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Special situations, contrarian, hedge fund manager
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I continue to believe that to best profit from investing, you must embrace the irrational behavior of all forces influencing the market. I spoke about this before when oil prices were at $125 per barrel this summer and surmised that prices had to come down because of the stupid headlines and frankly things just not making sense.

I believe that on the night of Thursday, October 9 and the morning of Friday, October 10, stupidity and lunacy were out in full force.

From Monday to Tuesday, the stock markets took a beating this week unlike one I have ever seen – and the downward swings of hundreds of points within a matter of an hour, all without some form of worldwide geopolitical fallout event was just crazy. On Thursday, I just watched and laughed like the Joker from the Batman movies. Strategies or objective attack plans to counter this debacle – non-existent.

On Thursday late afternoon, I added to some of my positions. Looking back, I should have waited until Friday morning, but you can never time the market. Here are some of my observations that gave me the courage to jump in and start adding to my positions.

First, on Thursday night, there was not ONE SHRED of good news out there. Every headline was negative and reminiscent of the Great Depression. It was as the world should have ended. The entire world was writing about the end of the Dow Jones; there was not one voice that had the courage to say that maybe we are at the bottom. When the entire pack is moving one way, that is often a sign to maybe look at another direction.

I am not calling a bottom here by any means – some very sophisticated experts that have called this credit crisis fall out to a T are calling for Dow 7,000 or Dow 7,500. We got awfully close today with the Dow touching the 7,800 range. Frankly, if people are saying Dow 7,000-7,500, I think after losing 7,000, we can stomach another 500 points. All I know is that the further this thing drops, the closer it is to its bottom (even if that is zero).

Generally speaking, there is not a lot of good news out there. We all know the credit markets are frozen – we all know that any moment now, another huge bank can fail or another institution will be nationalized, likely wiping out the shareholders. We all know that we are going to have to wait a few weeks until the bailout package starts being able to pump money into the program. Specifically, I have heard rumors of Citigroup (NYSE: C) being the next bank to fail or be nationalized – and perhaps at a 90% discount to it Friday closing price.

I think this is ludicrous and makes absolutely no sense. If C were truly on the verge of collapse, why would the government even let them to the negotiating table for the Wells Fargo (NYSE: WFC)/Wachovia Bank (NYSE: WB) deal? Even if C needed the WB deposits to stay whole and it was a desperation move to let C in the game, in the end, C didn't get the WB deposits – WFC did – and everyone seems ok. Plus, C has strong Tier 1 capital, begin raising capital at very favorable prices nearly a year ago (compare that to BAC and GE raising capital via common stock offering at multi-year lows), and was one of the first banks to cut their dividend – and there is still room for the dividend to be cut. Also, per the last quarterly statement, C has net cash of nearly $11 on their books. That is cash (not assets) minus liabilities. Ok, maybe they have more liabilities and they are hiding some, but C has already taken sizeable write downs.

C traded at $12 today, which means that you could have theoretically bought the entire C franchise (perhaps including bad assets, but also many good ones) for $1. Ok, maybe I have no idea what I am talking about, but if there is a nationalization of C this weekend or C fails, will anyone be surprised? I think Washington Mutual failing caught everyone with their pants down as did the nationalization of AIG, Fannie Mae, & Freddie Mac. If either of these catastrophic things happens to C, will anyone be surprised? That is the idea – if we are all not going to be surprised by it, you can bet the markets will not act like someone put a banana down its pants and turned a monkey loose.

Today's action was very telling. The markets were obliterated all day and towards the end of the day, rallied huge to be up over 300 points and close with a 'small' 128 point loss. Here is my take on it. Everyone panicked Thursday night and just sold everything at the market open. The shorts then took this opportunity to cover which drove the Dow into positive territory early this morning. Then, the normal market mentality took command and on multiple occasions, tested that 8,000 mark – and it held.

I am not saying that 8,000 is support, but today, when things were at their darkest, it held. I am not exactly sure why, but I was watching the banks closely all day today. Even when the market was down 10%, the banks were strong. Bank of America (NYSE: BAC) was in the green nearly all day. Seacoast Banking Corporation of Florida (NASDAQ: SBCF) just would not go any lower than $7. XLF also spent most of the day down slightly or in the green, regardless of how huge of intraday losses the Dow and the S&P 500 were posting.

Normally, there always seems to be one sector that outperforms the other on a given day, but the banks? Aren't the banks the problem and source behind this entire credit crisis? On days the Dow is down 5%, shouldn't the banks be down 10%? This has been the norm, but it was not today. For instance, Citigroup (C) traded at $12 today right when the Dow was around 7,900. It then ran to $14.50 on the early morning run up. On the multiple times the Dow and S&P 500 drifted down to the 8,000 level, C maybe dipped to $12.50-$12.60 and only for a brief time. That is, at some point, C's downward drift stopped although the Dow continued to slide. In the afternoon, the Dow posted a furious rally and nearly every stock followed. However, as the market closed up for the day, some of those gains waned. But, many of the banks saw their prices close at or near their daily highs, despite the Dow pulling back some.

I am not saying go nuts and buy bank stocks, but perhaps maybe, they found their bottom. As for another failure or bad news driving them down, we already know all of the bad news. Imagine if there is no news this weekend – or perhaps some form of good news? We could see a monumental rally because nobody is expecting it. I bought more C under $13.

I also paid close attention to some of my thinly traded, family controlled favorites: Seaboard Corporation (AMEX: SEB) and Ash Grove Cement (OTCPK:ASHG). Specifically, ASHG has held up pretty well during this debacle? Why, well, the thing never trades. Granted, it is off from its $304 high (which was a very transient, almost artificial high) and has seen some decline from the $240-$260 levels (really more of their real high). But today, literally for NO REASON, the stock traded down to $205. What does ASHG have to do with anything? They do not publish financials and who owns this stock anyway? The family owns almost all of it – fear took hold and the irrational holders of this stock just had to get rid of it. There is absolutely no reason for ASHG to even have moved or traded today at all, but someone thought so. It was ludicrous. Similar activity was seen in SEB, but there may be a better case for this one. Regardless, I added to my SEB at $880-$890 – after adding some on Thursday at $1,000. It is below book value and their stock has nothing to do with the credit crisis.

How about Pfizer (NYSE: PFE)? 9% dividend yield when the stock touched $14.50 on Friday morning. Are you nuts? We all know Pfizer is struggling, but that is no secret. I am sorry, they are not cutting their dividend. They have so much cash, they could likely alleviate some of the credit crisis themselves. If you are not a Pfizer fan, then look at the other drug companies or basically any other company out there that is totally separated from any of the credit crisis discussion. Merck (NYSE:MRK) with 6% yield, AT&T (NYSE:T), 7% yield. Come on – these are not banks that may have to cut the dividend to preserve capital. These are boring, cash generating machines with dividend payouts well less than 100%. Everyone thought Buffet was a genius for getting the 10% dividend on GE – you could have been 90% as smart as Buffet and picked up PFE and earned 9% on the dividend; you could have been 75% of Buffet and gotten 7.5% yield on AT&T early this morning. I added to my PFE position today at $15.

Yes, I spent much of the day feeling like I was about to vomit as I watched my portfolio get ransacked, but when everybody around me told me Dow 7,000 was inevitable and going to happen today, well, I held on and at least as of the close, I am glad I added when I did and held on. Some may say the late day rally was short covering, perhaps, but what about in the morning? It cannot be both times, or can it? Even if it was the shorts covering, that is good for equity prices.

Right now, everyone is expecting horrible news this weekend about a bank or the bailout plan. It's already priced in as far as I am concerned. I do not anticipate a return to Dow 14,000. I do anticipate that the worst may be coming to an end. It just does not make any sense for these things to go down forever.

Disclosure: Long

Source: Market Bloodshed May Almost Be Over