Portfolio Killer

Ulli Uncategorized Contact

Another drubbing yesterday pushed the major indexes down to their lowest levels in some 5 years. The speed with which the markets have fallen surprised many and in the process destroyed just about all Buy-and Hold portfolios.

As I have repeatedly said, investors need to lose some serious money before they will awaken to the fact that they have been sold a bill of goods via the idiotic advice of buying and holding a portfolio into oblivion. I know, because I had my share of calls and emails from furious investors, who had their accounts with major money management firms, only to see them lose some 40% so far this year.

I have been saying the same thing over and over again that this bear market has the potential to make the last one (from 2000 to 2002) look like a pimple on a gnat’s butt. As always, most investors don’t see the light until it’s too late and major portfolio damage has occurred. If you still have any money invested, head for the sidelines, regroup and review your investment approach as well as the guidance and advice you have received.

Right now, the markets seem to simply ignore the Fed’s latest steps to intervene as another useless attempt to stem the tide. The bear is in charge right now—so don’t get in the way of the downtrend. Why? Because you don’t have enough money and time to outlast this one and then try to attempt to make it back. Being a broke hero, is simply not worth it.

Hitting The Skids

Ulli Uncategorized Contact

Yesterday, the markets tanked big time with the Dow being down some 800 points at one time before recovering. Even crude oil sinking below $90/barrel couldn’t offset the downdraft.

This confirms my suspicion that no one entity or government is powerful enough to stem the global credit crisis, which was based on a built-up process of leveraging and accumulation of tremendous debt, which now has started to unravel and affected all corners of the world.

Since an anticipated market rebound after the acceptance of the $700 billion bailout plan has not materialized yet, you could argue that many have come to realize that the plan may have no impact at all. While the jury is still out, apparently the world community is not buying it either, hence the lack of confidence and continuation of the sell off. So, once we all realize that the bailout plan is not working, why don’t we just cancel it and not waste the money? (humor attempt).

It’s no surprise that our Trend Tracking Indexes (TTIs) slipped deeper into bear market territory and are positioned as follows:

Domestic TTI: -9.81%
International TTI: -19.00%

Right now, doing nothing and watching this debacle from the sidelines is the way to go.

They Didn’t See It Coming

Ulli Uncategorized Contact

While nobody could have predicted the extent of the fallout of the credit crisis, the handwriting was on the wall that trouble was brewing the moment the Subprime crisis made news. It’s interesting that those who read economic and investment blogs seem to be better informed than the leadership. Take a look at this video:

[youtube=http://www.youtube.com/watch?v=HqM7hcTMXDs]
I’m sure you remember Paulson’s constant reminders that “we have a sound banking system.” Maybe the top political echelon should also start reading blogs regularly instead of watching the cheerleaders on the financial news channels?

Sunday Musings: Can The Bailout Work?

Ulli Uncategorized Contact

The short answer is: Fat chance. This is according to Jon Markman, who wrote a piece titled “Can the bailout work?

Here are some highlights:

The recent volatility on Wall Street is virtually unprecedented and is likely to remain so until every trader dies of heart failure or the banking system is recapitalized with pixie dust, whichever comes first.

But don’t blame Wall Street vacillation for the jumpiness. It should be seen in the context of a decisive, coordinated effort by governments worldwide to manipulate stock markets higher by every means possible without regard to such niceties as fundamentals, the rights of shareholders or the laws of financial gravity.

Few citizens will wish to complain, of course, for U.S. equities actually have a shot at advancing as much as 10% over the next few months. Wall Street veterans call this the “free-lunch trade,” and it could be very tasty for a while.

Yet experts say it will likely fail eventually, by running into the usual set of bugaboos that we have discussed for some time: levels of debt deleveraging and slowing growth that no additional amount of monetary or fiscal stimulus can vanquish.

Virtually every respected authority in the world of real capital believes the bailout bill approved by lawmakers won’t solve our banks’ problems. Yet the nation’s political leadership pressed to pass it with the breezy confidence of the captain of the Titanic.

After it’s signed into law, the Federal Reserve will flood the system with additional money, just as it did in 1999 to ward off expectations of a financial meltdown from the Y2K bug. Then markets will lift. But that won’t mean all is well, not by a long shot, as eventually the plan must actually work. And every credible expert I’ve spoken with believes it won’t. (The experts also have solutions, though, which I’ll share with you in a moment.)

So here’s the problem: As explained by John P. Hussman of the Hussman Funds, the financial bankruptcies we’ve seen in the past six months have come in order of their gross leverage, or the ratio of total assets to shareholder equity. The more leveraged — Bear Stearns, Lehman Bros., Washington Mutual, I’m talking to you — the more vulnerable they were.

The reason is that as loans of a financial company lose value because of underpayment, company executives must write down the asset side of their balance sheets and at the same time reduce their shareholder equity on the liability side. Banks are allowed to lend only in proportion to their shareholder equity, so as the equity becomes thinner, banks are less able to lend money to make a profit.

Sophisticated customers then see that the banks are in precarious condition and make withdrawals. And so to satisfy those requests for withdrawals, banks are forced to liquidate more assets at distressed prices, prompting further reduction in shareholder equity. Yow! This process is then repeated in a vicious cycle until shareholder equity goes to zero and the company becomes insolvent. So long, banko.

Got that? What the government now proposes to do is to buy the questionable assets to protect the institutions against failure. So far, so good. Yet just taking the assets out of the mix would do nothing to provide additional bank capital, so the balance sheets would be just as fragile and prone to bankruptcy. At best, Hussman adds, you’d be allowing banks to liquidate their bad loans more easily to meet the demands of customer withdrawals.

The only way buying the bad assets could increase capital would be if the Treasury overpaid for them. And that would be so politically unpalatable that it isn’t worth even contemplating.

Hussman has this solution, which is a variation on what credit derivatives expert Satyajit Das recommended last week: have the government provide capital directly via a high-interest “superbond.” It would be counted as capital, yet in the event of a bankruptcy, it would have a senior claim above stockholders and senior bondholders. That would protect the financial system, Hussman says, while also protecting customers and taxpayers. Bond interest would be deferred until a bank met a certain level of profitability.

This is essentially the route that Warren Buffett has taken with his investments in Goldman Sachs and General Electric over the past two weeks: provide capital in return for a financially viable security that is senior to shareholders’ stakes, accrues at a high rate of interest and can be called early, as soon as the bank can secure cheaper financing.

In summary, we are on the cusp of a historic moment in world financial history. Virtually every country in the world is trying to throw truckloads of borrowed money at a problem created by borrowed money. As listed by analysts at ISI Group in New York, even before the rescue bill hit Congress, in this country we already had short-term interest rates slashed to 2%, bank-collateral quality lowered from AAA-rated securities to boxes of old spaghetti, a boost in conforming-loan limits at Fannie Mae, the nationalization of the nation’s two largest mortgage lenders and the expansion of the Fed balance sheet by $300 billion-plus.


Elsewhere, the European Central Bank, Bank of China, Bank of England and United Arab Emirates have all injected liquidity into their monetary systems. Taiwan and China have cut banks’ reserve requirements, allowing them to lend more from a lower capital base. China, Australia and New Zealand have abruptly changed course to lower interest rates. Russia has announced a $120 billion stimulus package, and Sweden is cutting taxes. (Come on, Andorra and Zambia, where are your contributions?)

And now we’ll just have to see whether their efforts will work out for more than a couple of months and we can all go back to our regularly scheduled lattes, or whether it’s time to start figuring out how to sell pencils. Place your bets.

[emphasis added]

The votes have been cast and the bailout plan has been accepted. We now have to wait and see how it will work out. If you have any article or link written by an economist who agrees with the bailout provisions, please email it to me, and I’ll be happy to post an opposing view.

Bailing Out The World

Ulli Uncategorized Contact

One of the more unknown aspects of the bailout plan is that it provides foreign investors the opportunity to join in the dumping fest of bad assets onto the US Treasury.
Here’s a video interview with Rep. Brad Sherman discussing the pros and cons of the plan.

Below are some of the highlights of that video as featured at Global Economics with Larry Kudlow interviewing Brad Sherman:

Rep. Brad Sherman, D California:

Larry I am glad you have a few seconds to talk to someone who voted against this bill. I am not changing my mind. I want to thank my colleagues who stood up to the purveyors of panic and voted against a very bad bill and voted with 400 eminent economists including three Nobel laureates who wrote to us and said don’t panic, don’t act hastily, hold hearings, work carefully. The fact is Larry if you read this bill, even you would have voted against it.

It provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson’s power. There is a critique board but not really a board that can step in and change what he does. It’s a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries.

Larry Kudlow:

Let me just ask you one question. I think you are referring to foreign banks headquartered in the United States. I do not see how foreign investors get bailed out.

Rep. Brad Sherman:

Larry you have to read the bill. It’s very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn’t owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can’t buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can’t be sold to the Treasury.

There are a lot of pros and cons but I still stick to my viewpoint that this bailout plan will do nothing to support the sliding US economy or end the real estate/foreclosure crisis.

No Load Fund/ETF Tracker updated through 10/2/2008

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Buy and Hold investors got crushed this week as the major indexes had their worst week in 7 years.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -8.38% thereby confirming the current bear market trend.



The international index now remains -16.32% below its own trend line, keeping us on the sidelines.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.