How Did That Feel?

If you invest $10,000 & the investment declines by 75%...then increases in value by 100%...how much are you down? ...50%...ouch!

$10,000 x 0.75 = $7,500. $10,000 - $7,500 = $2,500. $2,500 x 1.00 = $2,500.

$2,500 + $2,500 =$5,000...still down 50%.

How does that feel? How realistic is it to expect a double in an investment that was so impaired or damaged? Hoping for this outcome seems fruitless & unlikely to happen.

Many investors are not only hoping that they get this or a better result from their existing longterm investments, they are making the decision to invest more in these impaired assets looking forward to doubles & triples as the stock market will surely recover & surges to new heights...at least according to many pundits on CNBC.

A quick look at the 'Japan Experience' & its 'Lost Decade', which is turning into two decades, shows quite clearly that further asset destruction is possible & may even be likely, based on recent US government efforts that look alarmingly similar to what Japan did which perpetuated the economic malaise.

I have a few clients that decided to ride on Warren Buffets coattails in mid-October. They read Warrens Op-Ed, "Buy America. I Am" which was published in the NY Times on October 17th & that was enough to put their fears to rest & allow them to ignore their devasted portfoilos for just long enough to encourage them to say "buy me some of what Warrens buying". That has proven to be a very poor decision...to the tune of 30-50% in many hiqh quality blue chips stocks including GE, Goldman Sachs, American Express, & Wells Fargo...all Buffett favs.

So I ask again...How does that feel? And whats the likelihood that you will do that again?

U.S. auto sector bankruptcy would devastate: GM CEO...So you better help us!

"This is an issue of the whole auto industry, if that becomes under severe pressure, the impact on the whole U.S. economy will be devastating," Wagoner said in an appearance on a NBC-affiliated television station in Detroit.

This is going to hurt me more than its going to hurt you?!?! Or is it the other way around??

Or maybe its..."Help me, to help you".

Either way, it seems that GM management is trying to scare the political leadership into saving them. GM will not stop making automobiles if it has to be reorganized in chapter 11 bankruptcy. Under reorganization, GM would be able to rework its labor & supply contracts, be relieved of its ownerous legacy pension & medical benefits cost (those will be taxpayer obligations either way), GM would be able to offload GMAC & ResCap lending operations to the TARP, and then they could compete effectively in the automobile manufacturing business. That is what should happen & that would be best for GM & America. Millions of jobs wont be lost in this process...unless that is what the excess capacity & waste is. Hundreds of suppliers won't go bankrupt...unless that is why the supply chain costs are so uncompetitive. And the US economy won't crash any more or less than it would if GM didn't file chapter 11, unless that is how important they are & how much they have been propped up for the last 10 years, even while being uncompetitive & mismanaged. All this talk about how important GM Is to the overall economy is just fearmongering... taught to them by the Bush administration...the same tactic just used in the $700 billion Paulson Bailout Plan. Bottom line is what's good for GM is not good for the America. GM is just plain old not good for America anymore. The legacy workers will be saved by the US taxpayer & the equity & much of the debt used to fund a failing enterprise will be lost. As for the number of jobs we will lose or how much it will hurt the overall economy...all that will happen whether we throw more money at the problem now or not.

"This idea that you just go into Chapter 11 and hang around for three months and agree to reduce your debt obligations and don't pay your retirees, this is a fantasy," Wagoner said. "Most people will stop buying the cars of a bankrupt company."

...Hey Rick...most people aren't buying your cars now!

Expecting A Crash

There is no denying that the stock market has been volatile. That volatility has been quite a bit more extreme & completely unpredictable. The weekly, daily, & most especially hourly swings are unprecedented & there is less & less reasoning behind the movements. Dismal economic data, disappointing & downbeat corporate reports & outlooks, confusing recovery plans & signs from our financial leadership...both corporate & political, are all combining to cause the market to be dysfunctional. Investors & money managers are simply confused. FEAR is the only motivation...fear of further losses & fear of missing the next 10% rally. Valuation, fundamentals, prospects for the future, understanding the current economic weakness & knowing that all the powers that be are doing everything they can to fix it all seem irrelevant to the movement of stock prices. We are experiencing hourly swings that used to take months or years. Numerous Fortune 400 billionaires have lost vast amounts of wealth. Many S&P 500 companies & Dow Jones Industrials have been reduced to mere fractions of their former valuations. Pillars of our country's corporate strength have been decimated & are doing all they can to survive the severe credit crisis & economic weakness. Government intervention after government intervention has failed to provide even temporary stability to the markets & has clearly not stopped the systemic failures from continuing to occur. Leadership has tried to assure & reassure the markets, corporate managements, & investors that they can contain, control, & rectify what is broken, yet to no avail & certainly to no success. Its obvious that the market is headed lower. While that path lower may be uncertain, it seems inevitable. Even as many put forth valuation as a reason for the market to stabilize & in fact move higher, that is just not enough anymore. Confidence is shattered. Fear is pervasive. Leadership seems powerless. And people cannot accept the risk of losing any more of their wealth. The stock market has demonstrated that it can destroy wealth swiftly & sometimes for reasons unknown until too late. The market & individual companies have shown that nothing is unusual anymore. Movement in the market & stock prices has become completely random. A huge rally or devastating decline would surprise noone at this point & could be seen as nothing but expected. While most continue to hope for the market to rally sharply in order to stop their financial pain, what should be expected is a crash.

Closing Out 2008...

Heading Into 2009

With about 8 weeks left in the year, 36 trading days to be exact, I have become more nervous, anxious, & concerned about the market action.

Nervous that the economy is in even more trouble than most believe & that stock valuations haven’t fully discounted that. Anxious that the market is fluctuating (volatility) more than most can handle, both retail & professional players, creating a very unstable investment/trading environment, where neither rallies nor sell-offs can be "trusted". And concerned that the dreaded 'black swan' event (dislocation/crash) is yet to happen.

Bailouts all around. Unprecedented rate cuts. A new & improved president & congress commited to doing anything & everything to fix what is wrong... regardless of the consequences. Capital injections into the banks, backstops for important industries & companies, and a middle class stimulus in the works should all set the stage for a recovery going into 2009. So why wouldn't the stock market be anticipating a much better economy & corporate profits 6 months from now?

Clearly, the end of 2008 will continue to provide dismal economic data & weak corporate earnings reports with cautious guidance going forward (this is now widely expected & anticipated), yet the news will almost certainly improve, at least relatively, in the early part of 2009.

The new president & congress will act quickly & boldly to do things to address the most important & critical problems and will pass a stimulus package ASAP. That could happen shortly after the Jan 20th innauguration & be implemented before the end of the 1st quarter. Getting from here to there, the market will have to get through the next 8weeks of gloom & caution, portfolio rebalancing, tax loss selling, & hedge fund liquidations(closures).

The holiday season will be muted by the overall economic bad mood (which is headlined in the news), layoff announcements, & stressed consumers. With this as the backdrop, I think the stock market will bottom sometime in early to mid December... volatility will hopefully subside & investors will come to terms with the new, lower stock valuations.

I am also anticipating an increase in trading volume...maybe a sharp increase. Dollar weighted average volume must increase dramatically in order to accommodate for the much lower stock prices across all equities. That increased volume could be problematic for the market to handle as investors/professionals continue to withdraw (lower exposure & reduce leverage) from the stock market.

Early January could be the time to begin setting up portfolios for a better market in late 2009. I'm not exactly calling for a new bull market to begin, rather a sustained bear market rally that would coincide with the new administration & its bold plans & policies to fix the economy. An exhaustion of bad news & data which will become "boring" & uneventful (anticipated & expected), and possibly some relatively better news &/or economic data.

Bullish I am not. Less bearish...ok.

WHAT'S NEXT

I have looked over the market (wreckage) & I have come away with some ideas for what to expect next. It seems that the equity markets, both here & abroad, have effectively crashed & last week we had what is nothing other than a dead bull bounce. World markets have declined precipitously, precious metals have fallen sharply, oil had its worst weekly decline ever. Herculean efforts & programs have been put into place & are being set in motion, albeit slowly, and the governments all around the world have effectively agreed to not let the system fail, regardless of the consequences of what they do to prevent that failure, not sure which is worse, but the sales pitch is that what they are doing is better than the alternative, can't disprove that, but we will see what the results of the fixes are in the coming years, but I digress. System saved, where do we go from here?
The economy is showing clear & ominous signs of weakness, and most do not believe this will be a "V" recovery. In fact, some are now looking towards a deeper & more protracted recession, with some even murmuring depression. I anticipate, and now others do as well, that the economic data & corporate reports will continue to be bad for the next few months, maybe quarters. The housing & mortgage problems are being addressed by the treasury & the FED, yet the general economic fallout is starting to pick up steam & there really are no quick fixes for the general economy ... rates are already very low, consumer stimulus has been tried & failed, more consumer & business stimulus will be tried, but consumers are frozen & businesses are in contraction mode to cope with the weakening economy & forecasts for a slower recovery than most would hope for. Lastly on the general stuff, Credit has been changed dramatically, for both borrowers & lenders it will be harder & more expensive to get it…for consumers & businesses and the demand for it is even in question as businesses & consumers make a secular change to utilize less leverage/debt/credit.
Going forward it will be critical to determine if an industry or individual company will be deemed too important to fail & thus deserves a government bailout. The good news about that is that you know the enterprise will not fail. The bad news is that the government is your partner & your business model will be different & probably less profitable.
Once you determine that an industry or company will be allowed to fail, normal fundamental analysis of the industry & business prospects will be similar to previous efforts to determine value, with some additional emphasis on avoiding businesses that require credit or debt to operate.
Here are some additional financial issues that could have a significant influence in determining the valuation of companies.
1) Determine if the company has investment losses embedded in the corporate cash reserves & investment portfolios.
2) Determine if the company has goodwill writedowns.
3) Determine if the company has unfunded pension obligations that will require cash infusions.
4) Determine if the book value of the company has to be reduced.
Bottom calling on the market or individual stocks is an exercise in futility. I think the best we should hope for is stabilization...sideways trading for a few weeks. At that point, we will have had enough time to determine new valuations with consideration for the weakened economy and more restrictive capital/debt markets, That's when the bottom will form & a new recovery phase for the equity markets can start to develope.