Wednesday, October 28, 2009


The past 5 or 6 trading days have been miserable. If I was fully invested my nausea would resemble the swine flu. While I've taken my inoculation of holding cash, writing calls, and shorting a few names, the sick feeling still overwhelms me as I watch the equities that I own crater.

The sweaty brow, clammy hands, and ache in the pit of my stomach are symptomatic of my feelings last Spring as the market plummeted. Is this downward move just a minor, sideways adjustment or the onset of a major correction that will again test men's nerves?

We've only slid down to 9750 on the Dow and 1042 on the S&P so the bulk of the market's recovery is intact. Yet it feels as if we've fallen off a cliff. Rebounding equities have felt so good after the misery of the recession and credit crisis. Will investors panic and attempt to avoid a repeat of the March lows by selling out or will they view a 10-15% correction as a buying opportunity and start pushing prices upward again?

My guess, and it is obviously just a guess, is that the bias is still positive and after some of the gains are protected and taken off the table, the buying will resume. But the names will be different. The crappiest of stocks have done the best in the rally, and even the boldest investor should sense that it is time to become more cautious. Speculative names will be replaced with reasonable investments.

Over the next 6 months I still believe we will head lower, but not yet. So, use upcoming rallies to lighten up so that when the swine flu of investments hits us the nausea, chills, and aching won't become terminal.

Wednesday, October 14, 2009

Mister Market Is Laughing At Me

I will never be a great investor because I never follow my convictions and place all my marbles on my view of the future. My hedged bets tend to minimize being right and being wrong. That approach suits me as I sleep well and am still solvent. In the current rally, my stock positions have grown nicely and make me feel good. My cash position, on the other hand, makes me want to go sit in the corner.

As I stare into the corner I calculate how much I could have made had I put all my cash to work in equities. That bothers me. Then I remember how horrible it feels when stock prices tick downward and net worth sinks. An especially sick feeling if you are retired and no longer earn any replenishing investable cash. That's why I attempt to stay cautiously invested. Home runs aren't worth the risks involved.

Within the next six months I'll be happy that I'm not fully invested and I hope that I recognize an appropriate time to pull back from my long positions. I probably won't and that is why market timing is difficult.

JP Morgan is instructive. I should have bought it six months ago. Now it sells at almost its ALL TIME HIGH! Even after the dilution that came from issuing lots of new shares to repay TARP loans. You'd think that all the problems are finished. No, they remain. Now JPM is the best of the big banks, but they are still loaded down with non-performing consumer loans and accelerating losses. Loss Reserves have been built, but they will need further provisioning. The market has been celebrating the slowing of JPM's rate of losses. Losses are still growing, just not as fast! Is that worthy of a stock price that is very near its all time high? I don't think so, but I wish I had bought some six months ago. Now sure isn't the time to buy, but traders are.

Goldman Sachs is a similar story, as are the BRIC and commodity stocks. Their recent results have been astounding. They make me green with envy and feel like donning a dunce cap. Until I think about the likelihood of them remaining at current levels, then I regain some comfort in my liquidity.

A review of a DOW chart of the Great Depression depicts a strong bounce back before returning to lower levels. We've had our bounce back, and it may go higher, but I suggest preparing for a return to bleaker times. I will sleep peacefully, even though I will wish I had made some easy money when Mister Market taunts me.

Monday, October 12, 2009

An Unscientific Examination Of Our Financial Future

Economic and financial education, the financial press, and prayer have failed me. No matter how crusty and savvy I think I am, my results don't equal the image I have of my abilities. While far from prescient, thank God I tend to eke out better results than the professional investment sages. Still, I'm about ready to take up the Maharishi Yogi's Flying Yoga and look for enlightened answers to our investment future.

Where are we headed? Television's talking heads swear it is upward, even though they hedge their verbal bets with a few negatives that could pose problems. Sideline money that needs to be invested, a weak dollar and strong commodities, and momentum are forces that are too strong to stop. The market marches on. Or does it? That's where I wish prayer or Yogi flying would work. Where are we going, because Mama needs new shoes.

Did we overshoot by 50 percent at the nadir? Is cost cutting and an inventory correction worth a 50 percent retracement? Can decent growth in China, Brazil, and India compensate for anemic economic activity in the US and Eurozone? Is deleveraging over or the impact exaggerated? Who knows?

After bouncing up and down on my ass and attempting to fly into meditation, I've come to the following conclusions. We over indulged for too long and we're going to deleverage and suffer for a long time. Our 50% party is overblown and will not last. After a quarter or two of easy comparables fueled by inventory replenishment and cost cutting, we are going to flat line for quite some time. Select companies, in select industries, will do well but the "market" will struggle. Deleveraging is brutal and we haven't experienced brutal yet. Government may slow the process, but they can't stop it, especially since they are attempting to with DEBT!

So, I'm keeping lots of cash and only investing in select stocks that "may" do well despite the upcoming economy. I've kept some emerging markets ETFs and international mutual funds. I've added some short positions and will probably add more, but I scare easily. I'd like clarity, but I can't find any. OM, OM, OM. Off to Fairfield.


I've owned SMBL on and off over the past several years. The story hasn't changed, but the share price is inching lower. An opportunity is at hand if you can wait five years. Regardless of the "markets" results, Smart Balance will reach $1 Billion, control a significant share of the dairy case, and sell out for a very nice price.

The "story" is one of smart management that has built brands successfully before. Steve Hughes, SMBL CEO, has been the architect of tremendous brand growth at ConAgra, Dean Foods, and Celestial Seasonings. His team has years of experience and the goal of building SMBL into a billion dollar foods concern. They are currently at the $250MM level after several years of business.

Smart Balance is a BRAND. It doesn't own manufacturing or research facilities. It is product, marketing, and people. It makes a little money and generates cash. Enough to paydown it's acquisition debt to $65MM. They should be debt free in a year or so. The lack of manufacturing is an advantage in our current tough times.

At its current share price of $5.90 the stock can be gathered in at a price that is significantly lower than the IPO price, employee options, and the entry points of some of their largest private equity investors. While it isn't at its 2 years low point, it is well off its highs and hasn't participated in the market's run up.

A reasonable plan is to buy some and tuck it away for 5 years. Forget about what the market price is and let Steve Hughes do his magic. Within that timeframe he'll sell the company and you'll end up with a boatload of ConAgra, Kraft, or Heinz shares. That's my bet anyhow.

Thursday, October 1, 2009

Banks Require Zero Cost of Funds

It's well known that commercial banks have faced strong headwinds for the past several years. While banking commentators acknowledge that all of the problem mortgage loans haven't been foreclosed yet and commercial real estate problems loom, the industry has been saved by the combined action of the Fed and the Treasury. Share prices have moved dramatically upward off the fear induced bottom. Many seem inclined to believe that there is more upside to be had as long as the Fed keeps interest rates near zero.

Even with a very accommodative Federal Reserve, bank share prices will not stabilize at higher prices. Earnings power is becoming an issue. Where investors were once willing to celebrate the lack of failure and push shares up, they will shortly start to concentrate on what can banks earn with more capital, less leverage, a changed fee and expense structure, and examiners breathing down their backs. The answer is going to be that banks will earn substantially less than at their peak earnings.

Zero interest cost for overnight funds is necessary to offset the following:
1. Continued Loan Loss Reserve funding so mortgages can be foreclosed, HELOCs and credit cards can be written off, and commercial real estate loans restructured. Cummulative LLRs are not adequate to avoid future provisons on a grand scale.
2.Reflecting the above, the FDIC must be refunded and the two year advance premium payment the banks are now required to pay, even with the funny accounting treatment, will impact the banks ability to lend.
3.Regulatory changes in credit card rate changes will start to impact P&Ls.
4.The same will be true for Overdraft Fees, a major source of income for banks.
5.With quality loan demand slack, investment alternatives are not carrying high yields.
Treasuries and Agencies barely exceed overnight funding costs which has pushed bankers into GinnieMaes to find yield.
6.Finally, Regulators are behaving excessively tough on existing portfolios and requiring more reserves for a growing number of loans that are being classified as "substandard". Pressure is not inducive to extending new credit.

Earnings are apt to be "substandard" for banks for the next several years.

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