Continuing Global Economic Uncertainty

These last few days are reflective of the bounce I had been expecting. As I have said, monetize your profits and build up your cash position. Boone Pickens of BP Capital (hedge fund focused on the energy sector) has moved over 50% of his holdings to cash for the time being. This morning on CNBC he said he is no hurry to redeploy the capital as he wants to see sustained strength in the equities markets. I don’t think he will see that anytime soon but the volatility will remain (yesterday the market was up 200 points and after the rate cut, it was down 200 points just to rebound slightly and close down 70 points…a lot of that was due to a rumor about GE supposedly cutting its outlook which isn’t true). Tough to trade in this environment.

This has been an extraordinary year in terms of market and government actions. For example:

1. The Fed cutting interest rates from 5.25-1.0% (Sept ’07-today)
2. The Bear Stearns deal – Fed taking on circa $30 billion in junk mortgages (March ’08)
3. The Fed opens up the lending windows to the investment banks (March ’08)
4. The SEC proposes banning short-selling on financial stocks (July ’08)
5. Hank Paulson gets a blank check for Fannie and Freddie but promises not to use it (July ’08)
6. Hank Paulson uses the blank check with Fannie and Freddie (Sept ’08)
7. The Fed takes over AIG (Sept ’08)
8. The $700 billion Troubled Assets Relief Program (TARP) – the Government taking stakes in private banks (Oct ’08)
9. The Fed offers to buy commercial paper (non-bank debt) from non-financial firms (Oct ’08). Remember, this is short-term paper that is backed by nothing…only a promise…a glorified IOU.
10. The Fed offers $540 billion to backstop money market funds (Oct ’08)

These are shocking events as we know from history that the government is not a good investor. Essentially, the Fed has become the lender of last resort for non-bank institutions. Initially, they were only trying to help the banking sector and it has since extended the madness across multiple sectors. So, the Fed is now risking its own solvency by backstopping everyone’s junk assets…not just Wall Street.

A lot of economic data just got released. Jobless claims increased slightly to 479,000 to inch closer to that dreadful 500,000 mark. Some good news with this is that the 4-week moving average for claims decreased by 4,500. Also, the insured unemployment rate held steady at 2.8% once again. Regardless, I think we can all agree that the job market is soft and will be very slow to recover. On the other hand, some progress is better than no progress.

The most important bit of economic data to be published today was that GDP declined by 0.3% for the 3rd quarter. This is better than the expected -0.5% but still not a good stat nonetheless. For many of the experts, this -0.3% figure indicates that we are in midst of a recession. From an emotional standpoint, the sooner we admit that we are in a recession, the better. The biggest drag on GDP was consumer spending dropping by 3.1%, the largest decline since 1980, for the quarter. Since GDP was a bit better than expected, this should give the market a bit more juice in this bounce we are seeing.

I am continuing to sit on the sidelines and be patient. For those of you who bought MCD and WMT, they are holding strong during this volatility. I don’t think you can go wrong taking advantage of the premiums in selling put options on stable and strong cash flowing companies. The worst thing that could happen is that you are stuck with high quality companies at more attractive prices. Cash is king during these times. Also, we are starting to see some strength in gold and silver based on price movements over the past few days. I still recommend buying the actual bullion and the ETF’s (GLD and SLV) because the mining stocks are still struggling with increased mining costs. For example, in a Reuters story, I read that Neumont Mining has reported that its average production cost per ounce of gold increased from $374 a year earlier to $480. Also, NEM’s average costs per pound of copper rose from 64 cents a year earlier to $1.98.

Here are some articles for your reading pleasure:

• Here is a photo essay on runaway hyperinflation. Are we headed to this? I very much doubt we will go to that extreme, but we are moving in that direction based on our poor monetary policies.
• GLG (Europe’s biggest hedge fund) has warned that thousands of hedge funds are on the brink of failure. Here is the article…another sign that we have yet to reach the bottom.
• Here is an article on what’s going on with Russia as it teeters on the brink of a financial crisis. To read the full article, you will need to complete the free registration on the FT site.

Regards,
Moolah

A Bounce Back…Temporary?

The global markets were up today. In the US, the Dow was up almost 900 points! This is a short term bullish indicator since the Dow closed above 8,400. That had been an area of resistance. So, we may see a continued move up over the next few days. Regardless, I am selling into this short term strength to continue monetizing my gains because I do not feel the worst is over. Remember that there will be selling pressure no matter what from mutual fund redemptions and hedge funds (including the one that was on the wrong side of the Volkswagen trade today). Just like how the weakness in the US economy trickled over to Europe and Asia, I think the ongoing weakness overseas will put downward pressure here in the US because, after all, it is a global economy.

The Case-Shiller Housing Report wasn’t pretty. It showed that housing prices in the major cities (Phoenix, San Francisco, San Diego, Los Angeles, and Las Vegas to name the key cities) continue to nosedive. Only two cities, Cleveland and Boston, saw a month to month increase in average selling price.

Today’s consumer confidence index figures were abysmal. Actually, they were the worst numbers ever in the history of this tracking. The Conference Board, who administers this study, began posting results in 1967 and never has the figure been as low as 38.0. The experts and other market professional were looking for a reading of 52.0! Some takeaways from this analysis include:

• People that believe more jobs available decreased to a reading of 7.4 from 11.9
• People that believe income will increase over the next six months dropped to a reading of 10.8 from 15.1
• People that say jobs are plentiful dropped to a reading of 8.9 from 12.6
• People saying that jobs are hard to get climbed to a reading of 37.2 from 32.2

As I said, we should only be getting a temporary bounce in the stock markets. There is plenty of disruptions both domestically and internationally that need sorting out.

Check out these articles I came across today:

• This article discusses how Europe may be facing a currency crisis meltdown. I think this will definitely be the case.
• I didn’t realize the IMF could actually finance itself through a bond issue in its own name! Essentially, the IMF will be printing paper to bail out foreign nations. This is crazy…it can only be a positive for those holding gold and is a sign that there are many nations facing imminent issues that will continue to put a strain on a global recovery for the near future. Here is the article.
• This article discusses some bullish developments in the silver market.

Enjoy your evening!

Regards,
Moolah

House of Cards Falling

Not much to write about today as not too much as changed. Once again, today was a day where the bulls and bears fought all day long and the bears won (Dow down 203 points). The last hour of trading has been quite volatile for the last few weeks. It’s not surprising as the foreign markets took a beating today.

Hungary is now experiencing some major problems with investor confidence and its banking sector. Today, the IMF (International Monetary Fund) finalized its financing plan (amount unknown…expected to be in the billions of dollars) to bail out Hungary; and, in turn, the country must cut spending by 300 billion forint ($1.4 billion) next year. Here is the article for additional details.

What we are witnessing is a credit crunch and financial sector issues that extend globally. I don’t think this will be resolved in the near future. We will continue to see blue chip stocks and certain ETFs (such as GLD, GDX, and SLV) to get cheaper and cheaper. I think the Dow will test previous lows which is why I did not do any buying today. I think it’s wise to stay on the sidelines, continue to monetize gains when you can, and build up your cash position as we will eventually approach a once in a lifetime buying opportunity. Until then, keep reading and learning about this global mess and take the opportunity to get smarter, more nimble, and less reliant on debt to achieve personal and professional satisfaction. I hope I am helping you to achieve this and, as always, let me know if you have any questions.

Here are some articles for you:

• Check out this article. It is a must read. It describes how the current economic issues reflect a solvency crisis and not a liquidity crisis. Hence, we have a massive debt problem that can’t be solved by offering additional debt at lower costs. With the $700 billion bailout, the federal deficit is expected to exceed $1 trillion next year! That’s crazy. A time of reckoning will come since foreign nations (Germany, Russia, China, and France to name a few) are now losing faith and trust in the greenback. All of this points to the fact that gold should be higher, and it will eventually rise once the liquidating by hedge funds has completed.
• As I mentioned earlier, foreign nations are losing confidence in the US government. Here are two articles: one concerning Taiwan and another concerning China. The US has had the luxury of being in a large debt position because the world viewed the US dollar as the global currency of choice and a stable currency. Now, that is changing and our society will need to learn to live within its means, rather than rely on debt and leverage.

Enjoy your evening, and I will write more soon.

Regards,
Moolah

Global Recession?

I normally do not execute any new buy orders on Fridays as it allows me to sleep well over the weekends. Right now, it’s even more imperative to not execute any new buy orders because there has been so much volatility over the last so many weekends. Right now, the Dow is down by almost 300 points, or 3% (it was down by over 400 points earlier). Before trading started today, the US futures markets halted trading as they dropped by 5%.

A reason for the massive sell off is because Asia is falling off a cliff. Corporate earnings (Toyota endured its first sales decline in seven years and Sony gave disastrous guidance) sent the Nikkei down almost 10%, and the Kospi tumbled 10.6%. The dollar is at a 13-year low versus the Yen but at a two-year high versus the Euro.

With regards to Europe, the UK just released a negative GDP rate indicating that it may be heading towards a recession. Also, Iceland seems to have reached a deal for a $2 billion loan from the International Monetary Fund and says it hoped to secure additional support from other countries to prevent a total economic collapse. Apparently, Maine lobsters have nosedived in price because Canada (largest customer of Maine lobsters) is unable to receive credit from the Icelandic banks. Talk about different industries all being interconnected! In mainland Europe, Denmark’s central bank raised its key lending rate to 5.5%, which is crazy considering that everyone else is cutting rates and Denmark’s housing market is crashing and its unemployment rate is skyrocketing. For the global economy to get on track, I would think that we all need a united front with all nations singing to the same tune. However, as we are seeing with Denmark, there may be some cracks in this plan. This global meltdown is going to test many things such as the Eurozone because as the environment gets grimmer, each country will naturally fend for itself.

On a news wire today, a hedge fund manager with a US fund in an overseas office said, “We’re just doing whatever it takes to survive at this point.” To me, that means continued unwinding of existing positions, additional redemptions, and panicked selling. There will definitely be additional problems overseas because many of the developing nations lack the resources to save their banking systems in the manner that the US and Europe are able to. S&P cut its currency rating on Ukraine because it feels that the global financial crisis will increase the costs to recapitalize its banks and continue to slow economic growth.

Not sure if you read but PNC will acquire National City for $2.23 a share, a 7.1% discount to yesterday’s closing price. Another bank is gone but how many more? Now, we will see continued consolidation of the smaller, regional banks. They will have to due to the burden of mortgage debt and lack of interbank lending.

Also, Chrysler has told its employees that it will cut 25% of white-collar jobs next month due to the downturn in the economy and tightening credit. The job reduction is expected to affect about 5,000 of employees. It’s about time. There is talk of GM buying Chrysler. Does this make sense as you are simply taking two nonperforming businesses to form a larger nonperforming business?

Here are some articles for you to read:

• Russia’s default risk has escalated to beyond that of Iceland since foreignors are pulling capital out of Russia at an escalating rate and its credit default swaps (cost to insure Russian bonds against possible bankruptcy) have skyrocketed. Here is the article.
• This article discusses how France’s president has promised “massive” state intervention to support the local economy. Germany isn’t too pleased. Is this a lead-in to the eventual breakdown of the Eurozone?

The bluechips are dirt cheap by historical standards; but, with the ongoing global economic and financial problems, I think they will go lower. It’s tempting not to buy back in at these levels, but I am holding steady and being patient. I have increased my cash position in my investment accounts to circa 35%. At least gold and silver are holding steady today.

Have a good weekend! If you have any questions, don’t hesitate to either post a comment or e-mail me at moolahtimeletter@gmail.com.

ciao,
Moolah

Could Be A Rough 4Q

A day like today gives me a severe headache and confuses the heck out of me. First of all, the market opened up +100 pts, then rose to nearly +300 pts, then down nearly -300 pts, and finally finished +172 pts. The last few minutes was crazy…-130 to +130 in a matter of minutes.

It’s tough to trade in this environment, unless you are well adept with options. I don’t want to give out too much options trading advice as it could be risky, especially if you are not familiar with the techniques. So, better to stay on the sidelines and sell into strength like today. Today, as much as I think gold stocks are ripe for a surge, I sold them at breakeven. I maintained my positions in both GLD and SLV since they are ETFs and not as volatile as the mining companies. I also sold some shares of MCD and WMT to monetize the gains since I think the blue chips will go down some more before plateauing. The issue that we are all encountering is that the hedge funds are still unwinding their positions across the board (the most liquid first…hence stocks) due to redemptions. Also, nothing is improving from a fundamental and economic standpoint. Banks aren’t any better off (still no credit…I see it firsthand at the investment firm I work for), Chrysler says it may go bankrupt, GM is burning through a billion dollars a month and has enough cash for next 1.5 years max, home foreclosures are still soaring, massive company layoffs across a variety of sectors, jobless claims in the US increased to 478,000, Russia halts trading on a regular basis and is losing foreign investment commitments, Dubai has asked for a loan from Abu Dhabi (UAE), EU has instilled a massive bailout plan but Germany wants to do its own, gold and silver are tanking despite the current environment….shall I continue? I think you get the point.

If we do not have a substantial rally to allow stocks to break out of their trading range in the next few weeks, I think the fourth quarter could get ugly due to “performance gaming” by the hedge funds. I have been familiar with the concept but learned the term today in an investment letter I subscribe to. Performance gaming is a term used to describe the closing out of losing positions by hedge funds to artifically improve their short term performance. The SEC requires fund managers to publish their existing positions at the end of each quarter. Remember…existing positions…not divested positions. So, right before quarter end, they sell off losing positions and improve their cash balance. So, on face value, it appears they only have winners and a lot of cash. Sounds like a good situation, right? This is only a short term tactic, and it catches up to them when they report full-year performance. Most of the selling to date has been a result of redemptions. So, the combination of investors continuing to pull money out and these hedge funds desperate to improve their performance in any way possible (even if it is on face value only) could result in plenty of downward pressure towards the end of the fourth quarter.

Not sure if any of you purchased some SRS, SKF, and/or SDS, but they have had a great few days. If you have bought them, you might want to think of realizing some gains. I did as no one goes broke making a profit. It’s volatile times which means the long-term investor continues to get pummeled at the moment. However, I think stocks should be higher five years from now unless we enter a period like Japan has been experiencing. If we do, stocks will stay flat and dead for at least the next few years. If you see some high quality stocks that look very cheap, think about selling puts as the premiums are high right now. Effectively, you collect a premium in exchange to possibly owning the stock at a lower level. I am thinking about doing so with stocks like WMT, MCD, and MSFT.

Here is an article that is absolute comedy. Apparently, San Francisco (beautiful city and great food…if you are ever there, be sure to eat at Parma Ristorante in the Marina…great eggplant parm) is looking to name a sewage plant after good ole’ Dubya.

Well, I am off to get a workout in. Chat later.

ciao,
Moolah