Effor.com

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

Back in January, I posted a short article basically saying that it was way too early to call a bottom in financial stocks.  I had been reading an article on TheStreet.com by Doug Kass where he made the case that it was time to buy the financial sector, via XLF.  

While I agreed with much of his analysis, I didn’t think the financials were anywhere near a bottom - most banks and brokerages simply hadn’t taken into account the full impact of the sub-prime mortgage debacle.  Those relatively few bad mortgages were so highly leveraged that just a few percent failure rate is enough to make the whole house come tumbling down.

Despite the best efforts of the Fed, Bear Stearns has disappeared.  It took a $30 billion taxpayer backed guarantee to do it, and I think the buyout simply swept the underlying problems under the rug and out of sight - for a few months.

The last few months are looking more and more like a rehash of the Internet bubble and the resulting bear market from 2001 through 2003.  during that time, I lost count of how many times I heard things like “buy and hold”, “stay the course”, “this is a great buying opportunity”, etc. 

The people who listened “to the experts” back then STILL aren’t back to even on their investments, while those who got out and waited for the smoke to clear are way ahead.  Those of us who are conservative investors, who follow broad trends and don’t move in and out of the market very often know that this isn’t the time to buy back in.

Could this be the bottom?  Sure - but I don’t think so.   I move in and out of the market in my 401K based on the crossover of the 75 day EMA and the 200 day EMA.  I usually go with an S&P 500 index fund, and here’s what the chart looks like today.

The 75 and 200 day EMA’s are nowhere near signaling the start of another bull market, so my retirement money is 80% in cash and 20% in overseas funds.  I’m down about 4% for the year - how’s your 401K YTD? 

If you’re still fully invested (like the “pro’s” tell you to be) you’re down over 12% YTD, and you’re right back where you where in July of 2006.  If you’re retired and you’ve been fully invested for the last decade, you’re right back where you were in March of 1999. 

9 plus years and zero return - how’s that “buy and hold” strategy working for you?

Anyway, it’s time for a check on Mr. Kass’s buy call on XLF.  I normally don’t make a big deal about stuff like this - after all, analysts make bad calls everyday - but he titled his original analysis “Buy the Financials. Yes, Buy” to emphasize what a great opportunity it was.  So, let’s see how XLF is doing since Jan 14th.

XLF closed at $27.88 on Jan 14th.  It closed today at $20.57.  That’s down $7.31 - or about 26% in about 6 months. 

Great timing on the “Buy the Financials.  Yes, Buy” call Mr. Kass!  I hope you haven’t screwed over too many investors with your advice.

In my original post, I made this prediction: “In my humble opinion, we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.”

Since I recomended investing in commodities instead of stocks, let’s see how my pick (gold) is doing.  Gold closed at $903.40 on Jan 14th, and it closed today at $931.30.  That’s up $27.90 - or about 3% in 6 months.

Yup, gold is up just a tad, and it’s actually off the highs of a few months ago.  It’s also just come back up over $900 after being stuck in the $860 to $890 range for a while - I mention that because it just came back up this week, and I don’t want to appear to be trying to hide that it’s been lower.

But as long as the Fed keeps printing extra money (inflating the supply) the dollar will keep falling, so gold will continue to hold its’ value for now. 

Only if Bernanke gets serious about fighting inflation and ensuring a stable dollar (which is the Fed’s primary purpose - read the Fed website if you don’t believe me) will the dollar rebound and gold fall.  And “Helicopter Ben” isn’t Paul Volker, so it ain’t gonna happen anytime soon.

For you too young to remember the late 70’s, inflation was high and the economy was stagnant - the term “stagflation” was coined to describe it.   We’re in the early stages of it now, and unless we get the Fed to grow a pair of brass balls, it’ll be 1980 all over again.

Raising rates and restricting money supply killed the stagflation, but it also caused a deep recession.  But that recession led to one of the greatest bursts of prosperity this country has ever seen.   We can do it again - if the Fed would administer the medicine.

As is stands, Bernanke is simply trying to keep a sinking ship afloat.  He doesn’t want a deep recession (or worse) to mar his tenure.  After all, he is an “expert” on the Great Depression, and he know’s what he’s doing.  Just like the experts calling repeated bottoms in the stock market.

I didn’t come up with any of this on my own.  Read  Warren Buffett’s annual letters to shareholders.  Read Phil Town’s “Rule #1″.  Read damn near anything by anyone who isn’t a Wall Street “expert”.  Their jobs are going away as the companies they work for are revealed to be a highly leveraged house of cards.  They’re running scared and are trying anything to keep up the pretense of the 80’s and dot com years.

What about the next 6 months?  I don’t see the financials (banks and brokerage houses) coming clean with their books yet - many are still pretending that their “level 3″ securities are still worth a lot of money.  Until they ‘fess up and take the losses they’ll just be on a long slow bleedout. 

This part is simply a guess, but I think Goldman Sachs is priced way too high.   At some point I think they’ll come down to earth just like the rest of the investment banks.  This might sound “out there” but I would not be suprised to see GS lose 50% (or more) of their value over the next 2 years.   Maybe sooner.  Something is fishy in their financial statements, but I can’t put my finger on what.  Just doesn’t smell right….

Back to the “hard vs soft stuff” that started this.  Don’t take my word for it - read and look at the situation for yourself.  Decide where to put your money because YOU want to put it there - not because some so-called “expert” on TV or the Internet said “Buy the Financials.  Yes, Buy”.

gk

As regular readers know, I think that the price of “stuff” will go up long term as the dollar continues to fall - and the dollar will continue to fall long term, as our governemnt prints more pretty green pieces of paper.   So why have commodities (gold, silver, oil, wheat, etc.) dropped so much over the past 2 days?

The short answer is that I don’t know.  How’s that for sticking my neck out? 

From what I’ve read and heard, it’s a combination of two distinct factors:

1) The market had priced in a 1% drop in interest rates, and the Fed only dropped 3/4%.  So traders think that the Fed is now hawkish on inflation.  (Yup, I think it’s weird too.)

2) The US is definitely going into a recession.  That means that demand for commodities will drop as consumers spend less. 

Of the two reason given for the drop, I’m inclined to think that #2 has more validity than #1.   Not that I think that’s a bad thing!  The US needs to spend less.  The average US consumer is in over their head with debt.  Collectively we need to stop spending more than we earn - and the same goes for the US Government.  If the dollar is to rise long term, we need to stop spending more than we make.

We need to pay off old debt and stop taking on new debt for awhile.  We need to accumulate capital so that our banks don’t have to drop their trousers and bend over for money from Sovereign Wealth Funds in order to stay in business.  A little actual capital would have prevented Bear Stearns from being bought out for $2/share.  Of course, that was us (the US) doing the “buying”, but now we’re all on the hook for $30 billion of Bear Stearns’ over-valued mortgages.

I don’t know what the next shoe to drop will be - or how the markets will react to it.  In spite of the fact that CIT Group (not to be confused with CitiGroup as I did at first!) today announced that they didn’t have any money on hand and needed to borrow $7.3 billion to stay afloat, the US stock markets all went up today.  And the commodities all dropped. 

Side note:  I like the headline on the CNN article I linked to - “CIT Borrows $7.3 Billion to Repay Debt“  I’m still trying to figure out how borrowing money to repay debt works….

Anyway, despite the news of yet another financial company having problems, the stock market shrugged it off and the DJIA soared 261 points.  XLF (an ETF that tracks all the financial stocks in the S&P 500) was up an astounding 6%!  But I think that we’ll see this sector plumet at some point as this mortgage inspired credit crisis unfolds.

Remember that very few of the ARM’s and Option ARM’s that were handed out at the peak of the housing bubble (2005 through 2007) have reset to higher rates yet.  A lot of those mortgage holders are making minimum payments on their interest only loans.  This is far from over, and I’m hanging on to my gold ETF.  I’m also buying silver when I find it cheap on eBay.

In other words, I’m using this drop in commodities as a buying opportunity.  I don’t know about oil, wheat, or corn (they depend too much on the economy) but I expect to see a big rebound in precious metals sometime soon.  And when that happens, I’m betting that the rebound in precious metals will coincide with a drop in the financials.

gk