Scary Numbers, Part II

Exactly two weeks ago I posted these same three stocks. Back then GE was at $10.06, BAC $3.93 and Citi at $2.51.

I don't follow General Electric (GE) very closely, but the looming downgrade, should it happen, will cause its costs to go up. The more notches in the downgrade, the more expense in funding its operations. There also exists the possibility of an $8 billion CDS problem. According to the FT the company has $36 billion in cash and its recent dividend cut should save $9 billion per year. The company has always had a lot of moving parts; I have no idea what will happen here but avoiding this sort of extreme complexity is not a bad idea.

What is there to say about Bank of America (BAC)? Well, probably a lot. I disclosed selling the stock in the face of the merger. For the first few points down it was a smart sale, then at some point on the way to $3 it became a lucky sale (actually right after I sold, they banned short selling and the stock went up a lot before going down).

Two appearances ago on CNBC I said that Citi (C) would not go to zero as the bailout / investment by the government would take that off the table. Why would they throw billions at the problem only to then let it fail? Either my conclusion was wrong or someone forgot to tell the market.

While we're at it, General Motors (GM) is below $2; the market cap is just over $1 billion. It would seem there will be a lot more tears for people that rely on that company.

While I believe the key to capturing a turnaround in your portfolio at some point will be sector and country selection (as opposed to SPY and EFA) the manner in which we access "the right" countries and sectors could pose problems. Even if a bottom in the market is coming soon, there will be more horror stories like the stocks mentioned above. There are certain country and sector funds that are heavy in a couple of stocks. So it may be possible to pick the correct sector but be adversely affected by a fund's composition.

As an example the iShares Telecom Fund (IYZ) has 21% in AT&T (T). If T drops 90% (unlikely, but look at the names above) then IYZ will get hurt even if the rest of telecom does well. If you are going to use ETFs you will need to look under the hood and for some sort of opinion on the construction of those ETFs, so this means more work, not less.

Comments

[Larry House:]

Any voice for caution is a good one now. That is about all I get from the piece--the usual vagueness and lack of specificity--"at some point," some sector, some country...

Mar 06 11:26 AM

[MarvinMBA:]

This is no guru in todays stock predicting game. There is none. The best recommendation is to stay out until there is some evidence of a turn around. This downdraft is a long term DEPRESSION that's going to last for years in my opinion. There's no rush to market. MarvinMBA

Mar 06 11:42 AM

[buddy_j:]

When "everyone" was saying that the markets were just going to go up ... up ... up....it was probably time to get out.

When "everyone" says we're now headed (if not already in) a "great depression," it's probably time to get in.

Then again I'm no "expert."
Then again, by acknowledging that, I'm probably better than the "experts."

Mar 06 12:08 PM

[Tesa:]

The hedge funds have extracted all the market cap which was meat of these companies so the attacked companies have only bones left. So no matter what the shorts say, there is not much meat for them to consume so they will have start attacking healthy companies now to provide new meat for their grinding machine or go long.

They will need to attack and chew on healthier companies with high market cap like XOM, WMT, CHL,PG, T,JNJ... to crush them. So they start with rumors and then the quota ith would be one panic a day laughing all the way to the bank.

I see that the author has T on his list.

Mar 06 12:23 PM

[Larrysyr:]

Caution is certainly warranted.

However, this sort of severe contraction presents buying opportunities. I wouldn't jump in with both feet, but the companies that survive will produce great long-term results. I'm interested in strong balance sheets (lots of cash, low debt/equity ratios) to absorb the downturn and sharp management.

My favorite at the moment is Corning (GLW), which has all 3, has been beaten down, and survived the dot-com crash even after betting the farm on fiber-optics. (Disclosure - I'm long in GLW)

I'm sure there are other beaten-up gems out there that will provide good returns if you can be patient.

If your time horizon is a year or two, though, it's probably best to run away for now.

Mar 06 12:24 PM

[NickH:]

While you are looking under the hood, others are making money with FAZ, SDS and other leveridged ETFs. Things are so bad that you can buy and hold these puppies for a few days and they will bring a warm glow to your portfolio in these cold days of Bear winter. Are they scary? Yes. Is this market volitile? Yes. The full moon is coming next week. Now before you laugh, it is a well established fact that in mental wards, around the time of the full moon, the patients get more upset and they have to use more medication to control them. No idea why, but people get more emotional. I predict that next Tuesday, Wednesday and Thursday you will see some real fireworks. Get on the right side of the market on those days and you will feel alot better about things.

Mar 06 12:38 PM

[whidbey:]

Your comments are too tame I fear. The administration is "jobs" oriented and they will count jobs before the dollar costs involved. I think GM is safe unless management recognizes that it can dump its obligations or bargain them down, but they will go to PBGC , the tax payer. On the other hand saving GE is a technology and manufacturing play and it would be desired in all circumstances. The banks are Zombies as the expression goes, but they will end up nationalized public utilities until the final plunge which come later this year, and that will force the bet off the table. Not really too hopeful.

Mar 06 12:38 PM

[Fred Voetsch:]

"Two appearances ago on CNBC I said that Citi (C) would not go to zero as the bailout / investment by the government would take that off the table. Why would they throw billions at the problem only to then let it fail? Either my conclusion was wrong or someone forgot to tell the market."

Imagine that...someone on CNBC being wrong.

Mar 06 12:59 PM

[Fred Voetsch:]

On Mar 06 12:08 PM buddy_j wrote:

> When "everyone" was saying that the markets were just going to go
> up ... up ... up....it was probably time to get out.
>
> When "everyone" says we're now headed (if not already in) a "great
> depression," it's probably time to get in.


Or you could actually look at economic indicators and data that will make it very clear to you that getting in should still be a ways off.

Mar 06 01:00 PM

[AndrewBaker:]

Right now no-one knows which way the market will move: not even intraday! No-one should use ETF, leveraged or otherwise, unless they know "what's under the hood," and stayng out of the market is a good idea for those not prepared to use leveraged ETF or other similar instruments. Buy and hold investors have plenty of time to look at fundamentals, and if they can also time their entrance using technical means (a good chart, for the uninitiated), then sometime soon-ish could be for them. Trouble is, no-one knows which way the market will move: which is where I came in! lol

Mar 06 01:05 PM

[logicalman:]

and what would the "right side" be?


On Mar 06 12:38 PM trader1234 wrote:

> While you are looking under the hood, others are making money with
> FAZ, SDS and other leveridged ETFs. Things are so bad that you can
> buy and hold these puppies for a few days and they will bring a warm
> glow to your portfolio in these cold days of Bear winter. Are they
> scary? Yes. Is this market volitile? Yes. The full moon is coming
> next week. Now before you laugh, it is a well established fact that
> in mental wards, around the time of the full moon, the patients get
> more upset and they have to use more medication to control them.
> No idea why, but people get more emotional. I predict that next Tuesday,
> Wednesday and Thursday you will see some real fireworks. Get on the
> right side of the market on those days and you will feel alot better
> about things.

Mar 06 02:00 PM

[Mad Hedge F...:]

These prices are getting rediculous! One out of five stocks in the S&P 500 has a single digit price. General Electric (GE) hit the $5 handle. Amazing. This is a company that has $45 billion of cash, $60 billion in back up government financing, and has already rolled over 70% of its long term debt due this year. GE Capital will be profitable this year, because only 2% of its holdings are subject to market to market rules. CFO Keith Sherin says the only explanation for a share price that is a hat size is the rampant fear now sweeping the markets.

Mar 06 07:17 PM

[Ricard:]

Interesting article.

"If T drops 90% (unlikely, but look at the names above) then IYZ will get hurt even if the rest of telecom does well. "

I don't follow T very much. However, GM has been a value basket case for decades, and GE,C, and BAC all have one thing in common: derivative speculation in what looked like proprietary funds. So, as long as T is not bankrolling its customers (GM through its finance arm, Lucent during the dot-com boom), and is not running its own hedge fund, then we can pretty much exclude the possibility of it running into the same problems as the three companies you mentioned.

So, at this point, I'd look at fundamentals...see if it has enough cash on hand to weather a storm, solid cash generation, and manageable amounts of debt. As long as it didn't participate in this alchemy of finance, it should be fine.

Mar 06 07:36 PM

[investor88:]

Not a time to be fooling around for sure. For the good traders, fair game.

Mar 06 07:56 PM

[billyboy54:]

I might like GLW, and TXN, good companies, but only at half their current valuations........i.e.... $5 and $7, respectively.

They'll get there..........then I'd buy, not until.

Mar 07 09:40 AM

[Richard Col...:]

Buy low, sell high and have patience.

Dan Kowkabany

Mar 07 12:46 PM

[Hari Seldon:]

I think the best point in your article is the suggestion to "look under the hood" of the ETFs. In my personal experience, it has been much easier to buy or sell specific names rather than purchase an ETF that holds multiple names because of this reason. They are convenient for making short-term directional bets but the output is often different than expected, especially when leverage is added to the equation.

Good call on BAC (even if you didn't get the highest price). I was a shareholder until the MER acquisition and promptly sold my shares. I'm disappointed in Lewis & Co for not recognizing the degree of magnitude of the problems and making a terrible purchase at far above a prudent valuation.

Mar 07 01:00 PM

[Dan H:]

We need to look under the hood of our government!
How many Billions of $ went into Citi, AIG, BOA, ML etc. and what are they worth now? Less than 0. They are a liability. There are plenty of well run regional banks. We should be supporting THEM.

What we need to do is have a national strike to get the attention of these crooks. They are forcing us collectively in to huge debt obligations to bail out folks who ought to be thrown is jail for malfeasance! The only way they will listen is if we turn off the engine for a while until they notice that the American people mean business!

Mar 07 03:04 PM

[Roman_Fiddler:]

Actually, I agree with this.

However, all the rhetoric and talk is aimed mostly at keeping the multitudes calm and stopping this type of behaviour.

Withdrawing the troops from Iraq with hold a new meaning once hyperinflation hits and people really do start to realise how bad this all is.

Or then again, I could be very wrong - I really, really hope so :)


On Mar 07 03:04 PM Dan H wrote:

> We need to look under the hood of our government!
> How many Billions of $ went into Citi, AIG, BOA, ML etc. and what
> are they worth now? Less than 0. They are a liability. There are
> plenty of well run regional banks. We should be supporting THEM.
>
>
> What we need to do is have a national strike to get the attention
> of these crooks. They are forcing us collectively in to huge debt
> obligations to bail out folks who ought to be thrown is jail for
> malfeasance! The only way they will listen is if we turn off the
> engine for a while until they notice that the American people mean
> business!

Mar 07 05:33 PM

[ashadu:]

Wonder what would happen if we all just took a market holiday until the present and future hysteria died out, and no one really cared about paper assets and non essential items. food ,shelter,clothing, safety =the essentials

Mar 07 11:45 PM