Effor.com

I don’t know what news people are seeing that encourages them to buy stocks.  I meant to post this last night but didn’t get the time, so here goes.

The DJIA went up over 500 points yesterday and I’ll be damned if I can figure out why.  I kept an eye on the news headlines during the day, and here’s what they looked like at 2:45pm ET - just before the market skyrocketed into the close.  Here are the top headlines on MarketWatch.com as displayed by my “My Yahoo” page yesterday:

· Intel, H-P, Dell lead tech-sector losses - 14 minutes ago

· Citigroup looks for a new fall guy - 14 minutes ago

· Economic clouds could thwart some Obama energy promises - 14 minutes ago

· Energy stocks flirt with gains in volatile session - 14 minutes ago

· Chrysler’s survival difficult without government aid: CEO - 14 minutes ago

· GE shares fall back to 1996 levels on financing-cost concerns - 14 minutes ago

· U.S. stocks bounce back some after hitting new lows - 14 minutes ago

· Shares of Citigroup, Bank of America sink to decade-plus lows - 14 minutes ago

· Treasurys steady after 30-year bond auction - 14 minutes ago

· Gold dips below $700 as traders take more money off the table - 14 minutes ago

And here’s what the topr Reuters Business news were at the same time:

Jobless claims hit 25-year high, imports plunge - 1 hour ago

• The number of U.S. workers drawing jobless benefits hit a 25-year high this month and imports suffered a record fall in September, according to reports on Thursday that underscored a rapid drop-off in…

  · Stocks cut losses; energy offsets tech drag - 36 minutes ago

  Stocks cut losses on Thursday, sending the Dow and S&P 500 back briefly into positive territory, as investors scoured the market for beaten-down shares, including those of energy companies, offsetting…

  · Top hedge funds see more rules ahead for industry - 53 minutes ago

  Some of the world’s richest and most powerful hedge fund managers told U.S. lawmakers on Thursday that they support greater transparency for the secretive industry, but offered divergent views on …

  · GE shares tumble, company confirms 2009 dividend - 1 hour ago

  General Electric Co (GE.N) confirmed on Thursday it plans to pay a dividend through the end of 2009, but shares of the U.S. conglomerate remained down sharply.

  · Goldman suspends GM rating, Chrysler urges aid - 53 minutes ago

  Goldman Sachs suspended its rating on General Motors Corp on Thursday and said the automaker needs at least $22 billion in federal aid, while Chrysler said it would be “very difficult to survive&…

  · RIM co-CEO says market environment is “intense” - 50 minutes ago

  The current market environment is rife with challenges and requires careful planning of strategy, the co-CEO of Research In Motion (RIM.TO)(RIMM.O) said on Thursday as an analyst warned that sales of …

  · Citigroup board says supports its chairman - 39 minutes ago

  Citigroup Inc’s (C.N) board of directors said it supports its chairman and a newspaper report that said it was considering replacing him was “completely erroneous.”

  · Oil rises 4 percent on OPEC, equity market rebound - 9 minutes ago

  Oil jumped over 4 percent on Thursday as OPEC seemed poised to cut production again later this month and equity markets rebounded.

  · Lawmakers challenge big banks on bailout funds - 36 minutes ago

  Senators asked the nation’s biggest banks on Thursday to explain how they are using the billions of taxpayer dollars provided to them under a massive government bailout program. The answers were m…

  · Qualcomm halts UMB project, sees no major job cuts - 11 minutes ago

  Qualcomm Inc (QCOM.O), seeking to cut costs in the face of slowing demand for cell phones, has stopped developing a next-generation wireless technology called Ultra Mobile Broadband and is making smal…

There’s not a single bit of good news hitting the wires, but yet the market reverses course and ends up almost 1000 points higher than the low for the day.  Makes no sense to me, but I don’t see anyway investors can continue to ignore the news that says earnings are falling dramatically.  At some point the “P” needs to adjust to the dramatic drop we’re seeing in the “E” in order to bring the Price/Earnings ratio back in line.

gk

This needs to be read by more people, so more people can contact congress to let them know what they think of it.  I’ll post the reasons for my own thoughts later (I think it sucks!) but for now, here’s the text of the proposed plan according to the NY TImes.  Please read it and let congress know what you think!

gk

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

Does this sound familiar?  According to the story, Bank of America CEO Ken Lewis says “that he sees no need for the largest U.S. bank to raise capital or cut its dividend.”

I don’t know why, but it sounds like I’ve heard that before….  Oh yea, now I remember.  Citi Group said that on November 4th last year - then on January 16th they announced a 41% cut.

I’m too lazy to look up the details right now, but if my memory serves correctly, MBIA, AMBAC, Lehmann - and several other financial institutions have said the same thing over the past 6 to 8 months. 

Here’s a fun trip down memory lane.  Read this excerpt from Bloomberg dated August 28, 2007:  Moszkowskicut his estimate for Lehman’s earnings in 2008 by 22 percent to $6.80 a share. That compares with an average estimateof $8.14 in a Bloomberg survey of 19 analysts. He expects the firm to earn $7.07 this year.

Bear Stearns will earn $12.07 a share in 2008, Moszkowski predicts, more than $2 below the average estimateof $14.53. Earnings this year will drop to $11.86 a share from the record $14.27 that Bear Stearns reported in 2006, he said.

Lehman shares declined $3.47, or 6 percent, to $54.28 in composite trading on the New York Stock Exchange. Bear Stearns fell $3.78, or 3.4 percent, to $108.42.

“Merrill’s downgrade is a very good sign that these stocks will bounce from here,” said James Barrow, president of Dallas- based Barrow Hanley Mewhinney & Strauss, the sixth-largest Bear Stearns shareholder. “They’ve made many market-bottoms by putting stocks on sell lists.”

Obviously, Bear Stearns is now out of business (having been bought by JP Morgan for $10/share) - yet James Barrow said that the downgrade was “a very good sign that these stocks will bounce from here” when the stock was at $108.  I sincerely hope that no one listened to him.

How about Lehmann stock?  It was at $54 when this pronouncement was made, today it closed at $19.74.

Don’t you just love the way the market pros can call the bottoms?  (Umm, that’s sarcasm - no need to tell me I’m agreeing with someone who’s wrong.)

I’ve said it before, but it needs to be repeated because I’m tired of people acting like they’re surprised when the market - particularly financials - keep going down.  If you learn nothing else from these rants, please remember this:  Until the financials “come clean” and write off the majority of the toxic “level 3″ assets, they will continue to lose value.

These financial geniuses have leveraged sub prime and “alt-a” loans 20 and 30 times.  When even one defaults, the whole house of cards comes down.  I’m guessing - strictly a guess because none of them are providing accurate numbers right now - that the major banks have written down maybe 30% of the losses they’ll ultimately take.

In other words, this show ain’t no where near over - it ain’t even halftime.  I don’t care how many times Ben Stein says buy and hold, I don’t care how many times Doug Kass says we’re at the bottom, I don’t care if MBIA and AMBAC say they don’t need capital, I don’t care if Lehmann downgrades (or upgrades!) Merrill or Goldman - or vice versa.

Someone needs to say it - These companies are too highly leveraged.  Some will not be in business a year from now.  It’s true that one or two will emerge stronger, but I’m not picking that horse yet.  Better to sit on the sidelines (in cash or gold or silver) and wait to see who’s left when the dust settles.

Right now, I’m long Novagold (NG) strictly as a speculative bet on gold.  I’m also long on FXE - which is a “long-term-no-way-I-can-lose-on-this” type of bet.  That’s it.  Everything else is in cash and silver - real silver coins that I physically have in my possession.

I don’t have the balls to short financials right now - although everything I know tells me to.  Someone (don’t remember who right now) said something like “the market can remain irrational longer than you can remain solvent.”  Good advice, and I rarely bet short - or wager much on hunches.  The dollar going down long term is NOT a hunch.  In my book that’s as close to a sure thing as there is today.

If I had the guts, I’d short XLF from here - it closed at $19.36 today - and take my profits at $17.  But I don’t have the guts to do it, so I prefer to sit on the sidelines until there’s something I can go long on.

Maybe someday the buy and hold crowd - who have cost so many people so much money in the past 8 years - will shut up and go away.  I hope the same goes for those who keep calling bottoms in this bear market.  Buy when the market trends (when the 75 and 200 day EMA cross going up) are on your side - not before. 

Unless you’re a trader or speculator, in which case you don’t care what I say anyway.  Even then, I know traders who use technical indicators - but much faster than 75 and 200 day MA! 

Anyway, I don’t think anyone will get rich bottom fishing at these levels - and you could lose it all. Be patient, wait, buy when the market trend is in your favor, and you’ll be just fine.

gk

I was responding to some comments to a post I made to www.seekingalpha.com a few minutes ago, when I said something that I think needs to be explained further.  I mentioned “leverage” and since that’s been in the news (especially regarding financial stocks) quite a lot over the past few months, I decided to expound on it a bit.

In the comment I referenced above, I said “Let’s say you have $1 million equity in your house, and you take it out in a HELOC. You take that $1 million and put 10% down on 10 other $1 million properties - and you depend on the renters to make your payments.“

That’s leverage.  I just took $1 million in assets (my home equity) and used it to gain control on $10 million in assets.  I used the words “gain control” rather than saying “to buy” because I don’t actually own them - the bank I borrowed the other $9 million from actually owns those properties.

It’s an important distinction, because what happens to my $10 million in assets if just one renter falls behind on their payments?  Suddenly I can’t make my mortgage payments.  It’s only 10% less income, but it causes me to suddenly have to sell the whole $10 million in leveraged assets - because I can’t make the payments.

That’s what happened to Bear Stearns.  They had some assets which they leveraged (borrowed against) in order to buy (with other peoples money) other assets.  When one small part of the initial asset didn’t make their payment, the whole house of cards fell.

In my example, I used a leverage ratio of 10 to 1.  Bear Stearns was leveraged over 30 to 1.  I’ve sen some arguments from pundits (including Ben Stein) where they say the markets have over reacted; that a 10 percent jump in the rate of defaults doesn’t warrant a 20 or 30 percent drop in the stock price of financial companies. 

They’re wrong.  And they’re wrong for the reason above.  When you’re that highly leveraged; when you have 20 (or more) dollars of debt for every dollar of assets; you are hosed when just one percent of the underlying assets doesn’t pay up.

Suddenly you can’t make your payments on all the debt you’ve borrowed.  And since you really didn’t make much of a down payment anyway, you have no equity in the investment.  If you had some equity, you’d have a little breathing room.

But you don’t.  You need every dollar that you’ve counted on to make those payments - because you’ve leveraged your equity. 

And what happens when the value of thoseleveraged assets turns out to be too high?  You’re fucked.  Not only are you highly leveraged, but the base value of thoseassets has dropped, so now you are more leveraged than you were just a monthago.  And so you’re even more vulnerable when there’s a small rise in loan defaults and bankruptcies.

It’s a wild, wild world right now.  I can’t think of a single bank or REIT that I’d touch with a 10 foot pole.  Go ahead and Google the news results for the 3rd quarter of last year.  Check out all the stories that claimed that the 4th quarter was the “kitchen sink” quarter.  Be sure to read how damn near everyone thought that the banks and investment houses have finally fessed up and come clean.

Now watch the headlines during the week ahead.  Let’s se how many additional write-downs there are.  A lot of people have written me saying that I’m overestimating the impact of the sub prime stuff.  Many have told me that all of those losses for the upcoming rate adjustments (for the Option ARM’s and ARM’s written in 2005 through 2007) have been accounted for, and that there’s no where to go but up.

They may be right, but I don’t think so.  I don’t think people truly understand the impact of leverage.  I don’t think they truly understand that just a 3 or 4 percent drop in the base asset (mortgages) can cause a company to disappear.  

I’m not putting my money back into the market until I’m sure that risk has been priced in.  Given the (in my view) extremely optimistic earnings forecasts for 2008 and 2009, that risk is being ignored right now.  I may be wrong (I often am!) but I think I’ll be getting 2 or 3 percent in my money market funds while the optimists are losing 10 to 20 percent (or more) trying to bottom fish the market.

Any questions?

gk

Some headlines from today for perspective.

Fed Officials Saw Contraction in Economy `Likely'

Washington Mutual to slash jobs despite cash injection

Pending home sales index off 1.9% in February: NAR

Credit crunch cost $1 trillion estimates IMF

Basically there was a lot of bad news that came out today, and the US stock markets were down a little for the day.  Given the news today, I don’t understand why they weren’t down more - but you can’t argue with the markets. 

The market is always right (no, I’m not being sarcastic) and no matter what I think are compelling reasons for it to drop, the market will do what it wants to do.  The market is the ultimate arbitrator of right and wrong, because it will do what it wants to do regardless of what I think.

That’s the short term view anyway, and successful traders already know this.  I’m not a trader - I look strictly at long term trends - but I confess to being annoyed when the market doesn’t do what I think it should do based on the fundamentals and the news.

I’ve started to do a little analysis of the S&P 500 earnings based on Standard and Poors own published data.  No conclusions yet, but the estimates for Q4 2007 were way high, and I expect the estimates for Q1 2008 will be even more off base. 

The estimates I’ve seen are for a 12% drop in earnings in Q1.  That’s simply wishful thinking.  I’m expecting a minimum of a 25% drop (year over year) and I will not be surprised if the total S&P 500 earnings ends up 50% lower that Q1 of 07.

Any takers?

gk

It’s been done to death today, but a quick scan of the headlines tonight will make you think everyone is in on a huge April Fool prank.  UBS wrote down $19 billion and Deutsche Bank wrote down $4 bilion, so investors bought everything in sight, sending the market up almost 400 points to close at 12,654.

Everyone is once again saying that the worst is over, that they’ve finally accounted for all the losses, and that things are going up from here.  I hate to be the bearer of bad news, but they’re wrong - and it’s not the first time.

Most people probably remember the Bear Stearns meltdown, the AMBAC and MBIA fiasco’s, the comments from Standard and Poors about the worst of the writedowns being over - and the subsequent surges in the markets after each of them.  But you may not remember that this started last year.  A quick refresher….

Here’s a NY Times story from October 2nd, 2007 

The country’s biggest bank, Citigroup, will write off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier. Europe’s biggest bank, UBS, said it had written down $3.4 billion in the value of mortgage-backed securities and would suffer a loss in the quarter. Other banks, including Merrill Lynchand Bank of America, have issued similar warnings.

Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained. 

The Dow closed at 14,087, and the S&P 500 closed at 1546 on October 2nd.  The Dow close was a record high.

Here’s another NY Times story from November 14th, 2007.  According to the story:

Investors were buoyed by comforting words from top executives at Goldman Sachsand JPMorgan Chase, who said they were confident their companies would emerge relatively unscathed from the subprime mess. Lloyd C. Blankfein, Goldman’s president, said his bank would not take more write-downs on mortgage-backed securities, sending the bank’s stock up 8.5 percent to $233.04 a share.Shares in JPMorgan rose 6.3 percent.

The Dow closed at 13,231, and the S&P 500 closed at 1470 on November 14th.

Now comes todays’ news.  Stocks Surge on Hopes Financial Woes Are Easing is the NY Times headline today.  Another big surge in stocks with everyone thinking that the worst is over….

It’s not over.  I don’t think it’s even halfway over.  All those ARM’s and Option ARM’s that were taken out in 2005 through 2007 have yet to reset from their teaser rates. 

When they do (throughout the next 2-1/2 years)  there will be more losses.  Many more losses.  Much bigger losses.  And stocks will need to fall to reflect those losses.

gk

“Fraidy Cat”?  C’mon, Walter, can’t you do better than calling people names and making fun of them when they get nervous?

http://money.cnn.com/2007/11/29/pf/expert/expert.moneymag/index.htm?postversion=2007112910

Since this article was posted by Walter Updegrave on November 29th, the market (as measured by the S&P 500) is down more than 7%.  That’s more that it gained during all of 2007.  But Walter says you can’t time the market.  Walter says “That’s why calling turnarounds in the stock market is an iffy business at best. Ultimately, it’s a guessing game that isn’t worth the effort. I say you’re much better off setting a mix of stocks and bonds that makes sense given your planned retirement date and then sticking to that mix regardless of what the stock market is doing at any given moment.”

I say he’s wrong.  I have a very simple strategy - I move in and out of the stock market according to when the 75 and 200 day EMA’s cross.  For example, move out the week of Nov 27th, 2000 (S&P 500 at 1315) and put the money into either money market or bonds or split between the two. (More on how to choose between bonds and money market funds later).  It stays there until the 75 day moves back above the 200 day EMA, which was the week of June 9th, 2003 (S&P 500 at 988).  You stay in until the week of Jan 14th, 2008, when you sell at 1325. 

Note:  I only check the market at the end of the week, so I normally have a clear crossover point if there’s been a change during the week.  I haven’t defined “clear”, but lets just say the lines have crossed by more than 1%.  Look at the direction they’re heading (up or down) if you can’t decide.  Or simply wait another week until the direction becomes clear to you.  A week is nothing in the time frames I’m talking about.  It may mean 1 or 2% difference, but I don’t care about that.

By using this strategy, you’ve captured the majority of the upside, and you’ve missed the majority of the downside.  If there’s not a clear crossover point, you stay with what you were doing.  So if the market has no clear direction (such as in 1994), you’re either in or out - depending on what the last clear crossover point was.  You won’t make much during these times - but you won’t lose much either.

So right now (Jan 28th, 2008) you should be out of stocks.  Yes, you’ll miss a big up day - or even a big up week - but we’re looking for long term trends, not the flavor of the day.  As Will Rogers once said “I’m much more interested in the return of my investment, than the return on my investment”.

But guess what?  By following the above strategy, you’ll beat the snot out of a buy and hold investor - and you won’t be jumping in and out of stocks so often that you end up paying a lot of transaction or broker fees. 

Note: By using this strategy, you will not get out of stocks soon enough to miss huge one day losses, like the crash of 1987, or the big drop in July/August of 1990.  And you’ll be sitting either in or out of stocks when the market has no clear direction, such as pretty much all of 1994.  There will even be times (such as the two instances I just mentioned) where you’ll buy back in at a higher price than where you sold.  Remember, this strategy isn’t for short or intermediate term trading and it doesn’t work for that.  It’s only meant to be a guide for long term trends, such as the bull market of the late 90’s, the bear market of 2000 through 2003, and the bull that took us through 2007. 

Yup, you’ll be sitting on the sidelines on some huge up days, and you’ll be fully invested during some big down days, but you’ll do better than the market as a whole, because you’ll be out of the market when bears are eating everything in sight, and in it when bulls are charging.

How are those buy and hold guys doing since 2000?  If they’re lucky, they’re almost back to even.   If you had put $1000 into the S&P 500 on Jan 1, 2000, and you left it alone (you’re a long term buy and hold investor like Walter!) that $1000 investment is now (Jan 28th, 2008) worth $1011.87.  You made $11.87 TOTAL in the past 8 years.  If you had followed my strategy, you’d have a lot more.   I’m too lazy to do all the math right now, look at a chart and see if it makes sense to you.  I may come back to this later when I have more time.

Anyway, I told you I’d tell you how to choose between bonds and a money market fund.  If interest rates are heading down, as they obviously are right now - at least it’s obvious to anyone with warm blood in his brain - you go into bonds.  The price of bonds rises as the interest rates fall.  If rates are rising, move your money into a money market account.  If you can’t guess which way rates are going, split your money between the two.  You may not make much, but at least you won’t lose much either.

So I disagree with Walter - it’s OK to be a “Fraidy Cat” - just have a plan for when you move in and out of stocks.  I think my plan works well, but you may have something else in mind.  If you have a long term trading strategy that works for you, pass it on.  Post a comment with your strategy for all to see.  Walter will disagree, but others may still find it useful. 

gk