prudentinvestor

Insiders Continue to Sell, Sell, Sell

This is an unusual and unpredictable economic environment, with market dynamics driven by HF computer trades and by forces beyond my own experience and comprehension, despite my 30+ years of investment experience.

This rally may falter next week, or add another 20% before it inevitably runs out of steam. When it does run out of steam, the range of outcomes is very broad, from a full retracement to the March lows in a few weeks to a brief drop followed by yet another moonshot.

I've found it prudent to cash in a portion of this rally's gains, but am doing it slowly and steadily as the tradeoff between missing a significant part of the rally or getting caught in a rapid plunge is a moving target.

I hope that all "Mom & Pop" individual investors are exercising due caution and not being suckered in by the enormous forces beyond their comprehension.

The Mess at Extended Stay

" ....under which Lichtenstein should by rights be on the hook for $100 million now the company has declared bankruptcy. If the senior creditors get their way and manage to take over the company, however, it seems that they’ve promised to cover all such expenses — rendering the clause largely moot as far as Lichtenstein’s net worth is concerned"

It seems that the senior creditors are more concerned about Mr. Lichtenstein's net worth than about what they can recover on behalf of their own companies and their investors.

This implies that the old boys club trumps fiduciary responsibilities (and legal obligations to investors) at the senior creditor banks. Hmm.... I wonder why?

'Preventing Systemic Collapse': Bernanke's Ace-in-the-Hole

All the talk about "systemic collapse" is utter nonsense. Banks have failed before, and after a Friday night change in ownership have continued to function on the following Monday, with the same employees in the same positions doing the same things as on the previous Friday.

Taking over any failed bank, no matter how large, would have been better for taxpayers, as the public subsidy would have been limited to cover that bank's actual losses. Instead, with the current bailouts, the public subsidy is extended to cover the bank's investors as well as its actual losses. Additionally, the moral hazard of bailing out the bank's investors will distort investment decisions and the economy for the forseeable future.

If "systemic failure" were real, GM and Chrysler factories would have been piles of rubble by now. Instead, we have ads about "the new GM". Likewise, we could have been seeing ads about "the new xxxxbank".

Preview from Europe: Markets Dismiss Stress Tests and Crack 900

"On the latter, the aggregate sum looks easily within the bounds of the deep pockets of Uncle Sam, and thankfully so ...". Apparently, the uncle has very deep pockets for banks and pork, but not for honoring obligations to creditors.

When socialist countries nationalise companies, they usually assume their debt, and in some cases even compensate their equity holders (to some extent). Venezuela just did that with their national phone company. Egypt did that when they nationalised their canal in 1956 (but was attacked anyway). And the list goes on.

Here, on the other hand, Uncle Sam is in the process of nationalising the auto companies for the benefit of the UAW, and without assuming their debt, let alone compensating their equity holders.

I can already hear dissenters saying "... but the auto companies are only being nationalised because they're bankrupt ...". So, how come the banks are not being nationalised? Indeed, if Uncle Sam were to "invest" in the auto companies one quarter of what he has poured down AIG's conduit to the "sound banks", the auto industry would survive until the next upturn.

However, it appears that rather than "wasting a good crisis", the auto industry is being nationalised for political reasons, and without honoring its creditors. This is an ominous precedent for the bond markets.

Preview from Europe: Pigs Scare the Market Bulls

"..... there does appear to be some underlying resilience to the recent rally, presumably helped by the positive earnings surprises ...."

et tu Mole ? I cannot fathom the notion that when revenues are down 20-40%, and earnings down by 40-80%, we should rejoice because of the "positive surprise" that they are "higher than expected". I imagine that those who did the "expecting" were being clever, hoping all will celebrate and drink the kool-aid.

Wall Street Breakfast: Must-Know News

".....the research suggests the Fed should use unconventional policies to create the equivalent of a minus 5 percent interest rate."

I thought they already did.

Dividend Stocks to Avoid

I also think that GE is a great value below $10, even though risks remain.

However, I think one should not assume any slashed dividend will being reinstated, as historically, when companies have slashed dividends, it has taken decades for them to slowly raise them back to their former level, even in nominal terms. In real, inflation adjusted terms, it could take a generation, if ever. The historic trend has been slashing by 50%-80% in bad times, then increasing by a paltry few % in good times.



On Apr 21 10:58 AM sthpawil wrote:

> I consider buying GE back when it was below $7 an incredibly smart
> move on my part. In a few years when the dividend returns to its
> normal level, the ROI will be huge since my cost basis is so low.
> Between that and my capital gains, I don't see how anyone with an
> ounce of common sense can make the argument that one should avoid
> these stocks. Articles like this are very short sited and proof that
> so called "experts" are people too and they make mistakes just like
> the rest of us.

Is Bank of America Poised for a Major Move Up?

My guess is that the shares of BAC, as well as of all large US banks, will eventually recover; perhaps not to the dizzying heights of 2007 for several years, but to well above current levels.

The risk/reward paradigm of the new and improved capitalism is that the banking system's risk is to be borne by taxpayers, whilst the rewards are to go mostly to the banks. This ensures that banks cannot lose, but can only profit. I strongly disapprove of this distortion of free markets, but it now appears to be reality, especially as details of PPIP emerge; so I have long positions in several major US banks which I would have avoided in a traditional, capitalist free-market environment.

Why It's Better to Bail Out Borrowers than Banks

mathgeek,

I am not sure what makes you think the world would have ended if other mismanaged banks had failed and been taken over by the government, just like the successful resolution of failed banks in the 1980's. It would have ended up costing the public treasury less than the cost of all the tortured programs now underway, and would have kept the system fundamentally fair and transparent.

WaMu and Wachovia went under, their investors lost out (myself included). Yet the world did not end, and would not have ended had Citi, or others, also gone under. I made a bad choice when I bought WB stock and WaMu bonds, and took my losses as the natural consequence of making poor investment decisions. I blame no one but myself, and will be more judicious about speculative investments in mismanaged, over-leveraged banks that engage in irresponsible lending within a clearly unsustainable bubble.

This is how capitalism and free markets foster the wise allocation of capital: You make a good decision, you win, you make a bad one, you lose. Unfortunately, when government distorts the free market in non-transparent and unpredictable ways, the problem of capital misallocation grows, instead of diminishing.



On Apr 11 04:57 PM mathgeek wrote:

> Felix, while I prefer to keep the details private, I was living fairly
> close to the fire in this chain of events... and it was all about
> psychology. Everyone, from market participants to the media was playing
> the game of "whose next?"
>
> While Leman was alive, the focus was there. The moment Leman fell,
> the focus shifted to WaMu and Wachovia... and please remember...
> WaMu was wiped out in less than two weeks not by losses... but by
> panic deposit withdrawls. As soon as WaMu went under, the pressure
> shifted almost instantly to Wachovia and Morgan Stanley.
>
> What the regulators realized they needed to do was to draw a line
> underneath the financial system and say, this far, and no further.
> That is why TARP funds were crammed down all of the largest banks...
> the government needed to make it clear that the government would
> not allow either speculative attacks nor a deposit runs to close
> any more major institutions.... Period.
>
> And, for better or worse, it worked. Almost overnight, speculation
> about who would be the next to go ended and that phase of the crisis
> ended. Now, its not at all clear that WaMu or Lehman share or bondholders
> were treated fairly... why let them hang while protecting Citigroup,
> for example? But the decisions were not made on principle, they were
> made in response to a chain of events, and by the time WaMu and Wachovia
> were gone, the Fed realized that they had to stop what had basically
> become a rolling bank run, and consistancy of policy was far less
> important than changing the psychology... and at the point, the train
> had already left the station on bailing out borrowers. The Fed needed
> to credibly back the remaining financial institutions, and they did.
>
>
>
>
>

Preview from Europe: Market Back on the Defensive

Regarding AIG's use as a router of taxpayers' money to the banks, you state: "..... however these profits were: one-time in nature ....".

I'd suggest that this sort of operation will continue on a massive scale in various ways, some transparent and others concealed.

Exclusive: Big Banks' Recent Profitability Due to AIG Scam?

The government had to make a choice: (a) nationalise the large banks and reboot, or (b) prop them up and save their powerful managers.

They chose (b), which requires shovelling hundreds of billions, if not trillions, into private for-profit companies, at the expense of taxpayers. Since the required amounts are much larger than can be announced in a transparent way without excessive public opprobrium, it follows that hidden or disguised bailouts on a massive scale have to be implemented, so this "news" is no surprise, and likely just the tip of the iceberg.

As to your statement "...... If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day ......."; I personally doubt that the general public will have any interest in the arcane details of what is going on, and the potential fallout will be limited to academic discussions on sites such as this.

S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers

Thanks for an informative analysis. When the market was near its lows I had argued that sound stocks were by no means "cheap"; and that the low SP500 was more due to some of its constituents being demolished, rather than due to its good companies becoming "cheap". This was just an observation, now bolstered by your excellent analysis, which says that the demolished ones have stirred back to life in the ER, boosting the SP500.

I still maintain that at current levels stocks are not "cheap" except relative to the bubble era. Dividends are being slashed at astonsihing rates, and historically, companies which drastically cut dividends have restored them slowly, if at all. Thus, I expect SP500 dividends will not climb back to 2007 levels for many years, and this suggests to me that stocks will be worth less than they were in 2007 for many years as well.

How to Profit from Market Manipulation

In the long-term, fundametals win.

If the hedge funds are cooperating with the PPT to buy stocks, do you expect them to end up in a year owning vast amounts of shares priced at 40x earnings and yielding 0.5%? I doubt it.

In the short term, they can act as a damper to slow down a plunge, or as a rocket to power up a spike, but eventually, fundamentals will rule. So private investors just have to consider probable PPT actions as one more facet adding complexity to short-term price movements.

The 'Sell After Dividend Cut/Freeze' Rule, With Exceptions

A very sensible and excellent article. However, those who say that the stocks mentioned by the author are down just because of the general market downtrend have a very good point.

The author would be commended if he were to present, in a future article, data over a longer period, and to show the change suffered by the stock which froze or cut its dividend relative to the change in the S&P500 12 months after the dividend freeze or cut. My hunch is that the author would indeed find a correlation that concurs with his current thesis.

Having been a dividend investor for over thirty years, my experience is that dividend cuts are usually (perhaps 80% of the time) a sign that a stock will underperform.

Are Investors Buying the Administration's Banking Story?

It is unfortunate that the government has already exposed the taxpayers to enormous losses, while trying to protect certain, but not all, banks' stockholders and bondholders. More disturbing is the lack of consistency or transparency. WaMu's bondholders were thrown under the bus, and there seems to be a consensus that GM's bondholders should suffer a similar fate. What is so special about Citi's bondholders? Why are they being treated differently from WaMu's or GM's?