Friday, November 28, 2008


There is great irony in the fact that the day after Thanksgiving used to be a trader's dream in that many institutions did not participate and the volatility in the market and especially smaller cap stocks was intense.... now, in the Year of Volatility - this is shaping up to be one of the quieter days in months. Just another bizarro event.

In the category of badly designed instruments, both Ultra Real Estate (URE) and Ultrashort Real Estate (SRS) are trading up today... wonderful.

We continue to remain bullish as long as the S&P 500 holds 870. There are many times in bear markets you get multi week or multi month rallies; what the market has just gone through in fact is more atypical than typical (falling off a cliff with no respite for months on end). This doesn't mean a new bull market is upon us, or things are really improving - but we were 37% below the 200 day moving average a week ago - a level of oversold never seen before in US market history . Reversion to mean happens eventually.

Again, it is not the news but the reaction to the news - it seems like eons ago but 1 week ago today we broke 2002 lows, Citigroup was on the brink and until the 3 PM Geithner announcement we looked to simply have no bottom. Now everything is rosy. The reality is very little has changed in the economic outlook or credit markets (except the mortgage market which Tuesday's announcement of coming infusion did in fact affect rates) - it's just sentiment. When you sit and really analyze what is said on financial TV in any 30 minute period, almost every 3rd sentence is about what the government/Federal Reserve is doing. It is really startling when you take a step back and realize every investing thesis now is based on what a few head honchos in Washington (or London, or over in China, or in Frankfurt) will do and nothing about basic company fundamentals anymore. I think those that follow the market have started to get conditioned to it because until I really thought about it and compared it to things I used to think about 2 years ago, 5 years ago and 10 years ago - it is a striking contrast.

Of all our conditions to construct a more bullish outlook nothing has changed except for one "reaction to bad news" - stocks have been rallying in the face of bad news this week. Everything else unfortunately still remains the same. I used to run weekly screens of stocks that outperform or underperform - it has been useless for months since everything trades in monolithic nature. On good days, throw a dart and you have a 90% chance of riding a stock up - and vice versa. It is impossible to tell where the relative strength is because it's all student body left (or right) trading. Until the market begins to act rationally and not in such herky jerky moves, either up or down, there is really a great difficulty in buying individual names as fundamentals of stocks are not respected and it's all about sentiment of the day i.e. sell infrastructure stocks because no one can get credit! 48 hours later... buy infrastructure stocks because Obama will flood the US will paper dollars! There is no investing there.

As I watched this morning's mall rush I could only be reminded of lemmings at the edge of a cliff - CNBC reported that 90% of purchases were credit. We are very slow learners.

One last point since I am getting a lot of emailed questions - I know people come to the website at different times so my "strategies" are not laid out for easy reading all the time. Unlike the vast majority of mutual funds I'm running this more like a long-short hedge fund but with a long bias... the reason for the long bias is because, frankly, 99% of investors go and look for typical mid cap growth, large cap growth, small cap value, etc type of funds, not the very small niche of 'long-short mutual funds' of which I've found maybe 5. Maybe that will change, with a stock market that has gone nowhere for a decade per the major indexes. But to attract attention the mainstream financial media sources almost solely focus on long funds and their charts, tables, "best of" lists all rotate around the status quo. Hence why, despite being bearish since August 2007 tried to maintain 50.01%+ long exposure "most" of the time. That said, who knows how a Morningstar would categorize this type of strategy - I don't know.

Another question comes to why I hold short exposure on a rally. Well, first I have no crystal ball - no one told me a 16% rally was coming this week. Second, and pointing to the previous paragraph I will ALWAYS have some short exposure as a HEDGE - so I don't stop out of short exposure; I just cut back (and I don't even have stop loss ability in the account). This mutes some upside performance but also mutes the downside performance. When I am more bullish I have less exposure on the short side, when I am more bearish I add exposure on the short side. I layer in and out of positions - for example I've held Ultrashort Real Estate (SRS) and Ultrashort Financial (SKF) in the fund since August 2007, even as the market ran to all time highs in October 2007. I lost money at times, and now I've made a lot of money in those instruments. Sometimes I had them as 0.2% stakes, sometimes as 2% stakes, and sometimes as 6% stakes. But they never leave - it's all weighting based on how the market seems to be trending. While I do exit and enter some positions completely, some I've kept since inception or over a year, or however long. Even at my most bullish I'd still keep some proportion of short exposure as 'insurance' because anything can happen and that's the strategy we go with. From the email I get I assume many readers have an "all in" or "all out" strategy in regards to individual positions - and mistake my having a stake in something as either bullish or bearish. I take a more incremental approach and approach things more holistically and with an eye to portfolio construction. I might not be bearish on X but since I'm bullish on Y I want to have an offset. Or when I sell ABC, but I want to maintain long exposure I buy XYZ to offset - doesn't make me more bullish on XYZ. For example, as I have been selling some individual names or cutting back into this ramp I've offset some of it wil buying of Ultra Russell 2000 (UWM) so I can have exposure to upside without dealing with individual names; in case we have a quick reversal down. Does that mean I'm more bullish on an index than stock ABC? No. It's just portfolio construction.

Also, let me remind I am not using instruments I prefer all the time. I went through some old posts from summer/fall 2007 and last winter the past week and found about 25 short ideas - all over the map from Las Vegas casinos, to consumer discretionary to e-commerce to housing to financials. Many of those individual names have fallen 50-99% (we said both Freddie Mac and Washington Mutual were effectively going to zero) But we cannot short individual names in our tracking account at So we've left a lot on the table. And our trading efficiency is abysmal without the ability to have stop losses, trailing stops, et al. And we have to always stay 65% invested per rules so I cannot go 70% cash if wanting to avoid the market, etc. But as of Wednesday - even with all those barriers and lack of exposure to individual short ideas we've called out, we were down (ex technical snafu from 2 weeks ago where we could trade any ETFs during a 10% reversal) roughly 10% since August 2007.... seeing the carnage in the mutual fund world during the bear, I think this strategy would work very effectively over the long run. If you take care of the downside (protect capital) the upside will take care of itself... many mutual funds are down 40-50% and will need 80-100% gains from here just to break even with summer/fall 2007. We have very little work to do in comparison to get back to even; even with the structural barriers we have in our tracking system. I do wonder if I had abandoned the 50.01% long rule earlier (we've dipped to the 40%s most of the past quarter) if we would of been positive for this time frame - I imagine yes.

Anyhow we have a quiet day on the casino; we'll see if the 3 PM crowd shows up at noon but since many of those creating the 3 PM effect are not showing up to work today we might just end with a quiet plop.

Thursday, November 27, 2008

AP: Malls, Hotels Next Victims in New Mortgage Crisis - MSNMoney: The Tax Increases Begin

Story from AP on themes we've been touting for a long while...

... I have a hunch Americans will "come through" on Friday and shop 'til they drop due to the sales, but later into the Christmas season the numbers will be disappointing. But when the figures roll in Monday from the weekend, we have a good chance of hearing "the pronouncement of the death of the American consumer may have been premature" and we can all drink Kool Aid together. Until January 2009 when we see reality strike in terms of how bad Christmas was. From a commercial real estate perspective, I'll be curious how many chains close up shop in Q1 2009.
  • The full scope of the housing meltdown isn't clear and already there are ominous signs of a new crisis -- one that could turn out the lights on malls, hotels and storefronts nationwide. Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in.
  • Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
  • That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit. "We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.
  • That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.
  • Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans. But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system. (sound familiar?)
  • Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls. When those $20 billion in mortgages come due next year -- 2010 and 2011 totals are projected to be even higher -- many property owners won't have the money.
  • Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.
  • California, New York, Texas and Florida -- states with a high concentration of mortgages in the securities market, according to Fitch -- are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.
  • "The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.
Remember the thesis we've been advancing since 2007 - state budgets are going to be a wipeout and the solutions will be cuts across the board in services, along with tax hikes. I contend at least 15 states will be asking the federal government for money in the next 2 years. We're going to see a lot of Cook Counties [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%] City and state worker's benefits so far have mostly been sheltered - it is ironic that at the private enterprise level these are being slashed but government workers are not facing the same marketplace. I guess that's the "free market" for you - no competition in government = no cost containment. They will raise taxes first, before even thinking about cutting their own benefits. And I'll keep pointing to our education system, K-12 and even public universities as areas to watch - I saw a story on TV last week where a public school teacher is now selling ads on his tests and quizzes to raise money to fund the shortfall in school supplies between what he needs and what the school provides. Excellent - we are the "richest" country on Earth after all. (as long as you exclude all debt)

The Kool Aid bulls will say, the government will take care of it all and buy or backstop everything. I suppose that's an option, we'll know when gold hits $2000. Here come the first waves of tax hikes on a populace already suffering under a horde of malaise's. Ironically this is the same medicine that should be happening at the federal level, but instead of taking medicine we just turn on printing presses and/or sell more bonds to China, Japan, and the UK.
  • As if it weren't bad enough that Michele Cetta's home value is plummeting, she's also facing a property-tax increase. "The value of the house is going down, but the property taxes are going up," says the mom from Staten Island, one of the suburban areas of New York City. She anticipates adding several hundred dollars to this year's nearly $7,000 property-tax bill. "People already can't afford to buy in the neighborhood, and this makes it worse."
  • Homeowners see the same troubling trend across the nation. Despite a nationwide drop in home values of more than 6% -- and as much as 30% in some areas -- many homeowners are seeing their property taxes ratchet up, as state and local governments try to cope with revenue shortfalls caused by the economic downturn.
  • The proposed increases are generating stiff opposition from community leaders who worry that higher taxes will force struggling homeowners into foreclosure, accelerating the downward spiral in local economies. (don't worry - the federal government will pay for it - our problems will disappear)
  • Officials say they have little choice but to raise rates. Rising unemployment, declining business revenues and falling home prices -- which can reduce a home's taxable worth -- have left communities short of the cash they need to pay higher energy, infrastructure and employee-related costs, such as health care premiums.
  • "Any form of government that has a heavy reliance on property tax is going to face massive budget shortfalls," says Matt Moon, a spokesman at the Tax Foundation, a nonprofit tax research group.
  • In New Jersey, where homeowners pay the nation's highest property taxes, government officials have begun paving the way for additional increases. William Dressel, the executive director of the state's League of Municipalities, has called on New Jersey officials to increase a 4% cap on annual increases in property-tax bills. Some towns, such as Cherry Hill, N.J., face tax spikes as big as 17% under proposed 2009 municipal budgets.
  • Many homeowners say their financial security is just as precarious. In interviews with half a dozen New York City taxpayers, many said higher food costs, stagnant wages and tighter credit restrictions have left them unable to withstand larger property-tax bills. (just put in on your VISA)
  • "The middle class has been hit hard as it is," says Josephine Restivo, a 14-year Staten Island resident who expects to see her taxes go up despite declining area home values.
  • "In some areas of the country, this could push homeowners into foreclosure -- it's as simple as that," says Pete Sepp, a spokesman for the National Taxpayers Union. "For cities to cancel property-tax relief is bad enough; for them to go in the reverse would be unconscionable."
  • Some homeowners argue the federal government should use bailout funds intended for banks instead for property-tax relief. (don't worry - that's next - we can do both; we have unlimited pockets and can backstop everything in the entire nation)
  • New York City officials explain that they have no solid alternatives to property-tax increases. Businesses are already under strain, they say. And officials fear that raising sales taxes would only further dampen consumer spending, making the downturn worse. Cutting services might depress home prices even more, not to mention putting residents at risk. (the answer is there are no good solutions)
As we enjoy our Obama honeymoon let's look forward to the bailouts coming next summer as state after state, and city after city needs to set their 2009-2010 budget. The line up for handouts from federal government shall be an eye opener. If I had a nickel for every time we shall hear in 2009/2010: "if you bailed out the banks, you should bail out us".... I could fund my own mutual fund.

Jim Rogers on CNBC - 11/26/08


Wednesday, November 26, 2008

Let's Look at the Potential Upside

So far some great action on the day - and the casino is yet to open. 3 PM is now at the doorstep - would you like a drink with your rally? I just hope all the folks who jump in at 3 PM for their one hour of work did not leave early for the holiday - we need their buying power; would really like to hold this S&P 770 level so I can drink Kool Aid in great quantities tomorrow.

I don't know the statistics but I'd love to see the % of up weeks over the past 15 years during Turkey week - it seems 80% of the time we have great action, especially in the more speculative stuff. I still remember 1999 because of the crazy moves in the worst of breed dot coms that week.

Other than Nov 4th/5th where we were teased, we have not closed above the 20 day moving average since mid September. Unlike then, there is a huge gap between the 20 and 50 day moving averages... so if we can hold these levels one could make a case for a move to the quickly dropping 50 day moving average (S&P 970s) before we face a dose of reality. Volume is quite paltry but for now I am putting on my turkey... err bull costume and saying it's possible. Remember, Friday is a short trading day and even less people will show up so those that need to move this market up to generate good vibes have an excellent opportunity. I assume the 3 PM rule will be moved to noon Friday since we close out at 1 PM.

Have a good Thanksgiving and remember, no turkey sandwich crumbs on the casino floor - this is a reputable establishment, back stopped by the full faith of the US Government.

Bloomberg: U.S. Government Now on Hook for $8 Trillion+

The Federal Reserve is now Atlas.... let's just hope they do not shrug....

During the war of the TITANS, ATLAS stormed Olympus and threatened the Gods. And as punishment for this war crime, ZEUS sentenced him to hold up the heavens and bear their weight on his shoulders forever

I was going to post this story a few days ago when the U.S. Government was ONLY on the hook for $7.7 Trillion but with yesterday's additional $800 Billion, the entry needs to be edited (by the day it seems) The bill now could reach $8.3+ Trillion. This is staggering folks - just staggering; I don't think people can even wrap their minds about this sort of data. It is our typical American kick the can down the road - we'll worry about the implications of it all once we get out of this current mess - this is the U.S. mode of operation for multiple decades now. I do believe from what I am seeing lately that the Federal Reserve is now of mind of "print at all costs" - the money supply data is simply in "hockey stick" formation and they'll deal with the ramifications of their actions at a later date. For now, they are going to print like there is no tomorrow. (and let me be clear about the headline - technically the Federal Reserve is not part of the US Government)

This is an entry to print and hand to your friends who think we are "only" giving $700B of TARP money - if they're steaming mad about that, well that is now less than 10% of what we have exposure to. The scary thing? If we marked to market the whole banking system collapses so for all the problems we have morally with this, it might just be NECESSARY to flood the system with this many pesos if we don't want the end of the entire US financial system.
  • If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.” “Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.
But the distribution of said grandchildren money could of been a lot fairer to Main Street ...

Effectively the US produces $13 Trillion each year... so we're on the hook for (potentially) over half of a year of every dollar produced in this country. Other incredible statistics
  • The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.
Shouldn't we just have done the latter? I mean toxic mortgages are the nexis of the problem (the largest share) - give everyone with a mortgage a 50% payoff and all these toxic instruments in the system become "paid off" or a much smaller risk. And the "common man" wins from this socialism - rather than the Upper East Side Manhattan man. Nah, but that's not American - Cramerica - for the corporation, by the corporation.

From a "dated" story 48 hours ago (note the amounts have increased since)
  • The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
  • The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis. The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
  • Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.
  • “It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”
  • “There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.
  • Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion
  • The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market,
  • Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.
  • The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.
Here is a big one; I actually think this could be among the biggest liabilities when all is said and done!
  • Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency.
I totally missed this one?? Wow - I must of been asleep when this one was announced
  • The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.
More... so on top of all these handouts we give tax breaks to the guilty parties - we talked about this in [Nov 13: Washington Post - A Quiet Windfall for US Banks]
  • Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying
Then yesterday, another $800 Billion
  • The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.
  • Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”
  • The Fed won’t be removing cash from other parts of the financial system to make up for the purchases, government officials told reporters on a conference call. They rejected any comparison with Japan’s so-called quantitative easing effort to combat deflation (no of course not - we're better than Japan - how dare you compare us to a country with asset busts in both the stock market and real estate market. That's not us, do NOT call us Japan! Japanese people actually save money - don't you dare call us savers - we're better than that)
I just wonder if they will ever get around to asking "how we got here" and "what misguided beliefs as a nation took us to this stage". Why do I doubt it?

CNBC has a full list here; it is staggering when itemized - I won't bother to copy it; information freaks can follow the link.

Gobble Gobble.

Bookkeeping: Closing CME Group (CME) and Alliance Data Systems (ADS)

I am tidying up the portfolio as we have too many positions for this type of market where flipping ETFs every 48-72 hours is all that matters - I am going to close 2 of our smallest positions, CME Group (CME) and Alliance Data Systems (ADS)

At this point, as 0.1% stakes in the portfolio, if these positions gained 40% from here it would have no impact to the portfolio so no reason to continue holding. I don't really have conviction to add to them, since on a continued market rally I'd rather buy other merchandise first.

CME Group (CME) was restarted on the October 10th flush down low in the $360s - bad trade! Ironic, considering Oct 10th was a market low (up until last week) - right timing, wrong stock. Thankfully the stock had a quick bounce and I took some of a 3.3% stake immediately off the table in the $390s so we had a smaller position within a few days. I don't have the ability to put in stop losses, but the stock was above the 50 day moving average at the time - once it sliced below it ($360) on the 17th it fell $140 straight points down to $220. Ouch. This is why you need stop losses in this market - it really bugs me not to have them. After a rally to $320 to early November (we took quite a bit of the position off in the $290-$300 range), the stock has been cut in half again to $160. Terrible. It's now bounced to $210 so I'm taking my marbles and going home. Thankfully we cut back this position a lot during the bounces or this would of been a disaster. I thought the upcoming clearinghouse for Credit Default Swaps would help this stock but I guess my thesis here was dead wrong. We only had a 0.1% stake left and are booking a $9K loss. Considering the chart below - it would of been a horrific loss if not for trading in between since the stock is down over 40% since we entered. So we're ending our relationship - CME treated us much better in 2007. I'm not saying it cannot rally - could get to $275 in a heartbeat but we don't have enough skin in the game for it to matter.

Alliance Data Systems (ADS) was bought for reasons to have some "yin" to our typical "yang" [Aug 29: Starting New Position: Alliance Data Systems] - this is supposed to be a boring type of stock which would be helped by an ENORMOUS buyback; about a third of shares at the time and even more now considering the stock has sold off. But in this market even finding companies trading at cash or below, or buying back 15-20-25-33% of their shares has not helped. It is quite amazing :) Selling is relentless no matter what. I still agree with my original thesis in this name, but the market does not care so we're going to get out of our remaining 0.1% stake near $43 with a manageable $2K loss, since we were able to trade this name for a few gains along the way, offset by this last leg down. We also made an excellent technical call to short this for a one day 13% gain but since we cannot short individual names in Marketocracy, we did not profit from it [Sep 18: A Short Opportunity In One of Our Holdings] Again, there is probably some more upside to upper $40s or $50s but with such a small stake I won't partake in terms of portfolio gain.

When fundamentals matter again, this type of stock should do well - this is more of a long term buy and hold type of stock, in a traders market. As they retire more shares their earnings per share should continue to increase, and I still think this is company appears to be setting themselves up to be sold; however no one is buying in this world - more deals are falling apart than being formed. Ironically Alliance Data was the victim of a broken deal in it's own past. This now trades at under 10x December's earnings...

We've now jettisoned 4 positions this week, making it easier to keep an eye on what remains. Generally we want to have fewer positions but bigger stakes so we can profit if our theories are correct. But frankly in this market owning 4 ETFs is really all that is needed. Individual stocks are for old fashioned types who still read earnings reports and do homework...

No position

Bloomberg: Soros and Citadel Building up Coal Stakes

I'm still a fan of coal - this is why as I've dumped much of my global growth/commodity plays as hedge funds collapse - I've keep fertilizer and coal since they should be the LEAST economically sensitive. In theory you'd want your home heated or the ability to eat food even in a Great Depression - as opposed to say the need for copper to build new buildings. But that is sense, and the market does not use sense - it's all pack trading and every commodity is either bad, or good. Program trading does not seem to discern between coffee, copper, natural gas, or potash. The irony is some commodity drops actually help miners (steel, petrol, et al) as their input costs fall... but again, that would be logical fundamentals talking and we can't have that as we "student body left" trade.

As safety standards start to hit in China, many coal mines are closing (less supply) - and once more 80% of all Chinese electricity is coal. India is ramping; and even progressive Western countries trying to protect the environment, such as the UK are building coal plants. But again - those are fundamentals. We spoke about these things as coal stocks used to go up 7% every week, and I still speak about them - they have not changed. Only sentiment and hedge funds being blown up have.

Most important for the last 2-3 long term investors left in the world - as we've been writing; this credit contraction and lack of high enough prices is going to cause a lack of investment in the commodity complex - which will mean not enough supply and much higher prices in the future once the global economy just returns to neutral. If the global economy dare return to "growth" someday in the future - look out. For those that can look out past the "immediate" - this should be plainly obvious.

It appears other smart money is jumping in at these absurd valuations in coal.
  • Billionaire investor George Soros, Citadel Investment Group LLC and T. Rowe Price Group Inc. are snapping up coal mining shares, taking advantage of the cheapest valuations in five years as demand for electricity rises.
  • Soros bought 2.9 million Arch Coal Inc. shares last quarter for a 2 percent stake in the second-largest U.S. coal producer, filings with the Securities and Exchange Commission show. Citadel, the Chicago-based hedge fund, and Invesco Ltd. in Atlanta bought 3.5 million shares of Peabody Energy Corp., the biggest miner. T. Rowe reported purchasing stock in Peabody, Arch, Consol Energy Inc. and Indonesia’s PT Bumi Resources.
  • Now, investors are betting that Peabody, which traded at 3.7 times projected 2009 earnings as of Nov. 21, and Arch at 2.5 times are cheap because coal use will increase.
  • Coal is the best commodity to get into right now,” said Daniel Rice, manager of BlackRock Advisors Inc.’s $1.5 billion Global Resources Fund in Boston, which is among the largest holders of Peabody and Arch. “It’s a lot less sensitive to downturns because it’s needed for basic power generation, and demand is growing.”
  • Crude oil in New York has dropped 43 percent this year compared with a 6.1 percent decline in Australian coal prices.
  • Demand for electricity in major economies, where coal is used to generate 52 percent of power, will increase 3.3 percent by 2010, according to a UBS AG report on Nov. 17. Global coal use will rise 2 percent a year through 2030, led by China and India, the Paris-based International Energy Agency said Nov. 6.
  • As of Nov. 21, Peabody dropped 79 percent after reaching a record in June and Arch lost 84 percent. Consol, the third- largest U.S. coal producer, slipped 82 percent.
  • Analysts say the decline has been overdone. While oil company profits will fall this year after New York crude futures dropped, coal producers have the advantage because mining companies have long-term sales contracts that cushion them from falling prices. “People are dumping all equities and it’s particularly irrational for coal,” said Richard Price, an investment banker at Westminster Securities in St. Louis, who advises coal producers and utilities in the U.S. and China. “Even if contract prices come off next year, they’ve still got the ones signed this year at higher prices.”
  • I wouldn’t say we’re recession-proof, but certainly recession resistant,” Steven Leer, chief executive officer of Arch, said in a Nov. 19 interview. “People will still be turning on their lights. Electricity demand rarely goes down.”
  • Profits at Peabody and Arch, both based in St. Louis, will rise next year as less lucrative contracts get replaced with ones signed at this year’s higher prices, analysts forecast. Lower costs for diesel, steel and explosives will help reduce mining expenses, Leer, 56, said.
  • India’s government expects imports to double to 40 million tons by 2012 as Asia’s third-largest economy increases coal-based generation capacity by 72 percent. Japanese utilities plan to add 11 percent more coal-fired capacity by 2010, and Indonesia 40 percent by 2011.
  • Coal prices “will continue to fall” as economic activity deteriorates “very rapidly,” Francisco Blanch, a London-based Merrill Lynch & Co. analyst, said in a Nov. 14 report.
  • “While there is uncertainty in today’s economy, any easing of demand growth is likely to be offset by diminished coal supply,” Peabody President Richard Navarre said on an Oct. 16 earnings conference call. “Tight supply will be further compounded by the global credit freeze because a significant amount of planned production expansions and new mines will be at risk around the world.” (I cannot stress how important this is) Production in Indonesia, the world’s biggest exporter of power-station coal, will slow as the global credit crisis hampers expansion plans (again)
No positions

Bookkeeping: Cutting (BIDU), Closing Joy Global (JOYG)

Chinese stocks are flying today as China cut interest rates yet again...
  • China announced its biggest interest rate cut in 11 years on Wednesday to spur private borrowing and support a multibillion-dollar stimulus package to boost slowing economic growth.
  • The 1.08 percentage-point rate cut -- the fourth cut in three months -- reflects the government's urgency about raising private consumption and investment to supplement state spending on the stimulus package.
Remember our thesis, the emerging world will recover first - and drag the United States (some day) out of it's mess; not vice versa as the punditry tells us.

A few interesting notes today
#1 - one good sign, speculation is back (animal spirits) - incrementally positive. A lot of small caps are screaming higher today but the day before and after Thanksgiving is notorious for huge moves in small cap stocks as big money leaves and retail traders dominate. Today speculative solar stocks are flying 15-40%, and since our A-Power Energy (APWR) is now considered a solar stock it's having a decent day. Pathetic, but it is what it is. I have 3 solar stocks and I am hoping for another speculative day Friday so I can exit some of these - they are very small stakes however.

#2 - infrastructure stocks are screaming the past few days - I find this hilarious but again this market is always about sentiment. They told us to sell infrastructure stocks because as oil fell all those energy projects get cancelled. Then they told us to sell infrastructure stocks because as credit contracts projects cannot be funded. But NOW they tell us Obama is the savior and New Deal 2.0 means money will be flying from the sky and you must buy infrastructure stocks! Yes of course - that's logical - even though these projects will be years in the making it's time to pile in them now - don't worry about that whole energy thing or lack of credit thing. This is our modern day stock market - find a thesis, scream about it, and pile into stocks despite any sort of reality check that has to do with said thesis. Not bullish or bearish - just absurd :)

#3 - bad economic news continues, but the market is taking it more in stride rather than panic - incrementally bullish.

With that said, for the first time in a long time I began buying individual stocks last week - I was one day early as I did my purchases on Thursday and the Geithner bounce didn't happen until Friday 3 PM but I'll consider that good timing nonetheless.

I bought Joy Global (JOYG) at $15 last Thursday [Nov 20: Beginning Joy Global Position], saying enough was enough - I made a 5% position, and unfortunately took 3/5ths of the position off the very next day with a 10% gain. [Nov 21: Selling Some Joy Global] We've been conditioned to take our gains immediately and this will be the correct thing to do - until it is not. Sounds deep eh? Simply put, ride a pattern until the pattern changes - and then adjust. At some point we will get a rally that last weeks or heck, a month or two. So we'll adjust when that happens - maybe this is the beginning, I don't know.

If the "global growth is back on/commodities are sexy again" trade is back - Joy Global should do well - but I have other names to take advantage of what I call the "ReInflation" trade. Frankly I did not do my homework fully and had not realized that almost all of Joy Global's 2008 stock buyback was already done - which was one of my drivers for buying this stock. That said, we had an excellent trade in 1 week - we bought just above the absolute low during the panic selling Thursday and sold 3/5ths of the position with a 10% gain and now I am letting go the rest of the position (2/5ths) in the $22.40s. That's a 49% gain in under a week on that portion of the holding. We are closing out Joy Global's 2.0% stake and booking a $7K gain. It now approaches resistance and the chart looks similar to many other I have in my watch lists... if these moves are to continue many stocks need to begin breaking resistance ahead.

We restarted a smaller position in (BIDU) the same day [Nov 20: Bookkeeping: Restarting] as people were panicking about the name - the stock has jumped from our entry point of $115 to $136s, so I'm going to take some off the table. I am going to cut this name in about half, down from a 2.1% stake to 1.1%. We have a nice 17% gain booked, but I still see some upside to $150s or $160. I'll let go more there - this was one very oversold stock.

If I had the ability to place a "trailing stop" on this type of position I'd rather do that, but does not have that function. We really are limited in so many things we can do from efficiency of trading. So instead we are going to just book some gains since I cannot sit and stare at this tick by tick.

Remember, for the market [Short Term Views] - a close above S&P 870 has us bullish; a close below S&P 840 has us bearish - everything in between is white noise. We have two very thinly traded sessions sandwiching the holiday so it is hard to read much into the current action but S&P 840 is very important to me; it was our long time floor and if we can hold it - the super computers across America [Hal9000s] could be seen creating a rally into year end.

As I said, economic news will be bad, and continue to be bad for a long time - that does not mean we won't have rallies along the way so we'll keep this positioning we've done of late as it's working wonders.... high cash stake and then jumping in for trades at extreme sentiments (as we did last Thursday) with a portion of the portfolio. We've been able to book a 40%+ gain in Ultra Real Estate (URE) in 1 session, a 49% gain in Joy Global in under a week, Lennar jumped 50% in 1 day, James River Coal 35% in 1 day - etc - some crazy moves can be had even as we keep much of our capital protected. In the current casino you can make in 3 days what used to take 3 years. But only with some nimble movement. Don't confuse any of this with investing; investors have been left in the ditch and scoffed at by the super computers.

We'll partake in some of these rallies along the way while not drinking Kool Aid about the "coming recovery in 6 months". Don't believe one moment the stock market is any longer a discounting mechanism of the near future - that's baloney in this day and age of algorithmic computer dominance. The stock market was at an all time high in October 2007 - what exactly was that telegraphing to us about the 6-9 month period ahead? Nothing. So when we do get one of these bounces, ignore the foaming at the mouth by CNBC hosts about the economic recovery next summer and the bottom is in. They said that all spring when they yelled about the "2nd half 2008 recovery" - they'll just keep repeating the "recovery in 6-9 months" on every rally until finally they are correct. These are all sentiment moves.

I am at least constructive from the point of view that technical analysis has really been working very well of late. Fundamentals still mean nothing but at least one tool is useful nowadays. If we can see any sustained strength in financials, and small caps - you could build a case for a holiday rally. Which means nothing in terms of our economy. For now, we remain neutral and will take profits as offered. S&P 840/870 are our keys.

Long A-Power Energy,, Ultra real Estate, James River Coal in fund; long A-Power Energy in personal account

Buckle (BKE) - Fundamentals Don't Matter

The Buckle (BKE) is a great example of why there is no reason to do fundamental homework or look at individual stocks anymore. The market could care less about any positive news. This is a retailer - fine; we've been among the biggest bears on retail far earlier than it was fashionable to be bearish on retail.

[Sep 7, 2007: More Retail Tells? Harley Davidson & Office Depot]

Just for data points that point to a 'reality' of a consumer who, without his main arms merchant, the house ATM, is pulling back.

[Sep 23, 2007: A Lump of Coal This Christmas? A Look at Retailers]

I remain bearish on the middle class US consumer, deprived of his/her ATM card (i.e. house equity), as housing prices in general fall and many new found homeowners (from 2005 onward) will find themselves upside down on their 0% down homes - along with the inflation the government tells us is nearly nonexistent

[Sep 24, 2007: And Here Comes the Reality Check on Retailers]

Avoid 95% of retailers; this is just the beginning of what I expect to be a steady stream of lower guidance and excuses such as "cold weather" or "warm weather" or "too sunny" or "too rainy". The American consumer is pinched by lack of easy money via home equity withdrawals and inflation that the government believes is make believe. Period.

[Oct 11, 2007: Retail Sales]

Again I think the 'analysts' underestimate the cost of food spikes and psychology of hearing daily about how bad the housing market is on people - they retrench mentally. Just like the M&A market was in a bubble due to easy credit, I contend retail sales are as well - if this country ever went to "spending" at a level they actually earn money at, retail sales would probably be cut 20-30% across the board. All we are seeing now is "less" use of credit, as people are forced to use credit cards instead of their house for an ATM.

Again, I wrote the above litany of posts during the biggest Kool Aid period we've seen in a long time - the stock market was at ALL TIME HIGHS in October 2007 while I was streaming all these warnings about retail. So I was looking like a loony back then; spitting in the wind as the "pundits" told us not to fight the Fed and it's "only a subprime issue"....

With that said, as much as retail stinks - some companies are executing.... one of our conditions for "investing" rather than trading is that WITHIN sectors the good companies should separate from the bad; individual company metrics need to matter again. That has not happened yet, and how The Buckle (BKE) has been trashed is the perfect example of "why bother" with individual stocks or doing research.

We sold this name in early October in the mid $30s. That's 6 weeks ago. It's now in the $17s; 50% haircut. Despite continuing to execute and making their peers look hopeless. This is essentially all that is wrong with the stock market summed up in 1 stock. Last earnings report...
  • Youth apparel retailer Buckle Inc. on Thursday reported a 31 percent increase in its third-quarter profit on strong sales of its merchandise. (31% gain in retail? gotta be kidding me)
  • The Kearney, Neb.-based company earned $29.1 million, or 62 cents per share, compared with $22.2 million, or 48 cents per share, in the year-ago period. The quarter included a charge of $1.8 million, or 2 cents per share after taxes, related to investment losses. Stripping out the one-time item, the company earned 64 cents per share.
  • Net sales totaled $210.6 million, up 26 percent from $167.6 million last year.
  • Buckle said same-store sales at stores open at least a year -- a key metric of performance for retailers because new stores tend to skew results positively -- was up 19.1 percent from last year.
To boot, what other retailers out there are actually buying back shares? Most are trying to conserve cash so not to go into bankruptcy.
  • Teen apparel retailer The Buckle Inc. said Friday it will buy back up to 1 million shares of common stock.
  • The company had about 30.7 million shares outstanding as of Aug. 29, according to an SEC filing.
The point is... there is no point in doing research or finding diamonds in the rough anymore. I still spend the time researching and looking at companies, but they seem to trade in a parallel universe & there is no benefit in doing extra work. The "student body right" trading is all that exists - good stocks trade with bad, good sectors with bad - only what ETF you are in matters and making sure your timing of the ETF gambling is correct.

The Buckle is a great example of why investors are being mocked in this market. If we had held onto this name we'd be down well over 50% since early October - for a company that executes in an incredibly hard environment. We own many other stocks with similar characteristics - who are pummeled - despite executing. In return we lose money for holding them. Par for the course.

As I said earlier - someone who has 1 day of market experience can do just as well as someone with 20 years experience in this market. Just show up at 3 PM, put your chips on an ETF and you have a 50/50 chance of "winning". Research, homework, thinking, experience - all laughed at.

No position

Bookkeeping: Cutting Life Partner Holdings (LPHI) Stake

I am cutting Life Partners Holdings (LPHI) in half as it now approaches its 50 day moving average - unfortunately when we entered this stock the chart was tremendous but just our luck the moment we began buying it broke down. Without having the ability to have stop losses in, by the time I noticed this thinly traded stock was already down 10%ish so instead, I added to the position as it approached its 200 day moving average (mid $20s), so at least the average cost was lowered. In fact it ended up being one of our top 5 positions due to this maneuver.

Since we were not able to be stopped out of the majority of the position as it broke below the 50 day moving average support by utilizing a stop loss, we are now "break even" overall instead of booking a solid profit here. This is a very thinly traded stock and we are selling in the mid to upper $31s, and taking our stake from 3.1% to 1.6% of fund.

If it gets back over the 50 day moving average (low $32s) and can hold, that would be a point of strength and we'd add at higher prices.

[Nov 6: Bookkeeping: Beginning Position in Life Partner Holdings]

Long Life Partner Holdings in fund; no personal position

Reuters: After Citigroup (C) is Bank of America (BAC) Next?

We posed the exact same theory after the Citigroup (C) bailout was announced. Good to see realism and cynicism reach into our news agencies ;) That Countrywide Financial exposure cannot be a good thing. I am also wondering if the Merrill Lynch (MER) deal is still going to go through - certainly the terms are prone to change.

Thankfully the first thing they did when we gave them our tax dollars is they spent $6 Billion to buy a stake in a Chinese bank. Of course they say it's not the "same money" ;)
  • A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers.
  • The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage.
  • Before Monday's stock market rally, Bank of America shares had lost 52 percent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.
  • Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks' expectations, Bank of America would have a Tier-1 capital ratio of 7.15 percent. The minimum that regulators seek to consider a bank "well capitalized" is 6 percent, but any ratio near or below 7 percent tends to spook investors.
  • Under the same assumptions, and before the government's latest investment, Citigroup would have a Tier-1 capital ratio of 8.64 percent
  • The U.S. banking system is broadly undercapitalized, perhaps to the tune of more than $1 trillion, and the only investor that can bail it out is the U.S. government, analysts said.
  • Bank of America, through its acquisition of Countrywide, has more than $250 billion in residential mortgages and while it has stopped offering some of the most toxic types of mortgages, chargeoffs in the portfolio are increasing.
  • "The difference between Citi and the other three is that Citi clearly had more suspect management," said Mal Polley, chief investment officer at Stewart Capital Advisors in Pittsburgh. "They had not done enough to take the fat out of the system and right the ship," he added. But management at Bank of America and Wells Fargo, and even JPMorgan, widely regarded as the bank that has best survived the credit crisis to date, will need to allay investors' concerns about their capital position as financial conditions worsen.
  • "I definitely think other companies will need this help," said Paul Miller, analyst at Friedman, Billings, Ramsey & Co in New York.
I expect first half 2009 to be very similar to what we've just gone through. It will be interesting to see if we move up the food chain to Wells Fargo and JPMorgan. Still curious about the off balance sheet exposure at BAC.

But for now we are hopeful Kool Aid drinkers since the government will fix all our problems. Until it is clear they cannot.

No position

Food Crisis to Resume Next Year?

We haven't spent much time talking about our "World of Shortages" themes since the commodity indexes have crashed, with hedge fund deleveraging being one of the main culprits. Certainly demand destruction is part of the theme as well. However, the implications as we look out past the short term remain dire. What is going to happen across our commodities complex is a lack of investment as prices are too low to make profit; which will exaggerate shortages. And raise prices in the future (again). This will be a replay of what we saw about 9-18 months ago but I believe the next wave will be larger, more stark, and potentially with far more dire consequences for many. What we saw this past spring was scary enough - we pointed to the themes of food protectionism, social unrest, and the like - the drops in commodity prices of late are masking the situation coming in the future. [Jun 29: NYTimes - Hording Nations Drive Food Prices Ever Higher] [Apr 14: WSJ - Food Inflation, Riots Spark Worries for World Leaders] [Mar 31: Reuters - Tensions Rise as World Faces Short Rations] [Feb 13: As Asia Food Prices Bite, Analysts Warn of Worse to Come]

Again, the stock market focuses so much on the short term and I believe on this one is missing the forest for the trees. It's just a matter of timing... is it latter 2009? mid 2010? Too difficult to call right now... but this will be yet another crisis. One which will repeat over and over in the coming decades as human population growth and urbanization [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears] conflict with supplies of food... hence I continue to favor agricultural themes as the best long term play on my radar - even if they've been tossed to the curb along with all "global growth" stocks. As with everything in this market, we have a clear thesis on a long term trend but when investors switch from their infatuation with what lays ahead in the next 3-9 months, and look to the intermediate term future (12-36 months) is the open question.

I still believe if you have a 30 year time horizon the best investment is global farmland - and some very smart money is agreeing with me [Jun 14: Bloomberg: Farmland Reaps Bonanza for TIAA] [Jun 5: NYTimes: Food is Gold, So Billions Invested in Farming]

Some stories on this ....

Bloomberg: Food Prices Will Rise, Causing Export Bans, Riots
  • Food prices will rise next year, prompting a revival of protectionism from food-growing nations and risking a renewed bout of rioting, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich.
  • “Agricultural commodities will outperform the broad commodity indices in 2009,” Hitzfeld wrote in a research note this week. “If key crop-producing countries then impose export bans again and speculators drive up prices via physical stockpiling and futures contracts, new food unrest is even conceivable in the second half of 2009.”
  • The CHART OF THE DAY shows food prices for the past 10 years as measured by an index compiled by UBS AG and Bloomberg that tracks at least 13 foodstuffs, including wheat, soybeans, sugar, cocoa and coffee. The index has declined 35 percent since peaking in July.
  • “The prices of many agricultural commodities are now clearly below their production costs,” Hitzfeld wrote. “We expect the coming year to bring a cutback in area under cultivation as well as a decline in the yield per hectare.” (this is the important point, which the video below shows specific to rice in the Philippines - if this sort of cutback happens in energy; you are faced with brownouts or blackouts. When it is food, on the other hand, you have rioting)
Link to agricultural price index graph here

NBC News: Rice in the Philippines - Promise and Neglect (note this story focuses on 1 country but in greater Asia, rice is the main staple so the issues here are reflective of the fastest growing region on Earth)
  • A morning with Dr. Zeigler at the Philippines-based IRRI leaves you wondering how the world could possibly be facing food shortages, but travel just a few miles from here and there is a very different picture.
  • Rice farmers are abandoning their land, unable to afford the new seeds. Half the paddies in this area lack irrigation, and few farmers have basic storage facilities. The soaring cost of fertilizer and pesticides have eaten into the small profits they could make from rice, pushing them into debt.
  • "There's no money in it, there's no point," said Sionong, whose family had been rice farmers for three generations. She's converted her paddies to blue grass for the lawns of housing developments, which are also replacing the paddies. Another farmer told me: "Maybe after ten years, we won't have any rice farmers any more."
  • The farmers here have little real power. The local market is controlled by three powerful traders, who buy at a price they set, and who sell the fertilizer and other inputs. They have the storage facilities and the driers which add value to the rice.
  • In thirty years, the Philippines has gone from being a rice exporter to the world's biggest importer, unable to keep up with a population that has almost doubled to 90 million over that period. (remember population growth worldwide continues each and every day, even as we obsess with demand destruction from this global slowdown - the world still marches on, bringing online a good many humans each day, week, month, year - here is one country where the population has doubled in 30 years)
  • When world food prices soared earlier this year, the Philippines was one of the hardest hit, scouring world markets for expensive rice in a bid to head off a crisis that threatened to bring down the government. Although prices have fallen somewhat, during our visit they were still double than those of a year ago. A costly subsidy program was calming the poor districts of Manila.
  • "Rice is central to the fabric of Asian societies," Zeigler told me. "In terms of economic security, political security, economic growth, if you don't have abundant rice supplies, you can kiss goodbye to that stuff."

[Apr 21: The Economist - The New Face of Hunger]
[Jun 23: In India, Growth Outstrips Agriculture]
[Jun 11: WSJ - Food Crisis Forces New Look at Farming]

Tuesday, November 25, 2008

Fidelity Contrafund (FCNTX)

The webpage for Fidelity Contrafund (FCNTX) can be found here.

Manager is William Danoff

Expense ratio: 0.89%

This is in the Morningstar Large Cap Growth category

American Funds Growth Fund of America A (AGTHX)

Full description page of American Funds Growth Fund of America (AGTHX) can be found here

Expense ratio: 0.62%

Top Holdings: Google (GOOG), Oracle (ORCL), Cisco (CSCO), Microsoft (MSFT), Roche

Fund Managers
James E. Drasdo
R. Michael Shanahan
James F. Rothenberg
Gordon Crawford
Don D. O'Neal
Michael T. Kerr
Donnalisa Barnum
J. Blair Frank
Timothy P. Dunn
Gregg E. Ireland
Ronald B. Morrow

FDIC Troubled Bank List Grows 46% - Is Your Bank Safe?

As I wrote recently, I don't see much value in the FDIC Troubled Bank List considering two quarters ago it was missing IndyMac Bank - which went on to the largest bank failure at that time, and then last quarter [Aug 26: FDIC "Troubled Bank" List] it missed Washington Mutual (WM) which was the largest S&L in the USA, and effectively failed. Further, this list does not have Citigroup (C) which is being supported by the US taxpayer. So this whole list is measurably suspect. However, the one point of use is in the pace of degradation... granted its from one bad data set to another bad data set but we now have a 46% increase quarter over quarter.

Is your bank on the list? Well of course you won't know because banks are about trust and if your bank is on this list, it would cause a run on the bank. But don't worry about it - you are FDIC insured up to $250K per account. Don't worry if the FDIC has enough money... if not, they will raise fees on the banks to get more funds. What's that? How can you raise rates on banks that are imploding and hence can't afford to pay higher rates? Good point - well one scheme is for the banks to get money from the government (TARP) and then give it back to the government (FDIC insurance fund) - haha - it almost would be laughable if it were not so pathetic. I have an even better idea! Print more money out of thin air to fund the FDIC! Works for everything else! Just add it to the tab - $8 Trillion and counting.

  • The Federal Deposit Insurance Corp. said banks categorized as “problem” institutions increased 46 percent in the third quarter to the highest level in 13 years as the credit crisis battered the financial industry. The FDIC identified 171 problem banks as of Sept. 30, up from 117 in the second quarter and the highest since December 1995, the regulator said today in its quarterly report. The agency doesn’t disclose the banks’ names.
  • Lenders deemed problem institutions had assets of $115.6 billion at the end of the third quarter, an increase from the $78.3 billion in the second quarter and the first time since 1994 that assets of the companies exceeded $100 billion, the FDIC said (that's a complete joke - Citigroup with its $3.2 trillion should be on this list - oh wait, we "solved" that problem) The figure that suggests that the nation's top 20 banks aren't on the list, even though they are getting slammed, too, by the growing credit crisis.
  • Still, banks that don't make the list can end up collapsing anyway — the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC's list of troubled banks. Wachovia Corp., which nearly failed before it got bought by Wells Fargo & Co. in October, had not been on the list, either. (yes I forgot about the shotgun marriage of Wachovia - so many failures, and bailouts - I am losing track)
  • Banks are rated by regulators based on measures including asset quality, earnings and liquidity. They are ranked on a numerical scale, 1 being the highest and 5 the lowest. A bank with a rating of 4 or 5 is designated a problem.
  • “Many institutions are aggressively growing their reserves,” Bair said. “But overall reserve growth continues to lag behind the growth in troubled loans.” Loans 90 days or more overdue jumped 13.1 percent to $184.3 billion from $162.9 billion in the second quarter, the FDIC said (holy! Uncle Ben to the presses! $200 Billion in US dollar bills needed!) "The latest loss provisions absorbed a third of the industry's net operating revenue," according to the FDIC.
  • Bair continued that while many large institutions continue to post losses "due to weaknesses in their portfolios," the FDIC is "now seeing losses spread to a growing number of smaller institutions." (that's ok, they are not too big to fail - we should just give their assets to well run companies like Citigroup - that strikes me as fair)
About that insurance? Remember as part of the Citigroup bailout...err handout... err assistance [Details on Citigroup Bailout] the FDIC is on the hook for $9 billion...
  • Nine banks failed in the third quarter, decreasing the FDIC's deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter.
Again, please don't worry - if we cannot raise fees on banks to pay for their own failures, we always have your grandchildren's fund aka the Great Printing Press. Helicopter Ben stands at the ready. Look for the FDIC to borrow from the US Treasury for insurance funds by this time next year.

Bookkeeping: Cutting James River Coal (JRCC) on Bizarre Rally

I don't know what is going on with this stock; it's movement are of completely random nature of late. It's up 35% today so I'm going to sell most of the position into this rally; taking this down from a 0.9% stake to 0.1%, selling here in the $10.30s. It made a similar huge move last Wednesday out of the blue [Nov 19: Strange Action in James River Coal]

I'll put the same speculations I put out there a week ago - either completely random casino action or potential buyout bid. There is some activity in the December call options area along with January $12.50s - this is the 2nd time in two weeks we are seeing this type of activity.

If you bought at the close 3 days ago, you are up over 100%. That's reasonable.

So we had one stock up 50% today and another 35%. Looks like we went to the correct one armed bandit today.

Long James River Coal in fund; no personal position

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