Sentient Money

That appears to be what all the markets are hoping for, as there is no other good news.

Chinese Premier Wen Jiabao is considering new stimulus measures, adding to a 4 trillion yuan ($585 billion) spending plan as the government tries to revive growth in the world’s third-biggest economy.  -Bloomberg

I must admit I’m more than a little skeptical this will be enough to spike growth throughout the world.  China’s people have never been big consumers, so stimulating an export economy seems unlikely to be a huge benefit to the global economy. 

On top of that, how does this stimulus pull the U.S. and the U.K. out of this housing debacle, or the rest of the modern world out of what some are calling the Great Recession?  It doesn’t.  I may help, but it’s not the answer.

This does not mean the “good” news won’t create a nice run up in the market.  Everyone is literally begging for a positive sign (just watch CNBC) and this might be positive enough to cause a rally.  Well, at least a sucker’s rally based on current data. 

If a rally does appear I will shed some of the investments I have purchased over the last week to free up cash for the next drop, as volatility is far from over.  How can it be when GE is on the verge of losing it’s AAA rating. 

China’s day as a co-world leader or outright world leader may come, but right now they are only part of the solution…not the entire solution.

The silver lining amongst all this pain is the exposure of fraudulent money managers.  People like Madoff, Stanford, and the two most recent potential prison inductees, Paul Greenwood and Stephen Walsh are being revealed, as the downturn does not allow them to hide their criminal behavior.

For two decades, Paul Greenwood and Stephen Walsh looked like Wall Street wizards.

But on Wednesday morning, federal agents arrested the two money managers on accusations filed by the United States attorney for the Southern District of New York in what has become all too familiar on Wall Street: Their investment fund was in fact a $667 million fraud - a small-scale version of the $50 billion fraud that Bernard L. Madoff is suspected of orchestrating.

But unlike Mr. Madoff, who is accused of masterminding a global Ponzi scheme, Mr. Greenwood and Mr. Walsh simply stole their investors’ money, the authorities said. Their two firms, the WG Trading Company and Westridge Capital, misappropriated funds from a host of deep-pocketed investors, including state and city pension funds, Carnegie Mellon University and the University of Pittsburgh.

-NYT

Hopefully, this will help clean-up Wall Street, by removing a good portion of the completely immoral money wizards.  With these men gone and publicly punished, it may nudge the Wall Street attitude a bit more towards the ethical side.  Just maybe, our financial distract will emerge from this debacle, as a leaner and more capable industry.

No.  Feel free to read the rest, but I have no doubt this analysis is dead on.

This bill will not even come close to stabilizing housing prices.  Oh, it may cause prices to plateau for a month or two, or make declines over the next few months very minor, but this is a band-aid for the housing market…nothing more.

Let’s take a look at the ration of house prices to rents (see chart above):

A first grader can see the massive disparity that still exists.  Until we are closer to historical norms, it will still be cheaper to rent in many places.  This will make it difficult to sell any houses.

Now, let’s take a look at the ratio of home prices and median income (see chart above):

Again, anyone with eye sight and a grasp of grade school math can see this chart is out of whack.  Maybe if the population of U.S. had suddenly increased by 30 million people, who had average to above average jobs, there might be a chance this chart was correct.  By the way, if you haven’t checked lately, people are losing jobs, not getting them. 

Sure, this tax credit for first time buyers will help in the short-term, but what happens when people who bought houses in March ‘09 or April ‘09 have lost money by the Fall of ‘09?  The housing market will dry up again.  I can’t say this enough…we are just prolonging the pain.  If we would just let the market correct and rid us of these high housing prices and these shit banks, we would be a lot better off. 

As this is part of the weekend edition and I haven’t covered a quality beer yet…here it is.

Flying Dog has a sweet seasonal out right now called Garde Dog.  It’s a great tasting beer to snag on a slightly warmer day, as we head towards spring.  The aftertaste is light for the warm day, but it has a good solid lead in that let’s you know you are drinking a real beer.  I must say, that Flying Dog rarely disappoints. 

This wasn’t that hard to predict.

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

Some things are clear: real estate prices, which rose dramatically during Dubai’s six-year boom, have dropped 30 percent or more over the past two or three months in some parts of the city. Last week, Moody’s Investor’s Service announced that it might downgrade its ratings on six of Dubai’s most prominent state-owned companies, citing a deterioration in the economic outlook. So many used luxury cars are for sale , they are sometimes sold for 40 percent less than the asking price two months ago, car dealers say. Dubai’s roads, usually thick with traffic at this time of year, are now mostly clear. - NYT

How was a country with limited natural resources (Dubai’s oil reserves have declined faster than other countries in the region), hardly any major companies, a fairly uneducated population, sharia law (hinders a lot of capitalist practices), a terrible climate (130 degrees F and desert), and geographically located in area neither the West, Japan, or China would go to if it wasn’t for oil, going to become one of THE cities on the planet?  It wasn’t.  It still may become an important regional city, but not on the level they wanted it to become.

We have lost our way.  We used to pick out massive goals for our country.  We wanted to become the land of the free and we did it by defeating the greatest empire in the world at that time.  We decided we couldn’t bear enslaving our fellow man any longer, so we stopped.  Though, it was painful.  We wanted to be the world’s bread basket, and we were.  We decided we needed to sacrifice to save decent people from fascist dictators and provide ourselves security for the long haul, and we did.  We decided we would fight communism, and we won.  During this fight we decided we wanted to leave the Earth and visit another heavenly body, and we did.  We used to be the shining beacon on the hill for the rest of the world.  We used to be the good guys. 

What have we done since?  We created the internet right?  Nope, it was created even before we put a man on the moon and defeated communism.  If you doubt me, Google 1969 ARPANet.  No, I’m not giving you a link, because if you are too lazy to Google it, you are part of the problem dumb ass. 

Oh, wait, didn’t we defeat Iraq twice!!!  Really?  That’s our big accomplishment, defeating a country with 1960’s tech and a population smaller than New York City and Las Angeles.  If so, we have really lowered our standards.

So, what did we do on a massive global scale of importance?  We become fat and greedy, and damn awesome at both.  We wanted everything without doing anything.  It became ok to treat people like shit, as long as you were making money.  It became ok to send billions of oil dollars to dictatorships that oppressed and killed their populations.  (By the way, this included Iraq, who we actually gave guns and money to in the 80’s.  If you didn’t know this shut the fuck up next time everyone is having a political conversation, because you have nothing to add.)  We were lauded for making money, even though we made nothing of value in return for the cash.  Suing someone became all the rage, and why not, it required no effort on our part.  We have the worst health care system among first world countries on both important measurements (mortality rates and cost), but when you are making money who cares.  Teachers…aren’t they poor?  I don’t want to be one they are despicable.  What you want me to save?  But, the flat screen is so pretty…I need it.   Is that your BMW 7 series?  Yep, in two years I have to pay BMW to take it back when the lease is done.  We need a bigger house don’t we honey?  We have 3 people living here and only 3 bedrooms.   We were pissed when gas hit a $1.80 per gallon.  We were livid when it hit $4.00 per gallon.  Now that it’s at $1.80 again, ah, we are ok with it.  Gas is cheap enough at these prices that we don’t have to look for alternative energy sources…right?  The oil companies trained us well and have taken advantage of our fat and greedy asses, it doesn’t matter that the rest of the world is jumping far ahead in alternative energy tech.  This only allows them to control their own destiny, but who cares we are fine with the Sheiks controlling ours.  We are ok with CEOs making more in one year than the company they manage makes.  We are ok with CEOs getting paid $20 million for getting fired…shouldn’t we all get paid to do a shit job?

We have reaped the benefits of Gordon Gecko’s famous quote from Wall Street and now the payment has come due.  I’m not sure if we can afford it.

I’ve used that quote before, but I’m going to use it again as we, as a country, still refuse to take the pain.  I’m not talking about cutting back on eating out one night a week or not buying a new shirt we saw at the mall.  I’m talking about the hope that springs forth from every one every time the market jumps 500+ points in a week or two.  We keep thinking that everything is going to return to normal rather soon.  All the commentators on CNBC say this, even personal finance bloggers who should know better are saying everything isn’t so bad (How I Look at Economic News).  Well, I have news for everyone; the economy is still going down.  It’s not leveling off and it’s definitely not going up.

GE one of the most well run companies on this planet, with a ridiculously diverse business groups and huge government contracts that cushion economic blows.  They just reported earnings that are 46% below this time last year.  46%!!!  Microsoft just laid 5,000 people off… Google is starting to lay off people and cut perks.  WE ARE NOT ON OUR WAY BACK UP!  Will we eventually come back up…yes.  Was the run up before Christmas a recovery?  Just ask Eddie Bauer, Lane Bryant, or any of the other retailers who will be going bankrupt over the next few months.  Will the next 500-900 point jump be a recovery?  No, but you can bet there will be a nice run up over the next month, once everyone convinces themselves that these quarterly numbers are the bottom.

The government bailout is doing exactly what was feared, it is prolonging this recession.  If we would have just let the banks fail and insured all of the deposits, we would have completely new banks with pristine balance sheets by now.  Sure the market would have tanked and we might have seen 6000, 5000, or even 4000.  However, we would be on our way back up with banks everyone could trust.  Now we just have banks with bad assets that owe the government billions and we still have the same DAMN EXECUTIVES IN CHARGE OF THE BANKS! 

We have to TAKE THE PAIN before this is over, which we haven’t done yet.

I’m playing the rallies and then selling after a nice 5-10% gain.  Buy’n hold is for suckers right now.

On a lighter note I found a new tasty stout for the winter…Barney Flats Oatmeal Stout from Anderson Valley Brewing Company.  Not overly thick for a stout and it doesn’t have a strong aftertaste, so it’s a decent stout for those that aren’t overly fond of stouts. 

As the markets continue to inch higher and more pundits are starting to say the worst is over, can we begin to believe this rebound is actually a recovery?

I hate being the bearer of bad news, actually I don’t if I’m right.  Anyway, all the hope being touted by “experts” on CNBC, CNN, Fox, etc. is just that hope.  There aren’t any positive stats backing up this hope, which suggests this current run-up is entirely psychological.

To prove my point, I will provide hard stats as back-up:

• Housing starts fell 19%. This is the lowest it has been since the 1950’s (data does not go back further)
• The Consumer Price Index (CPI) fell 1.7% last month. Biggest drop since 1947 (again data does not go back further)
• Goldman Sachs fourth quarter LOSS of $4.97 per share ($2.29 billion!!!!), which was $1.24 per share more than expected.
• Morgan Stanley posted a $2.3 billion loss for the fourth quarter. Considering they were expected to lose $298 million, their actual loss is almost 8 times higher than what the Street expected.
• Oil supplies rose unexpectedly last week, which suggests demand is dropping. In turn, this suggests the economy is still slowing.
• China ’s November steel industry production drops 12.4% and electricity generation dropped 9.6% in November compared to prior year November numbers. This suggests the Chinese economy is still slowing.
• Mall vacancies are expected to rise past 7% by year end, which is the highest it has been since the tech bubble burst. This doesn’t sound like an end of the world number. However, when you factor in that most stores will strive to stay open until the end of December to try and salvage what they can from the holiday season, it is likely that store closings will increase dramatically in the first quarter. Remember that we have 6 times more retail space per capita than any other country, so store closings are probably a little overdue.
• The Madoff loss suggests that not every bad entity on Wall Street has been exposed. $50 billion potential loss on a ponzi scheme???!!!!
• Round 2 of the mortgage disaster: the idiocy doesn’t end with sub-prime mortgages. Round 2 consists of Alt-A and Option ARM interest rate resets, which will be over $1.5 trillion. The estimated failure rate for these mortgages will be 50-70% when the interest rates reset, which is just barely beginning.

I’m waiting for one more nice market downturn, which may or may not set a new bottom, and then I will jump back in with both feet.  Until then the negative information far outweighs any positive information.

After all that I want to make one positive point.  All of this pain is a good sign, as it means the economy is retrenching and getting rid of excesses.  This would go a lot faster if bad companies weren’t propped up by the government.

In the end, this entire situation will only be solved by one group of people….

AQUA TEEN HUNGER FORCE!!!!

______________________________________________________________________

The World’s Largest Hedge Fund

http://www.ritholtz.com/blog/2008/12/the-worlds-largest-hedge-fund/

Goldman Sachs posts first loss since going public

http://news.yahoo.com/s/ap/20081216/ap_on_bi_ge/earns_goldman_sachs

Morgan Stanley suffers $2.3 billion loss

http://money.cnn.com/2008/12/17/news/companies/morgan_stanley/index.htm?postversion=2008121709

China ’s steel, industrial output drops sharply in November

http://www.purchasing.com/article/CA6622799.html?industryid=48401

The dead mall problem

http://money.cnn.com/2008/12/17/news/economy/retail_wasteland/index.htm?postversion=2008121706

A Second Mortgage Disaster On the Horizon

http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

By now everyone has looked at their 401k and other investment accounts and thought to themselves, “Nice, the market is finally turning.”  It is turning up, but why and will it last?

What information is the market turning on?  The financial bailout?  Nope, that’s old news, if it was turning on that it would have already happened.  Good job numbers?  No way…there haven’t been good job numbers in a year and the recent job loss stats were worse than expected.  Good Christmas sales?  Naw, the stores are getting pounded.  Circuit City went bankrupt before the season even started.  The auto bailout?  A little, but no one thinks this will save the economy.  So, why is the market turning up?  Hope.  Hope for a new administration.  Unfortunately, that hope is misplaced.  Don’t get me wrong, I think President-Elect Obama will do a great job, but Presidents get far too much credit for a good economy and far too much blame for a bad one.  None of his actions will improve the economy by themselves, and in the end, his actions will only be a small part in correcting the economy. 

What happens when the hard numbers continue to disappoint?  Hope will disappear, as everyone will realize the market/economy still has a lot of stuff to work out.  Then the standard 2^nd crash will occur after a nice jump in the markets. 

So what should you do?  It depends on your situation, but I will tell you what I’m doing. I’m selling into this run-up.  I have already sold my position in GE, which I took a few weeks ago, for a nice gain.  I am also looking to dump my stock mutual funds in my 401k.  I’m hoping to move to a 90% cash position (roughly), which will put me in a good buying position for when the market heads south again.  I could be wrong, but I don’t see any good numbers out there so why stick around.

This is both a financial post and public service message…be very careful when buying gift cards this year.  In fact, I would suggest no gift cards this year for the following reasons:

1. Gift cards always suck.  Why is it a better gift to limit my options?  Just give money if you plan on giving gift cards. (This has nothing to do with finance, it’s just common sense)
2. Bankruptcies - Many retailers will be going bankrupt in 2009.  Guess what happens to your gift card when they file for bankruptcy?  You lose it.  DON’T BUY GIFT CARDS this year, as there is a decent chance they will be worthless in a few months.

Buy gifts or give money, but don’t give gift cards and you will have a better holiday season.

I had a recent, well not so recent now, request on what to do with a 401k consisting of S&P index funds and GE stock.  Should she move her money to new investments, keep it where it is or go cash.

To be honest, this is a tough call right now.  I do think the market is likely to go down more, as we are in a once in a generation economic tsunami.  Unfortunately, it is impossible to tell how far down it will drop, making it extremely difficult to predict anything with certainty.

GE

I will say that I love GE at the current price and I will be putting an order in tomorrow.  Seriously, an 8% dividend from one of the most diverse companies in the world is spectacular.  I can sit on that 8% dividend for years waiting for the big jump.  There is always the danger they cut the dividend, but they have stated they have won’t and they have plenty of cash right now, so it’s not highly likely they will cut it any time soon.  Even if they do cut the dividend it’s not a big deal.  Let’s say they hammer it down 50%.  This would still give anyone who purchases it now a 4% return, which isn’t a bad historical return.

Of course, all of this does not answer the question, “should a current owner keep GE?”  I’m leaning towards yes, as you have already ridden it down more than 50% if you bought it a year ago.  If you bought it two years ago…..ugghhh.  I feel for you. 

The one thing that current owners and potential owners of GE need to realize is that it is quite possible it goes down further.  Capital spending is slowing and GE gets a big chunk of their earnings from companies improving existing operations (such as airlines buying the Boeing Dreamliner, which has engines made by GE.).   However, there are few places you can earn a good return on your money and still get a good chance for capital gains, with low risk of bankruptcy.

S&P Index Fund

I have huge issues with index funds.  I won’t bore you with them right now, but if you are interested in some reasons not to own index funds here is a decent article The Death of Index Investing.  I will definitely be writing more about why I hate index funds in the future.

Ignoring my dislike of mutual funds let me answer the real question, “should you continue to hold index funds now and wait for the rebound?”  Personally, I would rather be in individual stocks and few well managed mutual funds (such as CGM Focus - huge risk so make sure you know what you are getting into.  Also, this is not a buy and hold fund!!!), but I like risk.  If you have no desire to actively manage your money, then holding your index funds might be the prudent choice if you aren’t going to retire in the next 5-10 years.  It is highly likely you have already seen most of the pain, so selling now and trying to time the market at this point is a fool’s game. 

Ok, here is your answer, well it’s two answers:

• 1. If you know you won’t sell if it drops another 10%, 20%, 30%, etc. then hold.
• 2. If you think you will panic and sell if it drops another 20% then you might want to think about getting out. This is not the best option, but it is better than selling after you lose more.

Above all think for yourself and get help from a fee only financial planner if you aren’t comfortable managing your money.  By the way, none of this advice is for anyone in retirement or within 5-8 years of retirement.