Tuesday, August 5, 2008

Some Random Thoughts

So we have multiple retailer and restaurant bankruptcies (Bennigans and Mervyns to name 2) but hey, no need to worry, the economy is resilient. We have high end developer, and Carl Icahn favourite, WCI properties, in bankruptcy, but hey, no need to worry, the credit crisis is contained. We have Merrill Lynch selling assets for 22cents on the dollar and financing 75% of the purchase price, but hey, no need to worry, they are adequately capitalised. Oh yeah, at the current time, so mark your watch. We have SunTrust Banks hawking the family jewels, that being their Coca Cola position, which by the way they have owned since Ko went public. But hey, no need to worry, foreclosures are only 2% the mortgage market.

We have new Wachovia CEO Bob Steele buying a million shares of the stock. Can anyone tell me if he paid cash or if Wachovia fronted him the money for the buy because for the life of me I cannot get thru to a live person in investor relations over at WB.

Anyone takers he didn't use a nickel of his own bread for the buy and got a forgivable loan from Wachovia ?

I don't know if you caught the article out of the Detroit Free Press, Detroit 3 ask for up to $40 Billion in Loans. Can you say MORAL HAZARD ? We are now reaping the seeds of what we have sewn. Who is next, to ask for a bailout from Uncle Sam, WCI?

I have ranted before, during the Bear Stearns debacle, about how the financial markets need trust to survive when you sell an invisible product like investments. Trust and confidence are paramount and when lost do not come back easily.

The first cousin to this is the moral hazard dilemma. Here we have the Fed bailing out banks and brokers. We have politicians delaying legitimate recognized accounting standard rules, (FASB 157 anyone?), in a thinly veiled attempt to buy time and stave off execution.(in my opinion).


Everyone widely believes Treasury Secretary Andrew Mellon, who was in his position during the 1929 crash, to be the worst central banking figure of all time. I would counter that he was a hero in that he ignored calls to bail out the banks and brokers of the day, instead focusing on making sure the Treasury and the federal government remained solvent, he kept the sick patients quarantine not wanting to risk an outbreak of the disease. He recognized the ramifications throwing good money after bad.

Do you recall basic life saving training? When someone is drowning you do not go near them as they will push and pull you under in an attempt to save themselves. Instead you are supposed to grasp an object, say a pole, a towel, a flutter board and offer that to them and using this pull them to shore.

The Fed, by opening its coffers to the banks and brokers (and eventually other ailing multinationals) has offered its hand and the victim, in a panic is now pulling the Fed in and will drown the Fed in an attempt to stay afloat.

Instead of ring fencing or quarantining the toxic patient our Fed and Treasury see now problem with taking on this toxic, worthless, and yes my friends, it is next to worthless paper, and exchanging it for U.S. treasuries. Now that the mold is set, the line is forming for the free money.

What is transpiring around us is not good to put it mildly and no matter what the pundits on pompom TV tell you, we are in a bear market rally. As painful as it can be, it is nothing more than that. The problem now is spreading and as unemployment rises the defaults and delinquencies on prime mortgages are going to skyrocket. This is going to get worse before it gets better. For those that are still in denial regarding this, I suggest you read Barrons interview with Nouriel Roubini over the weekend.

I wish I knew where this rally was headed but I can tell you this, smart money uses rallies in bear markets to unload stock. I would suggest that those of you out there still listening to Cramer, Kudlow, Kneale and all the other polyannas, use this rally to get out.

I know that no one wants to believe things can get worse and that the light at the end of the tunnel is just ahead. Be a realist. We have just come out of a credit and debt bubble of epic and monumental proportion. Do you really believe its over and down with in a year?
Do you really believe we escape with just over a 20% haircut in stocks?
Do you really believe Bear Stearns is the only investment bank to drown?
Do you really believe IndyMac is the only bank of significance to fail?
Do you really believe WCI is the only developer to sink?

Be honest with yourself now. Do you really believe it's over?

If you still do then just remember this, (A) the tech bubble burst and took 80% off the Nasdaq and (B) the Japanese equity and real estate bubbles burst and took 70% off each respectively. Just some facts for you to sprinkle in for consideration.


Housekeeping notes;

I was stopped out of my long CHK position at $43.79 for a loss of $1.75pts on 1 unit. 43.79 by the way was THE low tick for the day. Such is trading and the use of stops, which you can choose not to use at your own peril.

I was also stopped out of my short MS position at $43.45 for a loss of just over 3pts on 1 unit

Good speculating to you all and never ever forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 6 units Currencyshare Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 4 units Currencyshares Swiss Franc ticker FXF @ $97.70 stop at $93.82
Long 1 unit Ultrashort Dow ticker DXD@ $50.12 stop at $58.62
Long 1 unit Ultrashort QQQ ticker QID @ $37.05 stop at $42.87
Long 1 unit of Powershares Agriculture ticker DBA @ $34.50 stop $32.79
Long 1 unit Ultrashort 20yr Treasury ticker TBT @ $67.85 stop at $68.32
Long 1 unit of XTO Energy ticker XTO @ $43.85 stop at $39.62
Long 1 unit of ATP Oil & Gas ticker ATPG @ $27.10 stop at $25.76
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $131.54
Short 1 unit Sun TrustBank ticker STI @ $44.50 stop at $46.18
Short 2 units of Visa ticker V @ $71.30 stop at $75.16

2 comments:

Hard Right said...

I don't see any Treasury officials rushing to bail me out on all the money I've lost on SKF over the last two weeks.

Harleydog said...

hr,

yes, no bail outs for us, we are only asked to bail others out. Oh to be a friend of Hank or Ben.

make sure you keep your stops in place to limit the pain on SKF. I will be posting on it as we are getting close to finishing this washout.

HD