aspect of higher new home sales and new existing home sales
  3. A phased GM bankrupcy. Splitting the "good" assets from the "bad" would be the best approach in enabling the market to determine asset values.
The Details:

2 - Source: "The New Year Didn’t Change the Downward Spiral of Residential Real Estate Prices According to the S&P/Case-Shiller Home Prices Indices"

Graph illustrating the hardest hit cities:

















Source: http://seattlebubble.com/blog/2009/03/31/case-shiller-seattle-home-prices-just-shy-of-20-off-peak/

Notes:
The U.S. government employment figures will be released this Friday.

Hot Stock: Microsoft


Is there inherent value in Microsoft? Is the stock low enough to warrant investors to buy the stock?

I recently wrote an analysis on MSFT on kaChing. In the write-up below, I assessed Microsoft on the qualitative value of Windows 7 being released on time and on budget. But what does budget matter for a company with an adequately healthy positive cash flow and no debt.


Will Windows 7 be Successful for Microsoft? (Link: http://blogs.itworldcanada.com/idol/2009/03/30/lucky-number-windows-7/)

Note that Microsoft will be reporting in a few weeks. Investors will know more about how the company fared for the first quarter of this year.