Friday, February 27, 2009

Are There Any Bulls Left?

Its seems pretty much all of the bulls have thrown in the towel. It is pretty hard not to. Negative news has been cascading into the market, and the market has been reacting accordingly. Some things to consider though before we give up on stocks:

-The economic outlook is pretty weak, and possibly still weakening, but a lot of it is priced into stocks. The DOW is on the verge of breaking through 7,000, and could go lower, but what positive scenario have traders priced into stocks? That is something to think about moving forward.

-The stock market tends to rebound before the economy does. This is mostly due to the market anticipating future events.

-Bear market rallies are common, even if stocks aren't ready to make a significant move higher. There are opportunities to make money during these periods.

-Although there is virtually no limit how much further stocks can fall, the downside momentum will eventually subside, even though it feels like it may never happen. Try to see both sides of the argument.

Some things to think about as we try to navigate this market.

Tuesday, February 24, 2009

Rally Coming?

I've been feeling a bear market rally for awhile, but maybe its just too obvious, and too many people are expecting it. The market is up today, but not in typical snap-back fashion that follow periods of prolonged selling. Remember last fall when the snap-back rally was up 5% and the shorts were getting killed. Not happening today. This leaves me a little worried.

I think investors have lost confidence, and have just been beaten down. This climate is typically a great buying opportunity, but man its tough out there right now. Every time I dip a toe in, I quickly get stopped out of the trade. I'm not taking any chances and hanging onto new positions if they lose money. I'm cutting them off quickly.

As much as they're trotting out a deflating economy, I think we're going to be in for some heavy inflation once the economy stabilizes. So, for the next segment, I'm looking into agriculture and food. I've never been a gold buyer, but may have to do a little of that too.

Right now, I'm looking at these names:

Potash (POT)
Mosaic (MOS)
Monsanto (MON)
Powershares Ag. Fund (DBA)

And maybe oil. I'm not hurrying here, but if you're twisting my arm:

Petrobras (PBR)
Noble (NE)
National Oilwell Varco (NOV)

No Positions in Stocks Mentioned.

Saturday, February 21, 2009

Soros:Crisis Worse Than Great Depression

George Soros is often referred to as one of smartest investors in the world. His ties to politics always make me question what he means a bit, but this time, I think he's being clear.

Renowned investor George Soros said on Friday the world financial system
has effectively disintegrated, adding that there is yet no prospect of a
near-term resolution to the crisis. Soros said the turbulence is actually
more severe than during the Great Depression, comparing the current situation to
the demise of the Soviet Union. He said the bankruptcy of Lehman Brothers
in September marked a turning point in the functioning of the market
system. "We witnessed the collapse of the financial system," Soros said at
a Columbia University dinner. "It was placed on life support, and it's still on
life support. There's no sign that we are anywhere near a bottom."

Then again, the Obama camp is working on lowering expectations and this kind of talk helps their cause. If people get scared, they are more likely to go along with things like the economic stimulus bill. And when we pull out of this slump, they will end up looking better.

Anyways, these are some serious words from someone who knows what he's doing. We'll see what plans Geithner and Co. come up with this weekend.

Article via Reuters.

Friday, February 20, 2009

Lots of Pain

The bear-market rally I've been looking for hasn't come yet. In fact, its mostly just pain out there right now. Some stocks are just getting shellacked out there. The banks are facing nationalization. The positives right now are in relative performance, to give you an idea of how difficult it is. For some reason, the street is giving tech stocks a premium that it wasn't when the market hit lows in November. The biggest reason appears to be that many have a ton of cash on their balance sheets, and their businesses are holding up relatively well.

Relative performance seems to be the key phrase now. Preserve what capital you have left. Be aware that when the market sells off like this, we're probably going to see some big snap-back rallies, so don't get stuck to far in on the short side either.

If you're waiting out the storm, that might be the best approach. If you've got the itch to bargain hunt, I again reiterate take small positions, and don't let them get away from you.

That is all for now. Lets hope we don't get any of those "weekend government plans" this weekend.

Tuesday, February 17, 2009

Some Opportunities For Traders

We're in the neighborhood of the lows on the Dow from last fall (around 7550). Its a little tricky to say whether or not we'll bounce off these lows because the Nasdaq and S&P 500 aren't near their lows, which is a bit interesting.

Personally, I think we're going to see a pretty significant bear market rally upcoming. Its not necessarily a good buying point if you're looking to get into index funds, or larger purchases, but there will be an opportunity nonetheless. I'm just going to go with the flow here. At times like these, I like to stock with names I'm familiar with, and how they trade. I bought some stock in T Rowe Price (TROW) today, for a trade. It all depends on your situation and what you're comfortable with.

I'm reading some interesting things. Doug Kass said he is now slightly net long and is under the same viewpoint as I am about this market.

Nothing is for certain right now. We could be 10 percent lower this time next week. But I'm just going by gut feeling right now, with very small positions. We'll see what happens...

Disclosure: Long TROW

Friday, February 13, 2009

Interesting Reading-Friday

Rail Advocates Win in Stimulus Bill. One of the items I was hoping wouldn't get cut, and it didn't. We need more high speed rails to connect our metro areas.

Game Plan: The Mother of Energy Bills. What's coming in the clean energy realm.

New Shock Absorber Harvests Energy From Bumps in the Road, Increases Fuel Economy. Very cool. This is the type of research we need to be putting money into.

Is the Recession Taking Care of the Immigration Problem?

What was once one of the most important policy issues in our country, immigration has become almost forgotten. With our economy in a recession and employment being much harder to come by, there's evidence that fewer illegals are trying to enter through the border:

The number of people caught trying to sneak into the U.S. along the border with Mexico is at its lowest level since the mid-1970s. While some of the drop-off is the result of stricter border enforcement, the weaker U.S. economy is likely the main deterrent. Border Patrol agents apprehended 705,000 people attempting to enter the U.S. illegally in the 12 months that ended Sept. 30. That is down from 858,638 a year before and from 1.1 million two years earlier.

Some may view this as a positive, but there are negative implications as well. These workers contribute to our economy in ways which usually aren't counted by government statistics. Many take care of seasonal work or manual labor that many people have refused to do in recent years. The truth is many people who have become unemployed are now probably willing to do more of this type of work, but there will still be a big void left if less immigrants are here.

Not sure the long term implications of this, but it is happening now. At a minimum, its giving our lawmakers some time to focus on the economy before having to tackle immigration reform again.

WSJ Article.

Thursday, February 12, 2009

Interesting Reading-Thursday

Capitalism Needs a Sound Money Foundation. I'm sure we'll see more of this discussion as people realize how much inflation we'll see after this is all over.

Vestas' Fortunes Hinge on U.S. Wind Market. An updated power grid is very important.

Rio Tinto Sells $19.5 Billion in Assets to China. Cash is King!

A Bull Market for Lobbyists

Of all the things hurting our country and economy, nothing bothers me more than big business' influence in Washington, and the politicians that help them. When I see statistics like this, it makes me sick:

Total spending on lobbying will top $3.6 billion in 2009, up from $3.2 billion in 2008 and $2.8 billion in 2007. It was $1.4 billion ten years ago. The number of lobbyists has jumped, too. There are roughly 15,000 registered lobbyists pounding the pavement in Washington, up from 10,700 a decade ago. And there are several thousand not officially registered that do lobbying work for clients.

Of course, with the economic stimulus bill going forward, these lobbyists are scrambling like crazy to get more government dollars in their pockets. This is why Washington is broken. Many politicians are working for themselves, and not for the American people. Its a process that works for them during normal times, and only during difficult times do they see some scrutiny, but not enough to stop. Look at all the politicians involved in scandals lately. Some don't pay their taxes, others are involved in getting government contracts for those who contribute to their campaign, and others look to profit from appointments to key positions. Can this culture stop in Washington? It is crippling our country. You'd think during difficult economic times the American people would demand this activity to stop. But how would we do that? Where would we start?

Article via Kiplinger's Online.

China: What to be Concerned About

There has been a big debate over the economic health of China. Some believe it is quite healthy and will not see the level of trouble many other countries are facing, while others believe it is the same or worse. I did some digging, and found some interesting information on the subject. Here's a synopsis of what is happening relative to the United States:

The crisis in Western markets began at the top and worked its way down. When the US property bubble burst, it hurt some homeowners, but the real damage it inflicted was to undermine confidence in complex financial instruments and the banks that owned them. It was essentially a financial panic, and the first people to be laid off were Wall Street MBAs working at investment banks and hedge funds.

The effect on the real economy only came later. As big-name banks failed, consumer confidence took a nosedive, and as surviving banks retrenched, credit to consumers and business dried up. Only in the fourth quarter of last year - six to nine months after the first big bank, Bear Stearns, collapsed - did these factors result in significant working-class job losses.

The process unfolding in China is precisely the opposite. The threat comes not from the commanding heights of the economy, but from the grassroots. All along the coast, thousands of small factories that rely entirely on US and European export markets are cutting back production or shutting down. Their margins were thin to begin with, and now their orders are being slashed. The first to be affected aren't the global professionals that populate China's big cities, but the migrant workers that made those factories hum.

This is big. The U.S. relies on China's manufacturing sector for cheap goods. A huge number of Chinese workers rely on those jobs, and when U.S. demand drops, they feel it. This is an important balance that must be considered when thinking about the health of China.

The fact that China's slowdown is originating from the bottom up, rather than the top down, carries important implications. The first is the visibility of the problem. Today, China's high-income urban areas are experiencing a false dawn as banks churn out easy cash to prop up the economy. But quietly, behind the scenes, Chinese companies are revising their profit estimates downward, by as much as 50% for 2008. The bad news just hasn't hit home yet.

The second difference is the solution. Unlike the West, China does not face a liquidity problem, where financial markets have frozen and the government can thaw them out with easy money. China faces a breakdown in real demand due to an over-reliance on external markets, a core element of its growth model that will require a wrenching structural shift in the economy to correct.

This is an excellent analysis of the Chinese situation. Although China is rising as one of the world's future superpowers, there are many dangers for investors looking for a safe haven.

Full article is China on the Brink, by Patrick Chovanec at Asia Times.

Wednesday, February 11, 2009

TARP II: The Return

Yesterday's announcement of the next round of bailouts didn't please the market. Its interesting to me how these guys say that the first bailout had little transparency and and money is unaccounted for, and yet they offered little detail about this bailout. Its seems like playing politics.

The details I did read were eye-opening to me. With massive dollar figures thrown around on a daily basis, we all get a little numb to them after awhile. What's $100 billion here or there? But reading some of the language made me realize how crazy this is.

I'll paraphrase here, but these are the basics. First there is a requirement of all financial institutions with $100 billion in assets to undergo a "stress test", whether they are in sound condition or not.

Then, banks receiving aid are subject to three provisions:

1) Restricted from paying quarterly dividends in excess of $0.01 until the government funds are repaid. There goes the last reason for investors to buy the common stock.

2) They can't repurchase their own shares. Not likely anyway. They're more likely to issue more of their own shares, but banks in decent shape could technically purchase shares at depressed rates to, get this, ENHANCE, shareholder value.

3) No acquisitions. To me, this is interfering in the market process, but it would be opening a can of worms anyway. Would the government have to sign off on the deal first?

Not surprisingly, the market didn't want anything to do with it. The market doesn't like change and uncertainty, and this plan promises plenty of both.

Tuesday, February 10, 2009

Bailouts Promote Complacency and Underperformance

Watching President Obama on television last night, I spent some time thinking about the big picture, and the situation our country is in. The president's tone has clearly shifted from hopeful and optimistic to someone resorting to typical Washington politics. He's resorting to fear to get this recovery package passed because the bill has faced much more resistance then expected. His administration believed the election gave them a mandate to spend however they chose, and to make up for the last eight years. The quote from his Chief of Staff Rahm Emanuel said it all. "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."

So here we sit, with a massive economic stimulus bill on the verge of being passed. Once that is finished, we're almost certain to see another bailout bill to give more credit to banks. This will be TARP II, or something like it. I read a lot of commentary at the Ludwig von Mises Institute, where they talk about Austrain Economics, or basically free market capitalism in its purest sense. They talk a lot about the necessity of letting failing companies fail, and how destructive bailouts can be.

There's a great piece out there today called The Importance of Failure by Tyler A. Watts. I've highlighted a couple of meaningful quotes here:

Bailouts are designed to insulate people from the effects of bad decisions. When market prices change dramatically, exposing yesterday's poor investment choices, bailouts come "to the rescue," promising those left holding the bag that they won't have to endure the full cost of their errors.

But we should realize, as the fine print always says, that prices are subject to change. Change is a defining feature of markets. Entrepreneurs make money by casting about for "wrong" prices and making bets on what direction particular prices will move in the future. Successful entrepreneurs, who correctly anticipate price changes, are rewarded with profits. Erroneous entrepreneurs, who do a poor job of estimating price movements, are penalized with losses. This is the essence of the market process.

Bailouts, then, attempt to erase the effects of losses, or economic failure. But such efforts inevitably undermine the loss aspect of "profit and loss." Profit and loss go together — like up and down, left and right, good and bad. If we try to do away with losses, we'll wind up diluting the meaning of profits. After all, why strive for profits if Uncle Sam will cover your losses with a bailout? Why bust your butt to compete and succeed if you can just clamor for a handout instead? Bailouts destroy the profit motive — and all the benefits of a competitive economy.

There's a great irony in bailouts, too. The only reason we can afford to even talk about bailouts is because of the accumulated wealth brought about by centuries of capitalism.

My favorite quote is "If we try to do away with losses, we'll wind up diluting the meaning of profits." This is the essence of this line of thought. Bailouts cause people to become complacent. People won't strive to be their best when they know they have a safety net under them. In fact, people (and companies) will get lazy and take greater risks because the potential for losses is weakened or even gone. Never underestimate the power of self-motivation by personal need. The guy who needs it the most will always find a way to get the job done, and that has been proven. If we disrupt this balance amongst markets, work ethic and productivity will erode over time. The biggest reason for American success is its people. Their attitude, work ethic, and optimism. When you destroy that, you're asking for lasting negative effects.

Saturday, February 7, 2009

What Happened to "Choosing Hope Over Fear?"

I've talked at great length the past month or two about the stimulus bill. Needless to say, I'm not a big fan. Its turning out to be just a big spending bill.

Speaking to a House Democratic retreat on Thursday night, Mr. Obama took on those critics. "So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)"

So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.

But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.

At the current moment, amid a capital strike, the latter is the kind of fiscal stimulus we really need. Yet there is virtually none of it in the bills now moving through Congress. Senate moderates may succeed in cutting $100 billion or so in spending from the bill, which is political window dressing. Even they aren't talking about adding the kind of tax cuts that would really help the economy now.

It is interesting that he's playing the "disaster card" now to get this bill passed. Isn't this exactly the type of behavior he condemded the previous administartion for? Bully the people into following their chosen politcies because its the best thing for them, and the government knows best?

Its more of the same. Period.

Opinion piece from WSJ.

Buying Opportunity of the Century...Just Not Yet

An informative piece in Barron's today. Its the interview with Bridgewater CIO Ray Dalio. I've read some of his commentary before, and he is one of the "ones to listen to." According to him, we're not in a recession, but what he calls a "D-process", or bascially a depression. People don't understand them because they are so rare.

When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?

The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

By the way, in the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% -- and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem. The Hoover administration had the equivalent of today's TARP [Troubled Asset Relief Program] in the Reconstruction Finance Corp. The stimulus program and tax cuts created more spending, and the budget deficit increased.

At the same time, countries around the world encountered a similar kind of thing. England went through then exactly what it is going through now. Just as now, countries couldn't get dollars because of the slowdown in exports, and there was a dollar shortage, as there is now. Efforts were directed at rekindling lending. But they did not rekindle lending. Eventually there were a lot of bankruptcies, which extinguished debt.

He also sees inflation coming back, and likes gold.

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.

And on stocks...

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.

In my opinion, this guy is pretty much right on. We're in a de-leveraging period, and it has to clean itself out. This will come through defaults and bankruptcies, but its the only productive way. There will be some pain in the near term. Economic numbers are getting worse. And Washington politicians, like always, think they can fix everything, so they are pushing this stimulus through. Maybe it will help consumer confidence, because I'm not convinced it will help the economy. But looking back to what Dalio said, we'll see renewed optimism in a false sense many times through this turmoil, but it won't be good for investors. We cannot make significant moves higher until most of this toxic debt has been washed away.

He sees late 2009, maybe 2010. That could be correct. But I do agree there will be "better" buying opportunities than now, so we must be patient.

Article via Subscription is required.

Tuesday, February 3, 2009

What is on Your Watch List?

Last week I posted about the direction of the blog, and the format in which most of the content was heading. Because of market conditions, my posting has been a lot of news and stories, with my own take on them. I've been doing my best to look at individual stocks and sectors to analyze and discuss. So today, I'll share my watch list, or the current stocks on my radar. Keep in mind, these aren't all stocks I'm looking to buy, but names I'm keeping an eye on. I often watch specific stocks to see how they react in different markets and sometimes use them as indicators of strength or weakness in other potential names. If I have similar stocks, I'll post them together. So here goes...

ABB (ABB). Diversified electrical company with a great reach. I think they'll benefit from upgrades to the power grid and other efficient energy projects. Also a company positioned to do well once the market decides to plow money back into China and other emerging markets.

Apple and Google. (AAPL, GOOG). I like to watch these names as a barometer for tech stocks.

Nokia. (NOK). A beaten up stock, but a company I believe in. I think they will come out of this better than many other companies.

Wyeth. (WYE). They're being purchased by Pfizer. The only thing to watch now is if the stock trades closer to the buy price (around $50).

Ormat Technolgies. (ORA). Geothermal company. I love their outlook going forward. I've been waiting for the stock to get cheaper and it just hasn't happened. Stockholders aren't giving up on this one.

T Rowe Price. (TROW). A stock I've wanted to buy for ages, but wouldn't pay the premium. They have no debt and high profit margins. The stock is finally coming down as their outlook has weakened, but I'm still waiting.

Charles Schwab. (SCHW). One of the big winners in the collapse of the old Wall Street. More money will be flowing their way.

Family Dollar, Dollar Tree (FDO, DLTR). Benefiting as consumers "trade down." Unfortunately, we're a little late to the party here. I like the story, but I'm not going to buy the stocks just because of that. They're too expensive now for retailers.

First American, Fidelity National. (FAF, FNF). Title company stocks. Benefiting from consumers refinancing mortgages, and still doing well with transaction volume because of foreclosures. These stocks go up when mortgage rates drop. I'm still a little unsure on these names.

China Security and Serveillance. (CSR). Interesting smaller company. Gets a lot of business from the government. Should do well with their stimulus package. Provides security for train stations, public places, as well as private companies. I like this stock.

Mosiac, AG. Fund. (MOS, DBA). I'll want to get into these probably later in the year when we get a better picture of the global economy.

So what is in your watch list?

Disclosure: Long ABB, NOK, WYE

Monday, February 2, 2009

Let's Make the Stimulus Package "Smarter"

The stimulus bill is moving to the Senate, where it might encounter a little more resistance than it did in the house. Republicans are looking to add more tax cuts and business incentives, while the Democrats are feeling the pressure to add more infrastructure-based measures.

Republicans are preparing alternative proposals that would shift the emphasis away from spending. One proposal calls for cuts in the two lowest income-tax rates and strengthened aid to distressed homeowners, among other measures.

At the same time, a Democrat-backed amendment being readied would increase infrastructure spending in the bill by between $20 billion and $30 billion, boosting support for mass transit, highways and bridges, and wastewater-treatment plants, among other things. "We're going to see an increase," Sen. Charles Schumer (D., N.Y.) predicted on CBS News's "Face the Nation."

Here's the way I see it. Some version of this bill is going to pass, so there is no point now in debating the necessity of the entire thing. But I'm discouraged by the fact that much of the spending won't come until after 2009. The whole point is to stimulate our current weak economy. If left alone for a year or two, the economy is going to recovery significantly without this government help. Thus, all we'll be left with is more obligations; many which could be deemed unnecessary if the bill takes as long to get going as proposed.

I'd like to see the money shifted toward "smart infrastructure." Upgrade our power grid. Make smarter highways to decrease congestion in our major cities which will increase productivity. Look at building some high-speed trains to connect major cities. Upgrade our water systems. IBM's CEO wrote an interesting piece in the WSJ a couple of weeks ago. Its a good starting point from a company thinking in the right way.

Today's piece from WSJ.