Did Yesterday’s Crash Hurt You?

So, how ironic is it that the Dow was down 777 points yesterday? In slots, that number would be a big winner. However, not many people felt like winners at the end of the trading day yesterday. Today, we have the expected bounce back in the Dow. That should be expected given we were down 700+ points yesterday. Will the bailout plan ultimately go through? I don’t think it will pass in its current form as it got shot down pretty hard yesterday. An adjusted form may get passed later this week given the amount of internal lobbying occurring at the moment…Bush’s speech this morning and the pleas by various Democrats and Republicans yesterday late afternoon and throughout today. I hope the adjusted form would include the following at a minimum:

- Get serious pledges that banks will resume lending
- Suspend mark to market accounting
- Raise FDIC insurance to at least $500,000
- Cut capital gains tax

Here is a questions for you. A few weeks ago, the Fed pumped an average of $188 billion a day into the system. They pumped another $650 billion yesterday alone. If the Fed can pump $650 billion in a day, why do we need a $700 billion bailout plan?

With all of this extra supply of USD’s, hopefully we have all been taking steps to shore up our investment accounts. With yesterday’s crash, those of you that had already shifted some of your assets to cash and bought some gold, you were able to sit back with some peace of mind. For those of that didn’t with today’s morning bounce, any gains or even losses that you may have, it may not be a bad idea to shift them to cash and buy some gold (GLD, PRPFX, bullion, miners with proven reserves and manageable mining costs, etc.). Personally, with the exception of some uranium stocks that I have that are very much in the red, I have shifted everything else to cash or to gold and silver over the last few weeks. The reason why I haven’t shifted the uranium stocks to cash is because I had taken some profits off the table over the last few years and feel that they won’t go that much more lower since the long-term spot price for uranium remains in the mid $70’s, which is higher than the historical average. Plus, I want to maintain some exposure to uranium with all of the nuclear reactors (for energy purposes) that have been signed for construction in areas like China, India, Russia, and Canada. If McCain wins, he says he will push for the construction of nuclear reactors in the US. As for Obama, he is entertaining the idea as long as the US can figure out a way to dispose of the rods after they have been reused to the point that they are deemed useless. Either way, it’s a win over the current administration. Regardless, there are other countries (look at what France has accomplished…circa 70% of energy from nuclear) moving forward with nuclear as a means for energy. At some point in the not-so-distant future, with the limited supply of uranium in the ground, there will be a supply crunch.

As for making money in this market, many of the wealthiest individuals (Buffet, Icahn, and Zell to name a few) all made their initial wealth during bear markets. Five or 10 years from now, I am sure we will all be slapping ourselves silly if we don’t gobble up shares of the plethora of debt-free stocks trading under eight times earnings at the moment. All I am saying is that we should get ready to buy. However, personally, I think there is still some downside movement to occur in the market. So, I am not buying right now. When I do, I will let you know. Also, I don’t claim to be an expert at timing the market, so how you profit or protect yourself during these times is up to you. I have just sharing some ideas.

I know I have referenced CNBC in past blogs but I don’t take investment advice from them. I view CNBC, Bloomberg, and like networks to be a good source of real-time information. However, I read plenty of independent research and investment books on the side and then come up with my own thoughts and ideas as to what’s going on around us and how I might profit from it. So, in the near term, I plan to publish a post with books, investment letters, and other readings that I have found helpful or plan to read soon enough. Feel free to add to it via comments to that specific post.

I look forward to chatting with you more. Also, RJ, thanks for your comment on an earlier post. I look forward to building more traffic on this blog and making this more of an interactive forum.

cheers,
Moolah

Bailout Plan Finally Getting Finalized!

What a weekend…the Cowboys and the Florida Gators both lose, but at least the Kentucky Wildcats won! Also, the Republicans finally stop fighting so a plan can be approved and Wachovia goes to Citigroup. Well, I guess Vikram Pandit has placed his stamp on Citigroup. Looks like JP Morgan must be in a better position than Citigroup since JP Morgan was able to cherry pick the good assets from WaMu, which wasn’t the case with Citigroup since they will do an immediate writedown of around $42 billion and provide warrants of around $12 billion to the FDIC for taking on part of the risk of Wachovia’s mortgages. There was a lot of talk also about National City on CNBC this morning. I hope that’s all it was…just a lot of talk since not sure how many more hits the financial markets can keep taking.

So, what do I think this all means for us? Personally, I think we are damned if the plan goes through and damned if the plan does not go through. Why? Honestly, I wish I could be more positive, but I would rather relay my thoughts and ideas to you in a truthful fashion. If it does go through, the markets should spike up in the short term but by turning the printing presses on, the dollar as we know it will continue to downward spiral. That should be positive for those holding gold bullion and gold stocks. Silver should follow. The largest silver-backed ETF, SLV, rose to a record 6,901.41 tonnes on 9/25/08. Also, the Treasury has announced that they are “temporarily” halting production for gold buffalo coins. They said they can’t keep up with demand as their price books show the coins selling for $1,100/oz. As I am writing this, gold is up $19 to $901/oz. Now, if the bailout plan does not pass, then the markets will inevitably tank because there will be more blood on the street and ultimately nothing to suppress the negative pressure on home prices. The government would essentially be saying that they will let the free markets work and let the firms fail regardless of the systemic risk at hand. However, with all of the government intervention to date (Bear, Merrill, AIG, WaMu, and Wachovia) and all the flack that they have taken globally by letting Lehman fail, my guess is that the bailout plan will pass. However, there are a group of conservatives in the House that will vote against it. If it passes, according to CNBC, the approval would result in $350 billion initially and then another $350 billion, which would be subjected to additional approval, at a later date. I assume the government would get an ownership stake (warrants, direct equity) in the banks that choose to sell their crap to them.

Everything the government has done to date has been in the name of limiting systemic risk to the global markets and to reinvigorate the credit markets so lending would resume. This hasn’t worked thus far. What happens if the banks sell their crap to the government and then resume sitting on the sidelines, refusing to lend as they could enjoy being in a more capitalized position? That would be another goose egg for the government.

The few people I have spoken to on the trading side are all scared due to the uncertainty in the markets. As I said before, monetizing your gains in the stock market is a must to improve your cash position. Also, the areas I think will be profitable during these times are precious metals and companies that sell products you buy regardless of the market conditions (fast and cheap food, booze, tobacco, possibly porn, etc.).

Enjoy your Monday and have a good start to the week…

Until later,
Moolah

Pluto…still a planet? US financial empire over?

Hey everyone,
So, get this. I went yesterday evening to the Miami Museum of Science since they were having a professional networking event. It’s always nice to have a drink and have the opportunity to chat it up with intelligent professionals. I always say that if you want to feel young, surround yourself with older people. Likewise, if you want to feel smart, surround yourself with smarter people. Well, after having a drink and some good conversation, I decided to take a walk around the museum and check out the science displays. One of the hallways had planetary exhibits, which showed Pluto as being the 9th planet. Am I wrong or do I remember poor Pluto being demoted not too long ago? As expected, I was a bit of a smart elic (of course, all in jest) in explaining this to the museum owner. She agreed this definitely needed to be changed. However, I was the first person at this event to point it out! Either I failed in surrounding myself with smarter people or people didn’t care since the drinks were pretty good. I opt for the latter since I definitely indulged in a few drinks myself.

I read through several investment letters and online news articles today and here are two I found to be of particular interest:
- Germany proclaiming that the US financial dominance is over
http://www.reuters.com/article/newsOne/idUSTRE48O2L020080925
- US economy is busted under the weight of ever-increasing debt
http://www.journalinquirer.com/articles/2008/09/25/chris_powell/doc48db9d8625518811197071.txt

I agree with the Germany article that there needs to be some form of an international set of standards for regulation of financial entities. This would prevent the overleveraged investments (derivatives in particular) that have characterized the revenues of the i-banks and hedge funds, rather than being derived from core business.

The Bush speech today seemed to indicate that the Republicans have finally stopped fighting and there may be an agreement on the $700 billion bailout/rescue plan sooner than later. That would mean the printing presses are going to be in high gear. Have you bought any gold? Another investment I failed to mention in yesterday’s blog is PRPFX (permanent portfolio). It has been a solid performing mutual fund this year (about a 2% return YTD…not too bad when you compare it to the Dow and S&P) and double digit returns the last few years. It’s holdings include: gold, silver, Swiss franc assets such as Swiss franc denominated deposits and bonds of the federal government of Switzerland, stocks of U.S. and foreign real estate and natural resource companies, aggressive growth stocks and dollar assets such as U.S. Treasury securities and short-term corporate bonds. Also, if the plan goes through, I think we will see a short term increase in the stock market and then things could get nasty.

It looks like McCain has finally decided to continue with tonight’s debate with Obama. I am glad that this will happen since there is roughly about 40 days to go until we decide who the next president will be. Plus, there is still so much for the voting public to learn: more granularity on Obama’s plans, actually see the candidates debate head to head, is Palin ready to step in if something were to happen with McCain, can McCain remember his comments from a week ago or how many homes he owns. I plan to order a greasy pizza, have a beer, and enjoy the debate at 9pm EST. All of you are welcome to come over and join.

Enjoy your weekend!
Moolah

Wall Street Bailout

Hello to all,
So, what does this $700 billion bailout of Wall Street mean to you? How can we make money whether or not it passes?

I am sure most of you agree that it is a disgrace how our capitalistic society works from the standpoint of a common phrase that many of you have come across: privatize the gains and socialize the losses. The more disgraceful aspect is that if we don’t approve the bailout plan, then all of us Main Street folks will continue to suffer as a result of more banks failing, fewer foreign entities looking to invest in the US, less confidence in the dollar due to ongoing financial sector woes, etc. I really feel that our economy is in a situation that we will suffer whether or not the bailout plan gets approved by Congress. Sorry…don’t mean to be so morose.

If the bailout plan gets passed (each day it looks to be an increased likelihood of doing so…would Warren Buffet have come to Goldman Sachs rescue if he didn’t have some sort of assurance or confidence that the plan will pass?), that means the US will turn the printing presses on again (was it ever turned off?) to the tune of $700 billion which will inevitably resume the devaluation in the greenback. Gold stands to be the winner if this happens. Silver will follow right along. Some safe investments in this area include buying actual gold and silver bullion (kruggerands, maple leafs, eagles, bars, etc) if you can still find some, buying shares in the GLD and SLV etfs, or being more speculative with the mining stocks (SSRI, AEM, ABX, and GBX to name a few that I personally like). If you are looking to be conservative and have easy access to converting your investments to USD, I recommend GLD and SLV as they should trend along with the spot prices for gold and silver without the intangibles and leverage inherent in the mining companies. Also, both etfs have been adding millions of ounces to their holdings over the past few weeks.

I don’t know about you but the last few days have ominously felt like the quiet before the storm or the eye of a hurricane. Is there more bad news to come? Will this bailout plan solve all of the US economy’s problems? I, personally, don’t feel that we are close to being at the end. China recently ordered its banks to cease lending with the US banks for the time being. Foreign nations are rethinking whether the USD is the reserve currency of choice. Many nations want our troops out of their countries. US firms are increasingly selling significant ownership stakes to foreign entities. As a result of all of this, I think we should all have defensive plays and companies that are the largest and meanest and baddest in their respective sectors in our stock portfolio. These would include WMT, KO, and MCD to name a few of the ones I like. In tough times, the dollar menu looks to be more and more attractive, everyone will keep drinking Coke, and shopping at Wal-Mart isn’t too painful on the wallet.

Whether or not the bailout plan passes, I think commercial real estate still hasn’t been beaten down enough as it typically lags the residential sector. If consumers aren’t buying, then retailers eventually won’t be expanding, which should place continued strain on the retail sector. Also, the office sector should continue to see cap rates increase because Corporate America is definitely not in a growth mode. However, with that said, if you are going to own commercial real estate, you want the class A in strong metropolitan areas as they will naturally hold up the best. So, the stock I like to profit from the continued downturn is SRS. It is a way of shorting the real estate index. Watch out for potential wild swings with this one and hold tight with your thesis because it makes no sense that this etf is well off its 52-week high since commercial real estate is still in the early stages of its inevitable downturn.

Also, in these turbulent times, always keep part of your portfolio in cash. Personally, I have about 20% in cash. I pulled my gains over the last few weeks and stuck it in cash. I kept the principal in the stock market but maintaining a 20% stop loss mentally. Never manually input a stop loss or trailing stop loss position into the markets! Too easy for the traders to take advantage and dip a stock so it executes just to have it trade higher moments later.

Until later…
Moolah