Tuesday, October 28, 2008

second highest gain

At the close, the Dow Jones industrials were up 889 points, or 10.9%, to 9,065. The Standard & Poor's 500 Index was up 92 points, or 10.8%, to 941, and the Nasdaq Composite Index was up 144 points, or 9.5%, to 1,649.

It was the second highest gain ever (and the best finish in about two weeks).

Monday, October 27, 2008

Asia is crumbling

Hong Kong stocks crumbled under a barrage of selling Monday, with the benchmark Hang Seng Index plunging 12.7% to its lowest finish in more than four years as investors who bought shares on credit were forced to offload them in a falling market.

The session also saw benchmark indexes in Mumbai, the Philippines, and Thailand slump 10% or more, although India's Sensex pared losses by the end of the session on the back of better-than-expected earnings from Icici Bank and short-covering by investors in the afternoon.

"What we're seeing is capitulation selling on covering of the yen positions. That's creating an awful lot of uncertainty," said Benjamin Collett, head of hedge-fund sales trading at Daiwa Securities SMBC in Hong Kong. "The yen continues to strengthen as people are unwinding risk and there is nothing but pain there."

Meanwhile, Japanese shares slid further Monday, with the Nikkei 225 Average extending losses into a fourth session to end 6.4% down at 7,162.90. The benchmark was unable to hold gains despite moving into positive territory several times during the session, on a wave of selling in the afternoon. The close is its lowest in 26 years, according to Reuters.

[10/28 the next day] Asian markets rebounded strongly and were led by a 14.4% surge in Hong Kong's Hang Seng Index, which was its biggest advance in 11 years, as volatility in the market continues. Shares had started the day in negative territory, but bargain hunting took over in afternoon action following huge losses yesterday.

Saturday, October 25, 2008

hedge funds spark fire sale

At the peak in the market, it was estimated that about 10,000 hedge funds were managing about $2 trillion in assets. Though that pales in comparison to the money in traditional mutual funds, if you add in the leverage, you’re talking serious market weight. Due to forced deleveraging, partly triggered by record-breaking redemption requests, hundreds of hedge funds are selling, sparking a fire sale on all sorts of investments. We all feel the pain though, of course, as much of what they’re selling is also owned by individual investors, pension funds, 401(k)s, etc.

As part of this great deleveraging, lenders to hedge funds are slashing credit lines or triggering margin calls. The resultant cash squeeze is forcing a rush to the exits, which is exaggerating the market’s swings.

mutual fund redemptions on record pace

Investors have been selling their mutual funds in record numbers. According to Morningstar's Market Intelligence data, a net amount of $49 billion left mutual funds in September alone. We've been tracking redemption data since January 2000, and that's the largest one-month outflow that we've seen to date. Yet, it looks like October is on pace to beat it.

The heavy redemption activity that we've seen has implications for funds and shows a repeat of investor behavior that seems unlikely to pay off for anybody.

Many funds are carrying a small amount of cash and, at the same time, facing large shareholder redemptions. The average domestic equity fund held just less than 5% in cash as of its most recently disclosed portfolio. That means that they have little dry powder sitting around on the sidelines with which to buy depressed securities and meet redemptions.

Even if opportunities are plentiful (which many well-respected fund managers and industry pundits argue is the case), a fund facing redemptions is restricted in its flexibility to do much about it. If you're a mutual fund manager in this position, you have to sell more than you can buy, which is far from ideal when you're finding a lot more to buy than to sell.

At its worst case, depending on the liquidity of holdings in the portfolio, redemptions can trigger a vicious cycle that can really drive down a fund's value. We've seen that risk turn ugly during the past year with ultrashort bond funds such as Schwab YieldPlus and Fidelity Ultra Short Bond. The funds experienced some losses early on, which triggered redemptions that forced them to sell securities into an illiquid market, which locked in further losses, which invited more redemptions, so on and so forth. Such drastic illiquidity has been more of an issue with bonds (excluding Treasuries) than with stocks.

So, if funds and remaining fundholders are hurt by extreme redemptions, do the investors who cashed in benefit? Unlikely. Cashing in during a fear-stricken period like the one we're in now is like watching a bad horror flick where the plot is clear and predictable from the very start. Investors are notoriously bad market-timers. When we study Morningstar Investor Returns--which consider the timing of investors' purchases and sales--we've found that investors buy high and sell low to their own disadvantage.

So, if investors who have proved to be poor market-timers in the past are again selling into a slump and their actions are limiting the flexibility of mutual funds, who wins? Nobody.

Munger says

Highlights from a dinner where Charlie Munger spoke [allegedly]:

- The longest recession ever was 16 months. He thinks best case we entered into a recession in November of 2007 or worst case January 2008. This would put us well into the later half of the cycle, which will be painful but short.

- We are setting the base for a 10 - 15 year bull run. The stock market has never performed worse in the last 10 years, yet corporate profit expansion has never been better.

- The market will not rally until bond yields come down on the long end. Right now you should be in munis of solid states that are yielding 7% - 8% risk free.

- TARP will make money. Historical yields on toilet quality mortgage packages are well above the prices people are contemplating buying them. Really smart vulture guys are buying at the 50% - 60% levels. He and Buffet are also buying at these levels.

- We will see a healthy level of deflation before we see inflation. He predicted $50/barrel oil. Demand has been slowing for a year. As long as money velocity turns to favorable, government can pull out the excess liquidity before it becomes inflationary.

- The dollar has turned the corner and will rally from here against the Euro.

- Governments will drive LIBOR down to force interbank lending. Europe is much worse off than the U.S. in terms of bank health.

- Cash on the balance sheets or corporates has never been higher. If they all bought back there stock their P/Es would be trading at a 50% discount to the historical market average.

- He and Buffet are buying U.S. equities for their personal accounts.

[via chucks_angels]

VIX hits record high

CHICAGO, Oct 24 (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's favorite barometer of investor fear, settled at a record high on Friday, indicating investors remain fearful heading into the weekend after U.S. stocks slid in a worldwide sell-off.

Investors cashed out of stocks as signs mounted that the global economic slowdown could be deeper than feared and the corporate profit outlook darkened.

The widely popular VIX closed at 79.13, up 16.71 percent. It had peaked at a record high of 89.53 near the open, surpassing the record set on Oct. 16, using the modern VIX methodology that goes back to 1990.

The VIX measures projected stock market volatility conveyed by Standard & Poor's 500 index .SPX option prices, and generally moves inversely to the S&P benchmark.

[via chucks_angels]

Thursday, October 23, 2008

Peculiar Prices

though from a macro standpoint things look grim, the good news is that since we have some excess cash we are able to buy securities at somewhat peculiar prices -- thus the spectacle of Shimano's shares trading at 8x cash-adjusted earnings after having fallen by half in three months, 3M's at 9x earnings, Pargesa's at close to our first purchase price 6 years ago, and Nitto Kohki's shares at 2x cash-adjusted earnings. As investors with a long-term perspective, equities are beginning to look attractive, even as corporate profits come under pressure.

We are focusing on the types of companies we always have--a combination of “cigar butts” (as Warren Buffett called Benjamin Graham-type stocks) and some truly exceptional businesses trading at fire sale prices. Sometimes when investing seems most scary it's the best time to invest. This may be one of those times.

- Jean-Marie Eveillard, Matt McLennan and Abhay Deshpande

Monday, October 20, 2008

week after week

The market had its best week in 5-1/2 years. Unfortunately this followed the worst week in history and we're still way down from two weeks ago.

Let's see. The Dow finished last week at 8451 and finished this week at 8852. So it was up 401 points or 4.7%. However, to give this perspective, the previous week it finished at 10325, so last week it was down 1874 or 18.2%.

Sunday, October 19, 2008

VLMAP

A valuation indicator maintained by Value Line, Inc. (VALU) rose to the 100 level that marked the last three significant stock market bottoms.

Those were the bottoms in October 2002 and March 2003, and the panic low immediately following the 9/11 terrorist attacks.

What is this indicator from Value Line? It is a single number, representing the median of the projections made by Value Line's analysts of where the 1,700 stocks they closely follow will be trading in three to five years' time. Followers refer to this number as the VLMAP, which stands for Value Line's Median Appreciation Potential.

[This article was written in July. iluvbabyb relays that the reading is up to 135]

Saturday, October 18, 2008

it IS rocket science

the NASA scientist started playing hardball. First, he used his big brain (OK, probably a MacBook) to randomly generate 25,000 hypothetical stock portfolios. Next, he created a portfolio of his own, using David Gardner's proprietary, so-called "alpha-generating" model. Turns out the NASA guy's portfolio outperformed 99.4% of the random portfolios.

Has something like TARP worked before?

Indeed it has. In the 1980s, several economies were in dire straits in terms of indebtedness, including Mexico, Brazil, Argentina and the Philippines. The countries set up a program to buy back their own debt from distressed small banks at an 80% discount to par value. On 9% and higher interest rates, these purchases allowed the countries to save, annually, 45% to 60% of the money invested in these programs. Effectively, the countries paid down $5 billion worth of debt with only $1 billion of investment and recovered the expense in less than two years on interest savings alone.

reversal patterns

In last month’s On Trading feature, “Understanding Chart Patterns — Flags and Triangles,” we introduced this topic by focusing on flags and triangles—two of the most common and potentially useful types of continuation patterns. Now, we’ll turn our attention to another group of chart patterns — reversal patterns — and examine two of the most common types: double tops/bottoms and head and shoulders tops/bottoms. We’ll discuss how to identify these types of formations and how traders often use the formations to help measure price targets—and potentially improve their trades.

Buffett buying American

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

keeping money safe

After the recent wild fluctuations in the Dow, many investors have lost faith in the market and the banks. Bank deposits have decreased an average of $500 million a day over the last 90 days. Meanwhile, the stock market has shed around $8 trillion in value. Try wrapping your head around those difficult numbers.

One thing is for sure, people are sick of losing money. In the current climate, many investors have given up trying to make their capital grow. They are solely focused on keeping it safe. As it turns out, spooked investors are taking the notion of “safe” literally.

SentrySafe, the nation’s top safe manufacturer, reported that sales have surged 50 percent in the past three weeks. Home Depot (HD) reported a big spike in the sales of safes and some stores are running low.

current market valuations

At current levels, the market is trading about 13 times trailing operating earnings. While below the 16.7 median level since 1972, the operating P/E ratio is still well above the 6 times earnings seen in the early 1980s. Granted, the lower current interest rate environment does argue for higher P/E ratios — albeit with a wide historic dispersion. Considering current interest rates, the earnings yield of the S&P 500 (E/P, the inverse of P/E) is relatively attractive on a trailing operating basis. The forward P/E ratio has pushed lower and now stands at about 9 times expected earnings over the next four quarters, and the forward earnings yield is very attractive relative to Moody’s Baa corporate yields.

It’s also important to remember that valuations based on forward earnings were attractive heading into the crash. And, again, it is increasingly difficult to reconcile a rebound in earnings with the ongoing economic slowdown in the U.S. and deteriorating conditions abroad. Nevertheless, the market appears to have priced in a fairly deep recession. And barring a significant near-term rise in interest rates (which we don’t foresee unless there is a disorderly decline in the dollar) or depression (which we also consider unlikely), current market valuations may increasingly become a compelling offset to the ongoing liquidation in the market.

Friday, October 17, 2008

market bottomed last week?

The Dow finished Friday down 37.5% from its Oct. 9, 2007, closing high; the S&P 500 is down 39.9% from its high on the same day. The Nasdaq is still down 40% from its Oct. 31, 2007, high.

But it is possible that a bottom for the market was put in a week ago.

One prominent chart watcher, Dan Sullivan, editor of The Chartist, said there's "an excellent chance" that the Dow's Oct. 10 intraday low of 7,882.51 will prove to be the market bottom.

You say you missed that low? A lot of people did. It occurred almost immediately after the market opened that morning. Stocks promptly rebounded, with the Dow actually going positive about a half-hour later. Traders on the floor of the New York Stock Exchange actually cheered when the Dow went positive.

The Dow came close to matching the opening low before closing that day down 128 points. But it stayed above the low, and that's important. In fact, with Friday's close, the major indexes are all 10% higher than their Oct. 10 lows.

So, if a week ago was the bottom, should you buy?

Sullivan emphatically does not think so. "Given the incredible volatility, it is simply way too early to re-enter the market," he wrote in his Friday newsletter. "Our advice is to continue to stay on the sidelines in money market funds."

* * *

But here's the quote from the hotline:

"We indicated on yesterday's hotline that we expected last Friday's intraday lows to hold up over the next three months and as an outside possibility they might represent the extreme lows of the entire bear market. This is based on what we felt was the outright capitulation during the opening minutes of trading last Friday, October 10th. The areas of support are the Dow - 7,882, S&P 500 - 839, Nasdaq - 1,542 and the Russell 2000 - 468. Despite today's carnage we expect these support areas to hold."

[Not sure if that "outside possibility" = his "excellent chance".]

Thursday, October 16, 2008

Japan down too

Japan's Nikkei 225 Index registered its biggest decline since the 1987 stock market crash, with the benchmark index falling 1089 points, or 11.4%, to 8,458. Wednesday's late-day slide in the US and concerns that Japan's economy is teetering on the brink of a recession were responsible for the massive sell-off. A Reuters' survey of manufacturing confidence showed that sentiment dipped to a six-year low. Comments from the country's prime minister that the US rescue plan may not be enough to fix what ails financial markets added to the gloomy mood. His comments were based on market weakness over the past couple of days. Separately, the Baltic Dry Index - a measure of shipping rates - fell to a 5 1/2-year low, suggesting that global growth is quickly moderating. Though the index is influenced by economic activity, new ships coming on line (increases in supply), also impact rates.

Schwab Center for Financial Research - Market Analysis Group

Wednesday, October 15, 2008

The VIX as an indicator

A hackneyed phrase is that investors oscillate between fear and greed. When one emotion gets too powerful relative to the other, stock markets become volatile places. There now exists a method that some believe is a gauge of the collective fear among equity investors. This mirror into the collective soul of the investing public is called the VIX. VIX is actually the ticker symbol assigned to the Chicago Board Options Exchange Volatility Index. It measures the expectation of traders as to the volatility of the S&P 500 over the next 30 days. The higher (lower) the VIX the more (less) volatility that is expected.

Since the VIX was introduced in the 1990s, there have been a number of periods where the index has spiked upward. Typically, this has happened after periods of poor performance. The question we asked was: "How does the stock market perform after a period where the VIX has been at unusually high levels?" Let's first focus on days when the VIX has been above 30. In the four weeks after those periods, the S&P 500 index has been up 4% on average and up 22% in the one year after the VIX has been at that high a level. What's more interesting is that, if we restrict our focus even further to just those days when the index was 35 or higher, the subsequent upward has been, on average even higher whether we're looking at four-week or one-year periods. Finally, on rare occasions, the VIX breaches 40. This has tended to be an even more positive development for stocks in the past. Where are we now? The VIX closed at 69.95 on October 10.

Buffett remains rosy

It's been a marvelous time to be alive. It wasn't really a whole lot better to live in the fourth century BC than the fourth century AD. But it's been a lot better to live in the year 2007 than it was in the year 1807.

...Even those on the low end are doing far better than people on the high end were doing 100 years ago. There're many, many things that a person earning a normal wage in this country can do and enjoy that John D. Rockefeller couldn't do and enjoy. So a rising tide has lifted all the boats... The average American is going to live better 10 years from now, 20 years from now, and 50 years from now.

[interview in I.O.U.S.A (via investwise)]

Grantham starting to buy

In July 2007, Grantham warned of a financial bubble as hedge funds, private equity, and homeowners gorged on debt.

Today Grantham says we're in for slowing global economic growth. In particular, he believes China will slow down more than expected as most economists have taken in their forecasts for Chinese growth only a touch. He argues that China is very dependent upon exports and that the countries on the other end of the trade are too weak.

Grantham expects that slowing growth will also keep commodity prices falling. "I would keep out of commodities for the near term," he said.

In addition, he sees the deleveraging--an unpleasant unwinding of debt-- leading to a reverse wealth effect for companies and consumers alike. Both had been living beyond their means and now will have to adjust to below-average earnings and income, and that means they'll be tight with spending.

Nonetheless he's now more constructive about equities because he believes they are trading at severely depressed prices. He said that at the end of Friday, global equities were trading as cheaply as they had been since the 1980s. In fact, the U.S. had traded below GMO's fair value estimate--though as we spoke Monday morning a rally had brought it back to around fair value. Specifically, he prefers blue chips to small caps or highly leveraged companies.

"We're buying carefully and slowly," Grantham notes. Why slowly? "When bubbles correct, they usually overcorrect so that the market is selling well below fair value."

U.S. Government to invest in banks

[10/14] The Treasury Department outlined its latest plan to stabilize the US financial system and restore confidence. From the $700 billion recently approved by Congress, the government is expected to invest up to $250 billion in the banks via preferred stock, with about half of that going to nine major banks. The Treasury Department confirmed that nine large institutions will participate but did not name the banks. The Wall Street Journal reported that the companies that have agreed to participate include Wells Fargo (WFC $34), Goldman Sachs Group (GS $127), Morgan Stanley (MS $24), Bank of America (BAC $27 1) and Citigroup (C $18). Shares of the firms are up sharply but none have commented.

[Schwab Alerts]

Tuesday, October 14, 2008

Europe up too

[Monday]

Markets in Europe are finishing the day up an astonishing 10% after the announcement of a new round of actions designed to stabilize financial markets. The European Central Bank, the Bank of England, and the Swiss National Bank said they will put no limits on loans of dollars to the banks, and the swap line between the Federal Reserve and the corresponding central banks will be increased to accommodate whatever quantity of dollar funding is demanded. The Bank of Japan is considering similar measures, while the Bank of Australia said it will guarantee lending between banks. Although counterparty risk remains high and banks continue to hold onto cash due to fears that a borrower may collapse taking the funds with them, the three-month Libor lending rate and lending rates across Europe eased following the massive new injections of liquidity and the extraordinary measures taken to restore confidence.

In order to restore confidence, drive short term rates to more normal levels, and encourage lending, Germany said it will guarantee up to 400 billion euros in lending between banks and offer recapitalizations of up to 80 billion euros. And France said it will provide a total of 320 billion euros in guarantees and an extra 40 billion euros to help recapitalize banks.

The UK will inject 37 billion pounds ($64 billion) into Royal Bank of Scotland (RBS $1), HBOS (HBOOY $2), and Lloyds TSB Group (LYG $13) to keep the banks afloat. US Treasury Secretary Henry Paulson also intends to present plans to inject capital directly into banks later this week, the Wall Street Journal reported. Plans have not yet been finalized, but the Treasury Department said early this morning that the government is looking at varying ways to provide capital for banks. Schwab's Chief Investment Strategist Liz Ann Sonders pointed out this morning in her Breaking Commentary, What a Difference a Weekend Makes, that guidelines are being developed that will govern the purchase of bad assets, and the plans will include stock-buying efforts. She also details the major events that unfolded in Europe over the weekend and in early morning action. Ms. Sonders remarks are also available on Schwab.com.

Meanwhile, the G7 meeting in Washington that concluded on Friday night was short on specifics but finance ministers said in their communique that the current situation calls for "urgent and exceptional action." The nations must use "all tools" to support systemically important financial institutions and prevent their failure, and take all necessary steps to unfreeze credit and money markets. Separately, Phillips Electronics (PHG $20) is trading solidly lower after posting a drop in profits and saying its healthcare unit had seen a slowdown in orders in the past weeks, mainly due to the US. Phillips said it will slow its share buyback. Elsewhere, Russia's benchmark index closed down 6% since authorities had closed the market on Friday, and traders were unable to react to Friday's debacle in Asia. Iceland's market remained closed but is scheduled to re-open on Tuesday.

Schwab Center for Financial Research - Market Analysis Group

Monday, October 13, 2008

Dow's biggest day

The blue chip index had its biggest one-day point gain and largest percentage gain since 1933. Governments around the world race to help rebuild the financial markets. Mitsubishi UFJ closes its deal to buy a stake in Morgan Stanley.

The Dow closed 11.1% to 9,388, its biggest percentage gain since March 15, 1933 when the index gained 15.3% and its fifth largest percentage gain ever.

Saturday, October 11, 2008

Cramer says 5886

The Dow lost 2,000 points this week, making it the worst sell-off since 1933, Cramer said. He doesn’t think we’re done, though.

Today’s late-day rally brought us too far too fast, he said, and bottoms rarely happen on Fridays anyway. Main Street isn’t paying attention, they find out what happened over the weekend, and then Monday they start to sell.

Keep this in mind as next week starts. Cramer can’t decide if this market is closer to 1987 or 1929, but he’s pretty sure bad news from Morgan Stanley and lack of good news from the world’s industrialized nations could cause a sizable drop in the markets on Monday and Tuesday. The Dow could go as low as 5,886, he said.

That’s what happened during the crash of 1987: The Dow lost 508 points from Friday’s close to the session-ending bell on Black Monday. Then Terrible Tuesday saw an intraday low 339 points below that before the market turned up. If this is how the present market plays out, Cramer wants investors to use a quarter of the cash he’s been urging them to raise each day to buy certain stocks on weakness. He thinks we might have come down enough to put some money back to work.

Why risk it? Because even people who bought stocks on the Friday before Black Monday broke even after a year. And those that bought during the lows of Monday and Tuesday saw some terrific gains 12 months later.

Seth Klarman's biggest fear

Biggest fear was buying too soon and on way down, from up in over-valued levels. Knew market collapse was possible and sometimes imagined I was back in 1930. Surely there were tempting bargains and just as surely would have been crushed after decline of next 3 years. A fall from 70 to 20 and fall from 100 to 20, would feel almost exactly the same. At some point being too early becomes indistinguishable from being wrong.

Getting in too soon brings risk to all investors. After a stock market has dropped 20% – 30% there is no way to tell when the tides will change. It would be silly to expect that every bear market will turn into a great depression. Yet fair value from under-valued can’t be predicted, and would be equally wrong.

As market descends you are tempted with purchasing companies. You will be bombarded with tempting opportunities. You never know how low things will go. When credit contracts and tide goes out on liquidity. At these times recall the wisdom of Graham and Dodd. At this time, you should not market time, but stick to your value convictions. You will see tempting bargains and value imposters. Ignore macro and look to buy cheap.

Stand against the prevailing winds, selectively and resolutely. Yet for a while a value investor will under-perform. Interim price declines allow you to average down. Do not suffer the interim losses, relish and appreciate them.

Controlling your process is essential.

A. Be focused on process, not outcome.

B. Do not judge a decision based on its outcome.

C. During periods of under-performance it is easy to change your process.

-- Seth Klarman at CIMA Conference 10/2/08

funds are selling (to who?)

Buffett's been busy lately putting his money where his mouth is. He has made high-profile investments in General Electric and Goldman Sachs' preferred stock, and he's likely licking his chops right now at the prospect of deploying capital in this target-rich environment.

So if Buffett's buying, why aren't fund managers following suit?

Many fund managers likely agree with Buffett's sentiments. And at today's prices, they wish they could be like Buffett and buy stocks. However, due to a panicked investing populace, that's simply not possible.

You see, when individual investors elect to withdraw their money from a mutual fund, the fund manager must quickly come up with the cash to redeem those investors. For the week ended Oct. 8, equity investors withdrew a whopping $43 billion from mutual funds, spurring a wave of selling by fund managers -- even though those managers likely still believed in the prospects of the stocks they were selling!

As Morningstar's Director of Equity Research Pat Dorsey explained in a recent video, these stock sales had "nothing to do with fundamentals, nothing to do with the underpinnings of our economy ... no matter what the stocks are, no matter how attractive those assets may be, [fund managers] have to sell them because they need to raise the cash to send those checks out" to their investors.

And that $43 billion figure doesn't even include hedge fund managers who are forced to sell stocks due to investor redemptions and margin calls!

As master money manager Ken Heebner -- skipper of the CGM Focus fund -- told USA Today, "The reason for the sharp decline is massive selling from hedge funds, not because they want to, but because they have to reduce their leverage ... it's the biggest margin call since 1929."

This indiscriminate selling likely explains why shares of quality companies have stumbled over the past month, even though the prospects of many of these companies have remained strong.

Mutual fund and hedge fund managers can't buy shares in these companies right now -- but you can. If you have money sitting around that you're comfortable committing for the next three to five years, and if you can stomach a little short-term volatility, now is a great time to scoop up shares of quality companies on the cheap.

[unless the market crashes further on Monday of course]

Friday, October 10, 2008

Dow dips below 8000

The Dow Jones Industrial Average plunged nearly 700 points in the first minutes of trade to trade below the 8,000 mark for the first time since April 1, 2003, before bouncing back and erasing two thirds of its opening losses. The Dow industrial last traded down 247 points, or 3%, at 8,323. It earlier fell 697 points to a low of 7,882. The S&P 500 index ($SPX) was down 24 points, or 2.3%, at 889, while the Nasdaq Composite (COMP) fell 21 points, or 1.3%, to 1,625.

In the first five minutes of trade Friday the Dow plunged 697 points, falling below 7,900 to the lowest point since March 17, 2003. The Nasdaq and S&P also hit more than five-year lows. But stocks recovered abruptly, with the Dow erasing losses. The afternoon saw the Dow make violent swings back and forth across the breakeven line, toppling as much as 600 points and rising 322 points.

The Dow has now tumbled for eight consecutive sessions, losing nearly 2,400 points, or 22%, as panicked investors ditched stocks across the board.

For the week, the Dow fell just over 1,874 points, or 18%, its worst weekly decline ever on both a point and percentage basis. Wall Street lost roughly $2.4 trillion in market value during the week, according to losses in the Dow Jones Wilshire 5000, the broadest measure of the market.

downs and ups

Past Financial Crises (click on the dots)

Bear Market Blues

The Best Bull Runs

current stories

Pabrai on short selling

A good example to see how effective a ban on short-selling would be is to look at the Chinese stock market, where shorting stocks is illegal altogether. You can't short at all. Until recently, China just had ridiculous stock pricing, and even with their permanent short-selling ban, it didn't stop stocks from falling a tremendous amount.

This all reminds me of a comment made by Charlie Munger a few years back. He said that England, after the South Sea bubble, made publicly held companies illegal. They made them illegal for 100 years. They thought, "It's a casino, it's all nonsense," and they just got rid of the entire system. There was no stock market for 100 years.

Here's what's important: when they got rid of publicly traded companies, it made no difference in terms of the way commerce progressed. The GDP of England grew dramatically during those 100 years. The English people weren't bad at forming companies -- businesses still flourished -- and entrepreneurs could still raise capital from private sources.

Anyways, what Munger's point was is that many of the financial instruments that we think we need, we really don't need. They don't make a positive difference in commerce.

The Real Great Depression

our current period is unlike the pre-1930s depression era. That depression was triggered by the crash of 1929 but primarily caused by bad monetary policy that exacerbated the debt deflation that followed from consumer over-indebtedness. Weakly structured consumer lending and manufacturing sectors led a sudden decline in consumer purchasing power. Demand crashed. The US depression was then quickly transmitted throughout the world via financial markets, then more slowly through disturbances in trade, which were multiplied by politically motivated disastrous trade policies, and finally war.

Our current episode has more in common with the 1870s depression which, as Nelson notes, was considerably worse. It was primarily caused by over-indebtedness in the commercial real estate sector, which mortgages were based on new forms of financing which were intermingled on the balance sheets of commercial banks with less rarefied assets that the banks added by making business loans. The era, as the poster to the left depicts, was one of broad based public participation in credit financed asset price inflation and speculation. When the commercial real estate market crashed, it took down the banks and caused the market for commercial credit to seize up, much as we are seeing today. Small businesses were hit especially hard. Unemployment spiked and a severe and lengthy depression ensued as financial markets throughout the world suffered, followed by international trade. The crisis emanated from Europe. It was the beginning of the end of Europe's dominance as the center of global economic power.

[via chucks_angels]

be in the game

This past Thursday, Columbia Business School held a conference on value investing to commemorate the publication of the revised edition of Benjamin Graham's classic volume, "Security Analysis." Seth Klarman of Baupost Group in Boston is an editor of the book and one of the leading value investors in the country.

"Normally, as a buyer you have to compete with a lot of very, very smart competitors," said Mr. Klarman. "But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don't have to be as smart as you did before. You just have to be in the game."

The day Mr. Klarman spoke, the Dow fell an additional 348 points, and 658 stocks, or more than 15% of the total, hit new 52-week lows on the New York Stock Exchange. Yet the word Mr. Klarman and several other speakers kept using was "excited."

That is because investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt -- so much so that stocks now offer more income than bonds do. The dividend yield on the Dow Jones Industrial Average is currently at 3.14%, higher than the 2.68% yield on the five-year Treasury note.

With so many professional money managers afraid to act, with most of the public in the grip of fear and anger, you should put your cash and your courage to work.

[via chucks_angels]

stock market value to GDP ratio?

Ratio Of GDP ($14.3 trillion) to total stock market value($11.8 trillion) now stands at 82.5%. This compares to 139.1% a year ago and 190% in 2000. Buffett said in 2001 that satisfactory investment results could be expected when the ratio “70% to 80% area”

In 1974 the ratio was below 50%, but long treasuries were yielding 11% and sucking money from equities. You can argue that it is still too soon to buy, but I see lots of individual prices that are cheap and have started to commit some cash.

I think that even if it is too soon to buy, it is way, way too late to sell.

[via chucks_angels]

[later in the thread]

This is not correct. Buffett uses GNP:

You are right. I wrote my question incorrectly. I meant to ask Losch why he used GDP instead of GNP. That only makes sense given the context of the exchange.

Also, I am genuinely interested to find out how to get up to date and accurate numbers for total stock market capitalization. When I made a post on this topic a couple of days ago, a poster wrote me an email asking why I used the quoted index number for the Wilshire 5000. I made that assunmption given the index's description of itself being a good dollar for dollar measure of the US stock market. But after thinking about it for a while, I am not convinced that is a good approximation of total market capitalization. It definitely does not include the pink sheet or the OTC markets, and there could be other problems with the weighting et cetera. I figured if anyone could clear my misunderstanding up on the board, Losch could.

If my method was right (Wilshire 5000 quote divided by government GNP numbers), on the other hand, Losch is understating the general attractiveness of stocks by almost 25% using this value metric. Any help would be greatly appreciated.

* * *

I was wondering about the same thing. I found this in Wikipedia, but of course don't know how reliable it is:

"One index point corresponds to about US$1 billion. Hence the value of the index, multiplied by one billion dollars, roughly equals the total capitalization of the US stock market."

http://en.wikipedia.org/wiki/Wilshire_5000

If that were true, then 9,200 bn Total Market Cap would be around 65% of 14,300 bn GNP.

[stay tuned?]

Thursday, October 09, 2008

quick drops

[yesterday]

The S&P 500 has dropped 18% in just seven trading sessions. The Dow sliced through 10,000 as though it wasn't even there, and has lost more than 15%. The Nasdaq? Off more than 20%. In just a week and a half.

If you didn't think stocks were risky before, you certainly know better now. Is it time to get off the ride before things get even worse?

What history really says
You've already heard all the basic talk about how historically, big market plunges are a great time to buy. That's easy to say looking back, but a lot harder to believe when you're in the middle of a plunge. So let's take a closer look at some similar periods in the past 20 years or so when stocks fell sharply:

Dates of Drop % Drop on S&P 500 % Change After 6 Months
7/12-7/23/2002 (13.4%) 11.2%
9/5-9/21/2001 (14.7%) 19.5%
4/3-4/14/2000 (9.9%) 2.2%
8/26-9/4/1998 (10.1%) 28%
8/15-8/23/1990 (9.7%) 19.2%
10/5-10/19/1987 (31.4%) 14.7%

Source: Yahoo! Finance.

Note that in terms of short-term drops, the past two weeks have been extraordinary -- only the 1987 crash exceeds the speed of the declines we've seen. Also, it's reassuring to see that after big drops, the market tended to do reasonably well in the near future. That even includes drops early in the bear market of 2000-02, when those short-term gains would later give way to further declines before hitting bottom in late 2002.

credit default swaps (CDS)

How do credit default swaps work?

Don’t let anyone tell you CDSs are too complex for you to understand – they’re not much different from the insurance you purchase on your home or your car, except it’s bonds that are being insured.

Say you are the nervous owner of $10 million in face value of Morgan Stanley (NYSE: MS) bonds and you fear the bank could go belly-up, putting the value of your bonds at risk. One solution is to purchase protection in the form of a credit default swap.

Last Thursday, credit default swaps on Morgan Stanley’s debt were trading at 975 bps. In plain terms, in order to insure $10 million in face value of bonds against the risk that Morgan Stanley won’t meet its obligations, credit default swap buyers were willing to pay an annual premium of:

($10,000,000) * (9.75%) = $975,000

This premium is on top of an up-front payment -- last Monday, that sum was a whopping 12% of the total face amount being insured. In return, the credit default swap seller guarantees the bonds’ payments or their value in the event of default or bankruptcy.

coordinated rate cut

[yesterday]

In an historic move, the Federal Reserve, the European Central Bank, and many of the word's major central banks enacted a rate cut designed to contain the global credit crisis and support the worldwide economy. Stocks were initially higher following the coordinated actions, and markets in Europe pared losses. But the initial enthusiasm is being tempered by a lack of confidence in the credit markets and concerns the global economy is teetering on the edge of a recession.

Historic global rate cut

The Federal Reserve, along with the European Central Bank, the Bank of England, the Bank of Sweden, the Bank of Canada, and the Swiss National Bank acted together to cut rates as the Fed said that the recent intensification of the financial crisis has augmented the downside risks to growth and has diminished the upside risks to price stability. The Fed cut rates by 50 basis points to 1.5%, and the European Central Bank, which has resisted rate cuts this year, cut its key rate by 50 bp to 3.75%. The Bank of England, the Swiss National Bank, Bank of Canada, and Swiss National Bank also reduced their key rates by one-half percentage point.

The Bank of Japan welcomed the action but noted that at 0.50%, its main lending rate is already "very low." Shortly after the decisions were released, the central bank in Hong Kong acted in a similar fashion and slashed rates by 50 basis points. The People's Bank of China also reduced interest rates and cut its reserve requirement amid signs that the fast-growing economy is slowing. The unprecedented global action speaks volumes about the severity of the financial crisis and the desires of central banks to unthaw frozen credit markets and prevent the financial crisis from escalating.

UK rescue plan

European stocks have significantly pared losses following the global decision to slash interest rates but remain lower due to worries that the financial and banking woes are escalating. The UK said it will inject 50 billion pounds ($87 billion) in the banking system in order to recapitalize banks and prevent a breakdown in its banking system. Institutions that are included in the rescue plan include Barclays (BCS $18), the Royal Bank of Scotland (RBS $2), and six other major banks. The Bank of England also said it will provide at least 200 billion pounds to banks under a special liquidity scheme in order to encourage intra-bank lending. The initial reaction did little to help credit markets as the overnight Libor lending rate surged from 3.93% to 5.38% and the three-month Libor rate rose from 4.32% to 4.52%.

Elsewhere, the global panic in emerging markets forced down Russian stocks by more than 10% in the first 30 minutes of trading before authorities halted trading. Ukraine, Romania, and Indonesia also stopped trading as shares plunged amid worries about the global banking system and expectations that worldwide growth is poised to slump. Commodities, which drive a significant portion of developing economies, continue to fall, but persistent anxieties are supporting gold prices.

Tokyo shattered

Rising worries about a global recession knocked down the Nikkei 225 Index in Tokyo by 9.4%, the worst decline since 1987. Shares of Toyota (TM $68) extended losses for the fifth consecutive day and fell 11% after the Nikkei financial daily said the leading automaker might lower its full-year profit outlook, but near the close, a senior executive said the company was not contemplating a reduction in its current forecast. Meanwhile, the growing financial crisis and recession fears leaned heavily on stocks, with South Korea losing nearly 6% and shares in Hong Kong falling over 8%.

Schwab Center for Financial Research - Market Analysis Group

Martin Weiss' target = 7200

[Tuesday 10/7]

Today’s 508-point plunge brings the Dow closer to our long-standing target of 7,200. But to get there, it still has a long way to fall — over 2,200 points.

And if credit markets continue to shut down the U.S. economy, it’s not safe to assume that 7,200 will be the ultimate bottom.

* * *

That's it. Change your target as it gets closer..

Note: With two more days of declines, only 1400 points to go..

* * *

[10/10/08] Roubini has revised his target from 8500 to 7000

tax-exempt municipals

As with stocks and other investments, rates in the money market world tend to rise as risk increases. So ultra-safe money market funds that hold only Treasury debt have extremely low yields -- around 1.5% to 1.7%. Higher-yielding money market funds that hold corporate debt pay a bit more -- around 2.3%.

Those small differences in rates make plenty of sense -- in a tight credit environment, corporate issuers have to pay a premium to get investors to own their debt. But where traditional rate relationships have broken down is in the tax-exempt municipal money market. Although you might consider state and local governments to be no riskier than corporate issuers, the rates governments are having to pay for short-term borrowing have gone sky-high -- above 5% as of yesterday.

When you consider that interest on tax-exempt municipals is free from federal income tax, making that 5% equivalent to nearly 7.7% in a taxable investment for someone in the 35% tax bracket, you can see that things don't make sense right now. Are munis a great opportunity, or the latest value trap?

Dow dives below 9,000

The Dow Jones industrials fell under 9,000 this afternoon for the first time since the summer of 2003 as investor confidence that markets would stabilize appeared to collapse.

The S&P fell under a closely monitored support level of 960. A support level is important because it is supposed to trigger new buying.

At those levels, the crash of 2008 has left the Dow 39% below its record close of 14,164.53 and the S&P 500 down 41% from its record close of 1,565.15. Ironically, both records were set exactly one year ago today.

people depressed

Nearly six out of ten Americans believe another economic depression is likely, according to a poll released Monday.

The CNN/Opinion Research Corp. poll, which surveyed more than 1,000 Americans over the weekend, cited common measures of the economic pain of the 1930s: 25% unemployment rate; widespread bank failures; and millions of Americans homeless and unable to feed their families.

In response, 21% of those polled say that a depression is very likely and another 38% say it is somewhat likely. The poll also found that 29% feel a depression is not very likely, while 13% believe it is not likely at all.

But economists, even many who feel current economic risks are dire, generally don't believe another depression is likely.

Wednesday, October 08, 2008

no bottom in sight

The bear market that is ravaging investor portfolios is now one of the worst in modern U.S. history and has wiped out more than $7 trillion in shareholder value, with no bottom clearly in sight.

A year ago Thursday, Wall Street was celebrating the fifth anniversary of a bull market that had created $10 trillion in shareholder wealth since 2002. The Dow Jones industrial average and the Standard & Poor's 500 index hit all-time highs on Oct. 9, 2007.

A headline in USA Today captured the prevailing sentiment: "Market's run could keep going for a while."

In fact, the party was over. The subprime mortgage problem that was laid bare by a decline in home values developed into a much broader credit crisis that toppled giant banks and financial institutions.

Panicked investors have been fleeing from stocks. The S&P is down 37 percent from its peak of 1,565 a year ago, closing at 985 on Wednesday, and the Dow has tumbled 35 percent from 14,164 to 9,256.

Most experts don't see a recovery until there's greater stability in the housing market, banks are lending freely and employment improves.

Unlike other periods that saw precipitous drops, this one is rooted in foundering credit markets. That makes predictions more difficult than if the plunge were based on company profits or stocks alone.

"When you have an environment like this where the crisis is so deeply rooted from the credit standpoint, it adds an extra layer of ambiguity and ultimately of uncertainty," said Mark Freeman, portfolio manager for Westwood Holdings Group Inc. "That is what the markets are struggling with."

No turnaround is seen before 2009 or later. And there is a wide divergence of opinion on the future of this bear market, which feels unlike any other because of the $700 billion federal bailout and the collapse of investment banks.

This bear market — a term often defined as a prolonged drop in stock prices of 20 percent or more — already is harsher than most of the 10 bear markets since the 1930s. Those markets have lasted an average of about 16 months from peak to trough, with average stock losses of 31 percent, based on S&P data.

Since the record 83 percent plunge in 1929-32, the current market is exceeded only by the drops of 49 percent in 2000-02 during the tech stock implosion and 48 percent in 1973-74 during a recession and energy crisis.

[posted 11/2/08]

Tuesday, October 07, 2008

It Will Be Better

... In a Few Years, writes Joe Ponzio.

From its peak on January 11, 1973, the Dow began a two year, 47% slide from 1,067 to its December 9, 1974 low of 570. With no internet or stock market channel, most people continued on saving and investing, cognizant of the losses but not completely panicked or terrified.

Today, the doomsday crowd is calling for the end of the world and a total and final financial collapse. If we were to drop 47% from our high, the Dow would be 2,300 points lower at 7,568. Possible? Absolutely. Anything is possible.

But, like we did after the Great Depression and the 47% drop in 1973 and 1974, and like after so many other times throughout history, we will get through this, great businesses will be more valuable five- and ten-years from now, and price will eventually follow value.

Believe me — there are some very attractive bargains developing in this market, and you should look for them the same way you looked for them when the Dow was at 14,000.

Monday, October 06, 2008

Dow dives below 10,000

The Dow Jones industrials plunged below 10,000 today for the first time since October 2004 as markets struggled to cope with continued fallout from a global credit crunch.

The sell-off wiped out more than $2.5 trillion in wealth, and it pushed the losses sustained by major indexes in the United States since their peak in October 2007 to more than 30%. The Dow's loss is about 31%, with the S&P 500 down 33.8% and the Nasdaq down 36%.

Friday, October 03, 2008

Rescue Package (aka Bailout Bill)

In a decisive vote, the Senate passed the $700 billion rescue package by a vote of 74 to 25, including a provision to raise FDIC coverage to $250,000, but a raft of tax cuts unrelated to the financial crisis could hamper chances in the House of Representatives. Persistent tightness in credit markets, nervousness over eventual passage of the bill, and worries about the economy are weighing on shares. Furthermore, losses accelerated after jobless claims unexpectedly rose. Still, House leaders are cautiously optimistic they can win passage of the package. [Schwab Alerts]

* * *

In a 263-171 vote, Congress passed the Emergency Economic Stabilization Act of 2008in the hopes of unfreezing the credit markets. It will also hopefully reverse the panic that erupted after the plan failed to pass the House on Monday. As most of you know, the legislation authorizes the government to buy troubled assets from financial institutions.

The bill had $149 billion in tax breaks added to it since Monday’s no-vote, some of which were ridiculous earmarks as I touched on earlier this week. As unfortunate as this situation is – with the largest government intervention since FDR’s New Deal – passing this bill was absolutely the right thing in our opinion. We needed to stop the panic.

No, the plan’s not perfect. But the problem was that if we waited to act until a new, better version of the plan was constructed, a complete financial system breakdown was all-but inevitable. Anecdotal evidence of just how dire the situation had become probably swayed some votes into the yes camp. Even well-qualified borrowers being shut out of credit; small companies are finding they no longer have ANY access to their existing credit lines; and the market for commercial paper – short-term borrowing by businesses – suffered the biggest one-week drop on record. Businesses cannot function without access to credit, and the majority of the House finally came around to this realization.

Terrible “marketing” job

Part of the problem getting a majority of politicians and the public to rally around this plan was its poor “marketing” by the media and politicians themselves. The fact that the term “bail-out” has been used so ubiquitously is a frustration. No one is being bailed out and it’s not going to “cost” the taxpayer $700 billion. The U.S. government (taxpayers) is not handing the money to financial institutions … it is buying distressed assets with the money, and if structured properly the government (taxpayers) stands to ultimately benefit from the deal. That’s why Warren Buffett himself has said he’d like to get in on the deal with a 1% stake.

[Liz Ann Sonders, Charles Schwab & Co.]

* * *

NEW YORK (CNNMoney.com) -- After two weeks of contentious and often emotional debate, the federal government's far-reaching and historic plan to bail out the nation's financial system was signed into law by President Bush on Friday afternoon.

"By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said less than an hour after the House voted 263 to 171 to pass the bill.

The House vote followed a strong lobbying push by the White House and other supporters of the bill. The House rejected a similar measure on Monday - a defeat that shocked the markets and congressional leaders on both sides of the aisle.

The law, which allows the Treasury Secretary to purchase as much as $700 billion in troubled assets in a bid to kick-start lending, ushers in one of the most far-reaching interventions in the economy since the Great Depression.

Thursday, October 02, 2008

Sweden 1991

"Risky lending practices, poor reporting transparency, and a booming real estate market led to a major meltdown in a large, established banking system. A weak regulatory framework was in dire need of an overhaul, and the government had no choice but to step in and take direct action in the banking sector."

That paragraph is about Sweden in 1991, but I'd forgive you for thinking "Washington, D.C. last week."

This time, there's a Greek chorus of respectable voices behind me, too. Bloomberg, The New York Times, and The Wall Street Journal all ran similar opinion pieces last week, pointing out the similarities between "the here and now" and "Scandinavia in the early 1990s."

In short, the credit crisis described above was stopped in its tracks by unblinkingly severe action among the Swedish, Norwegian, and Finnish central banks. Some of the largest Scandinavian banks were taken over by the local governments, while others were simply allowed to fail, but with government guarantees for their debt payments. All of the central banks raised interest rates to shockingly high levels. When the central lending rate sits at 500% -- however briefly -- you might as well just shut down bank lending altogether.

It was tough. It was expensive. Unemployment rates soon exploded, and the stock markets in Oslo, Helsinki, and Stockholm suffered dearly. But five years later, these banking systems were back on their feet and started lending out money again. Finnish phone giant Nokia (NYSE: NOK) was a 20-bagger in five years, starting in 1995, while rivals such as Motorola (NYSE: MOT) merely doubled. The Swedish precursor to today's pharmaceutical titan AstraZeneca (NYSE: AZN) tripled in three years, keeping up with American contemporaries such as Merck (NYSE: MRK). The crisis was over.