Sunday, March 1, 2009

A Life Raft with Duct Tape and Glue... A Tale of Two Cities... Stock Watch...

As a kid, I loved watching TV shows like McGiver and The A Team. Like McGiver Mr. T was always able to make some type of device out of nothing. For instance, Mr. T made a hang-glider out of a few aluminum bars, a sheet of fabric, and duct tape. The market needs a McGiver or Mr. T to make some type of invention to bring stability.

Warren Buffet has already written off 2009 claiming it to be a financial shambles. Since that is what some of the analysts and TV personalities are finally admitting, we all know that it will probably get a lot worse. How much worse will it get? Buffet went on to write “That the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond.” (1) In particular, both Buffet and Munger chastised the financial industry for creating loan products that required anything less than 10% down. However, made the most important part of the statement Buffet made about the world economy is enough to put a shiver up one’s spine. “A free-fall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. - and much of the world - became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.” (2) You don’t have to be a financial expert to read between the lines on this one… hope for the best, but expect the worse. This could be another opportunity to short the SP 500 or Russell 2000 or even FTSE to 2011.

Similar to the Lost Generation written about in F. Scott Fitzgerald’s The Great Gatsby, there are now a growing number of analysts, strategists, and hedge fund employees who are taking this opportunity to travel the world looking for excitement, exploration, and items of self-interest. In one instance, Alex Iscoe is now plotting to climb Mount McKinley in Alaska, Mount Kosciuszko in Australia, Mount Kilimanjaro in Africa and, of course, Everest. He hopes he can raise money for charity with his feat, and when it is all over in a few months, he will consider what to do for a living.
"As silly as this may sound, focusing on getting a job, even though it's relatively soon from now -- three or four months -- it's not at all on my mind," Iscoe said. "I have a 29,000-foot mountain to climb." (3) I guess Alex is not totally lost, he must be financially stable, and his heart is in the right place if he is mountain climbing for charities. The question becomes “Is this a way of clearing the mind, body, and spirit of the financial industry?”, or “Is this an opportunity of a lifetime?”

A Tale of Two Cities
Alex, if this is a way of clearing the mind, body, and spirit I would recommend that you invite John Thain and Ken Lewis along for the trip. The now infamous John Thain spoke to New York Attorney General last week regarding $3.6 Billion dollars of bonuses that were delivered as Merrill Lynch was going into the tank. According to Morningstar, there were over 700 employees who received bonus of a million dollars. “Thain was forced out of the top job at Merrill last month in the wake of his handling of the investment bank's $15.31 billion fourth-quarter loss. The investment bank set the bonus payouts in early December, when it was anticipating only about $7 billion of losses, according to Cuomo's office.” (4)
To make matters worse, Bank of America’s Ken Lewis also met with Cuomo regarding bonuses. Cuomo wants the list of those who received bonuses… and Ken Lewis is refusing to share that list unless there is a promise the names will be kept confidential. Cuomo left the meeting feeling extremely frustrated.
One thing is becoming increasingly apparent. We live in an America where most white collar criminals are untouchable. In pre-revolutionary France, the same rules applied… the rules and laws for the rich, and the rules and laws for everybody else. It appears that Obama (or at least his rhetoric) falls squarely on the side of the people. However, like most of the folks on Main Street, our ship is tied to Wall Street… and the American people will sink or swim with these crooks. Can anyone say a Tale of Two Cities? Can anyone say life raft?

In A Tale of Two Cities
, Charles Dickens begins with "It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way." Along with this theme, we are empowered to make the best of this market, and that market suggests to short practically EVERYTHING!

Stock Watch...
For instance, one might believe that companies specializing in asset recovery... repossession etc. should be hitting on all cylinders in this type of economy... Looking at charts of these two lovelies, nothing could be further from the truth.
PRAA and ASFI So this could well be a market that defies some aspects of conventional wisdom... a note that all traders should take in earnest.

Like fellow blogger Ax said MCRI is moving down, and moving down rapidly. I am tempted to make additions of 6/5s which are trading at .45. WYNN and CHDN may be on there way to oblivion as well. I dumped WYNN several weeks ago... and was thankful to hit a 60% profit. Now it is looking like it could hit 10. 10s... that is the option range to consider in the next six months on that one!!! It could be a home run just in time for baseball season. RYL is also picking up a bit of steam to the down level as it appears that things will get much worse before they get better. My 12.5s are moving very close to ITM plays... MLHR suffers from a general lack of interest, this option contract only shows a 12% increase in value while I have seen the overall share price drop 4.00. It is a lesson in interest and volatility. CNK... is ITM and will need to exit this one before the 3/21 X date. O.K. so I am a bit of a pig! I also added shares of SLV to my holdings... Poor man's gold yes, but also another hedge against the gathering storm. Mr. T's Gold must be worth a fortune!!!

Next Time...

Thinking Outside the Box and Intrinsic Investing Part II

Sources Cited

2. home


AX said...

Buffett is starting to look more like Greenspan with each passing catastrophe. The hypocrit who trades in derivatives and arbitrage, who used leverage to get sweet deals from GS and GE is getting hammered....

Stocks have made me ill for awhile now, but facing the specter of mass catastrhophe, maybe it's time to Black Swan hedge again with ETFs like EWU and EZU. Also, if USO gets dinged, maybe DXO is a better play. Finally, TM is back on my screen. Reports of Toyota having to rent lots to store unsold cars makes me think a $65 price tag is unsustainable.

AX said...


Anonymous said...

Ax... Chances are the Buffet was well short on the Monday market before he released that newsletter...
All good thoughts... NOC is another play...negative eps... maybe a low-ball takeover....