On The Stock Market Going Forward

My Thoughts On The Stock Market Going Forward

By Mike Swanson | 1 March 2009

In the Fall when the stock market crashed I think it was obvious that the United States— and the rest of the world— was in a financial crisis, that would lead to a severe recession. However, after the crash by December it also seemed logical to expect some sort of counter trend rally. Even though we were in a bear market I did not think it would be a good time to short until sometime in 2009. Therefore the only way to try to make money would be to go long.

So I tried to do that, by going long the only sector in the market that looked to me to have the ability to begin a new bull market in the first quarter of 2009— airlines. As the market fell in January though I got stopped out for a small loss. Of course this is the type of thing that happens when you try to go against the big trend of the market— you lose money.

That trade reminded me once again of the importance of recognizing the reality of the bear market. That means the best way to make money this year will be to try to short the market when it has its 10-20% rallies until it is clear that the bear market is over. The thing is though very few people are respecting the big trend. Almost every single email I've gotten since this year began has been from someone wanting to go long the market— they either want to know what stocks to buy or are enamored with gold or energy stocks.

I get the impression that many of these emails are coming from people who are total beginners in the stock market— which I tend to get a lot of, because I really try to educate people with my writings and website. However, all of these people seem to think all they need to do is buy into the right thing on the next rally.

But this isn't like the old days, pre-2000, when you could just buy a stock and see it go up. In a bear market stock picking means absolutely nothing. The only thing that matters is respecting the broad trend of the market. Trying to pick the right stocks is a fool's game until this bear market is over.

Most people don't know that— especially people just starting in the stock market, because every book they read and all the talking heads on TV want to teach them or tell them to buy stocks. People are watching Cramer and Fast Money and think the stock market is just going to print them money— it's just a matter of waiting a few more months for the next bull to come along.

In bear markets though you get your occasional 10-20% rally, but trying to pick stocks and go long isn't a winning strategy. Even playing the rallies doesn't benefit you much. The best way to make money is to short rallies and have heavy cash reserves available so you'll be able to buy in when it is clear that the bear market is over.

The only thing that has a chance to go up this year is gold stocks and I'm not sure about them. [[and, indeed they won't, seriously, so long as we are in deflation.: normxxx]] And that leads to my last change of heart. Although I tried to dabble on the long side at the beginning of the year, by the end of January it became clear to me that this recession and bear market is going to be much worse than most people imagine.

The 4th quarter GDP numbers released a few weeks ago were a real eye opener to me and created the last turning point in my thinking. The [[preliminary estimate of : normxxx]] -3.8% [[since adjusted to -6.2%: normxxx]] was better than expectations, because it was helped by a steep drop in consumer prices to the tune of 17.8% for durable goods. Yes, the price for big ticket items fell 17.8% from where they were a year ago. That is deflation folks— nightmare deflation— and helped the GDP report "beat" its number.

Oh yeah government spending— which rose 5.8%— helped too. So did a big rise in inventories. Both the fall in prices and rise in inventories helped the overall number, but in reality they are very troubling signs. Inventories rose because people couldn't sell their stuff.

Inside the report, overall nominal demand was shown to have collapsed at an 8.9% annualized rate. Consumer spending fell 3%. Consumption as a percentage of GDP shrank from 71% in the third quarter to 63% in the fourth quarter.

Now if this was the end of the recession none of this would matter. We would go run out and buy stocks right now. But business investment— which is more of a forward leading indicator— fell 19.1%. That's the worst performance since the early 1980's. You can't expect economic growth in an economy when business investment is in freefall.

To me it looks like the economic recession is picking up steam and if we are going to get a trough in the recession next year, then you have to ask yourself how much worse is it going to get? It is unreasonable to expect a bull market to begin anytime soon in such an environment. In fact this could easily lead to the type of bear market bottoms that we saw in 1982, 1933, and after WWI and WWII.

I don't know exactly how it would get there— but that would mean the S&P 500 falling below 600 and probably to 500 by the end of this year or sometime in the first half of next year. Maybe we will still rally here first. That is what I was expecting— a big rally into March-June then a big drop.

I looked at the historical data— and the only times that the economy contracted that much in a single quarter were associated with these major bottoms. Now they didn't mark the bottom— what they did was show you an economic environment so brutal that stocks fell until they actually became absurdly cheap. So cheap, that the stock value of operating companies were actually cheaper than their break up values— well below their book values.

For our market to get this cheap, the S&P 500 would have to fall into the 500-600 area, and even below 500 is possible. The other thing all of these environments had in common was deflation in consumer and producer prices. This is something that is happening right now.

The problem is the economy. The recession is not going to end this year, because real estate prices are not going to bottom out this year. According to futures contracts on the Schiller/Case real estate index there will be no bottom in real estate until at least the second half of 2010— they are projecting a bottom sometime in the fourth quarter of 2010 and first quarter of 2011.

[ Normxxx Here:  More Good News: A Barclay's report says $227 billion of option-ARM loans will reset in 2010 and 2011. The resets are already starting to grab headlines. FirstFed Financial of California saw its ratio of nonperforming assets rise from 2.34% in November 2007 to 7.54% in November 2008, due largely to skyrocketing option-ARM, not sub-Prime, losses. FirstFed is deleveraging its balance sheet, offering bondholders $0.33 per $1 of par value on $150 million of outstanding debt.  ]

That is over a year and a half from now from now.

What I've come to conclude over the past few weeks is that we are not in a 'normal', Fed induced recession and that most people do not recognize this. They think this is maybe like the 1970's, in which the market went sideways because there was a lot of inflation (but inflation adjusted, the Dow lost over 70%). Gold and commodities went up and so did some stocks during that time.

People think the Fed has gone crazy printing money and any rally could be the start of the next bull market and runaway inflation (if not hyper-inflation) simply because of that fact. Therefore they are desperately looking for new stocks to buy into on the first likely rally, or are just holding on to their losing positions long enough for them to go up again. No one is really preparing for the bear market to continue.

But I think this bear market is going to to be longer in duration and more severe than almost everyone expects (and could easily give 1929-1933 a run for the records). If I'm right, stocks will become so cheap that those that buy in when this bear market ends, probably sometime next year, will make a fortune. And those that learn how to trade market trends and short bear market rallies will make a ton of money this year before then.

This is a bit different than what I was thinking at the start of the year. I never experienced the 1930's bear market or lived in Japan in the 1990's. My experience is the same experience as most Americans of today when it comes to the stock market— the past thirty years. I saw the last bear market and the last bull market. I was thinking we could see some base building and a recovery like we saw from the second half of 2002 through 2003 after the last bear market, because the stock market dropped by half last year.

Just about everyone I know was thinking at the start of this year that the market had fallen so much last Fall, that it just HAD to be the bottom or at least the start of a really big rally. That, and the fact that it didn't seem to be a good time to short, seasonally speaking, so I was only looking for long opportunities. And that led me to dabble for a few weeks on the long side and bet against the primary trend of the market. I quickly recognized the error of that way of thinking.

The reality of the economic data has made me conclude that this was just a momentary bout of overly optimistic thinking on my part. I think the market is going to go lower over the course of the this year and I'm ready for that. I'm ready to go short against the market the next time it has a 10-20% rally. I'm ready to make money in this market. I hear what the market is saying and I'm listening. Are you?

.

‘Dow Theory’ Says Worst Isn’t Over For U.S. Stocks

By Eric Martin and Cristina Alesci, Bloomberg | 21 February 2009

Feb. 21 (Bloomberg)— A 125-year-old method for forecasting the market is telling investors the worst isn’t over for stocks. Dow Theory, which holds that simultaneous moves in industrial and transportation shares foreshadow economic activity, indicates the Dow Jones Industrial Average’s drop to a six-year low yesterday may presage still more losses. The Dow industrials slumped to 7,365.67 on concern the deepening recession will force the U.S. government to bail out banks. Adherents of Dow Theory say the 30-stock gauge will fall farther because the Dow Jones Transportation Average has slipped to the worst level since September 2003.

"When you have that confirmation in both legs, that’s clearly negative," said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati. "There’s some validity to Dow Theory." This week’s retreat left the Standard & Poor’s 500 Index, the benchmark for U.S. stocks, within 2.3 percent of breaking through its Nov. 20 low to the worst level since 1997.

Citigroup Inc. and Bank of America Corp. declined the most in the Dow this week, losing more than 31 percent, on concern shareholders will be wiped out through nationalization. General Motors Corp. had the third-biggest slump, losing 29 percent on concern about its solvency. General Electric Co. dropped 18 percent to $9.38, becoming the fifth stock in the average since last year to sink below $10.

"The direction of the market is clearly down," said Richard Moroney, who manages $150 million at Hammond, Indiana— based Horizon Investment Services and edits the Dow Theory Forecasts newsletter. "We’re holding a lot more cash than we normally do."

‘Clearly Down’

Dow Theory, created by Wall Street Journal co-founder Charles Dow in 1884, argues that transportation companies are harbingers of economic activity. The transportation gauge slipped below its November nadir in January and has kept retreating. YRC Worldwide Inc. and JetBlue Airways Corp. fell the most this week, losing more than 27 percent.

Dow Theory is showing that "the bear market is in full force," said Philip Roth, the New York-based chief technical analyst at Miller Tabak & Co. "It doesn’t tell you whether it’s going to last another year or another day. It isn’t a forecaster of magnitude, just direction." In November 2007, one month after the Dow industrials and S&P 500 surged to record highs, Dow Theory suggested the rally was over. The S&P 500 went on to tumble 38 percent in 2008, the most since 1937.

Bullish Strategists

The Dow Theory signal goes against all 10 Wall Street strategists tracked by Bloomberg, who on average project the S&P 500 will end the year at 1,059, a 38 percent gain from Thursday’s close of 770.05. Almost $800 billion in federal spending and the cheapest valuations in two decades will spur the rally, the strategists say.

The S&P 500 is a better indicator of the market’s direction because it has almost 17 times more companies than the Dow average and uses market value, not share prices, to determine company weightings, said Roger Volz, New York-based senior vice president at Hampton Securities Ltd. and a technical analyst since 1982. The index would probably plunge to 681 should it fall below the 11-year-low of 752.44 reached in November, according to Volz. His chart-based techniques include Fibonacci analysis.

"I don’t think we get out of the woods for 14 months," he said. "The destruction is severe."

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

On The Stock Market Going Forward

My Thoughts On The Stock Market Going Forward

By Mike Swanson | 1 March 2009

In the Fall when the stock market crashed I think it was obvious that the United States— and the rest of the world— was in a financial crisis, that would lead to a severe recession. However, after the crash by December it also seemed logical to expect some sort of counter trend rally. Even though we were in a bear market I did not think it would be a good time to short until sometime in 2009. Therefore the only way to try to make money would be to go long.

So I tried to do that, by going long the only sector in the market that looked to me to have the ability to begin a new bull market in the first quarter of 2009— airlines. As the market fell in January though I got stopped out for a small loss. Of course this is the type of thing that happens when you try to go against the big trend of the market— you lose money.

That trade reminded me once again of the importance of recognizing the reality of the bear market. That means the best way to make money this year will be to try to short the market when it has its 10-20% rallies until it is clear that the bear market is over. The thing is though very few people are respecting the big trend. Almost every single email I've gotten since this year began has been from someone wanting to go long the market— they either want to know what stocks to buy or are enamored with gold or energy stocks.

I get the impression that many of these emails are coming from people who are total beginners in the stock market— which I tend to get a lot of, because I really try to educate people with my writings and website. However, all of these people seem to think all they need to do is buy into the right thing on the next rally.

But this isn't like the old days, pre-2000, when you could just buy a stock and see it go up. In a bear market stock picking means absolutely nothing. The only thing that matters is respecting the broad trend of the market. Trying to pick the right stocks is a fool's game until this bear market is over.

Most people don't know that— especially people just starting in the stock market, because every book they read and all the talking heads on TV want to teach them or tell them to buy stocks. People are watching Cramer and Fast Money and think the stock market is just going to print them money— it's just a matter of waiting a few more months for the next bull to come along.

In bear markets though you get your occasional 10-20% rally, but trying to pick stocks and go long isn't a winning strategy. Even playing the rallies doesn't benefit you much. The best way to make money is to short rallies and have heavy cash reserves available so you'll be able to buy in when it is clear that the bear market is over.

The only thing that has a chance to go up this year is gold stocks and I'm not sure about them. [[and, indeed they won't, seriously, so long as we are in deflation.: normxxx]] And that leads to my last change of heart. Although I tried to dabble on the long side at the beginning of the year, by the end of January it became clear to me that this recession and bear market is going to be much worse than most people imagine.

The 4th quarter GDP numbers released a few weeks ago were a real eye opener to me and created the last turning point in my thinking. The [[preliminary estimate of : normxxx]] -3.8% [[since adjusted to -6.2%: normxxx]] was better than expectations, because it was helped by a steep drop in consumer prices to the tune of 17.8% for durable goods. Yes, the price for big ticket items fell 17.8% from where they were a year ago. That is deflation folks— nightmare deflation— and helped the GDP report "beat" its number.

Oh yeah government spending— which rose 5.8%— helped too. So did a big rise in inventories. Both the fall in prices and rise in inventories helped the overall number, but in reality they are very troubling signs. Inventories rose because people couldn't sell their stuff.

Inside the report, overall nominal demand was shown to have collapsed at an 8.9% annualized rate. Consumer spending fell 3%. Consumption as a percentage of GDP shrank from 71% in the third quarter to 63% in the fourth quarter.

Now if this was the end of the recession none of this would matter. We would go run out and buy stocks right now. But business investment— which is more of a forward leading indicator— fell 19.1%. That's the worst performance since the early 1980's. You can't expect economic growth in an economy when business investment is in freefall.

To me it looks like the economic recession is picking up steam and if we are going to get a trough in the recession next year, then you have to ask yourself how much worse is it going to get? It is unreasonable to expect a bull market to begin anytime soon in such an environment. In fact this could easily lead to the type of bear market bottoms that we saw in 1982, 1933, and after WWI and WWII.

I don't know exactly how it would get there— but that would mean the S&P 500 falling below 600 and probably to 500 by the end of this year or sometime in the first half of next year. Maybe we will still rally here first. That is what I was expecting— a big rally into March-June then a big drop.

I looked at the historical data— and the only times that the economy contracted that much in a single quarter were associated with these major bottoms. Now they didn't mark the bottom— what they did was show you an economic environment so brutal that stocks fell until they actually became absurdly cheap. So cheap, that the stock value of operating companies were actually cheaper than their break up values— well below their book values.

For our market to get this cheap, the S&P 500 would have to fall into the 500-600 area, and even below 500 is possible. The other thing all of these environments had in common was deflation in consumer and producer prices. This is something that is happening right now.

The problem is the economy. The recession is not going to end this year, because real estate prices are not going to bottom out this year. According to futures contracts on the Schiller/Case real estate index there will be no bottom in real estate until at least the second half of 2010— they are projecting a bottom sometime in the fourth quarter of 2010 and first quarter of 2011.

[ Normxxx Here:  More Good News: A Barclay's report says $227 billion of option-ARM loans will reset in 2010 and 2011. The resets are already starting to grab headlines. FirstFed Financial of California saw its ratio of nonperforming assets rise from 2.34% in November 2007 to 7.54% in November 2008, due largely to skyrocketing option-ARM, not sub-Prime, losses. FirstFed is deleveraging its balance sheet, offering bondholders $0.33 per $1 of par value on $150 million of outstanding debt.  ]

That is over a year and a half from now from now.

What I've come to conclude over the past few weeks is that we are not in a 'normal', Fed induced recession and that most people do not recognize this. They think this is maybe like the 1970's, in which the market went sideways because there was a lot of inflation (but inflation adjusted, the Dow lost over 70%). Gold and commodities went up and so did some stocks during that time.

People think the Fed has gone crazy printing money and any rally could be the start of the next bull market and runaway inflation (if not hyper-inflation) simply because of that fact. Therefore they are desperately looking for new stocks to buy into on the first likely rally, or are just holding on to their losing positions long enough for them to go up again. No one is really preparing for the bear market to continue.

But I think this bear market is going to to be longer in duration and more severe than almost everyone expects (and could easily give 1929-1933 a run for the records). If I'm right, stocks will become so cheap that those that buy in when this bear market ends, probably sometime next year, will make a fortune. And those that learn how to trade market trends and short bear market rallies will make a ton of money this year before then.

This is a bit different than what I was thinking at the start of the year. I never experienced the 1930's bear market or lived in Japan in the 1990's. My experience is the same experience as most Americans of today when it comes to the stock market— the past thirty years. I saw the last bear market and the last bull market. I was thinking we could see some base building and a recovery like we saw from the second half of 2002 through 2003 after the last bear market, because the stock market dropped by half last year.

Just about everyone I know was thinking at the start of this year that the market had fallen so much last Fall, that it just HAD to be the bottom or at least the start of a really big rally. That, and the fact that it didn't seem to be a good time to short, seasonally speaking, so I was only looking for long opportunities. And that led me to dabble for a few weeks on the long side and bet against the primary trend of the market. I quickly recognized the error of that way of thinking.

The reality of the economic data has made me conclude that this was just a momentary bout of overly optimistic thinking on my part. I think the market is going to go lower over the course of the this year and I'm ready for that. I'm ready to go short against the market the next time it has a 10-20% rally. I'm ready to make money in this market. I hear what the market is saying and I'm listening. Are you?

.

‘Dow Theory’ Says Worst Isn’t Over For U.S. Stocks

By Eric Martin and Cristina Alesci, Bloomberg | 21 February 2009

Feb. 21 (Bloomberg)— A 125-year-old method for forecasting the market is telling investors the worst isn’t over for stocks. Dow Theory, which holds that simultaneous moves in industrial and transportation shares foreshadow economic activity, indicates the Dow Jones Industrial Average’s drop to a six-year low yesterday may presage still more losses. The Dow industrials slumped to 7,365.67 on concern the deepening recession will force the U.S. government to bail out banks. Adherents of Dow Theory say the 30-stock gauge will fall farther because the Dow Jones Transportation Average has slipped to the worst level since September 2003.

"When you have that confirmation in both legs, that’s clearly negative," said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati. "There’s some validity to Dow Theory." This week’s retreat left the Standard & Poor’s 500 Index, the benchmark for U.S. stocks, within 2.3 percent of breaking through its Nov. 20 low to the worst level since 1997.

Citigroup Inc. and Bank of America Corp. declined the most in the Dow this week, losing more than 31 percent, on concern shareholders will be wiped out through nationalization. General Motors Corp. had the third-biggest slump, losing 29 percent on concern about its solvency. General Electric Co. dropped 18 percent to $9.38, becoming the fifth stock in the average since last year to sink below $10.

"The direction of the market is clearly down," said Richard Moroney, who manages $150 million at Hammond, Indiana— based Horizon Investment Services and edits the Dow Theory Forecasts newsletter. "We’re holding a lot more cash than we normally do."

‘Clearly Down’

Dow Theory, created by Wall Street Journal co-founder Charles Dow in 1884, argues that transportation companies are harbingers of economic activity. The transportation gauge slipped below its November nadir in January and has kept retreating. YRC Worldwide Inc. and JetBlue Airways Corp. fell the most this week, losing more than 27 percent.

Dow Theory is showing that "the bear market is in full force," said Philip Roth, the New York-based chief technical analyst at Miller Tabak & Co. "It doesn’t tell you whether it’s going to last another year or another day. It isn’t a forecaster of magnitude, just direction." In November 2007, one month after the Dow industrials and S&P 500 surged to record highs, Dow Theory suggested the rally was over. The S&P 500 went on to tumble 38 percent in 2008, the most since 1937.

Bullish Strategists

The Dow Theory signal goes against all 10 Wall Street strategists tracked by Bloomberg, who on average project the S&P 500 will end the year at 1,059, a 38 percent gain from Thursday’s close of 770.05. Almost $800 billion in federal spending and the cheapest valuations in two decades will spur the rally, the strategists say.

The S&P 500 is a better indicator of the market’s direction because it has almost 17 times more companies than the Dow average and uses market value, not share prices, to determine company weightings, said Roger Volz, New York-based senior vice president at Hampton Securities Ltd. and a technical analyst since 1982. The index would probably plunge to 681 should it fall below the 11-year-low of 752.44 reached in November, according to Volz. His chart-based techniques include Fibonacci analysis.

"I don’t think we get out of the woods for 14 months," he said. "The destruction is severe."

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Twenty-Five Standard Deviations In A Blue Moon

Twenty-Five Standard Deviations In A Blue Moon
Even The 'Quants' Got Busted!

By Bill Bonner | 25 October 2008

What's going wrong in the financial sector is not so unusual after all. One of the funniest moments in the Great Credit Crunch Of 2007-20?? came in the summer of 2007. "We are seeing things that are 25-standard deviation events, several days in a row," said David Viniar, CFO and chief 'quant' of the smartest financial firm in the world, Goldman Sachs.

That Viniar. What a comic.

According to Goldman's mathematical models… August, Year of Our Lord 2007, was a very special month. Things were happening then that were only supposed to happen about once in every 100,000 years. Either that…or Goldman's models were wrong [[not possible! : normxxx]]

We recall looking out our window. Outside, we saw a summer day much like any other. And inside, what we saw in the news was also rather typical— a credit crunch. No, credit crunches don't come along every day… but nor do 100,000 years separate one from another. In the United States, recently, we have had the crash of the dotcoms, the crash of Long Term Capital in '98 and the crash of '87; outside of the United States, there have been a number of credit crunches, in Japan, Russia, Mexico and various Asian countries.

When you make loans to people who can't pay the money back, trouble is only a couple standard deviations away.

[ Normxxx Here:  Feb. 12, 2009 (Bloomberg)— U.S. foreclosure filings exceeded 250,000 for the 10th straight month in January as falling prices trapped owners in homes worth less than their mortgage, RealtyTrac® (realtytrac.com) said. (See Center For Responsible Lending for the running total since 1 January of this year, 2009.) RealtyTrac®, the leading online marketplace for foreclosure properties, released its 2008 U.S. Foreclosure Market Report™, which shows a total of 3,157,806 foreclosure filings— default notices, auction sale notices and bank repossessions— were reported on 2,330,483 U.S. properties during 2008, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006. The report also shows that 1.84 percent of all U.S. housing units (one in 54) received at least one foreclosure filing during 2008, up from 1.03 percent in 2007. Nearly 1.3 million homes were in some phase of foreclosure in 2007.  ]

The individual amounts of money weren't very large, not by Wall Street standards. But when the money didn't show up, it had an alarming effect. The press for October 17, 2007 brought estimates of total losses of over $13 billion at Citi. Morgan Stanley is said to be facing $8 billion in losses. Merrill Lynch set records with estimated losses of $18 billion. The cat still has Goldman Sachs' tongue. But when the losses are toted up, they will probably be spectacular. Altogether, there is more than $1 trillion in subprime debt outstanding; much of it will go bad.

[ Normxxx Here:  More Good News: A Barclay's report says $227 billion of option-ARM loans will reset in 2010 and 2011. The resets are already starting to grab headlines. FirstFed Financial of California saw its ratio of nonperforming assets rise from 2.34% in November 2007 to 7.54% in November 2008, due largely to skyrocketing option-ARM, not sub-Prime, losses. FirstFed is deleveraging its balance sheet, offering bondholders $0.33 per $1 of par value on $150 million of outstanding debt.  ]

Already heads are rolling. First, Warren Spector of Bear Stearns got axed. Then, it was Peter Wuffli at UBS. He was followed by Stan O'Neal of Merrill Lynch. O'Neal made the headlines when he was pushed out of the corporate jet with a 'golden parachute' valued at $160 million. After O'Neal hit the ground, along came Chuck Prince of Citigroup— America's largest bank. The firm is expected to write down $5 billion this quarter alone. Chuck was chucked out.

What went wrong? The business model seemed so pure and simple. You simply bought up subprime loans from the knaves who made them…then, you cut them up, slicing and dicing them into a kind of mortgage spam. You got the rating agencies to bless them…and then you sold them off to naïve investors. The idea was to earn huge fees upfront…while laying the risk onto the fools who bought the stuff.

When the going was good, it looked as though no business could be better. You were providing 'a valuable public service', helping people buy houses by redistributing the risk from the people who incurred it to people who had no idea it was there. And in the process, you earned such large fees you would get your picture in the paper, build a huge mansion in Greenwich and acquire some abominable paintings to put on the walls.

But wrong it did go. The Financial Times provides more detail on what happened at Citigroup:

"The bank reported that, at the end of September 2008, it had around $2.7bn of unsold collateralised debt obligations— pools of debt securities that are repackaged and distributed to other investors. "But it also had $4.2bn of subprime loans it had bought previously, and about $4.8bn of loans to customers which were secured by subprime collateral. In addition, the bank had $43bn of exposure to the most 'highly rated' tranches of CDOs based on subprime mortgage assets."

It turns out Citi was fool and knave at the same time. It sold dubious subprime debt to its customers. But it bought some too… and took it as collateral.

Gary Crittenden, Citi's chief financial officer, claimed that the firm was simply a victim of unforeseen events. The losses were, "driven by some events that happened during the month of October, 2008" he said, referring to recent downgrades by rating agencies. No mention was made of the previous five years, when Citi was busily consolidating mortgage debt from people who weren't going to repay… pronouncing it 'investment grade'… mongering it to its clients… and stuffing it into its own portfolio… while paying itself billions in fees and bonuses.

No, according to the masters of the universe, downgrades by Moody's and Fitch's were completely unexpected… like the eruption of Vesuvius; even the gods were caught off guard. Apparently, as of September 30th, Citigroup's subprime portfolio was worth every penny of the $55 billion Citi's models said it was worth. Then, whoa, in came one of those 25-sigma events. Citi was whacked by a 'once-in-a-blue moon' 'fat tail'.

Who could have seen that coming? [[Who, indeed?: normxxx]]

(27 February 2009) Moody's May Downgrade $680 Billion of 2005-2007 Subprime Debt Securities

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Is The Market Bottoming?

Is The Market Bottoming And Nobody Knows It?

By David Banister | 25 February 2009

If you're at all like me, you're a bit tired of the negative headlines and the media frenzy that goes with it. The economic data is horrible and consumer confidence readings are as low as 1981-1982 before the last bull market began. The bulls vs. bear investor sentiment surveys have been running consistently high patterns of far more bears than bulls for months now. The news is unlikely to get much better for several quarters at least.

With the above said, I'd like to make a contrarian case that a multi year cyclical bull market is now possible. This opinion is based on historical criteria normally associated with bear market bottoms, as well as my own formulations that I have added. If you'll "Bear" with me, let's address some of those now.

1. The 2002-2003 bear market ending patterns looked technically very similar to what we are seeing in the 2008-2009 window. I've focused on the Russell 2000 "small cap" stock index as one of my proxies. In 2002 there was a bottom in early October, a multi-week rally, and then a multi week decline that nearly tested the October 2002 bottoms as the market bottomed in early March of 2003.

In 2008 there was a bottom in late November, a multi week rally into January 6th and, so far, a multi week pullback to test the Nov 2008 lows, although still about 12% above them. In both instances, the Russell 2000 index retraced a Fibonacci 78% of its initial rally off the lows, before proceeding higher. As of last Friday, the Russell 2000 index had indeed retraced exactly 78% of its Nov 21 to Jan 6 initial rally.


2. Consumer confidence index surveys are running at 27 year lows and virtually identical to the readings in the 1981-1982 window before the last long bear market ended. After all, markets bottom when everyone is negative and they peak when everyone is confident. In the fall of 2007, consumer confidence figures were running at decade level highs before the market rolled over.


3. Interest rates are at near historic lows, investors are hoarding US Treasuries and Gold for safety, and there is nearly $8 Trillion in "cash equivalents" on the sidelines, some 74% of US market capitalization!


4. Bank stocks are at multi decade lows, the outlook is horrible, and sentiment is worse than 1990-1991 in that sector.


5. Jeremy Grantham, the famous long time bear is now going cautiously bullish. Typically when the "perma-bears" finally go bullish, markets are bottoming out[!?!]


6. The SP 500 index is perhaps the best barometer of all. This index has just gone through a "Fibonacci" eight year cycle of peak to trough to peak to trough. Elliott wave analysts would call this an "A B C corrective pattern".

The 2008-09 lows are very close to the "A wave" 2002-2003 lows, and this forms a pretty clear chart pattern on a 10 year monthly chart. Elliott identified these (human) 'herding' behavioral patterns as common to corrections, whether in the very short term or very long term… the patterns indicate a possible bottom in sentiment of the crowd and a signal to go long.



[ Normxxx Here:  Warning: sentiment indices should never be used for timing; only for corroboration of established IT and LT price trends. A sentiment index is never so low (or high) that it can't go lower (or higher) or, in any case, plateau indefinitely.  ]

These are just a few of many instances I could give of apparently bottoming indicators. Obviously the stock market itself remains your best forecaster of economic peaks and valleys. As of today, the market doesn't yet seem to be predicting a bottom in the economy. Perhaps consumer confidence can fall further (or remain here for some time) before finally turning higher. This bear is already much different from the 2000 - 2002 bear.

Going all the way back to 1981-1982, the concern then was over high interest rates and inflation. This time around we have low interest rates and the concern is over deflation. The rubber band was stretched one way in 81-82 and it's the other way now in 08-09. These extremes usually revert towards the mean, so one could surmise inflation will start to come back soon along with higher interest rates.

What does it all mean? I'm a believer that human behavior has more influence over the intermediate and longer term movements of the stock market than is usually supposed— not earnings or interest rates or other traditional measures. When the herd is entirely pessimistic, consumer confidence is the worst in 27 years, and we've had 8 plus years of a massive trading range market with negative net returns... perhaps it's time to get bullish.

I've included a few charts showing the 2002-2003 Russell patterns compared to 2008-2009. The other chart is the long term 10 year S and P 500 index chart showing the ABC pattern aforementioned. Feedback on this article would be much appreciated and can be addressed to dbanister@cox.net.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

The Maestro And The Meltdown

The Maestro And The Meltdown

By Eamon Javers | 23 February 2009

NEW YORK— Alan Greenspan has some 'splainin' to do. But the former Federal Reserve chairman is offering no mea culpas. In 2000, The Washington Post’s Bob Woodward published a biography of the chairman of the Federal Reserve Board entitled "Maestro," with the cover image portraying Greenspan in full oracle mode: testifying before Congress, hands gesturing like a professor explaining some complexity to struggling students.

The cover line conveyed the message: "Greenspan’s Fed and the American Boom."

But by 2009, the confidence, the gesticulations and the aura were all gone, replaced in the public mind now by a computer generated image in Time magazine of Greenspan posed as if in a police mug shot, hands resting meekly at his side and head hanging slightly. It was with the two Greenspan images— the maestro and the mug shot— as bookends to his lengthy Washington career that the 82-year old Greenspan took to the stage before the Economic Club of New York Tuesday night to explain himself and the global economy to an increasingly skeptical world.

But if the economic and Wall Street luminaries who crowded the Grand Ballroom of the New York Hilton came to hear a mea culpa, they left sorely disappointed. Greenspan spoke softly, arms spread wide at the lectern, head down so he could read his speech, and rarely offered any insight into his own role in the global financial disaster. After his prepared remarks, Greenspan took a question from Jacob Frenkel, the former Israeli central banker and vice chairman of the insurance giant American International Group, which was bailed out last year by the federal taxpayers to the tune of more than $100 billion.

With the benefit of hindsight, Frenkel wanted to know, what were the decisions that should have been made to prevent the calamity? The question was a perfect launching pad for an admission of some degree of personal responsibility. But Greenspan didn’t go there. Instead, he said it was the very success of the Federal Reserve— largely under his tenure— that created the opportunities for "asset bubbles," like the ones in technology stocks and the housing market.

The very effort of creating "balance in the economy," he said, creates "periods of euphoria." "Is there a way to suppress that? I’m not sure," Greenspan continued. "There has never been, to my knowledge, any historical evidence that that has happened."

Translation: Sure, I didn’t stop the market mania and subsequent crash, but no one else did, either. Besides, it’s probably impossible anyway. Before returning to his seat, Greenspan added dryly, "I wish those who think it’s possible well."

Greenspan has plenty of company in the legacy management business these days.

President Bill Clinton, who reappointed Greenspan to the Federal Reserve shortly after his election in 1992, has gone on something of a PR offensive of his own recently, deflecting questions about his own blame for the economic crisis. Clinton acknowledged on CNN that he could have put in place more stringent regulation of some of the exotic derivatives that are at the heart of the financial crisis. But he told NBC that he doesn’t belong in the No. 13 slot on Time’s list of people to blame for the meltdown.

"Do any of them seriously believe if I had been president, and my economic team had been in place the last eight years, that this would be happening today?" Clinton asked. "I think they know the answer to that: No."

Another luminary badly tarnished by the market meltdown has been Clinton’s former Treasury secretary, Robert Rubin. He’s been blamed for pushing deregulation— and particularly for blocking efforts to regulate the exotic derivatives market, which became a key component of the market wipe out. And his post-government career has seen a humbling ebb.

[ Normxxx Here:  Eamon forgot Hank Paulson, who has already embarked on the re-writing of history to favor himself.  ]

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

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Shiller: Stocks Not Yet Cheap Enough

Shiller: Stocks Not Yet Cheap Enough For Me

By Henry Blodget | 23 February 2009

Yale professor Robert J. Shiller, the author of "Irrational Exuberance," created one of the most useful and predictive measures of stock-market valuation: the Cyclically-Adjusted Price-Earnings ratio (CAPE). As Professor Shiller explains it, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.

(Why is this important? Because profit margins are mean-reverting. In boom times, companies have high profit margins and big earnings. In busts, profit margins collapse and companies have small earnings. Taking a single-year P/E ratio can therefore provide a misleading picture of value: In booms, with high profit margins, stocks look cheaper than they really are. In busts, with low margins, stocks look more expensive than they are. Short time period P/Es should only be used for comparisons with those of other stocks over the same time period; never with past performance of the same stock.)

As you can see in the chart below, Professor Shiller's P/E has finally dropped below "fair value" for the first time in 15 years. Moreover, the S&P 500 is down significantly since this chart was created (EoY, 2008), so the market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X). Prof Shiller's work shows clearly that stock values are mean-reverting. The only trouble is the time that they take to mean-revert. If things go badly over the next few years, stocks could bounce along the bottom for another decade or more.


Click Here, or on the image, to see a larger, undistorted image.

So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past. That could happen either through an additional severe drop or a long period in which the market moves sideways and earnings grow again. [[Or, both.: normxxx]]

.

Stocks Now Distinctly Cheap

By Henry Blodget | 15 February 2009

One of the only silver linings of the current mess is that stocks are increasingly priced to deliver a compelling long-term return. Given that stocks had been overvalued for more than 15 years through last summer, this is a refreshing change. If the S&P does go to 600, which we think is possible, stocks will finally be a screaming buy.

Here are GMO's 7-year forecasts as of December 31, 2008. The S&P is down another 9% from there.


Click Here, or on the image, to see a larger, undistorted image.

GMO bases its forecasts on cyclically adjusted earnings, the same methodology used by professor Shiller in the chart below. (The "E" in a cyclically adjusted P/E is an average of the last 10 years of earnings. This mutes the impact of the business cycle, which can produce single year P/Es that are very misleading).

For example, Jeremy Grantham, whose shop produced the forecasts above, reminds us what happened in the 1970s:

Today all equities are moderately— one might say, boringly— cheap. The forecast for the S&P has been jumping around +6% to +7% real, with other global equities slightly higher. To put that in perspective, a 1-year forecast done on the same basis we use today that started in December 1974 would have predicted a 14% return (which, by the way, it did not deliver since the market stayed so cheap). For August 1982, the forecast would have been shockingly high— over 20% real! So do not think for a second that this is as low as markets can get.

(It's worth noting, though, that 1982 was the start of the great bull market.) Jeremy also warns of the possibility of another sucker's rally, so don't get too comfortable while waiting for and/or reaching for the über-bottom:

Now, I admit that Greenspan and 9/11 tax cuts caused the "greatest sucker rally in history" from 2002-07. We therefore cannot rule out another aberrant phase in which extreme stimulus causes the market to rally once again to an overpriced level for a few more years, thus postponing the opportunity to make excellent long-term investments yet again. But I think it’s unlikely.

One thing seems certain: Stocks are cheaper now than they have been at any time in the past two decades. That's encouraging for those with another couple of decades to invest and— increasingly rare these days— cash to put to work.

[ Normxxx Here:  WARNING: Even if we see the bottom for the secular Bear on this cyclical bear cycle (2007-2010? -2011?), be prepared for the market to revisit those lows during a subsequent cylical bear cycle, while the secular Bear lasts (2016? 2018? 2020?)   ]

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Preferring A Depression?

Being Street Smart: Preferring A Depression?
Click here for a link to ORIGINAL article:

By Sy Harding | 20 February 2009

For several weeks I’ve been writing about the need for the government’s financial stimulus efforts to be supplemented by efforts to instill some degree of confidence in severely depressed consumers and investors. I was thinking in terms of President Reagan’s strategy upon inheriting the similar economic collapse of the 1970’s. He provided financial stimulus, including huge increases in defense spending, some of it wasted, such as launching the costly but never completed ‘Star Wars’ anti-missile system, etc., but did create jobs.

He augmented the spending with upbeat assurances about the greatness of America, and how the country would soon begin to pull out of the seemingly impossible mess. Similarly President Bush provided a large stimulus package after the terrorist attacks in 2001, and supplemented it with confidence-building speeches about how Americans should get out of their terrorist-inspired fear modes and spend, "to show these terrorists who would tear down our economic system that they won’t succeed." Both times the ‘jaw-boning’ was as important as the financial stimulus in lifting the confidence and determination of consumers and investors.

My columns along those lines resulted in an avalanche of criticism, the mildest of which asked how I could advocate that the government attempt to brainwash the population— should attempt to hide the facts of how serious the situation is. That is not what I said. What I said was that for two years consumers have been fed a steady diet of doom and gloom, are well aware of the seriousness of the situation. It’s time for the government’s financial stimulus efforts to be supplemented by efforts to instill some degree of confidence in the nation’s future.

If that is brainwashing, then the problems were created in the first place by someone brainwashing people into thinking they could safely buy a house they couldn’t afford because home prices would just keep rising forever. Meanwhile, I have been saying since the real estate bubble burst and collapsed the economy, that the economy cannot recover until the housing industry recovers. So I was disappointed that the stimulus efforts had to begin with the rescue of banks and the financial system, then moved to bailout efforts for the auto industry.

I was delighted that rescue efforts have finally begun to focus on the housing industry. Home foreclosures are accelerating, sending home prices and buyer confidence even deeper into gloom and doom, and sinking the economy ever faster. But I have been surprised that rescuing the housing industry, which mostly affects the folks on Main Street, apparently faces even more opposition than bailing out Wall Street and the auto-industry.

Just how unpopular the plan is was revealed by CNBC reporter Rick Santelli on Thursday.

By now most of the country, if not the world, is aware that Santelli, noted for his daily rants from the Chicago Board of Trade about what he believes to be wrong with the country, took aim at the Administration’s housing rescue bill. During his rant he shouted this question to traders on the floor of the CBT, "How many of you want to pay for your neighbor’s mortgage because he can’t pay the bills? Raise your hands!" Amidst yells of agreement from the traders Santelli turned to the camera and shouted, "Are you listening, Mr. President?"

A landslide of approving e-mails apparently encouraged Santelli to announce that he would organize a "Chicago Tea Party" demonstration, a 'revolution' he called it. He surely hit a nerve with his opinion that those who are losing their homes and jobs should not be bailed out by those who are in good shape on their homes, finances, and jobs. Calls of ‘Santelli for Senate’, and ‘Santelli for President’ are spreading over the Internet.

It does have its amusing aspects, given that the economic mess was created by the financial industry, in part by its creation of high-risk derivatives, including mortgage-backed securities, and the wild leverage provided to hedge funds [[and including pressure on all to "push product" (ie, mortgages) at all cost and to anyone so as to feed the MBS operations of the banks, which garnered huge fees thereby: normxxx]]. Santelli became a CNBC reporter in June, 1999, almost at the top of the stock market bubble, leaving his position as a vice-president at Sanwa Futures LLC, where he handled institutional trading and hedge fund accounts. Prior to that, he served as managing director of the Derivatives Products Group of Geldermann Inc.

And now he is the hero of those who feel abused by the collapse of the house of cards created by the questionable products and greed of Wall Street firms? But of more concern to me is the apparent majority opinion that "I don’t care if the value of my home keeps dropping due to foreclosures on my street. I didn’t make any mistakes, and I don’t want my tax money used to bail out those who are in over their heads. I don’t want the banks saved with my tax dollars. Let then go bankrupt. I don’t want the auto-makers bailed out. They deserve to go bankrupt. I don’t care if it causes the whole country to fall into the next Great Depression."

I suppose the same argument could be made about giving of all kinds. Giving blood, or contributing to food banks, unemployment insurance, cancer research, the Red Cross, education. Hey, I didn’t get sick, I didn’t lose my job. I’ve got my education. [[I've got mine!: normxxx]] Do they even realize how much worse a depression is than a recession?

The Bush Administration tried to get things turned around by spending a few trillion dollars of taxpayer money, and the new Administration is trying. The results of those efforts won’t be known for awhile. But both administrations ran into a lot of opposition from those who would rather let those with the problems (banks, auto-makers, and millions of individuals) go bankrupt and see if the system can recover on its own or not. One often repeated additional reason is that it’s "unfair" to saddle future generations with larger deficits.

If, in a few years from now, the economy has worsened into a decades-long global depression, thanks in part to the unwillingness of even the folks on Main Street to unite in the common goal of trying to rescue the economy, because their money might go to someone less fortunate [[even if a little more larcenious or less "deserving": normxxx]], who, looking back, will they blame that on? And how much worse off will their children be than if the national debt is stretched even further now?

In his rant Santelli asked, "Are you listening, Mr. President?" I ask, "Are you listening America?"

[[When I was a kid, my mother taught me that it was not a good idea "to cut off your nose to spite your face!": normxxx]]

  M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Bargaining With A Fearful Market

Bargaining With A Fearful Market
Interview with Whitney Tilson, co-manager of Tilson Focus,
Sheds His Macro Bearishness To Buy.

By Avi Salzman, Barron's | 5 January 2009

Last year, value investor Whitney Tilson correctly predicted the bursting of the housing bubble, but failed to fully anticipate the deep economic distress it would create. The fund he co-manages, Tilson Focus Fund (TILFX) fell slightly more than the Standard & Poor's 500, though his hedge fund fared better than the index through shorting.

FUND FACTS Tilson Focus Fund (TILFX) Assets: $7.4 million as of Dec. 30 ($85.3 million in T2 Partners hedge funds as of Nov. 30)* Expense Ratio: 1.98% Front Load: None Annual Portfolio Turnover: 172% Yield: 0% ____________________________________________ Top 10 Holdings (as of July 30) Fairfax Financial Holdings FFH Resource America REXI Winn-Dixie Stores WINN Borders Group BGP Berkshire Hathaway BRKB Barnes & Noble BKS Odyssey Re Holdings Corporation ORH Target TGT call option Sears Holdings SHLD Sears Canada SCC Toronto Stock Exchange *Source: all info from Morningstar, except for assets, which is from T2Partners LLC

Tilson, who also chairs the Value Investing Congress, a biannual investment conference in New York and Los Angeles, says he expects some recovery in the financial markets next year, though the overall economy will continue to suffer. As 2009 begins, he smells panic on the Street and is pouncing on investments that other investors won't touch, including subprime distressed debt. What was it that Warren Buffett said about being "greedy when others are fearful"? Tilson spoke to us last week by phone from Kenya, where he was visiting his parents for the holidays.

Barron's Online: What can we expect this year? Does the S&P 500 end 2009 lower than 2008?

Whitney Tilson: My guess would be the S&P 500 is 10% higher. It rises by 10% next year but with a heck of a lot of volatility. The economic fundamentals are going to continue to get worse. The housing market, the housing bubble is going to continue to burst and be terrible so there will be tremendous economic headwinds. The reason I think the stock market might go up a little bit is because I think the stock market is already reflecting this and probably toward the end of next year the decline will start to taper off and we will start to see a bottom both in terms of the housing market and stock market.

We are very invested and very long right now. The things we own are unbelievably cheap. We have never seen bargains like this before so that overcomes our sort of macro bearishness.

Q: How do you find bargains these days?

A: Number one is companies where we are not buying earnings but we are buying the balance sheet, where companies are trading near or below liquidation value and so the balance sheet is providing downside protection. It almost doesn't matter what earnings are in 2009. The other types of companies that we are purchasing are in areas of extreme distressed selling— companies that are heavily owned by hedge funds where we think there is forced selling due to liquidations, redemptions, delivering and year-end tax selling.So we think there are companies that are very out of favor where the selling has been massively overdone and where they are being priced as if the company is about to go bankrupt and we don't think it is.

Q: What are a few of those companies with promising balance sheets?

A: I'll give you three examples with good balance sheets: a big cap; a mid cap; and a micro cap. We have been trimming our Berkshire Hathaway (ticker: BRK-A) position because the stock has rallied off its lows substantially but we think Berkshire Hathaway has somewhere between $75,000 and $80,000 per share of cash and investments and the stock hit $74,000 a share roughly a month ago and we more than doubled our position at that point [[so they bought it below $37000: normxxx]].

We took some of our profits above a $100,000 but today with the stock in the low $90,000s [[back down to $77,000 today, 2/20/2009: normxxx]] we think Berkshire Hathaway has probably $5,000 per share of pretax earnings power and if you assume let's say $77,000 of cash and investments and the stock is at $92,000 give or take. That means you are paying $15,000 a share for the operating businesses of Berkshire Hathaway, so you are paying three times pretax earnings.

Example number two is EchoStar Technologies (SATS). The stock is somewhere around $13 [[jumped to $16.01 today, 2/20/2009: normxxx]]. They have cash and investments of about $16 a share and so it's sort of an odd collection of businesses. It was a spin-off that went public Jan. 1 of 2008 and the stock has been a terrible performer and nobody wants to own it. But we think today it is trading at a discount to cash and investments and you are getting a set-top box business and a satellite business for free— less than for free. You get paid to own them.

And then a third example I will give just to give you a sense of what is out there among micro caps. We own almost 10% of a little teenaged-girl-apparel retailer, a mall-based retailer called Delia's (DLIA). The thing has got a $60 million market cap and it is trading at about a 40% discount to its cash. It has no debt. And the company is profitable. [[Since backed down about 20% to $1.76 today, 2/20/2009: normxxx]]

Q: How about companies that are oversold or have large hedge-fund exposure?

A: I can give you three examples of companies where we think the selling is massively overdone.

Number one is Huntsman (HUN). It's the busted Apollo Management acquisition. When the deal with [private-equity firm] Apollo broke down, all the arbitrageurs who owned it immediately had to sell. Now insiders have been buying like crazy. We more than doubled our position and we have trouble figuring any outcome here south of $10. [[Currently at $2.30 today, 2/20/2009, down from 1/5/2009: normxxx]]

Another example I will give you is Crosstex Energy (XTXI). There's a general partnership and a master limited partnership. XTXI is the ticker for the general partnership. XTEX is the ticker for the limited partnership and we own both. It's a natural-gas pipeline company and natural gas pricing has fallen. We thought it was interesting at $30. We started buying it a bit under $10 and the bottom has just fallen out of it and I think investors are particularly panicked… I think it's easily worth $10 if it merely survives. [[Currently at $2.36 today, 2/20/2009, down sharply from 1/5/2009: normxxx]]

The third company is Resource America (REXI), a small cap. It's got everything people would hate in this marketplace. It's a collection of sort of odd businesses. They've got a leasing business. At one point during the bubble they put together CLOs and CDOs (collateralized loan obligations and collateralized debt obligations). But they didn't keep any of it on their books so they're currently a servicer for these CLOs and CDOs. They collect a fee for just managing it, so it's sort of like an annuity. But of course they're tainted by that.

They have a small equipment-leasing business which is doing quite well. They've got a distressed real-estate business that's doing very well. We think any of the pieces of this business is worth the share price. Combined, the pieces are worth north of $10 a share. [[Currently at $3.04 today, 2/20/2009, down from 1/5/2009: normxxx]]

Q: Value guys often talk about investing in stocks with maybe 20% to 30% upside. Are you thinking the stocks that you are in very long have even 60% to 100% upside?

A: Virtually everything we own we think is a double and in some cases a triple next year.

Q: Thanks.

[[Maybe they bought in just a little early. Old Wall Street adage: "A stock is never so low it can't go lower— unless it's already at zero!" : normxxx]]

ߧ

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Fight Fear By Getting Defensive

Fight Fear By Getting Defensive

By Richard Lehmann, President, Income Securities Advisor, Inc. | 21 February 2009

Richard Lehmann, editor of the Forbes/Lehmann Income Securities Investor, warns of the consequences of the stimulus package, and advises how to protect your portfolio. Fear and uncertainty are still with us despite promises of up to a trillion dollars in stimulus, or maybe because of such promises.

As investors, all this funding and spending could be viewed as a positive were it not for the law of unintended consequences. The biggest concern is inflation. Students of Nobel Prize economist Milton Friedman know that inflation is a phenomenon caused by creating too much money. The Federal Reserve has certainly been doing this in an unprecedented way, and it is far from certain that they can contain the inflation that historically results.

[ Normxxx Here:  But there is a HUGE hole there of upwards of $700 TRILLON in vapor-money that has largely vanished or is in process of vanishing: $credit and $derivatives. So far, between the Fed and the rest of the world, we have barely shoveled in some $10 trillion to fill it!  ]

But then maybe the Fed sees inflation not as a problem, but rather as part of the solution. What better way to bail out debtors and clear out an excess housing inventory than through inflating the value of hard assets and at the same time diminishing the value of debt claims? That’s precisely what inflation does.

I don’t paint this scenario to depress you, but rather to alert you as to why you need to think defensively. But being defensive doesn’t necessarily mean foregoing yield in exchange for safety. The principal mistake to avoid is thinking any single strategy is a surefire winner. It’s imperative to be diversified.

Defensive strategies today include unloading most of your single-B and CCC-rated debt. Interest rates in this category are 16% to 30% if you can find a lender. This means that companies with such debt issues coming due will be hard put to roll the debt over— never mind finding fresh capital. And that’s assuming their profit margin is sufficient to cover such a heavy debt charge. In most cases it is not, which is why in a recession, companies dump inventories and scale back their operations so they can survive without fresh capital.

A safe defensive investment would be a security tied to the rate of inflation, such as Treasury Inflation Protected Securities, or TIPS. Their current yield on TIPS is only 1.74% plus the CPI inflation rate, which is accreted rather than paid out. Canadian oil and gas trusts, which I have been recommending since 2004, are another class of defensive investments.

Canadian oil and gas trusts have been volatile, but they have been profitable. Currently these trusts yield 10% to 25% and are at five-year lows. However, most trusts have already cut their dividends to reflect current low oil and gas prices, so the upside potential here outweighs the downside. And don’t let tax law changes in 2011 concern you. They will have negligible effect on dividend payouts.

The ultimate defensive asset is, of course, gold. A 5% to 10% allocation here would be advisable given the inflation concerns. It is a better place to park cash than CDs or money market funds. Today, however, you should buy gold in the form of an exchange traded fund to avoid the 6% or so buy and sell charges for actual coin holdings.

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Time For A Reality Check

Time For A Reality Check

By John Mauldin | 13 February 2009

European Bank Losses Dwarf Those in the US
Geithner: "You Can't Handle the Truth"
Time for a Reality Check
Earnings Will Get Even Worse

It is not just the US that is in recession. The world is slowing down, and rapidly. This week we quickly survey the rest of the world, and then come back to the US. We follow up with the implications for corporate earnings worldwide, and specifically address my speculations about earnings forecasts for 2009.

World Trade Is Falling Off A Cliff

Let's start with some charts from my friend Simon Hunt, out of London. The following chart shows World Merchandise Export Values and World Industrial Production falling off a cliff. This is the worst such period since the end of World War II. And as the data we will examine next indicates, it is likely to get worse.

Simon notes that consumer spending is about 60% of world GDP, and it is not just in the US that spending is slowing down. Consumers all over the developed world are in shock, as assets such as stocks and houses, real estate, and commodities fall in value. Unemployment is rising.

We think that almost 2,000,000 lost jobs in the last three months in the US is a catastrophe. China lost a reported 20,000,000 jobs in the last quarter, and migrant workers came back to the cities after Chinese New Year to find jobs and factories simply gone. Unemployment is rising rapidly in Europe, as the demand for goods has clearly been falling since last October.

This means that inventories are too high, not just in the US but in factories all over the world, and that production is slowing down. Look at the recent US trade deficit. Many market analysts rejoiced that it dropped to a six-year low, just below $40 billion. But the internal numbers were not as positive.

Exports are dropping faster than imports, as seen below, left. "After growing in every quarter during the last three years, real goods exports fell 34.9% at an annual rate, the worst performance in more than three decades." (Dismal Scientist) And a falling deficit means that US consumers have to save more to balance out less foreign buying of US debt. There is no free lunch.

Let's look at a little bit of insider economics trivia. The US government first estimated that GDP last quarter was a negative 3.8%. I wrote when that number first came out that it would be revised downward.

When the government makes its initial forecast of GDP one month following the end of a quarter, it has to estimate what exports and imports were for the last month of the quarter. There is simply no data. For the 4th quarter of 2008, they estimated that the trade deficit would be about $34.5 billion, in line with what most economists thought. As it turns out, each $1 billion represents about 0.1% of GDP.

So being off about $5 billion from the actual total of $40 billion subtracts another 0.5% of GDP from the previous estimate of -3.8%, taking it to a -4.3%. Further, the government makes estimates about inventories which also affect GDP. When final numbers on real inventories come in, it will also add to the negative GDP estimate. Expect GDP to be in the range of a negative 5% for the 4th quarter, and the current quarter is likely to be almost as weak.

In the US, the leading economic indicators (LEI) continued to decline, but the leading indicators in the rest of the world were often much worse. (The chart below, left is again from Simon Hunt.) These are results from the OECD's analysis of the leading economic indicators for a variety of countries. Notice in particular how poorly Russia and China are doing! [[As also Germany!: normxxx]]

Also remember that the LEI is about how the economy is expected to be doing in six months, not what is going on right now. This argues that there is no real global turnaround in the picture before the end of the third quarter, at the earliest. China has seen its year-over-year exports drop by 17.5% and imports by 43%.

These are not signs of a healthy economy. That being said, China is massively increasing bank loans and other stimulus-type spending to try and offset the effects of the global downturn. But putting 20 million people back to work in a short time is a daunting task.

Japanese GDP was down by 9%(!) last quarter. Many of the largest corporations are seeing exports drop by 20-30% and are engaged in massive layoffs, larger proportionally than in the US. The euro area economy dropped by 6% in the 4th quarter, led by an 8.2% contraction in Germany (JP Morgan). I could go on and on, but the news is the same. The global economy is in a deep and worsening recession.

European Bank Losses Dwarf Those in the US

In a few paragraphs I am going to put up a chart from Nouriel Roubini's RGE Monitor on the size of US bank losses, and I'll comment on the Geithner "plan" for rescuing US banks. We have indeed dug ourselves a very deep hole here in the US. But European banks may be in far worse shape.

Bruno Waterfield of the London Daily Telegraph reports to have seen an "eyes-only" document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of £16 trillion, or about $25 trillion! The concern is that bailing out the various national banks for such an unbelievable amount would push 'the cost of government borrowing' to much higher levels than we see today.

As my kids would say, "Really, Dad, you think so?" Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified!

The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse. Waterfield reports,

"National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors— particularly those who lend money to European governments— have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back. "The Commission figure is significant because of the role EU officials will play in devising rules to evaluate 'toxic' bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries."

(data as of 13 January 2009)

Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses [[largely in 'hard' currencies: normxxx]] which are now facing severe financial strain and plummeting local currencies.

Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is [[further compounded by the fact : normxxx]] that Europe does not have a central bank that can step in and selectively save banks from one country, without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks.

It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.

Now, let's look at what Nouriel Roubini (Principal at RGE Monitor and professor at NYU) estimates for US banks' losses. He puts the figure at some $1.7-1.8 trillion out of a total of about $3 trillion (I think) in total financial system losses. And Nouriel's base assumptions are not all that bearish, given what we know: a 5% GDP contraction and 9% unemployment, with housing prices down another 20%. All those estimates are quite plausible.

(And a quick promotional plug: my next recorded "Conversation" will be with Nouriel and his staff in a few weeks. See the links at the end of the letter to make sure you get your copy.)

Geithner: "You Can't Handle the Truth"

The critics were quick to pan Treasury Secretary Tim Geithner's bank bailout plan as being weak on details. Which was true. There wasn't much substance in his speech. But let me offer a contrarian view. Geithner and the team around him may not be entirely tone deaf. They are very smart people and are surely in contact with major Wall Street figures, and would know that the lack of detail would disappoint.

Pretty much everyone knows the scene from A Few Good Men, where Jack Nicholson tells Tom Cruise, "You can't handle the truth!" What if the number that the Treasury and the Fed are looking at is a lot more than the remaining $350 billion in the TARP program? As in another $1 trillion more, or even the $1.5 trillion that Roubini says may be out there (and other independent analysts, like David Rosenberg of Merrill, say there may be another $2 trillion in losses).

Can you imagine what the market reaction would have been if they had announced that this week? The Dow down 400 points would have seemed like a Sunday walk in the park. Congress would be screaming, and the chances for the stimulus package to pass would have materially diminished. I don't think we know the real extent of what it is going to cost to shore up the banking system.

But the consensus among the financial leadership is that we have to fix the credit system no matter what the costs, or risk a repeat of the Great Depression. That is the essence of what Irving Fisher taught us some 75 years ago, when faced with a deflationary debt crisis.

Time for a Reality Check

Reality check: The "stimulus" that President Obama will sign Monday is a band-aid. If Irving Fisher, who by some accounts was our finest American economist, was right, such a stimulus is useful in that it helps those who are unemployed and replaces some lost consumer spending; but the real work that must be done is to get the credit system working again and credit flowing. I don't have the space to go into that economic debate tonight, but it is at the core of the problem. It is Keynes vs. Fisher, von Mises vs. Friedman. It is, as Lacy Hunt says, "The Grand Experiment."

After 70 years, we are going to see who is right. My money is on Fisher. It is not an experiment that is going to be fun to live through. But when we have the next debt deflation in 70 years or so, our grandchildren may know what to do.

We will see another stimulus package, probably by the end of the year. This time it will hopefully provide real stimulus. Much of the current version is simply an increase in federal spending that will be hard to rein in. And please, I am not being partisan. That is the analysis of many of Obama's advisors.

And it goes back to the debate I mentioned. Keynes would argue that it is in fact stimulus. The other three economists would have differing views. And like I said, in a few years we are going to know who was right.

But the heavy lifting is going to be done by the Fed. Watch their balance sheet expand. And watch Treasury and the FDIC come back and ask for massive amounts of additional money to take over very large insolvent banks. Stay tuned.

Earnings Will Get Even Worse

Last week I said that 2009 as-reported earnings estimates for the S&P 500 would be dropping. 2008 earnings had dropped to $29.57 as I wrote the letter. They are now down to $28.60. One of my favorite analysts is David Rosenberg of Merrill Lynch. His forecast for reported earnings for 2009 is now down to $28.

That puts the P/E for the S&P 500 at 30. He also projects "operating" earnings to be $55 for 2010. And, as he writes today:

"For those looking for a silver lining, at least we are going to have a deeper bottom to bounce off. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October if our estimate of the timing for the end of the official downturn is accurate."

That is a [further] 20% drop from today's close of 829. That is not what you will hear from "sell-side" managers who want you to invest in their mutual funds and long-only management programs. I noted the problem with the rest of the world earlier.

40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today's level. This is just far too precarious an economic and earnings environment. Given the probable ongoing bad news from financial and consumer stocks, plus the depressing news on bank losses coming down the road, why take the risk?

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The regular price for a yearly subscription to "Conversations" is $199, but you can subscribe now for $109 and still get access to the recent, timely Conversation with Ed Easterling (See Unexpected Returns: Understanding Secular Stock Market Cycles good book; especially for today's markets) and Lacy Hunt. Don't wait, as I am sure my staff will only keep raising the price. To find out more, just click on the link and put in code JM75, which will give you the discounted price.

And for organizations that would like to purchase a discounted multiple subscription for all their brokers or partners, just drop Tiffani a note at conversations@2000wave.com and she will get back to you.

Your on the lookout for more opportunities analyst,

ߧ

Normxxx    
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