Saturday, February 28, 2009

Warren Buffet's Berkshire Hathaway (BRK-A) 2008 Investor Letter

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If you are interested in Warren Buffet's take on things below is his always anticipated annual shareholder letter in it's entirety. I am adding some snippets from a related AP story below for the Cliffs Notes version - one fun excerpt "the nation's economy will be in shambles throughout 2009."

Another excerpt is one we speak about often - unintended consequences and how are we ever going to get people weaned off government assistance after this episode

In poker terms, the Treasury and the Fed have gone "all in." Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won't leave willingly.

  • Warren Buffett says the economic turmoil that contributed to a 62 percent profit drop last year at the holding company he controls is certain to continue in 2009, but the revered investor remains optimistic.
  • Buffett released his annual letter to Berkshire Hathaway Inc. shareholders Saturday morning, and detailed the worst of his 44 years leading the Omaha-based company. But in between the news of Berkshire's sharply lower profit and its nearly $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation's future. He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
  • "Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
  • Within Berkshire, Buffett said the company's retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.
  • But he said Berkshire's utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
  • Buffett devoted nearly five pages of his letter to Berkshire Hathaway shareholders to explaining the role derivatives played in the company's investment losses last year. Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor. "If we lose money on our derivatives, it will be my fault," Buffett said.
  • Buffett said he did not anticipate last year's dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
www.berkshirehathaway.com

Plugin 2008ltr

[Feb 21, 2009: Bloomberg - Warren Buffet's Berkshire Drops to Lowest in 5 Years]
[Feb 3, 2009: Buffet Provides Financing to Harley Davidson]
[Nov 11, 2008: Goldman Sachs (GS) - Beaten, Bloody - Warren Buffet Down $2 Billion]
[Sep 23, 2008: Warren Buffet Finally Decides to Start Buying Distressed Assets]

Reuters has another summary here

 ON THE 2008 FINANCIAL CRISIS
 "As the year progressed, a series of life-threatening problems within many
of the world's great financial institutions was unveiled. This led to a
dysfunctional credit market that in important respects soon turned
nonfunctional. The watchword throughout the country became the creed I saw on
restaurant walls when I was young: "In God we trust; all others pay cash."
 THE CREDIT MELTDOWN
 "By the fourth quarter, the credit crisis, coupled with tumbling home and
stock prices, had produced a paralyzing fear that engulfed the country. A
freefall in business activity ensued, accelerating at a pace that I have never
before witnessed. The U.S. -- and much of the world -- became trapped in a
vicious negative-feedback cycle. Fear led to business contraction, and that in
turn led to even greater fear."
 2009 OUTLOOK
 "Most of the Berkshire businesses whose results are significantly affected
by the economy earned below their potential last year, and that will be true in
2009 as well. Our retailers were hit particularly hard, as were our operations
tied to residential construction."
 MAKING MOVES IN THIS MARKET
 "During 2008 I did some dumb things in investments. I made at least one
major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission,
sucking my thumb when new facts came in that should have caused me to
re-examine my thinking and promptly take action.
 "Additionally, the market value of the bonds and stocks that we continue to
hold suffered a significant decline along with the general market. This does
not bother Charlie and me. Indeed, we enjoy such price declines if we have
funds available to increase our positions. Long ago, Ben Graham taught me that
'Price is what you pay; value is what you get.'
 "Whether we're talking about socks or stocks, I like buying quality
merchandise when it is marked down."
 IDENTIFYING ACQUISITIONS
 "Our long-avowed goal is to be the 'buyer of choice' for businesses --
particularly those built and owned by families. The way to achieve this goal is
to deserve it. That means we must keep our promises; avoid leveraging up
acquired businesses; grant unusual autonomy to our managers; and hold the
purchased companies through thick and thin (though we prefer thick and
thicker).
 "Our record matches our rhetoric. Most buyers competing against us,
however, follow a different path.
 "For them, acquisitions are 'merchandise.' Before the ink dries on their
purchase contracts, these operators are contemplating 'exit strategies.' We
have a decided advantage, therefore, when we encounter sellers who truly care
about the future of their businesses."
 GEICO
 "As we view GEICO's current opportunities, Tony (Nicely) and I feel like
two hungry mosquitoes in a nudist camp. Juicy targets are everywhere."
 REINSURANCE BUSINESS
 "From year to year, Ajit (Jain)'s business is never the same. It features
very large transactions, incredible speed of execution and a willingness to
quote on policies that leave others scratching their heads. When there is a
huge and unusual risk to be insured, Ajit is almost certain to be called.
 "Ajit came to Berkshire in 1986. Very quickly, I realized that we had
acquired an extraordinary talent.
 "So I did the logical thing: I wrote his parents in New Delhi and asked if
they had another one like him at home. Of course, I knew the answer before
writing. There isn't anyone like Ajit."
 HOUSING MELTDOWN
 "At that time, much of the industry employed sales practices that were
atrocious. Writing about the period somewhat later, I described it as involving
'borrowers who shouldn't have borrowed being financed by lenders who shouldn't
have lent.'
 "To begin with, the need for meaningful down payments was frequently
ignored. Sometimes fakery was involved. ('That certainly looks like a $2,000
cat to me' says the salesman who will receive a $3,000 commission if the loan
goes through.) Moreover, impossible-to-meet monthly payments were being agreed
to by borrowers who signed up because they had nothing to lose. The resulting
mortgages were usually packaged ('securitized') and sold by Wall Street firms
to unsuspecting investors. This chain of folly had to end badly, and it did."
 OWNING A HOME
 "Home ownership is a wonderful thing. My family and I have enjoyed my
present home for 50 years, with more to come. But enjoyment and utility should
be the primary motives for purchase, not profit or refi possibilities. And the
home purchased ought to fit the income of the purchaser.
 "The present housing debacle should teach home buyers, lenders, brokers and
government some simple lessons that will ensure stability in the future. Home
purchases should involve an honest-to-God down payment of at least 10 percent
and monthly payments that can be comfortably handled by the borrower's income.
That income should be carefully verified.
 "Putting people into homes, though a desirable goal, shouldn't be our
country's primary objective. Keeping them in their homes should be the
ambition."
 MUNICIPAL BOND INSURANCE
 "When faced with large revenue shortfalls, communities that have all of
their bonds insured will be more prone to develop 'solutions' less favorable to
bondholders than those communities that have uninsured bonds held by local
banks and residents. Losses in the tax-exempt arena, when they come, are also
likely to be highly correlated among issuers. If a few communities stiff their
creditors and get away with it, the chance that others will follow in their
footsteps will grow. What mayor or city council is going to choose pain to
local citizens in the form of major tax increases over pain to a far-away bond
insurer?
 "Insuring tax-exempts, therefore, has the look today of a dangerous
business -- one with similarities, in fact, to the insuring of natural
catastrophes. In both cases, a string of loss-free years can be followed by a
devastating experience that more than wipes out all earlier profits. We will
try, therefore, to proceed carefully in this business, eschewing many classes
of bonds that other monolines regularly embrace."
 MAKING MISTAKES
 "Without urging from Charlie or anyone else, I bought a large amount of
ConocoPhillips (COP.N) stock when oil and gas prices were near their peak. I in
no way anticipated the dramatic fall in energy prices that occurred in the last
half of the year. I still believe the odds are good that oil sells far higher
in the future than the current $40-$50 price. But so far I have been dead
wrong. Even if prices should rise, moreover, the terrible timing of my purchase
has cost Berkshire several billion dollars.
 "I made some other already-recognizable errors as well. They were smaller,
but unfortunately not that small. During 2008, I spent $244 million for shares
of two Irish banks that appeared cheap to me. At yearend we wrote these
holdings down to market: $27 million, for an 89% loss. Since then, the two
stocks have declined even further. The tennis crowd would call my mistakes
'unforced errors.'"
 DERIVATIVES
 "Derivatives are dangerous. They have dramatically increased the leverage
and risks in our financial system. They have made it almost impossible for
investors to understand and analyze our largest commercial banks and investment
banks. They allowed Fannie Mae and Freddie Mac to engage in massive
misstatements of earnings for years. So indecipherable were Freddie and Fannie
that their federal regulator, OFHEO, whose more than 100 employees had no job
except the oversight of these two institutions, totally missed their cooking of
the books."


TheStreet.com - Doug Kass: Kill the Quants, Punish the ProBears

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Intriguing article on TheStreet.com from hedge fund manager Doug Kass touching on two topics we spend quite a bit of time on. The quant hedge funds (who I lovingly refer to as HAL9000) are the more compelling of the two subjects, and it is very interesting to hear someone "inside" the game call them out. [Aug 6, 2008: Cramer - Quants and their Machines] I think as this market loses more and more participants their influence is becoming even more dominant...

Now let me clear before I go even 1 step forward in this piece - this market was an overvalued, blind to the risks entity and deserved to go down in a sharp way based on the challenges we are facing economically. So in no way am I blaming a downfall on any 1 group - I am more interested in the incredible volatility - especially that of the HAL9000 kind.

I will toss out an unpopular notion - there has been some talk of a trading tax which would obviously be an increased cost for all of us in the investing world. But I'd propose a smallish trader tax would curtail the activity of hundreds of trades a minute some of these computers are putting out. The counter argument is this would impede "liquidity" in the market... to which I ask how did we ever have liquid markets before quant funds? Or even before decimalization when stocks were traded in 1/8ths rather than to the penny. And what good will a liquid market be for the rest of the people, if all that matter is the dominance of a few huge players whose only care is the movement of an equity versus a model in the next 2-10 seconds? Perhaps a very naive viewpoint but I'd be interested if we put a modest trader tax on for 6 months to see if the volatility would drop dramatically. We'll never know.

While the leveraged ETFs also contribute to volatility, the more interesting part of the piece to me was calling out the quants.

(EDIT Saturday - new piece in WSJ on 2x, 3x ETFs - interesting stat of the day - on Wednesday last week the FAZ or 3x Bearish Financial traded 23M shares .. and there are only 2M shares outstanding. Meaning the average holding period was under 34 minutes - the casino lives. Holding a leveraged ETF for longer than a day, says Andy O'Rourke, marketing chief at Direxion Funds, is "like using a toaster to cook a turkey.")

On to Doug's story...

Most investors (who are long-biased), and indeed the very U.S. stock market as a whole, are disadvantaged in a market dominated by momentum-based quant funds and by ultra bear ETFs, both of which prey on a weakening hedge fund industry riddled by redemptions and by a community of individual investors whose confidence is badly broken.

These quant funds and ultra bear ETFs, which bypass Federal Reserve Regulation T margin rules governing the extension of credit by securities dealers and brokers in the U.S., wreak havoc in a market that needs all the regulatory support it can get.

Today's investors no longer walk tall as they have seen their portfolios shrivel up. For several years, institutional and individual investors have been competing on an uneven playing field dominated by the powerful quant funds and ultra bear ETFs that not only have a disproportionate role in total NYSE trading but, more importantly, have had an undue influence on pushing stocks lower during the course of the bear market.

The pages of RealMoney have included an extensive and effective discourse on the effect of the ultra bear ETFs on the market, so I won't spend much time repeating what others on the site have written.

In 2009, investors are not only facing an unprecedented economic, credit and financial outlook coupled with the uncertainty of public policy but they are also competing against quant funds and ultra bear ETFs that seem to resemble legendary basketball player Wilt Chamberlain, who dominated the NBA because his 7-foot-plus frame gave him an obvious advantage against the other players.

As referred to in the SEC mission statement above, our capital markets exist for the benefit of society, and a market dominated by quant funds and ultra bear ETFs does little to help society.

There has never been a period of time in which the markets had so much money around that could profit from declining prices and invoke economic pain on society (in the form of destruction of household wealth). That is what makes the current bear market so much more difficult to navigate than 1930, 1938, 1970 or 1974. Quant funds and ultra bear ETFs have muddled the ability of the markets to shift assets from weak hands to strong hands.

How do you get people out, if they never run out of firepower (i.e, can short, cover, short, cover all day)?

In time, Wilt Chamberlain flooded the record books with his incredible stats, mostly scoring records; he was impossible to guard despite constant double and triple teams. As Jeff Bagley mentioned yesterday on RealMoney's Columnist Conversation, Wilt Chamberlain was so unstoppable that a number of NBA rule changes occurred during his reign that were blatantly created to stop him, including the implementation of the offensive goaltending call, widening the lane, revised rules on inbounding, etc.

Under Christopher Cox, the SEC has dropped the ball on a number of key issues over the past several years. The agency's policy (and indifference) almost most certainly contributed to our current economic and stock market woes.

It is important that the SEC addresses the dominance and unwieldy influence of quant funds (through the reinstatement of the uptick rule) as well as the circumvention of margin rules by the ultra bear ETFs in order to "maintain fair, orderly and efficient markets." It is also important that the SEC considers regulation of the credit default swap market, a market that the Committee neglected and incorrectly left as materially deregulated in recent years.

Our stock market's playing field is no longer level, and, almost without question, the two players above have contributed to an acceleration of the market's downtrend in 2008 and 2009.

Once again, the SEC has dropped the ball, an all too familiar refrain.

I am hopeful that the SEC will not wait in addressing the role of quant funds and ultra bear ETFs until it is too late to rescue our stock market. Remember this is the same organization that crippled the markets with Sarbanes-Oxley, though, so I am not going to hold my breath.

*********

[Dec 29, 2008: Doug Kass' 20 Surprises for 2009]

[Dec 2, 2008: Doug Kass - Harder than the Average Bear]

[Sep 15, 2008: Doug Kass - Under-Regulated , Overcompensated]

[Sep 5, 2008: Doug Kass - Hedgies Get their Comeuppance]

[Jan 2, 2008: Doug Kass 20 Predictions for 2008]


Frontline: Inside The Meltdown

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The following is a video from PBS' Frontline - an hour in length if you've got some time to kill.





Friday, February 27, 2009

John Mauldin on Yahoo's Tech Ticker

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I highlighted Jon Mauldin's weekly letter in our weekly summary this week; it truly is a heck of a read. Below are 3 video clips (5 min or so each) of Mauldin with Aaron Task on Yahoo's Tech Ticker. Almost all of this mimics exact posts we have put up on the site the past year. The bottom video is the topic he focused on his weekly letter - I highly recommend the 15 minute investment into these videos this weekend.

before that, the market failed to reverse like I hoped so while light on the short side of the ledger, I cut back some of my bullish sector/index ETFs that I bought into the dip this morning. We have 1 hour to go but the action this afternoon was not very inspiring. General Electric (GE) cut their dividend ... just add it to the tiller of cut dividends. Interesting stat of the day - the market is down for 6 consecutive months for the first time since 1942.

Back to your normally scheduled post.



Don't 'Buy and Hope:' How to Survive Until the Next Bull Market


With the market heading lower again and the Dow hitting yet another new 11-year low intraday Friday, it's hard to believe stocks will ever be a good investment.

But "there's a bull market in our future," says John Mauldin, president of Millennium Wave Advisors.

That's the good news.

The bad news is Mauldin, who selects active fund managers for his high net worth clients, says any 1990's-style bull market that rewards passive index funds and "buy and hold" investors is unlikely to arrive before for another five-to-six years.

In the interim, the investor and author of the Thoughts from the Frontline e-letter says investors should focus on:

  • Staying conservative and preserve capital for the "great opportunities" that will emerge when the dust settles.
  • Be active with your portfolio and only buy stocks if you're both a good stock picker and an astute trader.
  • Avoid index funds: "Buy and hold was always a bad idea," he says.
  • Own some gold as a hedge: But he is not a gold bug or major dollar bear, as detailed here.
  • Seek income in quality munis, corporate bonds and dividend paying stocks but (again) you have to be smart with your selection, or find a manager who is.

As the name of his firm implies, Mauldin's market-timing work focuses on the market's "big" cycles - like 15-25 years - from bull (i.e. 1982-1999) to secular bear (2000-present). Price-to-earnings ratios are key to determining when the cycles switch, and Mauldin believes stocks are not "cheap" today based either on trailing 1- or 10-year P/Es, or by market-weighted P/Es as "Stocks for the Long Run" author Jeremy Siegel curiously argued in The WSJ this week.

Mauldin's baseline prediction is for "another leg down" this summer that takes major averages to new lows but sets the stage for a "1974-type bottom"; the key here is to recall the Dow bottomed in price in 1974 but then spent the next 8 years flip-flopping in a wide range around 1000, before beginning its historic rise to 10,000 (and beyond) in 1982.


$1.75T Deficit, Higher Taxes, "Bogus" Stimulus: John Mauldin Sees Silver Lining

President Barack Obama formally unveiled his budget blueprint Thursday and predicted the federal budget deficit will hit $1.75 trillion in the current fiscal year, ending Sept. 30.

Obama aims to pay for the orgy of spending largely by increasing taxes on the wealthiest Americans, "the first on high-income earners since 1993 and would reverse a course set by [former President George W.] Bush of lowering the tax burden on the nation's wealthiest people," as detailed by Bloomberg:

  • Reinstate the top two Clinton-era tax rates of 36% and 39.6% in 2011, up from the 33% and 35% the richest Americans now pay.
  • Raise taxes on capital gains and dividends to 20% for top earners, up from the 15% set by Bush in 2003.
  • Additionally, Obama seeks to raise $318 billion to pay for health care reform by reducing mortgage and other tax deductions for households currently paying the 33% and 35% rates, The WSJ reports.
  • Raise $210 billion over the next 10 years by "limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation," The Journal adds. "Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates."
While pledging to cut the deficit 50% by 2013, Obama didn't offer specifics on what the deficit will look like in fiscal 2010-2012. But they're likely to be in the same (nose-bleed) vicinity as 2009 unless the economy makes a remarkable V-shaped recovery and tax receipts surge in 2010 and beyond.

John Mauldin, president of Millennium Wave Advisors, believes that's a highly unlikely scenario; therefore, more Americans should expect higher taxes in the years ahead to help cover those budget gaps, he says.

Mauldin is "not very sanguine" about the outlook for taxation and calls the recently passed $787 billion stimulus package "bogus" and unlikely to actually stimulate the economy.

Still, the investor and author of the Thoughts from the Frontline e-letter does agree with Barack Obama's pledge: "We will rebuild, we will recover, and the United States of America will emerge stronger than before."

So, assuming they're both right, there is a silver line in this otherwise grim tale.



Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.


John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.

Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.

From The Business Insider:

If you think things are bad here, take a quick peek at what's going on across the pond:

The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

A note from Strategic Energy, as quoted by John Mauldin:

"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.

"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"

This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.

Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.

John Mauldin summarizes:

Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.

In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.

As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.

As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.

"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.

It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.


Cargill Rumors Heat up Mosaic (MOS)

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Sometimes you get lucky - I'm chalk this up in that column. Mosaic (MOS) is surging nearly 8% today on the rumor mill of Cargill takeover. This was one of the positions we loaded back into this morning (sorry I just noticed I posted the purchase on twitter but not here on blog) Apologies on that end; hard to multi task during day - should of been added to the "Various Buys" post.

I am going to sell the stake I bought this morning near $38, at just over $43 (about 1.8% of the fund) - we are still keeping our core position. This gives us a half day >10% gain.

12:12 MOS Mosaic follow-up: Talk on MOS is that Cargill will buy remainder of co for price in $58-60 range; Cargill owns approx. 64% of MOS (40.77 +1.11)

We talked about the potential of this deal back in October 2008 [Oct 28, 2008: Noteable Calls - Mosaic Cargill Standstill Expires Oct 22]

Soleil's Gulley & Associates is out with a noteworthy call on Mosaic (NYSE:MOS) noting that Cargill's four-year standstill re Mosaic expires this Wednesday. The expiration sets up the possibility that Cargill could accept the gift that "Mr. Market" is presenting: accretively increasing its ownership stake in Mosaic.

How accretive? Buyout of the 35% minority stake could boost Cargill earnings by more than 20%, given the fact that Mosaic is currently trading at just 2.7x consensus calendar 2009E EPS of $12.25.


Could just be a hedge fund starting a rumor to create some action; who knows. But I won't look a gift horse in the mouth.

But remember, as we said over and over - there is cash flow and valuation in these fertilizer companies and with the Agrium (AGU) CF Industries (CF) Terra (TRA) group hug - things could be heating up in the sector. [Feb 25, 2009: Agrium Launches $3.6 B Takeover Bid for CF Industries] [Jan 16, 2009: Congratulations Terra Industries Holders]

Long Mosaic in fund; no personal position

Bookkeeping: Restarting Baidu.com (BIDU)

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This covers me on both the China and technology angle in one fell swoop - that 2 bull market thesis in 1. Long 2.2% stake at $151s.

Another dreaded "breakout" chart that has done nothing but disappoint the past year - buy the breakout and 2 days later get your head handed to you. We'll give it 1 more try.

I like the relative strength of late.

Long Baidu.com in fund and personal account


I only bring out Kool Aid Man for special occasions - for example, when I'm net long in a major way. Do you really want to bet against him? (or her? or it?)


Bookkeeping: Various Buys

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We have spoken how we want to see the generals broken to believe in any intermediate rally - the generals of late have been technology, China, and healthcare. Yesterday technology and healthcare took big hits (but technology is of course everyone's favorite again today)... healthcare however was simply destroyed by Obama - especially the managed care companies. So another safe haven to hide out smoked out. We have some smaller niche healthcare stocks and even they are getting hit. This is one mean President.

I don't know what is going on at EZCORP (EZPW) but I assume something in the budget is aiming at cash advance stores. The stock was pole axed yesterday and again this morning - we had a smallish position on the long side - so I am adding to it today. Nothing major. I should of kept my hedge on here on the short side - the chart is a complete disaster.

Even defense is being hit as it appears the budget proposals are so enormous there is fear that SOMETHING will need to be cut and defense seems an obvious item. AeroVironment (AVAV) has fallen to its 200 day moving average ($31.80s) so I am adding to the position there. The problem with adding to a chart like AeroVironment (AVAV) is what today sits right at the 200 day moving average can tomorrow break through. So while I am ADDING today, if it slices through like hot butter I will cut back and take near term losses to save from potential bigger losses down the road.

Last, I added to First National Financial (FNF) and will be building a quite large position here - the stock is down to its 50 day moving average - $16.40s.

If S&P 741 does not hold at the end of the day today, we are headed to the Great Depression of the stock market :) This will be one of the more important closes of the bear market in my opinion.

Again, we are ULTIMATELY heading lower in my opinion as the market is very expensive - I'm making the first "unhedged" moves in a few months - actually betting on a direction. If I'm wrong I'll reverse course and it will probably cost a percent of return.

For now, I am selling Kool Aid... buy stocks ;)

(I'll post charts of the above when I have time later in the day)

Bookkeeping: Starting Anew with Morgan Stanley (MS)

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Morgan Stanley (MS) and Goldman Sachs (GS) have held quite well in this selloff; I am starting a 2% stake in the former around $20.50.

For the near term I am bullish on the market anticipating a rally; I'll reverse that on any breakdown below this morning's low on the S&P (734)

There is no good reason to rally; hence I believe we have a good chance too.

p.s. I also like Visa (V) and Mastercard (MS) here, but instead am using general sector hedges instead to get long --

Long Morgan Stanley in fund and personal account

EDIT 10:45 AM - should also add I covered a lot of short index exposure, and some of the Capital One (COF) from yesterday as well as Apple (AAPL). I'm as long oriented as I have been in a long while. I will rescind bullish nature below S&P 734. COF will be a permanent short for us, but in 24 hours we went from $14.20 to $12 (+15%!) on the dark side so I had to cover some. Will get back short on a rebound (if and when)

Fannie Post $25 Billion Loss; Comes to U.S. for $15.2 Billion

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Franfredron (for those of you new to the site that's when you combine Fannie Mae, Freddie Mac, and Enron) posted a lovely $25 Billion loss last night, and came to the pig trough called Uncle Sam for $15.2 Billion. We are watching the suckling of the teet very closely here because we were (ahem) promised that by taking over Franfredron the U.S. taxpayer would only be on the hook for "at most" $200 Billion. [Sep 7: Bailout Nation Continues - Fannie/Freddie Now Owned by You]

So I'm keeping a tab and checking it twice, to see if Hank Paulson has been naughty or nice. (naughty) p.s. not one single clawback anywhere in the system?

Let's keep these two suckling pigs straight - Fredron
  1. [Nov 14: Freddie Mac First to the Trough] $13.8B
  2. [Jan 25: Freddie Mac Saddles Up for Another $35B] $35.0B
And now Franron
  1. $15.2 B
$64 Billion Down, $136 Billion to go before we reach the "at most" promised to us.
  • Mortgage finance company Fannie Mae said Thursday it needs $15.2 billion in government aid to make up for losses from the slumping U.S. housing market. The mortgage finance company, seized by federal regulators in September, posted a loss of $25.2 billion, or $4.47 per share, in the fourth quarter.That compares with a loss of $3.6 billion, or $3.80 a share, in the year-ago period.
  • Fannie's net worth -- the value of its assets minus the value of its liabilities -- fell below zero at the end of the quarter, forcing the company to request funding from the government for the first time.
  • The Treasury Department, after seizing control of Fannie Mae and sibling company Freddie Mac last fall, pledged up to $100 billion in aid for each company, the largest buyers and backers of U.S. home loans. (cough)
  • Fannie Mae said its fourth-quarter loss was driven by $12 billion in credit losses due to declining housing market conditions, $12.3 billion in losses on derivatives and $4.6 billion in writedowns of the value of its mortgage-backed securities.
Ah, new news - I missed it last week in all the trillions we are passing around
  • Last week, the Obama administration expanded that promise to $200 billion each.
Well at least they are somewhat honest... I have to edit it to $64 Billion Down, $336 Billion to go.

When the original $200 Billion figure came out in September I said

Well it's official. We saw this day coming a long while back - starting last fall, and throughout the winter/spring as the government in its "brilliant" short sighted mode loosened regulations even further [Feb 27: OFHEO Increases Allowance for Fannie Mae] [Mar 19: Fannie, Freddie Layered with MORE Risk] to heap more and more of the mortgage market onto Fannie (FNM) and Freddie (FRE) we said this is only adding to the stress. Here are a series of posts where we predicted this day. [Aug 18: The Heat is On: Fannie Mae (FNM) and Freddie Mac (FRE)]



and you know when a government institution estimates one cost, that by the time we get there it is usually 2-3x higher. So figure $200 billion x 2-3 times = $400 billion to $600 billion cost to you


And they call me a bearish fella... see, I am always stating a probable outcome as opposed to "bait and switch". So $400 Billion it is to the 2 biggest lobbyists that Washington D.C. has ever known. Millions upon millions given to CEOs - no clawbacks though; it was a Black Swan event. No one could of seen this coming... nope.

Now again I'd like to state what I've been repeating over and over - the Federal Reserve is buying a lot of this junk and throwing it on their balance sheet. They never took that sort of risk before, but now they say it's ok "hey it's AAA rated". This is the same junk that is causing massive losses on balance sheets from Washington Mutual to Citigroup to Bear to Fannie. But when it gets on the Federal Reserve balance sheet - it's *MAGIC*. It doesn't go bad. How do I know? I don't know ... they won't release the details. Just know we're taking losses (and will take many more losses ahead as the Federal Reserve replaces our lending system and buys up car loans, student loans, personal loans, and now commerical mortgage back securities) under the cutely named TALF- but not to worry. It's all sitting in a magical places where losses go to disappear... in a galaxy far far away. Bentopia... it's like utopia but with bearded people. So think of Bentopia each time you hear about the vacuum cleaner that is the new and improved Federal Reserve - US Treasuries out, "highly rated" loans to US consumers in. Nothing can go wrong here.
  • The Obama administration also said earlier this month it will continue purchasing mortgage-backed securities from them and would allow each company to hold an additional $50 billion in mortgage securities as investments, expanding their combined portfolios to a total of $1.8 trillion.
One last thing - don't worry we're not nationalizing Franfredron. In fact you can go buy the stock tomorrow (it's fun, really!) We don't do nationalization in the United States, that's below us - that's for the socialistic backwards countries. Instead we keep the stock alive and funnel hundreds of billions into companies under the guise of the free market working. And don't you dare call that nationalization... you... you... technically correct wordsmith!

Sincerely,
You'll Nationalize Us Over Our Dead Capitalist Bodies

[Oct 12: Fannie, Freddie Turning into Vacuum Cleaners]

California Home Sales Double as Prices Plummet

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I am always on the search for any shard of good economic news - I've turned over old tires, looked under sofa cushions... I continue to look. Here is a promising sign in California that letting markets work, creates conditions that the old Economics textbook say will work. Lower prices will spur demand. It's an out of world concept. So what is the Federal government doing about it? Trying to stop this process from happening at all costs - lower prices can not be allowed.

Ugh.

When I saw in the Case Schiller index that even San Francisco homes had dropped 30%+ year over year you know supply/demand dynamics are finally working. I expect New York to be San Francisco-ish in about 6-9 months.

Via Bloomberg
  • California home sales doubled in January from a year earlier as buyers took advantage of an almost 41 percent decline in the median price of an existing home, the California Association of Realtors said.
  • The number of existing, single-family detached homes sold jumped to 624,940 on an annualized basis, up from 311,160 a year earlier, the Los Angeles-based group said in a statement today. The median price dropped to $254,350 from $427,200.
  • The drop in prices and rise in sales come amid an increase in foreclosure sales in the most populous U.S. state. More than half of all existing-home sales in both Southern California and the San Francisco Bay Area were foreclosure sales in January.
  • January was the first month since October 2005 that the seasonally adjusted, annualized sales rate passed 600,000 in the state, the California Association of Realtors said today.
  • The time needed to deplete the supply of homes on the market at the current sales pace dropped to 6.7 months from 16.6 months a year earlier. (that is actually a very good thing) The median number of days it took to sell a single-family home in California was 49.9 last month, down from 70.8 a year ago, the association said.
Remember our thesis behind First National Financial (FNF) [a title company] - we will see a surge in houses changing hands (if Big Brother allows); they will move from weak hands to strong hands. It does not matter if its a foreclosure or not. This type of story further convinces this thesis is valid and not one made up by a TV pundit to talk his book.

Long First National Financial in fund; no personal position

Thursday, February 26, 2009

FDIC Troubled Bank List Up to 252

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That headline is very deceiving - let's be very clear here on reality versus good PR.

Flashback to August 2008 [Aug 26, 2008: FDIC Troubled Bank List]

...every quarter the FDIC updates it's problem list; I'm on record saying when we look back in 12, 18, 24 months we'll see a slew of bank failures, many of which are names we've never heard of. At some point the FDIC will run out of money to guarantee the $100K per account so they will have to raise the fees on the remaining banks to raise more money to fund their bailout fund. Which is sort of circular when you think about it.

So far other than Indymac its been smaller names, but just looking at this Washington Mutual (WM) it seems almost apparent that our largest savings and loan will go at some point. As for FDIC insurance it is down to $45.2B from $52.8B just from 1 large failure (IndyMac)


So back in August we "only" had 117 troubled bank (up from 90) and assets in those banks went from $26 Billion to $46 Billion (ex IndyMac) - but nowhere on that list the quarter earlier(when we had 90 troubled bank) had been IndyMac - which was the 2nd biggest failure in history ... at the time. Nor in August did we have Washington Mutual (which we had to take over and give to JPMorgan)... nor Wachovia (which we had to take over and give to Wells Fargo). Nor did we have Citigroup (C) or Bank of America (BAC) both of which are alive only through largess of US taxpayer.

Then we moved on to November 2008 [Nov 25, 2008: 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.

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.


So we went from 117 to 171 banks and assets in said banks up to $115 Billion. Just that number alone STILL showed none of the major banks were on the list. Because they're "just fine" (as the stress test will soon show you)

FDIC deposit insurance? Down from $45.2B to $35.6B.

Let's see where we are today....via Bloomberg
  • The U.S. banking industry posted its first loss since the savings-and-loan crisis in the fourth quarter, and industry earnings last year were the lowest in 18 years, the Federal Deposit Insurance Corp. said.
  • Institutions on the agency’s “problem list” rose 47 percent to 252 lenders in the quarter ended Dec. 31 from 171 in the preceding quarter, the Washington-based agency said today in its quarterly report on the industry’s health.
  • “Rising loan-loss provisions, losses from trading activities and goodwill writedowns all contributed to the quarterly net loss as banks continue to repair their balance sheets in order to return to profitability in future periods,” the FDIC said in a news release.
  • Lenders on the FDIC’s “problem list” had assets of $159 billion at the end of the fourth quarter, an increase from the $116 billion at the end of the third quarter, the agency said.
So they "say" 252 banks and $159 billion... so of course with that paltry number Bank of America and Citigroup are STILL NOT troubled banks (hold on, have to stop laughing... can't type) - as you know those bankes are just fine.

On the "positive" side FDIC reserves, which had fallen to $18.9 Billion in middle of fourth quarter has jumped to $69.3 Billion due to a doubling of premiums the banks have to pay <--- as I predicted would happen in August
  • Funds set aside by banks to cover loan losses more than doubled to $69.3 billion in the fourth quarter from $32.1 billion in the year-earlier quarter. The FDIC has doubled premiums it charges banks to replenish its reserves, which were slashed in half to $18.9 billion in the fourth quarter from $34.6 billion the previous quarter as bank failures reached a 15-year high last year.
Now if you think real hard... considering all the major (and many minor) banks received $350B+ of TARP money.... whose pockets did these premiums come out of? You guessed it.

And once more.... say thank you to your grandchildren.

Just charge it on my TARP VISA!

Flowserve (FLS) and Fluor (FLR) Continue Best of Breed Ways

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We remain in a market where fundamentals seem to matter very little, and student body trading ("everyone in!" everyone out!") is dominant, but Fluor (FLR) and Flowserve (FLS) continue to be impressive in their respective niches.

First, Fluor (FLR) the largest "global infrastructure/engineering" firm out there - unlike a lot of peers who have been decimated on earnings of late (Foster Wheeler, Chicago Bridge & Iron) Fluor seems to be outperforming - although their business is not immune; their largest segment is "Oil & Gas". We deemed Fluor to be one of the premium franchises the last time we looked at the sector [Dec 3, 2008: Back of Envelope Look at Infrastructure] however after the Obama infrastructure hype run in December through mid January, the sector has weakened considerably. With all that said, the market is not at a moment where it differentiates much among franchises, as the chart shows - to HAL9000 (the quant fund computers) every stock in a sector is the same.


Full earnings report here. They reiterated guidance but with the global economy headed the way it is, I would expect them to most likely have to drop expectations a bit later in the year - I doubt they exist in a completely different parallel universe to their peers. I also would not be surprised to see consolidation in this sector - stock prices have fallen so dramatically and engineering talent is at a premium.
  • Engineering and construction contractor Fluor Corp. said on Wednesday its fourth-quarter profit fell 27 percent compared with a year-earlier quarter inflated by a tax benefit. But its operating profit grew on growth in its oil and gas segment, and the results beat analyst expectations.
  • The company reported net income of $190.1 million, or $1.04 per share, down from $259.5 million, or $1.41 per share, during the same period last year. for the quarter ended Dec. 31 was $6.07 billion, Revenueup 29 percent from $4.71 billion during the same period last year. Fluor said that its fourth-quarter operating profit rose 30 percent to $323 million.
  • Analysts surveyed by Thomson Reuters were expecting a profit of 92 cents per share on revenue of $5.81 billion.
  • New contract awards for the quarter dropped 34 percent to $4.2 billion because of a falloff in its Oil & Gas and Industrial & Infrastructure segments. The company said it is seeing evidence of a slowdown in some projects, but it said the impact on its backlog has been "relatively minor." (backlog is key in this sector)
  • "The gloom and doom that's out there is a general prediction. We're not seeing it specifically in our business," Chief Executive Alan Boeckmann said. "We have had some cancellations and delays, but they have not been major, and we have had some very nice surprises."
  • While giving no detail, he said a few "very significant" projects timed for the second quarter of 2009, if awarded to Fluor, could help maintain its backlog by the end of the year at about its end-2008 level of $33.2 billion. "The number will start with a three, I believe," Boeckmann told analysts on a conference call.
  • Despite increased pressure on prices, Boeckmann said he does not anticipate significant margin erosion in its backlog. New awards in the fourth quarter included a petrochemical expansion project in China and a refinery conversion project in Portugal [ID:n18377365], as well as some U.S. refinery work.
  • It left its 2009 guidance unchanged at $3.90 to $4.20 per share. Analysts were expecting a 2009 profit of $3.73 a share on revenue of $23.53 billion.
[Aug 12, 2008: Fluor to Hedge Fund Computers: The World Does not End at $110 Oil. Or $80. Or $50]
[Aug 11, 2008: Global Infrastructure Night in Earnings]
[May 16, 2008: Fluor as a Wind Play? $1.8 Billion Says Yes]
[Jul 9, 2008: Fluor vs Perini - a Rising Tide does not lift all Boats]
[Feb 28, 2008: Fluor with Great Report and Boosts Guidance]

***************

Onto Flowserve (FLS) which can be best described as a jack of all trades in the water infrastructure world. Another excellent leadership firm which the market has simply dismissed with a backhand to the face. [Oct 29, 2008: Flowserve Impressive Again] [Jul 31, 2008: Flowserve Mighty Impressive Earnings] We "escaped" this position in early September north of $100 - how the mighty have fallen.


This shows again - fundamentals and homework simply mean nothing in our current era; you can be completely correct on a stock's backstory but lose half your money. (or more) The stock is up a mighty 15% today but as of yesterday you were at lows for year 2009. Growth has slowed but in this environment any growth is a good thing. Latest earnings here
  • Industrial pump maker Flowserve Corp (FLS) posted a higher fourth-quarter profit, helped by increased sales in its flow pump and flow control businesses. For the quarter ended Dec 31, the maker of fluid handling equipment, posted net income of $114.4 million, or $2.03 a share, compared with $95.9 million, or $1.67 a share a year ago. Sales grew 5 percent to $1.2 billion.
  • Sales at its pump division grew almost 4 percent to $681 million, while flow control division sales grew 10 percent to $346 million.
  • Backlogs as of Dec 31, were up 24 percent to $2.83 billion. However, quarterly bookings fell 8 percent to $1.02 billion.
  • Flowserve also reaffirmed its 2009 profit outlook of $6.75 to $7.50 a share, which includes a charge of about 50 cents a share in realignment costs.
At $7 EPS for 2009 (if they hit it) the stock is about 7x forward earnings - again a premium global franchise. Flowserve stock is "multiple compression 101".

Once the globe returns to some semblance of growth (not anytime soon unless Kool Aid is your drink of choice) these should be among the stocks that lead the charge. For now we'll watch from afar...

No position

Adult Education Stocks Coming Back to Earth

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We are seeing a lot of examples of crowded trades reversing here in the past week. This group is so overhyped - I am still debating going short ITT Education (ESI) here at $108 now that it's broken support. Who exactly other than "federal government" is going to be funding the adult education. Sorry, I just don't buy this Kool Aid. As I wrote this morning

The "adult education" names continue to hang around although that is becoming one crowded trade.


There's a couple others in this sector but you get the point - this is when momentum goes bad... rats jump ship. Last rat turn off the lights....

Have I mentioned buy and hold is dead? Almost every stock - even Walmart (WMT) gives back gains nowadays.


Ron Paul Questions Ben Bernanke

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Nothing explosive here other than a lot of "truth" telling. For gosh sakes Barney Frank shut your mouth and let the guy talk - Ron Paul should have 45 minutes as he is one of the few who have a clue about what is going on (5 minute video - unfortunately Barney Frank is talking for 20 seconds of it)



EDIT 12:15 PM - a reader sent me this video he shot in D.C. I cannot confirm nor deny the accuracy of his footage - decide for yourself (ahem) [20 seconds]



If we cannot laugh at the absurdity of it all, we can only cry. I choose to laugh (and blog) ;)

Thanks for Feedback

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Thanks for feedback on the subscription idea thus far

Received an avalanche of emails so I can not respond to them all, but was nice to see a lot of faces (virtual) - I think 80% of emails I had never heard from before. No consensus on anything with so many opinions but what is interesting is to hear how differently people use the website - complete night and day based on each person.

For the short term the "tip jar" idea is a good one - I'll look to put one up by next week; then good hearted souls can contribute that way. What I will say is if there is a subscription model down the road, I will offset any "donation" to tip jar and put it towards subscription if that route is chosen.

I am still up in the air on direction - there are pros and cons to any change so weighing things out. Still gathering intelligence so feel free to continue to send me emails or comments to yesterday's posts. I got so many responses I will need to sit down this weekend and really read through them - only about 50% through what I got last night.

I would also like to in the next few weeks find a way to do a survey of investor experience, type of investor, your typical holdings (I only own mutual funds, I hate mutual funds and only own stocks etc) and how you use the site (for macro economics, for stock market daily updates, for stock selections) etc. It would help me figure out who dominates the audience.

Again thanks for all the responses; love to hear the feedback from everyone.

Bookkeeping: Starting Capital One Financial (COF) Short

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As I said this weekend and Monday I would be very wary about pressing shorts because everything was so oversold, especially worst of breed. Well true to form worst of breed is rocketshipping (not a real word) up.

Las Vegas Sands (LVS) up 32% on an upgrade - woo hoo; short squeeze

Capital One Financial (COF) up 100%+ in 2 days ($7 to $14) - woo hoo; short squeeze

I have been talking about credit card companies for a year and a half as shorts, but since I moved to the new investing platform in January where I could actually short individual names - these stocks have been going straight down - so I didn't chase into them; much to my chagrin! I prefer to short near a resistance area so if I am wrong I can get out with limited losses.

Today COF rallied (again after a 100%! 2 day move) to its 20 day moving average ($14 or so) so I am going to begin a modest short of 1.4% of portfolio in the $14.20s. In a perfect world the stock rallies to $20 where I'd really load up. My thought process is the market is dominating individual stocks so more than what Capital One is doing I want to see what the market does. We are looking at 783 and then 800 on the S&P, so if the market bursts through both of those I'll probably rescind the short or cut it back... if we break back down I'll add to it. Simple as that. If COF falls back to about $13.50 I will potentially make the position larger. We are not trading in a vacuum and we are back to the days of fall 2008; what I call HORDE trading - everything up or everything down based on what the market is doing. So you can't look at an equity in a fish bowl.


Again the only danger with shorting these type of fundamentally bad companies is in the near term you are in there with a ton of other greedy shorts who never cover except when they are squeezed (like the past two days) so the stock can work against you very fast. Hence moderation for now.

Short Capital One Financial in fund and personal account


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