Tiny Bits of Positive News

The markets love the little tiny bits of positive news and quickly turn them into giant mountains of positive expectations.  It’s fun to watch the markets move on little blips of hope.  This isn’t Bullishness that’s affecting the markets, it’s outright hope for relief from despair.  The problem is that hope doesn’t float the markets for long, and neither do earnings based on accounting practices and return on cash holdings.  At some point businesses must make real money, real earnings from real productivity of sales increases, like Apple does.  Not every company can do that right now since they are all held hostage by the little tiny people in Washington who are made up by the media to be great big world leaders and economic wizards. 

The markets have to come to the realization of all this and eventually price in the reality of the much higher cost of doing business.  Goldman Sachs and their Small Business effort isn’t likely to turn the markets around.  It takes freedom of cash flow and credit to do good business.  How will we have that if the Government keeps absorbing jobs and paying out cheaper dollars?

Stock Markets Are Wrong Today

Wow, look at that!  A big upside in the markets!  Are the traders wrong or is the media just gunning with the wrong story?  Do you really believe the markets should be up on hype about companies buying more computer infrastructure?  What does that have to do with the bottom line for companies other than computer manufacturers?  Something isn’t right here.

Business owners already know that gross, margin, and net are the only things that matter when evaluating whether a company is doing well or not.   At the beginning of the day we all know that you have to make a profit or nothing matters.

We have the news media telling us computer purchases are a reason to buy stocks.  Those computers are a commodity expense only and have nothing to do with earnings in the end, unless properly utilized.  If these companies were buying more pencils would we hear about it?  Would we say they are going to write more info on paper faster and thus the economy will get better?  We are at a point when companies need to upgrade hardware to keep up with software.  It isn’t an economic expansion event.

Reality is, if they are not investing in humans but are investing in technology you can bet the future is a lower standard of living for the population and a higher standard of technology and efficiency for companies.

There is no reason to drive the markets up on this news.  We have increasing taxes, increasing government debt, fewer jobs… you get the picture?  The markets should only rise if the economy is rising, the standard of living is increasing, and profitability is realistic.

Do you buy computers because you expect sales to increase or do you buy them to increase your efficiency and keep up with software?  Maybe the best investors are business owners.

Should I Sell My Inestments?

Here is the question of the day: Should I sell my investments?

Now that the Dow has moved down to 9,258 after achieving a high this past 12 months of 14,280 you might feel compelled to sell, because of the stress of losing so much in a short time.  But have you really lost much?  A good way to consider the downturn is to think in terms of how far back in time we have reset the market prices.  The DOW has backed up to about July of 2003.  That is further back than normal but not so far back when you consider that the last time the global economy was this crazy was in the 1930’s.  Back then the DOW lost nearly 90%.  In today’s market that would mean a DOW of 1428 which would take us back to 1985!  I don’t think that will happen because of the big differences between then and now, mainly the breadth of the markets and currency as well as advances in financial product design, not to mention a Fed Treasury already in existence.

So now it comes down to what you believe will happen next.  First, if you have lost money in this market it is because of bad investment advice.  If you ran your own account this is a signal that you didn’t know what you were doing, and if you had an adviser, broker, agent or some other professional, then it is likely he/she did not know what they were doing either, at least they were not letting you know to do any different.  Why do you pay them a fee if they don’t know anything?  I would contend that since about a year ago this was becoming a possibility and somewhere along the way one of you should have known better, you or your adviser.

At this point, what is wise?  You may want to consider the percentage which you could be wrong.  What is the likelihood that the markets will spring upward or fall downward from this point?  It’s hard to tell but if you think the low of the market could be DOW 8,200 (as an example) and we know the high of 14,280, then we know that we are x number of points from the bottom and Y number of points from the top.  You could also reduce the top by some portion of excesses in the market bubble prior to the sell-off.  So we could say we are 1,000 points from the bottom and 3,000 points away from the top if we use 12,000 as our top.  That being said, we are 3/4 of the way down.  That sounds good!  And it could be a good way to look at it.  There is a problem with this thinking.

The problem is that we can’t tell for sure how much the market has built into the excesses because nobody has the numbers from the bankers.  We don’t know the ratio of real money to borrowed money, not really.  When you throw in the idea that banks are networked via leverage (borrowing) across the globe, then we could assume that an obscure bank in an obscure country somewhere, like Iceland, could cause a domino effect that takes down more banks and more businesses.  We just don’t know.  In this case, the example of the low end in the market could be way off, too high or too low.  It is easy to get suckered into the basic thought pattern of either selling out completely or buying in completely.  In reality it should probably be some percentage either way.  If you want out but think you could be wrong, then keep some percentage of the amount you would have in stocks still in the market (25%?) and the same thing in reverse; don’t put it all in at once but maybe go back in with steps and stages of some percentage.  In this way you will not be fully exposed when you are wrong.

Volatility is a newer terminology of mainstream media and finance.  They used to just say “short-term highs and lows” also known as a “trading range” which is still heard once in a while.  The idea of saying Volatility is based on masking the reality that the market is moving up or down, and it implies a finite movement.  In this market, volatility as a term, seems almost meaningless.  The markets are “dropping” or “crashing” seems to be much more accurate than saying the markets are “volatile” (as if the one saying it has any more information than you do).  What they should really be saying is that the markets are dropping rapidly and we are in a Bear Market, and that way you have some idea of what action to take.

Now, what can turn the markets back up again?  People purchase what they think they are getting at a good value.  When the stocks sink low enough, buyers will step in and start driving prices back up again, or at least stabilize the market.  And now we have yet another problem.

This new problem is that we don’t know and cannot tell cearly, what is going on outside the United States.  We don’t know the level of credit problems and meltdowns in other countries.  We don’t know if their economies can handle this magnitude of downturn. The best thing to do is look for evidenc that the markets are headed up again. I like to use the Investors Business Daily because they seem to have this concept down.  Your postion in the market place is up to you, but don’t just react, make a real decision and be prepared to change it if necessary.

Stock Market Panic?

The current action is probably not Panic.  Usually Panic means you will soon be able to buy at a discount.  Instead, with the global negative economic news, this is a wholesale decision to move money out of the markets and into something else for safety reasons, a flight to safety.  If that is true, we can expect panic to occur at a later date, near a lower priced market bottom.

Finding Market Bottom

There are several ways to find the market bottom in a Bear Market:

1. Current value minus Margin equals cash value.  This would be a good one if you could still find the margin numbers.  They are hard to find and skewed because of all the derivatives in the market.  It can help.  In the 1980’s this worked pretty well, but has faded in use over the years.

2. Slope of the Market.  You have to have access to good charts to see this.  If you take the last 40 years of the DOW and chart it to today, then eyeball the chart and select the average low slope, that is the long term trend.  It isn’t exact, of course, but it can give you a hint of the downside potential… mainly where the market could stop falling because it finally reaches real cash value (liquidation value) at a normal long-term rate of return.  As of this post date, it looks like the underlying slope is near DOW 8,000 but that does not mean it will get there, just that it could if things get bad enough.

3. Market bottoms are cyclical.  Look at the chart and you can see that every so many years the market has interim and long term resets to return it to the major long-term slope.  You can make many assumptions about this.

4.  Not to flippant but you can just watch until it becomes obvious.  This works of course, and then you can make a better purchase decision when the upside flags are back in place.  This is all guesswork!

5. For those trying to avoid the downturn to a market bottom, look for the market top.  Usually 3 or more standard deviations from a moving average.  This can signal interim and long term tops.

6. My favorite indicator is the Investors Business Daily, which, if you are an avid reader, has done a great job of doing all this work for you!

7. Ask your advisor.  I like this one the least, but if you have one, make him/her work for you!

You may want to read some of my other postings on the economy and markets to help you with some ideas at www.mparnoldpt.wordpress.com

Good Hunting!

Bailout vs. The People

Goldman Sachs vs. The People?  How about the entire banking and brokerage business vs. the people.  I think so.  First, I am astonished at which people have bought off on the idea that we need a $700 Billion bailout.  What for?  The big wigs like Paulson would have you think this is 1930 all over again, but it isn’t! I will describe the differences:

1930’s: Large corporations were merging like crazy and the number of solvent corporations dropped from the thousands to about 200!  The remaining companies were hoarding cash into their accounts like crazy.  Workers made enough to live but few saved and even if they did it could disappear in a local private bank when it went under.  There were fewer and fewer jobs because of massive automation and fewer companies to employ people.  As the economy turned upside down, Congress passed laws to grab much of the gold in the country and hold it in the reserve to guarantee the dollar.  However, within a short period of time they took the dollar off the gold standard and by law repriced the dollar at half it’s previous value, thus creating inflation but increasing the value of the gold reserves!  All in a few years.  Only about the top 1% of the wealthiest people in the country had cash.  Real estate had collapsed because of borrowing from stock accounts, previously run up in value, which collapsed as cash constraints prevented investors from covering margin and withdrawing to make payments on real estate (Glass-Steagall).  At the beginning of the Great Depression there were few laws on the books regarding the handling of money, the Treasury, and controls.  Most came into being over the next 10 years.

Today: In comparison, there are many companies employing many people, in very diverse markets.  Most markets segments can weather the storm of a banking downturn.  I know for sure, since I study corporate earnings reports, that many companies have been increasing cash deposits dramatically over the last 4 years or more, a major red flag of the Great Depression.  Why?  Because the dollar was becoming cheap and at the same time hard to spend as corporations became more efficient.  So they banked it and started earning interest.  Many companies today could have negative earnings and growth but still show a positive net because of the amount of interest they earned on cash and cash equivalent accounts.  It is not likely we will reach anywhere near 20% unemployment.  We could in fact see a dramatic slowdown with a true depression in much of the world but not in the United States, because we have laws and regulations on the books which didn’t exist before the Great Depression.  Many individuals have cash in accounts, money markets, retirement accounts and they don’t need more debt or credit.  Not everyone has a bad mortgage.  Another big difference is that middle market business, those below $200 Million in valuation, have also been saving cash and finding alternative lines of credit, mostly from private accredited investors, for several years and they are prepared to go somewhere other than the bank for cash flow needs.  The Fed is not in the business of a gold grab at this time, the dollar has already fallen, and we are likely to see the dollar increase in value rather than collapse.  However, the dollar could collapse if the Fed decides to print too many of them anyway.  Still the amount of cash in the system, the number of jobs currently filled, the breadth of business of all types, the lack of a Dust Bowl, although we have had Hurricanes, and many more things do show that the last thing the general public needs is more debt!

All this being said, and the understanding that we are not going to fall back into a Great Depression with massive unemployment and a dramatic lack of real cash in the trading and consumer markets, the fact that companies and regional banks have increased cash deposits, makes one wonder why they need the $700 Billion to bail out the big international firms.  And it really is for them, more than for the citizens.  There are a lot of wrongs in place and this huge debt/credit increase will just simply allow them to continue to run a market that is overbuilt on credit.  Why would anyone want that?  Why give the Treasury, Goldman Sachs, Bank of America and more a brand new shiny credit-card?  We all need to get off the credit wagon and back to the basics of buying what we can afford. 

Just think about what has been happening to all that money in the first place, prior to the need for a bailout.  Much of it goes to large bonuses to CEO’s and other corporate managers.  It disappears into leveraged accounts which balloon up the credit lines as much as 9times the deposit in some cases, and then can be margined again in other accounts, many times, by using repurchase agreements and insurance.  The money was used to speculate on oil, gas, corn, ethanol, and many more commodities.  They bet on higher and higher prices in futures contracts until citizens had to pay over-inflated prices for everything.  Much of this inflation comes from this activity as well as China absorbing higher and higher commodity amounts and jumping into the futures markets.  And remember that much of the money, obviously a significant portion, comes form sub-prime mortgages thanks to Freddie Mac and Fannie Mae.  Whew!  What a deal!  They were betting that the poor people of the country could pay enough of their 100% loan mortgage payments to keep this monster fed for higher and higher prices!

Now think about this!  They  want us to fork over $700 Billion more so that they can snap up all the bad debt, mortgages, homes… however they categorize the final assets, and then they want to hold them until prices go back up?  Not all properties are worthless, but many are on this basis, and many are too expensive to be sold back into the market, since there are no buyers (unless prices go lower).  In order to sell this junk real estate back to the citizens, they want to artificially maintain a higher price on these properties, than they are worth.  In the end they are price fixing real estate at higher than market prices, attempting to maintain and maybe continue the junk mortgages.  Everyone forgets that there is a time cost here.  As the properties remain vacant, who will maintain them so that they can retain value?  The Fed?  No, probably a new Federal Agency. 

If they would just let the properties fall in value, to where speculators can purchase and maintain them at a reasonable price, and put them back on the market, this would all be over much, much quicker.  The population does not need artificially maintained higher bubble prices.  If they pass the bailout, and futures contracts begin to trade again, as they did before, then why would we expect commodity prices to not bubble up again?  That would be crazy, since one definition of crazy is doing the same thing over and over again but expecting different results.

There is enough money in other parts of the markets, few people have to worry about their accounts, and why should we bail out the bad?  It shouldn’t be done!  Not now, not ever!  So instead lets do something much smarter.  Companies need to use less credit, citizens need to use much less credit.  And big international firms need to stop cramming it down our throats.

But they are likely to pass it, now that they are in such a hurry.  In the end, either way, the markets may still correct, earnings may still come down, and people may still worry.


Copyright 2008 Michael P Arnold, MPArnold

Warren Buffett is no Buy Indicator

Warren Buffett is excellent at buying under-valued businesses.  What you have to remember is that what he does is not what you can do.  For the most part, he started very young in managing money for other people and making them wealthier.  If you think he invested his own money, as you would, and everyone else just jumped on board because of his personal success, you are making a mistake.  He is a manager of other people’s money and he has earned his share over the years.  Still not bad, but realize that his only ability is persistence of vision.

Warren Buffett gets the news headlines today because of his investment in special shares of Goldman Sachs.  This is NOT a signal for everyone to jump in the market, although the Media seem to think it could be.  He does not know if the markets will go up or down from this point.  He just knows that he can suddenly purchase special shares of a previously unavailable ownership position, that have recently become indirectly assured by the full faith and credit of the Federal Government.  Remember, Goldman Sachs also just cut a deal with the Fed and Treasury by working with Paulson, who used to work at Goldman.  So think in terms of how this deal benefits them, and not that it signals a great buying opportunity in the markets.  Yes, Buffett is buying cheap, but the rest of us cannot make a similar purchase. Personally I just don’t have $5Billion to invest, do you?  If you choose to invest, and the market then drops 20%, you are likely to be unhappy, but Warren will still have made a good deal.

The benefit to the Fed/Treasury (Paulson) is that they have just gained a new buyer of Treasuries and Bonds which foreign entities have not been buying like they used to.  The Fed needs to sell bonds to increase reserves.  In return, Goldman Sachs, Morgan Stanley, and other “New Deal-Part 2” banks receive FDIC insurance on deposits, deep pockets to borrow from, and now have a Federal mandate to do business within certain terms.  In this, they have the ability to create a new economy of scale that makes the risk taking portion of their business models look less risky.  Warren Buffet gives them a news worthy headline to make them all look good because most people do not understand what he is really buying. Buffett gets a permanent expectation on the performance of the money, and because of the deal with Paulson he does not have to worry about risk with Goldman Sachs.  In a way, Buffett has made a deposit to the Treasury.

How does this affect you?  It really doesn’t.  It is just one symptom of the new economy the Government and Bankers are putting together.

Wall Street Disappears, Goldman and Morgan Sell Out to Socialism

It no longer matters if McCain or Obama becomes president.  The economy is going to be the big issue for the next presidential term, no matter what, and congress will have to do the heavy lifting instead of the executive branch.  Speculation, long the driver of our free economy, will have a much harder time existing.  The capitulation of Goldman and Morgan into banking throws heavy lead weights onto the back of our economy to help assure very slow growth.

Few people will understand what this change in Goldman Sachs and Morgan Stanley really means for quite some time.  It’s good for Goldman and Morgan because it gives them access to quick and easy money in the Federal Guarantees, but believe it or not, it is bad for the rest of us.  Bad because it will slow the economy, bad because it puts caps and limits on creativity in the financial world, where the U.S. has been the big leader for close to 100 years.

There will be perceived benefits.  Less risk rolled downhill to unwary investors.  But this model overall just makes it so we all put our money in one hat and let the bankers do the rest.  People already don’t pay attention to what they invest in.  Now the bankers will make a higher margin and basic investors will just get the small passbook portion even though they are the ones taking the real risk.  They will keep on telling you to just ride out market volatility for the long term.  There are different types of risk.  Under-performance is a very costly risk!

I am hopeful that real stock brokering will make a comeback in some way.  I remember when brokers had to know something.  Talk to an investment adviser lately?  They don’t know much.  They talk about Asset Allocation, Diversification, taking less risk, but even they don’t know what you have in your portfolio.  Do they have good ideas?  Smart ideas?  I haven’t heard any.

You need to know one important thing about Goldman Sachs and Morgan Stanley.  Most of their clients are multi-millionaires and can trade outside the normal rules and limits because they are qualified at a higher level than the average person.  Goldman and Morgan will be business as usual but the rest who are not accredited will fall into the bowels of the bank accounts and market average mutual funds.  An even bigger gap between wealthy and middle class will occur.

Free Capitalism Losing to Socialism

How much of our Free Capitalist Society is being lost in the current financial crisis?

It is no wonder that we don’t have Socialized Medicine, we already spent the money on Socialized Housing.  The roots of this crisis are in pressure from congressmen to make housing loans available to those who do not qualify for normal loans.  This is the basis for the growth of Fannie Mae and Freddie Mac.  Yes, the American dream.  But what is the dream going to cost us now that the financial structure has failed?  So far about $900 Billion, which is the amount the Fed had in the bank (more or less).  It is likely to cost taxpayers about $3 Trillion before it is all said and done.

The whole point is the Government now owns and operates Fannie and Freddie and will soon own and underwrite the entire worthless portfolio of sub-prime mortgages to provide continuing house loans for those who cannot qualify for them.  I am not for putting people out of their homes but I am also not for putting people in homes who should not be there.  There are other alternatives.

What I would like to be able to calculate is the value of the future impact of such a socialist program.  I would contend that allowing the financial firms to collapse in a free market would actually put the assets back to work more quickly and safely than a slow federal process and at much lower cost.  This now limits the ability of those who can invest at reduced price, and would, to do so.

Imagine you have a herd of cattle and the government comes by and says your herd could have a disease and they want to put a fence around them and quarantine the whole herd.  In the meantime they tell everyone that beef is tainted and the price begins to fall.  While you are locked up and cannot sell into the market the demand for beef continues to fall.  Eventually the market bottoms and it is determined that your cattle are not sick, which you knew all along.  Your herd is released back to you and now they cost more to feed than you can ever get back in the market.  Now your only hope is that the Fed will purchase your herd or compensate you for the downturn.  This will be at a discount and a loss to you.  It could now take several business cycles for prices to return to a profitable level.

Should the Government be doing this with housing?  I guess they have.  In this case the rancher loses the beef and those who do not work for it will be eating well.

Blame Democrats or Republicans for this Crisis?

There is, as usual, a lot of finger pointing to try and blame someone for the current financial crisis.  It is crazy to say the the Democrats did this.  It is equally crazy to say the the Republicans did this.  They both did this.  If one party is in the minority, then it is still their responsibility to blow the whistle if the other party is doing something dumb.

Both parties have been close to 50% of the house and senate for a very long time.  Just a few votes above the other party does not make the majority all powerful.  When did any of them stand up and say no to dumb ideas like the repeal of the Glas-Steagall Act?  Look that up in Wikipedia and see what it was all about.  Then you will wonder why they repealed it and why did Clinton sign to repeal it? 

So here we are.  Blame them all, they all knew about the potential fallout from ending the act since they also knew what caused the act in the first place. 

We should all consider our representatives as a whole for any action they take or do not take.