H J Mann

Forget the long-winded explanations. Here it is in a nutshell, as concisely explained as I have heard it, from one of the absolute smartest guys on Wall Street or any street. Original link here.

“Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

“When they started defaulting, out of bad luck or bad judgment, we implemented fair value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial banking and investment-banking system.

“In the face of those losses…you needed to raise new equity…which came from sovereign-wealth funds in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system….It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. We had a series of bankruptcies, whether Bear Stearns or Lehman, or forced sales like Merrill. Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.

“So that’s the story of how we got there.” 

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Mark Cuban, who writes his thoughts on BlogMaverick.com, is indeed one of the smart guys. 

In a recent post about the financial crisis, he writes: “And one last thing I have to mention. Does everyone realize how much bigger a disaster last week would have been had Social Security been privatized?”

I posted the following comment in response. In addition to my comment, a homework assignment for you: pick any day in Q1 2002 when the idea of investment of these funds into the market was first seriously being bandied about. Then, find and write down the value of the Dow on that day. Then, take the lowest intraday point value of the Dow last week (which would be the lowest in two years) and write it down. Tell me what the percentage return is. Then read below.

Mark,

Have to disagree on the issue of Social Security. Does it occur to any of you that the only organization out there with worse accounting practices than Lehman Brothers is the US Government?

The odds of the entire investment being wiped out are negligible, whereas instead the money has been placed into a “Trust Fund” that is and remains within arm’s reach of politicians who have “borrowed” and keep “borrowing” from it. The “borrowed” money is gone and is never coming back. At least in the market, the politicians would not be able to put their greedy hands on money in the Trust Fund.

I would go as far as to say this: if you went back five years and you put every dollar that came into the Trust Fund into the market as it entered the Trust Fund, and kept the government from “borrowing” or otherwise leveraging against it, even after the recent carnage there would still be more raw dollars left in the Trust Fund than what are actually in the trust fund today (today, it’s just a pile of IOUs that are worth about as much as Lehman bonds).

By the way, not to compound the bad news, but you know what? Don’t count on Social Security to provide anyone any kind of retirement. It won’t be there for any of us under 40.

Spreading the good cheer,

H.J.  

Let me add one more point

Do you know what drove the markets so high in the 1990s? The advent and eventual widespread acceptance of the 401K account. Money came into markets like crazy, and money was put to work. And no one who put money in a 401k in 1990 is regretting the decision today. 

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Michael Moore’s latest reeking pile is not in theaters, but on the net, and at price even the most strapped consumer can afford.

However, no word yet on how/if you will be compensated for the time you will never get back.

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After the single wildest week in the markets that I have ever seen… With the goverment bailouts to the rescue… With the SEC ban on shorting stocks… What happens now?

A couple of predictions:

AIG Gets A Private Bailout, Markets Don’t Know What To Think

Hank Greenberg and company will figure out a way to intervene and get there before the $85B federal bailout does. This will bode well for markets… maybe. While generally seen as positive news, it will also be seen as “there goes money that could have bailed out or bought someone else.” Ridiculous thinking in my opinion, but that’s the way it goes.

Markets Will Stabilize Mostly Because Of One Thing

Because the Feds said they would assure the cash value of money market assets to their dollar-for-dollar value. This is important because without it, there is a great chance for a run on banks. A run produces substantial deposit withdraws. Deposit withdraws must be covered by selling assets (admittedly mostly short term assets, but this selling would have a directly negative impact on stocks) which drives markets lower. This stabilization was the most critical piece.

The Short Selling Ban Is A Huge Mistake

An outright ban was just too much. Temporarily reinstate the uptick rule (but only temporarily) and police the naked short selling until it’s stopped. Stopping the naked shorts will stop the dramatic swings we saw in stocks like Morgan Stanley and Goldman Sachs and Zions.

Remember that shorts perform an important service in the market. First and foremost, they give all investors a way to make money regardless of the market’s direction. I would say that over my lifetime as an investor that 40% of my profits have come from short selling. My single most successful trade was a short sell (In very late 2004, shorting TZOO at $115 and covering in the $20s less than six months later). It takes a fusion of many elements to get a stock to go up, and the failure of only one element to make a stock go down.

Second, it was the shorts who have been saying for more than two years that this was coming. Jim Rodgers, the famous commodities trader, said two years ago that Fannie and Freddie were toast. At the time, Fannie was trading at more than $60 and people thought he was nuts. In May of 2006, Barron’s wrote a cover story on this mess. At the time, they pointed to more than $3 trillion in ARMs that were due to reset at drastically higher interest rates, and the chaos that would ensue.

The shorts warned us, not with rumor mongering or manipulation or sensationalism, but with cold hard data. Now because they profited we blame them. Stupid.

What Happens Now?

At the macro level, look for more of the same wildness in the coming weeks. After election day, look for a rally if McCain wins and no rally if Obama wins. Christmas will just plain suck for retailers, so those stocks are dead money or worse, unless you are WalMart or Costco. Over the next two weeks, the hedge fund dollars that were poured into shorts will now focus on commodities, so look for a big jump in oil in the immediate term. Same with coal and nat gas, but not to the same level as oil. Look for gold to run up like freakin’ crazy.

Two more things: First, the write downs are at about $400 billion. But there is likely more than $600 billion of additional illiquid assets that cannot be sold, so they will likely be written down… unless the government soaks them up, which is a possibility. So unless the government soaks up this slop, the worst is not nearly over. So don’t go loading up on bank stocks. Buy only the big drastic dips and sell into the inevitable surge that follows. Trade them, do not own them, until the picture is much more certain. 

Second, pray… I mean literally pray… that people who own homes and have the ability to pay don’t resolve their negative equity problem by throwing the keys back to the  bank and walking away. If people who have the ability to pay choose not to, it will be a disaster.

So how am I playing this?

Early Friday morning I sold alot of stuff into the strength (some shares of LVLT, BX and some GS that I picked up in the low $120s on Wed… what a ride that was), and I will continue to be situational. I will be looking hard at BTU, OIL, GLD. 

Two pieces of final, somewhat unrelated commentary

First, my last post on Wachovia got pounded, particularly the advice that you should buy if it dipped under $10. The post appeared on seekingalpha.com, for who I am an occasional contributor. You should see the lambasting I took. Some funny stuff.

Then, about three weeks after I made this suggestion, Jim Cramer said the same thing… that you couldn’t ignore Wachovia under $10.

Well guess what? If you bought it when it closed under $10 on Tuesday, you could have unloaded it for more than $18 before the week was over. Last I checked, that’s nearly a double in just a few days, and my most successful prediction to date. So to my detractors I simply ask: Who was right?

Second, I have been an account holder at TD Ameritrade for 12 years… first as Datek, then Ameritrade, then TD Ameritrade. When their systems failed on Friday, for the third time in a year I found myself unable to log into my account when I most needed it. The last time this happened was in January, and on that occasion, I talked to friends of mine who had Etrade accounts that were working just fine. Same with Friday… Etrade was fine while TD was failing. So yesterday, when I finally got in, I began unwinding what was my longest standing financial relationship by transferring out of my account all of my cash. The shares I am holding will come a little later.

When I spoke to the rep at TD this afternoon, I told him that for this to happen three times in a year, someone ought to be calling for not just the CIO’s head, but for the CEO’s head as well. This is their business. This is what they do. How can they allow a single failure, let alone three in a year?

I don’t know, but I can tell you that the next time they go down, I won’t be worried because my money will be somewhere else.

Disclosure: As of publication I am have no positions in the stocks mentioned here, but positions can change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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I wrote not too long about about buying Wachovia.  I got in just under $17, thinking that the worst of the carnage was over. If you followed me, you followed me off a cliff. Hitting an intraday low of $7.80 on July 15, it was a pretty awful call.

Luckily, it had an extremely speedy recovery, getting back into the $18 range earlier this week. Seeing that this was an unbelieveably aggressive move up for any stock, and that the indices for banks in general had jumped historical leaps in just a handful of days, the writing was on the wall that at least for the short term the way forward was down. So I took the opportunity to cash out for a very small profit and look for a new, much lower entry point.

Well goody for me. Now to the point: the fact is that this is not the first time I have completely missed calling a bottom in a troubled financial. I missed massively on AIG and on Citi as well. So how did I miss so badly on these two and yet hit so perfectly on Countrywide? One word: patience. I started watching Countrywide for a buy opportunity right after BofA bought in at $18. But I never saw the opportunity literally until the day I bought it at less than $4.50. And even then it was speculative, but I figured the fall from $4.50 to $0 isn’t too far so it was worth a chance.

So goes Wachovia and Citi and AIG. These stocks have put in new bottoms substantially lower than what I thought possible, so there is new opportunity to trade them. But this is going to require substantial patience and the ability to say no if conditions aren’t exactly what they should be.

I am still unsure on how to play Citi and AIG, or whether to play them at all. But with Wachovia, I think the chaos made clear the potential opportunity. On Friday, Wachovia again got smacked with a downgrade, so perhaps it will run all the way down again, and I am waiting for the new entry point. For me, if it gets under $10, I will take another look at it, with the notion that if bumps up a few bucks I will take a profit, and if it goes below $8 I know to get clear and reset. 

For long term investors, Wachovia may languish for a while, but it’s not going under. If anything, there are a number of majors with the wherewithal and the room under the deposit cap who would love to have Wachovia’s footprint (think JPM Chase). So if it approaches that 52 week low again, it’s worth a look.

As for Wachovia’s new CEO Robert Steel buying 1 million shares at $16? In the short term, this is going to work out to be about as brilliant a move as BofA investing in Countrywide at $18. Take my personal experience here, and for heaven’s sake, do not use that price as the measure of a good price to get in. The opportunity will come much lower than $16, trust me. Alas, I do not think Robert Steel a fool. And while yes, this purchase serves as a vote of confidence in the company he is running, I also believe he sees from the inside that he can right this ship and expects that his investment will pay him back handsomely. And with patience, you can do even better.

Finally, you long term investors just remember the most important thing, which is the thing that I forgot and barely escaped getting burned: that what started this whole mess for these institutions is the housing crisis. And until that improves, the financial condition of these institutions won’t improve either. Be mindful of where we are overall in working off housing inventory and writing down losses related to housing. Only when this resolves will these stocks become something less than highly speculative.

Disclosure: As of publication I am have no position in the stocks mentioned here, but positions can change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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I have written here previously about shorting Amazon, and if you played the trade and held on long enough, it paid off nicely.

But with this recent earnings report, I think my original assessment of Amazon was wrong. I think that I have somewhat underestimated their ability to get it done in a very tough consumer environment.

With the out-of-whack P/E and investors seeking the shelter of stability, I don’t see this making a run to $120 or even $100. But at the same time– without a catastrophic catalyst– I don’t see a drop to $50 or even $60.

I think for the time being Amazon is going to be stuck in a range, and for those daytraders out there who pay attention to the intricacies of its intraday movements, there will be the obligatory daily ups and downs of a few bucks that can be played. But for the investing crowd, I see this languishing mostly in place until the economy improves and the stock goes up, or the economy doesn’t and Amazon eventually misses estimates and goes down.

Either way, the pending results will be telegraphed… the macroeconomic indicators will show improvement before Amazon makes any real move, so there will be plenty of time to get in. In the mean time, I am on the sidelines in this one, except if time permits for the occasional day trade.

Disclosure: As of publication I am have no position in the stocks mentioned here, but positions can change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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“I am, I fully grant, a phenomenon, but not because of any speed in composition. I asked myself the other day, ‘Who else, on so many issues, has been so right so much of the time?’ I could not think of anyone.”  – William F. Buckley, 1986

$100 Oil: Correct. I said we’d be there before May 2008. We got there intraday in very early January, and closed above $100 on February 19. Now, what we’d all give just to see oil back down at $100.

$100 Oil Stocks: Wrong. I said that Conoco and Exxon would cross the century mark by the end of March.

The Crocs fad was fading and with it would the stock price:  I said this when CROX was at $48. The stock is now hovering at $10.

Starbucks does not have room to grow: Correct. On January 7, Howard Schultz reassumed the CEO spot at SBUX and immediately announced a plan to close underperforming and cannibalizing locations. This bolstered the stock price, but a short the day I wrote about Starbucks followed by a cover when Schultz retook the reins resulted in a 25% profit. Moreover, Starbucks said on April 23 that  the economic environment was the “weakest in our company’s history.”

Countrywide found it’s bottom in the $4.50 range: Correct. Two days later, Bank of America bought Countrywide out for $7.16 per share, if you bought in just above the bottom at $4.37, this yielded a minimum of a 60% profit in just two days. It has since gotten back the $4.50 range, but I would not mess with it now.

Citi was good to go at around $26.50. Wrong. The promise of massive layoffs and writedowns send shares into the teens. Still believe its too big to fail, but staying away for now.

Merrill Lynch found support at $47.50. Yes and no. It found it twice, and on the third try plummeted through the floor. It has not held that level again convincingly since. 

Merrill Lynch is a buy on dips into the $40s. Right. In separate posts, I wrote about this twice, and both times the trade worked out. Merrill would dip into the high 40s and return to highs above $55. It happened a third time on March 4, with the stock hitting an intraday low of $47.98 and rallying immediately. A nifty trade if you played it. Again, on the third plunge, it fell through the floor, which was your signal to get clear. It is well below the levels where anyone should be holding. I am steering clear.

Yellow Roadway looks good at around $14.30. Yes. Dipped lower, then ran to around $20.

Mastercard looks like a buy at around $179.00. Right. It dipped to the low $170s first, and then screamed to above $220. That is a 25% gain really quickly. If you were holding, I hope you took at least some profit. If not, no worries. It dipped to the mid $190s and ran back up to over $300. Today, sitting pretty in the $280s.

Amazon looks like a short at around $82.00. Right. After I wrote this, it never saw this level again, and dipped into the 60’s, a nice gain in such a crappy market. Wrote about this again in April. It went from $80 to around $70… and quickly back over $80. I would stay away from it altogether.

Blackstone looks like a buy at around $16.75. Right and wrong. It got hammered into the $13 but now trades at more than $18. I still say that anywhere below $20 is a good long term play.

AIG looks like a buy at around $46. Right and wrong. It made a speedy return to the mid 50s, and has since absolutely collapsed into the low $30s. The issue: substantial exposure to the UK mortgage market, which isn’t faring much better than our own. I am still watching this for a long-term entry, but am in no hurry.

Buy Wachovia at $17. So far so good. Just a handful of days and its up about 8%.

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I bought some Wachovia today.  I have been watching it for a while… man has it been pounded. Let me tell you what tipped it for me: this article saying that Goldman has been hired to advise Wachovia.

Goldman’s involvement is a clear signal to me that they are shopping a buyer. Goldman can help value and negotiate the deal. These advisory services are what Goldman does, and they do more of this than any outfit on the planet. 

Even if they don’t get bought, it is so knocked down that if your timeline is a year or more you will be rewarded handsomely, and at this point, with very minimal downside risk.

Disclosure: As of publication I have am long WB, though my positions may change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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Very recently I took a new short position in Amazon. I had written previously about shorting Amazon, and if you played it, it returned a tidy sum in a relatively short period of time. Amazon earnings are out tomorrow. What I said previously is every bit as true today: Amazon is priced for perfection, and when they cease to deliver it, the stock will get clobbered. My guess is that they will provide an OK report and then offer lousy guidance. The stock will be at $65 within two weeks.

Disclosure: As of publication I am short AMZN, but positions can change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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From last week’s Olympic Torch Protests in San Francisco. Hang in there… I mean, was it over when the Germans bombed Pearl Harbor? NO!

Photo credit here

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