Saturday, February 28, 2009

Signs of the Apocalypse

Last October, I wrote a post entitled "The Best Investments You Shouldn't Make". Among all the longs was a short of a fraudulent company called ZAP, inc. I've been following this scam for five years. I don't know why I was so infatuated with it, but I was. They first got on my radar when they lied about having an exclusive agreement to bring Smart Cars to the U.S. This was followed by a statement by Daimler which basically said "who the hell are these guys and what are they talking about? We've never talked to them." For five years now they've been the company I love to hate, but it looks like the day of reckoning is finally, finally upon them. At 12 cents per share, the market is so bad it finally even got ZAP!

In my post, I wrote "They'll get theirs in the end...but it won't be while I'm shorting the stock. I wouldn't touch this thing with a ten-foot pole." I'm happy to say the end is near. With any luck we might even see a few top level executives on the evening news moving into their new 8 x 8 ft homes on in the next year.

I am finalizing my buy list.

This weekend's chore is to finish constructing my list of most wanted companies and to prepare myself to purchase stocks. No, I'm certainly not purchasing in the next few days, but it is getting close enough that I need to have my list prepared.

I'm not trying to catch the market bottom here (once again, I'm not a trader, I'm an investor) I've just been trying to protect myself from enormous risk and give myself the opportunity to buy great companies at great prices. I felt like the S&P 500 at 900 points carried enormous risk, and I remained in my short positions. I'm looking for another 15% drop or so in the S&P 500 and then I'll start looking at buying opportunities.

When I spoke about how low I expected the S&P 500 to go last year, I gave 650 as the TOP of the range. If I recall correctly, I also gave out 400 as an entirely reasonable estimate of how low it could go (earnings falling to $40 per share, with the recessionary average of 10 times earnings giving 10 x 40 = 400).

I'll point out again that S&P 500 analysts expectations of earnings of $89 per share were atrociously bad and still are.

At some point I'm going to buy in even though I think there is more room to fall, but the alternative of trying to catch the bottom is a losing game. I have no idea where the bottom is, but I know I should buy cheap stocks when they are cheap and hold them for a long time, and things really are that simple. Once the S&P 500 gets into the mid-600s, I will be comfortable making purchases and just dollar cost averaging from there should stocks continue to fall.

Speaking of stock lists, I'm finally back in the top 50 investors in CAPS now that the sucker's rally has finally ended. I lost quite a bit of position during that rally, but I didn't change anything because I still believed in the long-term thesis.

Berkshire's letter as expected.

The letter was great, the results were terrible. Essentially as expected for the annual letter this year. There's not much for me to discuss, really. My favorite company run by my favorite man, but I still see no point in ever owning stock is such a large, immovable, lumbering giant.

Buffett tries to explain every year that Berkshire Hathaway is just to big to see great returns. The problem is that he's been saying that since about 1980 when the $74,000 stock was worth around $120 or so (working from memory). As a result, no one is inclined to believe him. But he's not just being modest. This isn't his "aw shucks" folksy manor here...he really means it. Berkshire really is too big to actualize 20% for you.

I love this company to the ends of the earth and I will always go to the shareholders meetings, but I will never be a shareholder.

Buffett's letter is out

I haven't even read it yet, but wanted to post the link. It's under "annual report" for 2009.

Friday, February 27, 2009

Tomorrow is the big day!

Tomorrow is the day Warren Buffett's annual shareholders' letter comes out. It's an annual tradition to get up early on Saturday morning to read it, so clear your calendars!

Citigroup steals your money again.

I'm angry. Again. Today, you're going to read about Citigroup "striking a deal" with the government. What is happening is that someone is coming along and seeing a company which can be purchased in its entirety for $10 billion (Citi's market cap) and that person is giving them $45 billion for about a 30% stake.

Would you pay $45 billion for a 30% stake in a $10 billion company? No you would not. The government is also converting all its preferred shares to common so that we are the last in line to recoup any money in bankruptcy, and we are also losing the dividend Citi lied to us about paying. There is no other way to view this other than an enormous theft of your money to hand over to rich shareholders such as a Saudi oil billionaire (the largest Citi shareholder) and rich executives who created this problem on purpose. The government was going to take a 40% stake, but Citi executives were bargaining for 20%. It looks like they're unbelievably going to compromise at around 30%. 40% was a terrible theft as it was, and it is hard to believe Citi had the gall to try to talk that number down. It looks like Geithner and Bernanke are dumb enough to let them.

If the market is intelligent enough to understand what is going on, it would flee Citi anyway because its own shares are being diluted and the company will be put into pre-privatization in a few months anyway. No guarantees, though.

At this point I'm essentially not counting on anyone in a leadership position being intelligent enough or having the proper morality to do the right thing. I'm essentially counting on Congress to get tired of approving massive bailouts. The sneaky Obama administration came up with a clever way to steal your money this time by attaching its bank bailout to the budget this time so that if a democrat rejects it, he's also rejecting health care, carbon restrictions, etc. The immoral administration may get away with it this one more time, but they won't be able to do that again next quarter when Citi, BAC, and AIG "shock" everyone by losing another $100 billion collectively.

Thursday, February 19, 2009

Re-opened short positions.

Most of the details of Geithner's plans (and when I say "Geithner" I really mean "bank lobbyists" because the man is somehow beholden to them despite not being an elected official -- just like Paulson was) are still completely hidden from us, but in a broader scope I think the writing is on the wall. The stimulus bill was signed into law and the housing bailout was announced, so I am now comfortable enough guessing the direction of the government to reopen my short positions. I have once again taken out a heavy position against SSO, which is a 2x leveraged fund tracking the entire S&P 500. I have also sold short a small position in FAS just for fun (a 3x leveraged fund tracking the Russel 1000 Financials) and I have purchased $25 puts on KRE, the regional banking index.

I believe KRE will greatly underperform the overall market because it consists of a lot of regional banks which will fail and are not big enough to be bailed out by the taxpayer, and it will also fall when investors see a few of the large banks being nationalized pre-privatized put into pre-conservatorship with a cherry on top.

I'm happy to be in my short positions again. It was frustrating sitting out while waiting to see how the government was going to handle itself, especially as the market started realizing how poor the plans were and stocks resumed falling, but I believe it was the right thing to do given that I wish to be an investor and not a trader.

The market is still trading at more than 10 times earnings, and earnings have a very long way to fall in the next six months.

Again, my positions:
Sold short SSO
Sold short FAS
Purchased $25 puts on KRE

Tuesday, February 17, 2009

Shorting my own bank in CAPS.

I've been using Wells Fargo since I was 16 years old, but I just shorted them in CAPS. Their toxic assets are horrendous. A good example of this is a piece 60 minutes recently did, which you can watch here. Golden West is now owned by Wells Fargo, and so are all of its landmines.

Yeah, shorting makes sense again.

I'm starting to get a better picture of what the government is doing (or trying to do), and I think the future is clear. I think there is a very, very real chance they will nationalize the banks after all. The only two choices are to keep pumping in barely enough money to keep them walking dead (the so called zombie banks) or to realize the largest banks are all insolvent and nationalize them. Either way bank stocks will not do well over time. Regional banks will continue to blow up as the commercial real estate bubble finally explodes, and they will not be saved because they are too small to care about. I think the very largest banks will likely be nationalized. I'm thinking maybe four or five of them -- certainly Citi and Bank of America.

I'll say again what I've been saying since last year...I still expect the S&P 500 well into the 600s. Analyst estimates of $80-90 per share for the S&P 500 are still a complete joke, and I think that is apparent to most people now.

I'm selling short SSO. I think it was the right move to go all cash while I waited for details of the financial bailout, but the writing is on the wall now. I'll probably do this Thursday since Obama is announcing a housing plan tomorrow.

Thursday, February 12, 2009

Almost time to open into short positions again.

I think I've figured out what is going to happen here. I think we're going to try another half-baked bailout with "tough regulations" which will do nothing to remedy the situation. The government "stress tests" currently going on at the largest banks in the U.S. by federal regulators will reveal them all finally to be completely insolvent. When that happens, I think the Obama Administration - and Congress - will finally do the right thing and nationalize the banks. They've left enough doors open and they've shown an understanding. Regulators stormed major banks today to start conducted their stress tests. One month from now, they will admit banks are insolvent and we will likely nationalize a few of the biggest while wiping out shareholders and bond holders.

I'm about ready to enter my short positions again, although I will once again be shorting entire markets rather than individual companies. In all likelihood, Citi and Bank of America will be total losses...but the government could keep trying to prop them up forever, so it isn't worth a short. That would be gambling rather than investing. Instead, I will again be shorting the S&P 500, and will do so sometime in the next few days.

Wednesday, February 11, 2009

Where's the beef?

I haven't been posting about the latest bailout because nothing has been said. Yes, I know Geithner was all over the news announcing his bailout, but the fact is he didn't actually give any detail. He didn't say anything meaningful. I don't really know any more than I did a few days ago.

Some very encouraging news though...Obama's aides were pushing for top banks to essentially wipe out equity holders. Unfortunately, they lost out to Geitner, but I'm impressed they were pushing for at least a little of doing what's right.

I also didn't hear anyone say we were suspending mark-to-market accounting yet, so for that I give everyone involved high marks. President Obama is looking much better today than he was in my earlier post, thanks to his display of knwoledge about the past successes of nationalization and no calls for the suspension of realistic accounting standards.

However he still refuses to do what he knows is right for political reasons, and that teaches me that all this hope for change is misplaced.

Obama surprisingly versed and ne sais quoi

I was extremely impressed with Obama's interview with Terry Moran today, whereby Obama explained his impressively accurate understanding of the credit crises and past attempts to solve it. The President mentioned how Sweden did the right thing and nationalized (known as the Swedish model) and saw great success, and he even mentioned Japan's dismal failure (known as the Japan model) by doing what we are doing now and how that lead to two decades of sideways markets.

...he then completely destroys that all by saying we're going to do what Japan did anyway.

There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

OBAMA:Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

That segment was very impressive, but it ends with unbelievable incompetence. Just unbelievable. He is essentially saying, "Japan was wrong and Sweden was right, but we're going to do what Japan did anyway because otherwise Rednecks will cry about nationalization and I don't want to have to deal with that."

It is unreal...he literally admitted Sweden's model of nationalization is what saved them and then in the same breath said we will do what we know to be wrong and ineffective because our culture is different. I'm not sure if this makes him better or worse in my eyes. Would I rather he be ignorant of what is right, or intelligent enough to understand what is right and purposely choose wrong for political reasons?

Either way, today's major lesson should be don't Google "Swedish Model" when your wife is around. "I really was doing economic research" isn't gunna fly.

Monday, February 9, 2009

Guess I'll help the economy now. Rick Stimulus 2009.

What to do with your money when the government changes the rules every other day so you can't invest intelligently? Spend! Buy stuff at deflated prices.

Out with the old:

In with the new:

Yes, I'm aware my old entertainment system looks horrendous. It is ten years old, and yes, that is a VCR there, which I was using as my DVR (we didn't have cable). As you can guess, I don't watch much TV...or at least I didn't used to.

Best Buy is so desperate for sales that they are now offering three years of financing at 0% interest -- something they have never done before. I loaded up on all sorts of things: 52" LCD TV, Blu Ray player that streams Netflix in HD, a networked drive, etc., etc. I'll pay the minimum payment each month (around $10) and then pay off the entire balance on the 35th month. Meanwhile, sky-high inflation will eat away at the loan for three years, and I get three years to invest the money while I enjoy the system.

Also in the cards for the next two months, a trip back to Boston, wine tours in Napa, the Berkshire shareholders meeting, and camping trips. I'm starting to develop a new conspiracy theory; government is purposely trying to make the investing climate so horrendous with their daily law change leaks that they are trying to get us to spend our money rather than save it. Perhaps they want the savings rate to stop increasing and to go back down into negatve percentages!

Only kidding there, but that's what they did for me.

Saturday, February 7, 2009

Obama Administration: One of the worst we've ever had.

No, I'm not some crackpot Republican looking for an excuse to beat up on President Obama. I supported Obama, I waited six hours in line for an autograph, I voted for him.

But as of 12 PM Eastern this Monday, he will become the third or fourth worst President the United States of America has ever seen. If (when) Tim Geitner even comes close to uttering the words "suspension of mark-to-market accounting" it is over. Obama will have stolen more money - and with less accountability - for the greatest trickle-down, tax-the-poor, give-to-the-rich wealth transfer the world has ever seen (greater even that Russia's "Oligarch" theft by an order of magnitude).

I should go dig up my old e-mails from early 2006 talking about how no one cares about the ludicrous home loans occuring now and that rather than stop them, President Hillary will simply steal my money later to pay for people's mortgage equity withdrawals and bank bonuses. I was close -- just switch the names.

I want to apologize for my lack of posting lately, but the truth is I didn't have anything intelligent to say while the government figured out how to best pay off banking lobbyists and steal our money for bonuses and dividends.

I suppose we should be happy now; This makes it a lot easier to start shorting again on Monday. I suppose now we can watch stocks rally since "the recession is over" and then I can re-enter my shorts at elevated prices. However, this is all assuming the government doesn't reenstate its ridiculous short sale ban, which didn't work the last two times it was tried. I put the odds at 40% that they ban short selling again.

If the Obama Administration doesn't suspend reality mark-to-market accounting, I will temper my comments somewhat as banks will actually have to recognize some losses on their worthless assets. But either way, the government is still purposely overpaying for worthless debt.