Infirmary Check

Hey all. My apologies. I have been super sick the last few days. On the rebound currently. Alot has happened in the market this week though really it doesn't change anything fundamentally. Over the next several days I will be catching up on emails and try to get caught up.

Britt Harris - Texas Teacher Retirement Fund

My good friend and mentor had a feature article in the latest Institutional Investor. He has done some amazing things at TRS.

http://www.iimagazine.com/InstitutionalInvestor/Articles/2083134/TODAY/Texas_Turnaround.html

Britt Harris went home in 2006 to revive the giant Teacher Retirement System of Texas. After two decades back East, where he’d run Verizon Communications’ pension fund and served as CEO of quantitative investment manager Bridgewater Associates, the Bryan, Texas, native took one look at the more than $100 billion TRS portfolio and saw a dangerously narrow, all-too-basic mix of stocks and bonds that urgently needed a shaking up. Harris had a personal interest at stake: His 73-year-old mother, Allana, a retired fifth-grade science teacher, receives a $1,200 check from TRS each month at her home in Mesquite, Texas.

When he interviewed for the job of chief investment officer, Harris was blunt: He told the board of trustees, which oversees the system and hires its CIO and executive director, that he would take the position only if he could make widespread changes.

The Week Ahead

There is alot of economic numbers coming out this week. Will be very interesting to see how it plays out and more importantly how the market reacts to the numbers. The market sold off early in the day at the end of the week and then managed to rally back at the end of the day. We have been down several weeks in a row now fairly big. I wouldn't be surprised to see some decent rally. Also gold pushed strongly higher on Friday. Not necessarily something you want to go rushing into now but I do think it is now time to buy on dips. Looks like the Pfizer Wyeth deal is about done. That could also add some buying interest in the morning. Also I believe Caterpillar reports before the bell. Should be a very entertaining week.

Jeremy Grantham January 2009 Letter

Like always GMO Jeremy Grantham's letter is a must read. It is my favorite letter to read every quarter. Below is the link. Requires a log in and password but it is free and well worth it. This is part 1. Part should be out in the next week or two.

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBfJXb8ASd8%2bfe6xTnek30r%2fSsfGLZdf%2fgBjNfDjVKz9zThOLvkRsKheOtJDKEGJYxIjobQX%2bjp88EZ5lV%2fmtWGUUktMMu9ps8%3d

4th Quarter 2008 Letter

I have sent my quaterly out to friends and investors. If there are any followers of this blog who would care to get a copy, let me know.

"I Don't Know" - 3 Simple Words

How many times have you heard investment professionals say that? Not many and yet it is the three most important words right now to keep you safe. Good little write up in the UK Telgraph making that point. The points the author tries to make about other known knowns is less than insightful but the first part is very good. Thanks goes to Pete.

http://www.telegraph.co.uk/finance/comment/tom-stevenson/4310487/You-know-what-I-know-Ive-got-to-do-something-about-known-knowns.html

In a culture that rewards expertise no one owns up to ignorance. Politicians, professionals, even columnists, know it is better to be confidently wrong than honestly to admit to being in the dark.

But who, hand on heart, can say they are not confused and a bit scared by today's unfolding financial and economic crisis? I am sure the only really honest response to the current situation is "I don't know".

and

I'm reminded of another deceptively profound comment about uncertainty from former US secretary of defence, Donald Rumsfeld. In an unfairly derided remark in 2002, he said: "There are known knowns; things that we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know." Every investor should clip this quotation and put it on their desk

A Break from Finance - Football

Very interesting article in the WSJ about Arizona Cardinals receiving star Larry Fitzgerald. Examines some of his brain and eye functions that allow him to make unbelievable catches. Thanks goes to Jody.

http://online.wsj.com/article/SB123207803343289089.html

On paper, Mr. Fitzgerald is not an extraordinary athlete. He's not the tallest receiver in the NFL or the best leaper. His 40-yard-dash time of 4.63 seconds at the 2004 NFL scouting combine is mediocre for the position. To explain his 1,431 yards receiving this season and his ability to haul in footballs with one hand or hold on to them while being pounded by defenders, most analysts say he must have soft hands, great timing or excellent body positioning.

But after 20 years of studying the eyes of elite athletes, and after taking into account two unusual opportunities Mr. Fitzgerald had as a child, one prominent researcher believes his catching talent has less to do with his hands and feet than his eyes and brain.

Gold - It's Time

I rarely talk about individual trades or my investing opinion on individual investment or asset classes but will make an exception. I think it is now time to get very long gold. I think the most obvious sort of combo trade is short the British pound and long gold but gold will probably do fine on its own. There has been no doubt in my mind that gold over the next three years should do very well and I have been waiting for months from a timing perspective to increase a very small position. Today gold finally broke higher in a major way and I think we could see another 100 to 200 quickly. I like the setup also because if I am wrong I believe I am only wrong on timing as like I said I believe it is likely to be very good strong term. Money seems to be moving in and I think it smart money.

I also think this could carry over into other commodities for awhile. Oil was up strong today as was other commodities.

Nassim Nicholas Taleb Interview

Good piece in Forbes on the "Oracle of Doom" Naasim Nicholas Taleb author of Fooled by Randomness and Black Swan.

http://www.forbes.com/forbes/2009/0202/020.html?feed=rss_news

Imagine you are sailing on a dark night in iceberg-strewn waters. The ride is calm. But you are always just a few yards away from disaster. This is how Nassim Nicholas Taleb views the world. The 49-year-old options trader turned bestselling author has been warning about catastrophic market swings for years. And now, in spectacular fashion, he has been proved right.

He is right on this one:

Taleb scorns math models from economists that purport to explain the markets. All existing models for calculating risk, he says, should be thrown out because they underestimate extreme price swings. "The track record of economists in predicting events is monstrously bad," he says. "It is beyond simplification; it is like medieval medicine."

Even more right on this:

Taleb, who feels that society undervalues those with useful warnings

Mid-Continent Tab Company - The Buffett Analysis

I think I posted the video of Alice Schroeder's (author of Warren Buffett's biography Snowball) speech at the University of Virginia. I reiterate how good of a speech it is. This link contains a link to the video but also has a good synopsis of the most important part of the speech. Thanks goes to Nathan.

http://compoundingmachines.wordpress.com/2009/01/19/mid-continent-tab-card-co/

During her presentation, Schroeder provided a fascinating case study of a private investment Buffett made in 1959 in a company called Mid-Continent Tab Card Company.

All Eyes on Britian

Back in the office today. Been a crazy two days in the markets. I think everything going on right now in the U.S. is a sideshow. The story is in Europe and how things play out there. Nationalization, currency issues, sovereignty issues. These have world wide implications. Two articles in the UK Telegraph by Ambrose Evans-Prtichard tell the story. You need to know your writers. Pritchard is an alarmist. The problem is, I tend to think he is looking in the right places. This does not impact most securities and so usually can be ignored but it has profound systemic issues that impact all investments. Keep your eye on the English Pound. This first story, thanks goes to Ron.

http://www.telegraph.co.uk/finance/globalbusiness/4285331/Help-Ireland-or-it-will-exit-euro-economist-warns.html

"If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece," he said.

and

http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2009/01/20/seriously_alarmed

The slide in sterling has turned "disorderly".

We can argue over whether or not the first phase of devaluation acted as a shock-absorber for a badly mismanaged economy, providing a cushion against debt deflation and the housing crash. But the latest dive has a very malign feel.

For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

and

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn.

JIm Rogers - United Kingdom is Finished

Still in Colorado but saw this and thought it was interesting enough to take the time to put it on here especially considering what is going on with the UK banking system. I have said numerous times. England is in trouble. Jim Rogers is the first big name in finance to say it so directly.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aWkTImFCIfEU&refer=home

“I would urge you to sell any sterling you might have,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, in an interview with Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.”

and

“Sterling has struggled due to the announcement of the new policy measures, in addition to reports of big losses in the U.K. banking sector,” Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a research note today. “We continue to see bearish sterling views being expressed through the dollar.”

Colorado Bound

I am getting close to leaving for Colorado to go skiing. Will be gone for a few days. The market at this point on a short term technical basis is oversold. Once the Citigroup and Bank of America numbers come out I would not be surprised to see a sharp rally tomorrow or into Tuesday (Markets closed n Monday for MLK). I am not positioning for it. I think it will be short and do not know for sure it is coming. We are oversold but if October taught us anything we can become much much more oversold.

Ancient Historical Precedents

This I found really interesting It fits very well into research that have been doing over the last few months and with what my yearly letter will be over. Americans are short sighted that somehow looking back to 1920 is ancient history. You have thousands of years of empires, currencies, and economies coming and going and ours is no different. This talks about a sovereign crises which is also something I have been thinking about alot. I don't think if it would occur it will happen in the near future (next 24 months) though it could to England and Switzerland. A good starter read for what my annual letter will be on.

http://blogs.reuters.com/great-debate/2009/01/09/of-boom-bust-but-maybe-not-the-black-death/

As the crisis has deepened we’ve had to search farther back in history for precedents, and with deflation at hand much of the debate now centers on how similar the next while will be to the Great Depression.

But what if, rather than the 1930s, we ought to be thinking about the revolutionary crisis of the 18th century, or even further back to the 14th century lending and spending spree that ended with the Black Death?

A reading of The Great Wave: Price Revolutions and the Rhythm of History, by Brandeis University historian David Hackett Fischer will ring a lot of bells.

I haven't read this book though I may now.

This is the issues I have been reading and pouring brain power into:

Another possibility, not as grim as the Black Death although hardly appealing, is that we are about to enter into a last climax of inflation, courtesy of desperate deficit spending.

The latter stages of inflationary periods in the past featured effective bankruptcies on the back of fiscal stress by France in the 18th century and Spain in the 16th century, the economic and military giants of their times.

California....Bailout Needed

States will be on the of the next areas bailouts start working there way. It gets discouraging reading all this. This isn't sustainable pure and simple. The government can't do everything for everyone. Interesting article in the economist describing some of the problem.

http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12903483

California, first in many things, is facing America’s worst budget crisis. The gap between projected revenues and spending during this fiscal year and next amounts to $41.6 billion, which is almost half the total sum that the state expects to raise next year. Unlike the federal government, California is not allowed to get out of the jam by running a deficit. It is finding it hard to borrow to meet even short-term needs. Infrastructure work has virtually stopped. If nothing is done to close the gap soon—and perhaps even if it is—the state will begin issuing IOUs as early as next month.

The WSJ had an article today stimulus proposals to states to help cover education and medicaid cost.

http://online.wsj.com/article/SB123190040557580107.html

State and local governments would benefit from more than $160 billion in federal aid under a plan pushed by House Democratic leaders in negotiations over the economic-recovery package taking shape on Capitol Hill.

Another Hope Bag Found - Hopeless?

The markets broke the last of some serious technical indicators around the 888 area today. Fundamentally the train wreck just keeps expanding. I raised the red flag last week on banks and questioning the current rally with banks being left behind. Today the banks were leading the market downward. Citigroup showed how sick they really are with this potential broker deal with Morgan Stanley. The word desperate comes to mind Now you have the democrats focusing on "putting it to the banks." More reversions for TARP increasing conditions on banks who take TARP money. All this very bad for bank stocks. Even the brief respite in commodities seems to be over. A large portion of this spike in things like oil and copper was due to the rebalancing of the commodities index which greatly increased the short term demand for oil future contracts (and other metals like copper). It looks like we are headed lower and the idea of Obama rally may be over. Fundamentally there appears to still be many names to short. The construction and material sector being one of them.

Consumer Credit Deterioration

One of the stories of 2009 will be consumer credit (i.e. credit cards) really deteriorating. It is happening but I expect this to really pick up.

http://uk.reuters.com/article/marketsNewsUS/idUKN0748941420090107

U.S. consumer credit deteriorated in December as credit card defaults rose and cardholder payment rates suffered the largest one month drop on records hurt by a deepening recession, Fitch Ratings said in a report on Wednesday.

Fitch said the charge-off index, a measure of default, of prime credit cards rose 31 percent last month against a year ago to a four-year high of 6.84 percent. The agency expects it to reach 8 percent in 2009.

I would take the over on that estimate.

Major credit losses are big trouble for banks J.P. Morgan Chase & Co, Citigroup Inc, and Bank of America, as well as for other card issuers such as American Express Co, and Discover Financial Services.

You can also add Capital One to that list. These names are also the big losers so far of 2009 in the stock market.

Finally everyone always forgets about these:

But retailers share the pain, too. The store cards default rate jumped almost 50 percent to a three-year high of 10.51 percent. Fitch forecast the rate will surpass 12 percent by mid-2009.

Bankruptcy Mortgage Adjustments

Very interesting development late in the day that I would have thought would have been bearish but stocks sort of moved up on it. There seemed to be some momentum gained in the effort to allow bankruptcy judges to alter mortgages in a effort to prevent more housing foreclosures. What does this mean? This article summarizes it.

http://www.cnbc.com/id/28562958

Under the change, bankruptcy courts could alter the terms of mortgages, subject to certain conditions:

1) Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment. All loans, and not just subprime, are eligible.

2) Borrowers have to show they made a “good faith” attempt to work with the lender before considering this bankruptcy provision. Bankruptcy cannot be the first option, and borrowers have to prove it wasn’t.

3) Bankruptcy judges can strip away a lender’s credit or rights if they violated the Truth in Lending Act or other state and federal laws.

Basically under 2005 bankruptcy reform law homeowners could only enter chapter 13 as opposed to chapter 7. This means they could only enter into repayment plans and the value of the mortgage would not come down to the new home price (assuming the home price had dropped below the mortgage) There is no ability to "cram down" the mortgage to the collateral value like there is in all other bankruptcy proceedings. The banks have been ardently against this and for good reason because it means that they could be told their mortgage which was an asset for say 300k is now a new mortgage for 200k (the actual value of the house). You must take an immediate 100k loss. It is interesting that this seems to me to be a total reversal of the governments strategy during this crises. Prolong and disguise. Here you will have things coming to the head quicker and be more obvious of the overall losses. Let me say I am completely for this. This is what we need but I do not think this helps the economy in the short run. I also think provision number 1 is ridiculous. If I understand this correctly it is not for new mortgages made after this law would be passed. One of the greatest benefits of this would be for lenders to make sure they are more informed about the loans they make and the appraisals they receive. If they can get the loan "crammed" down this would cause caution before making a bad loan.

From a financial market perspective I think this is very bearish for financials. The banking lobby group has been fighting this and had it defeated earlier in the year. Today with Citigroup breaking ranks others will most likely follow. The reason Citigroup would break ranks is beyond me except for the fact that the government is a large shareholder and lender at this point and will probably get bigger so Citigroup may not have had a choice (at least a real choice). The equity markets may have got this wrong but the debt markets didn't. Across the board the tranches of the ABX index took it on the head today.

http://www.markit.com/information/products/category/indices/abx.html

For those more interested on the process and how it works I highly recommend the late Tanta's piece from calculated risk. I pride myself on trying to figure out what is important and what is just noise. I may be wrong and it depends how it plays out and how it gets watered down but this may be very important.

http://www.calculatedriskblog.com/2007/10/just-say-yes-to-cram-downs.html

2009 Reality Check

Aren't we in a new calendar year? How can we return to the ways of 2008 so quickly? Well, simple Sherlock, 2008 did not leave us and most likely won't for quite awhile. The markets were rudely awakened to the fact that the economy continues to get worse with the release in of the ADP report of 693k jobs loss in the month of December. OUCH!

Well if your a bull the bright side is your didn't break 900 on the S&P. The big numbers for technicians seem to be 888 and 900. If we break those, many markets technicians may be willing to throw in the towel on the latest rally and lower we go.

I spent sometime watching the tape today which I haven't done in awhile. Alot of people would find this useless but I feel like I do gain from it. I have 75+ tickers on various trading screens and I'll watch them and then something will catch my eye and will pull up a graph over the last couple of months or weeks. Its a good way for me to catch something I may be missing. Anyway what caught my attention today was how the money center banks / regional banks have not been participating in this rally and in some cases even headed lower. BB&T Corporation, ZION's Corp, Cullen Frost, even JP Morgan to name a few have not participated in this rally. JP Morgan (I have no position) had a dramatic battle around 28 going into the close that for markets nerds like me was terrible entertaining. 28 is a fairly strong resistance point volume really picked up with huge blocks hitting the bid and ask. If these banks don't start participating or if someone like JP Morgan truly breaks down the rally may be closer to the end than I thought. Several of those banks were the frustrating shorts of 2008 but may finally be buckling to reality as commercial real estate continues to decline.

Anyone I would guess we are within 10% of the next top before headed lower. I still think the odds are we get one more final push upwards to 1000 or above on the S&P but with jobs numbers like we had today who knows.

Those Wrong in 2008

I have posted a few predictions for 2009. What about some predictions for 2008 that were just plain wrong. I found this fairly amusing.

http://www.businessweek.com/magazine/content/09_02/b4115015697841.htm?campaign_id=rss_topStories

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" — Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8500.

2. AIG (AIG) "could have huge gains in the second quarter." — Bijan Moazami, analyst, Friedman, Billings, Ramsey (FBR), May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

The Markets

A couple of quick comments. The market continues to head higher and shows at every turn it wants to head higher. Be careful though right now. I have not been following technicals in awhile until yesterday and wow!! Before the market open yesterday we were extremely overbought. 83% of stocks were above there 40 day moving average. Last April/May we topped out around 76% and in August we topped out 62%. We are in extreme territory. Now we were extreme (broke records) oversold in October moving into November so for every action there is a reaction and just the way the price action works for moving averages we could be this extreme for awhile and move more extreme. Just saying be careful from a timing perspective chasing a stock you like. If your a bull at this point you would love to see some choppy action moving down around 920 to 900 working off the overbought nature before moving higher. I think we are still headed higher in the short term but we are as definitely overbought as I have seen in the last year.

Byron Wein Annouces Top 10 Surprises for 2009

Another 2009 forecast. This is the most bullish one I have seen. Thanks goes to Jody.

http://www.cnbc.com/id/28506226

Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:

1. The Standard and Poor's 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from "fortunes have been lost" to "fortunes can still be made." Higher quality corporate bonds, leveraged loans and mortgages lead the way.

2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.

Marc Faber on Bloomberg - Favor Industrial Commodities over Gold

Very provocative discussion with Marc Faber. He cited how gold compared to industrial commodities is the most expensive it had been in the last 30 years and that he would favor these metals over gold at this point (this is opposite the way I was thinking). He also thinks WW III has started. Some different thoughts from Marc Faber than in the past.

http://www.bloomberg.com/avp/avp.htm?N=adviser&T=Faber%20Says%20He'd%20Favor%20Industrial%20Commodities%20Over%20Gold&clipSRC=mms://media2.bloomberg.com/cache/vFxGybnAJsiA.asf

Mana From Heaven - Thoughts from Michael Lewis and David Einhorn

In my world this is all the buzz. IT IS A MUST READ!! The New York Times Op Ed section today was taken over by joint writers David Einhorn and Michael Lewis. Both unbelievable writers and both with careers and/or ties to Wall St. It summarizes much more eloquently and completely many things I have been saying for months on this blog, in my quarterly investment letters, and in private. It is the eureka of eurekas. Will it catch the eyes and ears of anyone in Washington to spark meaningful change? I remain doubtful but I have been and will continue to be avoiding the latest hope buying on Wall St unless some of this stuff gains momentum. If that happens then maybe I will even have some hope to spend on some significant purchases. There are two parts. The first describing what went wrong and the second with ideas of solutions.

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhornb.html

Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.

Oldest Anyalst on Wall St - 103

Semi interesting article mentioning Irving Kahn who was working on Wall St in 1929. Thanks goes to Pete.

http://news.bbc.co.uk/2/hi/business/7804768.stm

The current credit crisis has led to comparisons with the Great Depression, which for many of us born after the 1930s might not mean a lot.

For Irving Kahn it was the start of his career. He worked on Wall Street at the time of the stock market crash in 1929.

and

Mr Kahn warns against drawing close parallels between what the US went through then and the present financial problems.

The nature of the trouble in the credit markets is, as he sees it, far more concentrated: "It's a very narrow crisis because it involves people who borrowed too much money," he says.