Tuesday, September 9, 2008

Smart Money is Buying - So Should You! (Revisited)

A reader was nice enough to email me an article from John Mauldin which has this very excellent chart about the losses suffered by sovereign wealth funds aka "smart money". I mocked the buys at the time wondering if the fact you sit on a pile of dead dinosaurs qualifies you as smart money, but the pundits would have none of that. They screamed for us to get into financials because "this clearly marked the bottom; once smart money is buying, so should you". You can see how that turned out below.

(click to enlarge - via Mauldin newsletter)

So if you are doing poorly, don't feel so bad - these sovereign wealth funds got terms for their capital infusions that a normal investor would never of gotten, and still are losing on average 30-50%. That's just what "smart money" does. Again give me a call when the CEOs of banks across the board are buying in big swaths. They are the "smart money" - they know (to some degree, some seem clueless) how bad their situation is. Why are they not out there buying stocks left and right of their own companies? That says it all.

I won't rewrite my thoughts because I outlined them quite well in June [WSJ: Where will US Banks Beg Next?] so I'll just repeat it below for newer readers. Note - the pundits were finally correct for at least a month off of the July 15th bottom that financials were the place to be, but not after destroying their capital for months on end. See, when you lose 40% you need to make back over 60% just to break even. That's the problem with taking huge losses calling multiple bottoms. And again here is the scary thing - we have about $500B+ of losses in the financial system and have burned "smart investors" throughout the world who bought our cra... err, astute financial institutions.

(click to enlarge - this came from same Mauldin newsletter)

If many of the people who have called this correctly so far are right [Aug 20: Nouriel Roubini: "Told you So"], we have at minimum another $500B in losses to come. Where will the money come from? I will tell you right now. As things degrade there will be only 1 entity in the world who will provide the capital. That entity will be you. Otherwise known as the U.S. taxpayer. Freddie/Fannie is not the end of the 'capital infusions by US government'. It's still in the early stages. We cannot be allowed to have deflation - the government fears it - so it will create as much inflation as it can to stave off deflation - that means creating dollars out of thin air (printing press) and borrowing more and more from our friends across the globe. So instead of asking our friends to invest directly into our broken banking system and lose 30,40,50% - we will give them US Treasuries and a nice safe interest rate. And then we'll take their money and lose 30,40,50% ourselves :) Or buy mortgage back securities (we are already doing that as of Sunday night) And eventually we could be buying homes directly (we are currently not allowed to do that, but the rules have been changed for many things in the past year - this will in my estimation be the end game for the US government - literally buying mortgages directly) Will this cause the US deficit to balloon even further? Yes. But we can't worry about that as a government since we just look out for our short term interests. We kick the can down the road and will keep up appearances today. The problems we cause for the long run are someone else's troubles. This has been the policy for 30 years now, so why not keep it going. It's worked like a charm so far.

Here is my post from early June below -

This is an amusing story from today's Wall Street Journal; but before we go through it let's review 2 specific type of "conventional wisdom" that was shoved down our throat by pundits in the late fall through winter - the "follow the smart money" thesis. We've had call after call after call (after call) about "it's time to load up financials since it cannot get worse and the bottom is in"' this started last summer in fact. All those pundits have frankly destroyed their clients accounts. They have used multiple reasons over the quarters. but one flavor of the day was "smart money is buying, so you should to".... smart money being mostly Arab money (but some Asian money as well). In fact after a sell off in November 2007, we set the stage for a December rally when Citibank sold a stake (at terrible terms) to Abu Dhabi [Nov 27: Citibank (C) Sells Stake to Abu Dhabi] I wrote

You can tell how desperate the situation is because if this were 2 years ago, people would be raising a fuss, and worried about those "darn foreigners" buying our assets. Now, we are greeting this with hero worship - thank god, someone showed up to buy our crap.

I recall people SCREAMING this marked the bottom in financials (2 months before emergency cuts by the Federal Reserve, 4 months before the Bear Stearns bailout) Not so much, in fact we saw a continued stream of capital injections [Dec 31: Merrill Lynch Tapped Singapore - Next China and Middle East] I wrote

One of the themes I have been mentioning lately is the mainstream press clamor for how this must be the bottom for the financials because the 'smart money' is in... by smart money they mean mostly people sitting on eons of dead dinosaurs. I actually make the argument that the more money you have the more risk you can take, because heck, if you blow a few billion here or there - well there are more dead dinosaurs producing petrodollars tomorrow, and the next day, and the next. As for China, well that trade surplus is not going anywhere soon... so if you blow a few billion, US consumers will send you a few more billion next week. So in fact 'smart money' doesn't have to nail bottoms or tops very accurately. It is people with limited capital that actually have to be a lot more careful.

Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money is through no work of your own. We've seen many people (think Paul Allen of Microsoft fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that smart money? Are heirs of fortunes from their parents "smart money"? Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly "schrewd"? That's the talking points we are handed by the financial media. I'd rather listen to Buffet myself. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be "early" or "buy high" for the "very very long term". For the rest of us, we don't have those benefits, so we need to invest accordingly.

In February I mentioned that as one type of "smart money" was piling in, another type of "smart money" was piling out of financials [Feb 18: Eddie Lampart Selling Out of Citigroup While Arabs/Asians Piling In] I wrote

Now in an interesting twist it appears we have smart US money selling to smart foreign money as hedge fund king Eddie Lampert was selling a third of his stake of Citigroup (at a severe loss), most likely at nearly the exact same time the foreigners began piling in. So which smart money do you follow? ;) What is interesting about the Lampert move is one of the conventional wisdom themes that I do believe in... cut your losses. Eddie was buying in mid $40s to mid $50s and was selling large stakes somewhere in the $30s. Citigroup today? mid $20s. So in the short run it at least saved him from some more losses, even if he locked in some very bad results.

But back to Citigroup and the financials, is if an imminent rebound is coming by "2nd half 2008" why would Lampert not sit and wait out for the return of the roaring good times everyone is talking about by this summer/fall? Food for thought. Lampert has had a bad time of things lately but since the late 80s he has been one of the best in the business, so I'll still take his mind over those who benefit from sitting on dead dinosaurs or huge trade surpluses. And Buffet is not buying anything but stocks he has already been in, Wells Fargo (WF) and USB. I don't see any picking of carcasses there either. Strange considering we are going to be booming by 2nd half 2008.

And need I say anything about the "smart money" buying Bear Stearns? [Mar 13: "Smart Money" is Buying, So Should You!] I wrote

One of the propagandas constantly offered by the financial media is "you should buy because smart money is buying". We heard this throughout the fall in the financials as Arabs/Asians were buying stakes... just do a search for "dinosaurs" on the blog for earlier posts about how dangerous this line of thinking is to your portfolio. Even non Arabs/Asians are being blown up by the financials. Back in September 07, Joseph Lewis, a billionaire was adding to a huge stake (now nearly 10%) in Bear Stearns (BSC). The stock was trading $105-$120 or so at the time, down from a 52 week high of $160. Trumpets blaring, the financial media (and many investor managers who appears as pundits in these outlets) told us "the bottom is in", "kitchen sink quarter" and "smart money is buying" financials - so should you!

Conclusion: Oops. Bear is down to nearly $50 today on solvency fears. Ouch. Now if you are a billionaire with a nearly 10% stake, this stinks, but you still have your 8 houses, 3 yachts and private jet. Life will go on. If you are a regular Joe investor and you listened to the hype - well you just took a bath that is going to take a long time to recover from. Now in today's era you could call your government representative and ask for a bailout of your stock losses as it's the "in thing" to do nowadays, but I digress.

So now that we've had the benefit of time, we can look back to see just how silly these calls were - even though they were advanced by just about every "expert" they paraded on financial TV (not to mention throughout the print press). The apologists will now revert to the time old tradition of saying "we didn't mean things would get better in 3 months, 6 months, 9 months, we meant 5 years". Tell that to your account which has been pummeled... or tell that to the Arabs and Asians.... so now we wonder where we will go next? Here is the article but the last phrase sums it up, beggars can't be choosers - and that's the state of our financial system... a bunch of beggars.

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