Tuesday, September 30, 2008

It's All Political

Yesterday's market plunge was an overreaction to uncertainty. The market hates uncertainty. Here's my thoughts on the bailout. Its a flawed bill, but its a flawed system. Wall Street is flawed, and Washington is flawed. But we have to deal with what we've got, and we have to get out of this mess. So some version of the bill will be passed to shore up confidence. Do I think the bailout will make money for taxpayers? No. Washington politicians are experts at ripping off taxpayers, and they do most damage when people aren't paying attention. Now that their every move is scrutinized, we can see how poor they really are at accomplishing things. Hearing about Pelosi's political speech just before the vote made me sick. Of all the times to try and get a leg up in the election, that was not one of them. They don't get it, pure and simple. We all heard Harry Reid's "no one knows what to do" quote.

That's all this is is politics. Its too close to an election. Obama and McCain won't even talk about it for fear of alienating voters. That's not what a leader does. A leader puts his country's need first.

The Dems. could have easily passed this bill yesterday, as they have a majority, but were too afraid politically. If the bailout was a failure, they needed Republicans to be on board so there would be equal blame.

Quit the blame game. Quit the politics. Get something done for a change.

Monday, September 22, 2008

Life in a Post-Bailout World

So bailouts are coming one after another. What a wonderful job being done by our representatives in Washington on this. Neither candidate has taken any sort of position on what to do. Senate Majority leader Harry Reid said it best with his classic quote "no one knows what to do." Quite true. I get the sense that they're basically handing the checkbook to Paulson saying "do what you have to do." I don't think anyone else knows what to do.

So what happens once the bailouts are done? Okay, we've "saved" the financial system. But was it a system worth saving? Its quite possible that these bailouts won't bring needed reform that is necessary. We might just be happy that we survived and move on.

But the truth is that we need change. But its not a matter of needing more regulation across the board. Banning short sales isn't the answer. That only prohibits markets from performing as they should. And quite truthfully, it can't stop stocks from declining further. If a company is doing poorly, it can be discounted heavily because there won't be buyers for the stock. Simple supply and demand. Bailouts are also a negative because they basically condone the behavior that got us into this mess. If management gets a company into a horrible position, they deserve to be fired. They deserve to have consequences. If I mismanage my small business, and take on way too much risk, and it backfires, its tough luck. When companies know that there is a backstop, they will take more and more risk, pushing the envelope. This will continue the pattern of bigger and bigger bubbles, and each popping causing bigger problems.

You can't be excited about investing in anything that depends on the strength of the dollar. The actions in the past week have given that a weak outlook. I'm a believer that commodities will bounce back a bit, and those have the best chance in a scenario like this. After that, I'd only look at deep value plays.

It could get tough here for awhile, and there's nothing wrong in sitting it out for a bit.

Thursday, September 18, 2008

An Attempt at Clear Thinking

Okay, so the market is pretty much chaos right now. There isn't anyone who won't argue that. Will Goldman Sachs and Morgan Stanley survive? I don't know. But does it matter at this point? We're about out of investment banks now. Truth be told, some clear thinking would help everyone right now. Who isn't frustrated? But its times like these, believe it or not, when the money is MADE. In case anyone didn't notice Warren Buffett picked up Constellation Energy Group for $26.50 per share. It traded at nearly $70 last week. Nice job, Warren.

In the aftermath of this crisis, you're going to have many people who will be very apprehensive with their brokers. A lot of people. These people are going to look at who got them into things like mortgage-back securities for investments, among other things. Who pushed them? The big brokerages and investment banks. (Lehman, Bear, Merrill, Morgan, Goldman). Yeah, those guys. So okay, Ken Lewis, you got a great company in Merrill Lynch this week. But their perception in the investment world will be changed. For Good. They are going to have a tougher time convincing investors to place money in their hands.

What am I getting at? Medium-level or somewhat discount brokerages are probably going to see a major rise in business. I'm talking about Charles Schwab, Fidelity, TD Ameritrade, and Etrade. I'm going to focus on Schwab(SCHW) a little. They have a well known, successful business model. Cheaper commissions than the big guys, but more service and features than the little guys. A good place to be if you asked me. They've been making a major push into the banking business, and it has worked. They offer high-interest checking with no ATM fees anywhere in the US. Its a pretty good program. Shares have sold off a bit this week (what hasn't?) to around $22. I like the stock here, and would love it if we see it lower due to overall market weakness.

So, there's my attempt at clear thinking for the day. Let's keep our eyes open like Buffett.

Monday, September 15, 2008

"This Time It's Different"...

Although its seems like capital has dried up with everyone these days, if you've got some, history shows that now is the time to think about putting it to work. This is purely odds, statistics and history. Although people like to say "this time it's different", it usually isn't. History is usually a good guide for these things.

Those who cried that this crisis would happen are finally getting major airtime. Specifically NYU professor Nouriel Roubini. Six months ago, his statements sounded crazy. Today, his statements have been proved mostly true, and now he's all over the news and they're using him for ratings. Funny how things change. And all the "financial crisis bears" are running around and talking about how right they were, as they obviously feel vindicated. And of course, they're all continuing to lay it on, saying "this is just the beginning." But major market disruptions, like today, often mark significant points in the stock market (usually market bottoms). What will the bears say to that? "This time its different." There's those words again.

I'm a believer in a "reversion to the mean" in many aspects of life. Things usually aren't as good as people say, nor are they as bad as people say. The market often swings like a pendulum from euphoria to fear, and its clearly making new highs on the fear index.

I understand there are major problems going on, and I'm very, very hesitant to step in as a buyer, but I'm looking. But when this all slows up a bit, and things normalize (again, it could be awhile) stocks will rally again. And that is when the easiest gains are made, that 15% off the bottom. So stay patient, live to fight another day, don't make crazy changes to your portfolio, and realize that this time, although it feels different, it probably isn't.

Panic is Not Necessary

We've all heard the headlines this morning. It is a major, unprecedented series of events. But lets take it for what it is. Yes, these events are causing not only a crisis among these institutions, but a crisis of confidence. But in today's world we're getting used to so called "crises", right? But as investors, or even just people, there is no point in panicking. Our economy may get worse before it gets better. Many companies are hurting, but many are doing just fine. Its times like these that we need to step back, take a deep breath, and listen to some wise words of people like Buffett. "Be fearful when other others are greedy, and greedy when others are fearful." Have truer words ever been spoken in the investment world. Those who have the patience and cash to buy quality stocks in moments like these often come out ahead.

I read a good column this morning by Brett Arends at the Wall Street Journal. Here's an excerpt from this column.

There are a few things I know and they are material now. First, the people who stay at the table and don't make stupid moves here are going to be the ones who make the money in the years ahead.

Second, no one knows how much worse things will get, how much further the market will fall, or when things will turn. And you should not trust anyone who says they do know.

Third, trying to get rich quick is one of the surest ways to get poor quick, and the only way to win this game is to keep investing little, often, and broadly.

Fourth, most great investors made their money buying in a panic. If this isn't a panic, I don't know what is. My old fund management pal Dan Bunting, in London, accumulated a few rules of thumb over 35 years at this game. Among them: "Always buy the market after a spectacular bankruptcy."

Fifth, there are a lot of good stocks out there that are pretty reasonably valued. Even long-standing bears, skeptics and curmudgeons are starting to say this. These stocks may not be dirt cheap. Times may get much worse before they get better. But if history is any guide, buying good stocks when they are reasonably priced and hanging on for five years or more has tended to be the best thing you can do with money.

And sixth: At some point this will end and when the market turns it will be rocket powered. There will be no easy chance to get back in. Invest little, often and broadly. And don't panic.

You can read the full column here.

So stay patient, don't speculate. Remember the wise words of those who've survived many situations like the one we are in now.

Sunday, September 14, 2008

Brother, You Asked For It

This is truly unprecendented. In case you haven't heard, Lehman is basically declaring itself bankrupt. AIG is searching hard for captial, and Merrill Lynch is bought by Bank of America. I hope people grasp the gravity of these events. These institutions have controlled corporate America for most of our nation's modern history. Its all changing now. It shows us the problems of too much leverage, too much cheap money, and the constant cycle of bubbles.

I'm now listening to Nouriel Roubini say that investment banks' model is "fundamentally flawed", and he says Morgan Stanley and Goldman Sachs may not even be able to survive. The problem with investment banks is that they require confidence from investors to stay afloat. That confidence has obviously dried up. Where large diversified banks (like Bank of America and JP Morgan) end up being okay is because they have deposits to fall back on. Investment banks have no such safety net.

Futures are down hard. Tomorrow will be a crazy day in the markets. It will reverberate throught the entire world.

Will this cause huge disruptions like a potential crash? Who knows. Most likely not. The Fed, the treasury and our government has done a good job of fooling the public into beleiving there is no reason to panic thus far, and I'm sure they'll figure out something for tomorrow. I'm guessing it was something like the Fed urged Merrill to sell tonight to take the heat off Lehman for folding. I'm sure they will be on tv trumpeting how great this Merrill-B of A deal is for the market.

What is funny to me is how the general public doesn't really care. They don't care about issues in the presidential election either. If we don't make our politicians and government employees accountable, believe me they won't do it on their own.

Its hard to feel bad for these bankers and people in upper management at these firms, as they don't deserve our welfare, but I do feel bad for the system. I feel bad that it was corrupted and allowed to come to this. And I feel bad that this whole thing will become a burden for us all, even though it was caused by the actions of a few.

To these bank heads, and federal leaders, I can only say "Brother, you asked for it!"

Wednesday, September 10, 2008

Are Oil Stocks Still a Good Investment?

There's a lot going on in the energy space. Will we drill offshore? Will we embrace Natural Gas as an alternative to gasoline for powering vehicles? Will alternative energy tax credits get extended to promote wind and solar? How low will Crude Oil prices drop? And will it ever bring down gas prices?

Well, to begin with, we got some news from OPEC today. They chose to cut their output. Bottom line is the like oil prices better at $120 or $140/barrel than at $103 or potentially lower. This seems all too strange. Wasn't President Bush recently going to Saudi Arabia to beg them to increase production? The bottom line here is you can say all you want about demand destruction, but for the mean time, these guys are still pulling the strings, and they like oil prices high.

Word is coming from Washington that the Democrats are now open to "limited" offshore oil drilling. But it will have to come in the form of a compromise, which would include Alt-Energy tax credits being renewed. I think both need to be approved here. We need change, and need it ASAP. Bottom line here is that alternative energies are great, and we need to encourage them to be developed, but we need a bridge because they aren't ready to supply it all yet. That bridge is more domestic oil and using natural gas for more uses.

It is unfortunate that there has been a disconnect with falling oil prices and gasoline prices. When oil went from $100 to $140, we all know what happened to gas prices. Now, when oil goes from $140 to $104, I think gas prices went from $4.10 to $3.80.

So, what do we need to know as investors? Well, I think there are some oil stocks to take a look at. I'm looking at XTO Energy (XTO) and National Oilwell Varco (NOV).

XTO has a strong presence in Natural Gas, and if Washington jumps on board with this fuel, this stock will do well.

National Oilwell Varco has an amazing business of supplying services and part to oil wells. If we approve more offshore drilling, it doesn't take a genius to figure out this one.

Tuesday, September 9, 2008

The Disillusioned Individual Investor

Given the state of Wall Street, Main Street, and every other street you could name, its easy to see how most individual investors have reached a state of disbelief. Our leaders are carrying out a policy of Socialism, but only for the rich shareholders and management of failing companies. The question that seems to pop up in everyone's mind is, of all people to bail out, why them? Its a good question really. We continually hear that it is done to prevent major disruptions in the markets, but what has the last year been? And yesterday I heard Hank Paulson say something like "this is the best solution for the taxpayers." Hmmm. I'll have to think about that one for a bit.

Here's a good rundown of the situation, if you're interested.

The question is, who's next? Lehman? Maybe an airline or automaker?

We hear both candidates talk about how they'll "change" Washington. Is that really believable? Take a look at this and get back to me.

Monday, September 8, 2008

A Sad State of Affairs

Wall Street is reacting favorably to the government seizure of Fannie and Freddie. But this is nothing to cheer about. It is quite the opposite. The question is, what's next? Because these actions don't prompt settling in the markets, they only create a "need" for more companies to be "bailed out, seized, socialized" or whatever you'd like to call it.

Fundamentally, it completely disrupts the risk/reward model in business. When big companies have a backstop against failing, they will take imprudent, excessive risks because there is no risk of failure. So thus, more bubbles are created, each one a little larger than the last.

The question is, who is next? Detroit's automakers have already been asking the government for money. How about the airlines? My money is on the automakers. Any after their previous actions, how could Paulson and Bernanke say no?

All this really does is patch up the problem so the next administration can deal with it. Its not going away. You can't have a solution until you fix the problem. The recent government action has just contributed to the problem.

The question now is how long until a Unification Board is assembled, and directive 10-289 is issued? Where is John Galt when you need him?

Tuesday, September 2, 2008

Just Taking What the Market is Giving

Sometimes you just have to take what the market gives you. Its hard to get excited about entering any substantial positions here, but I'm fiddling with a few smallish positions. The market goes up today, so I'd be expecting a reversal trend either tomorrow or the next day, as we can't seem to hold any kind of trend.

I'd look to buy some Ultrashort Financial (SKF) around $110. It was down in the $108's today but I don't like to jump into anything during the first half hour of trading as it tends to be quite sporadic. If the market rallies again this afternoon, thats something I'd look to pick up for a trade.

Beyond that, oil is the hot topic. With the hurricane not causing too much damage, oil prices are dropping further. The real key here is determining to what extent demand will change in the next few years. The drop in oil prices has mostly been related to that.

Again, I'd look to add small positions of some short-term values. Nothing more beyond that.