To Make Informed Decisions No Matter Which Way the Market is Moving

It’s amazing how much the stock market can move on any given day.  Today, it was a huge downday as everyone got ahold of all the bad news (Intel’s sales forecast revision, ADP’s job report etc) and just ran with it.  Actually, they just ran away!

if you are invested in the stock market, I just have one word for you - Patience!  Unless you are a trader, you should just tune out the market news because its not healthy looking at all these economic news.  So what if GE went down 5%?  It’s going to go up and down and up again every single day!  Spare yourself the emotions and just go do something else!

Stop watching CNBC!

The federal reserves announced today that it has reduced the federal funds rate to zero to 0.25%.  This is the lowest since the numbers have been recorded since the 1950s.  The fed also pleaged to do everything in its power to stablize the economy and get it moving again as the fear now turns to deflation.

The stock market was certainly pleasantly surprised since the Dow shot up another 150 points (from 100 - 200) after the news.

We are no doubt in a bear market and any good news helps.  Let’s hope that this is the beginning of good things to come!  My friend predicts that the market will be in 10,000 territory by year end.  Let’s hope that he’s right (personally, I would be happy with 9000s)!

After pushing the ball around a bit, it looks like the automaker bailout could be sent to being voted as early as tomorrow (Wednesday).  If you thought bailing out the banks were unreasonable, you would really be upset at this bailout.  The US automakers clearly first need a major restructure and fire all the top executives who’ve made bad decisions for years.

If you think about it, there’s really not much that’s good about their business model.  The US automakers have:

• No Pricing
• Higher Cost
• Bad Branding
• Products with no edge over competition

Until most of the above are fixed, the automakers will continue to lose money for years to come.

It’s official.  The US has already been in a recession for a year!  As the average recession is only 10 months, we are already in a worst than average downturn.  It’s hard to say how long it will take us to get out of this slump as things seem to get worst every week but at least we know that everyone is going to do everything possible to keep this great country to a downright collapse.

The National Bureau of Economic Research (NBER) declared today that since December of last year, the 73-month economic expansion has ended.  The current recession, which many expected to last till at least the middle of next year, will be at least the third longest recession since the great depression (the other two are 16-month cycles in mid 1970s and early 1980s).

It’s interested to note that the NBER doesn’t use the widely known measure of “two consecutive decline in gross domestic product” as the measure of a recession.  Instead, it looks for a decline in economic activity as a true measure.  Personally, I think that while it’s probably more flexible, it sounds sort of subjective to me.  However, the NBER is a prestigious private research institute that is regarded as the arbiter of U.S. recessions so I guess they know what they are doing.

I’m watching Jim Rogers, a legendary investor is on CNBC right now and he put in a good perspective on his views of bailouts.  According to him (and this is not word for word but hopefully captures the meaning):

The system is setup so incompetent companies fail and competent ones buy them. This starts everything over from a position of strength. What we are doing right now is taking money from the competent ones, then giving it to the incompetent ones and telling the competent companies that they are going to compete with you.

It’s tough to say whether the bailouts will turn out good or not, but what he said made a lot of sense. He also referenced Japan and that we are doing similar things to what they did, which didn’t work. To be more specific, Japan is still recovering after 28 years. Yikes!

Let’s see what happens to the bailout!

Since the last short post on whether Citi will fall, the government and Citigroup (C) announced today that a $20 billion cash injection has been made by the Treasury Department.  To date, the $700 billion financial bailout has already given Citigroup $45 billion dollars to receive an ownership stake.

Even more importantly though, the Treasury and FDIC announced that they will guarantee a majority of Citi’s whole mortgage security portfolio of $306 billion if they were to default.  More specifically, Citigroup will take the first $29 billion of losses on the risky loans, then 90% further losses will be assumed by the government (the rest, 10%, is still assumed by Citigroup).

The potential losses will made up from the $700 bailout fund, money from the FDIC, then the federal reserve will finance the remaining assets and loan it to Citigroup.

On top of this, the government will get $7 billion in preferred shares of C, along with 254 million shares of common stock at a strike price of $10.61.  The bank will cut the quarterly dividend to 1 cent a share and won’t be increasing the dividend for 3 years unless the FDIC, Treasury department and the Federal Reserves all approves it.  Why not kill the dividend all together you say?  Because some mutual funds are not allowed to own companies who don’t pay dividends.  Citigroup will also place restrictions on executive compensation and bonuses for the future.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

The stock market certainly liked this, The Dow rallied 396.97 points today after the news, with Citi’s shares up 57.82% just in one day!  If you bought Citigroup on Friday, congratulations!  If you are a long term share holder however, it’s unclear how this will play out because in practice, this cash injection actually diluted your shares, not to mention the fact that the dividend is gone.

Oh well!  On to another day’s of exciting news!

In yet another OMG piece of news, Citigroup (C) is hovering around $4 and is in free-fall mode.  It’s amazing to see such a huge financial institution fall from a stock price of $50+ to almost nothing.

The board is currently meeting to asset their options to either sell part or all of the company to potential buyers (which few exists).

Their options:

1. Sell the whole thing, but most companies wouldn’t want the whole company.
2. Sell parts (like the brokerage business Smith Barney or its Global Transaction Services, both of which is doing quite well).
3. Merge with someone like Goldman Sachs, because at least they are looking for deposits (assuming Citi doesn’t get a run on the bank)

It’s hard to see how they can survive because their stock price will be next to nothing soon and perception will be trashed.

Citibank, whatever you will end up doing, RIP.

There are times when running and hiding is an absolute must in order to survive the current market.  Most of us develop a way to invest and trade in the stock market.  Some of us buy when we see momentum, some buy when we see value and some just buy regularly no matter what happens in the market.  Obviously, different market conditions will dictate the type of behavior that will be rewarded.  So unless you can adapt to different environments and make money in any market and switch your behavior on a dime (something I certainly cannot do), back out.

Yes.  Simply back out of the market.

In the current bear market, tons of people are losing money.  Even Warren Buffett is losing billions of dollars these days.  Remember how smart everyone thought he was when he injected $5 billion into Goldman Sachs (GS)?  How does the $115 strike price look now when the stock is trading at $70 and change?  How about GE’s $3 billion dollar bet at $21.50?  Warrent Buffett is a value investor, and this just doesn’t work in a market that is driven by fear.

There will be a time when Mr. Buffett’s investments in GE and GS are worth more than $3 billion and $5 respectively in the next 20 years, but the point is that he could’ve waited another month and bought those two stocks at 20%-30% off the price he paid.

If the legendary investor can make bad moves in some environments, shouldn’t you evaluate how you can survive too when it’s so easy to do?

Once you are ready for an evaluation, just simply think of when you made the most money and map that to certain bear and bull markets.  If you like shorting stocks, you will no doubt make more money during bear markets.  if you do nothing but go long, then by all means wait this recession and bear market out.  There will be tons of opportunities to make money in the future.

Yesterday’s market was very interesting.  While every other market rallied because of China’s announcement on its’ stimulus plan, the United States indices stumbled.  This make Tuesday’s market overseas interesting because markets around the world usually follow the United States’ lead.  It’s no question that the US has been the global leader because of its economic power and willingness to lead, but will this continue?

Financial Power and Influence
Before the financial crisis, most of the major financial powerhouses were residing in United States.  With 2 of the biggest investment banks now gone and most of the financial banks in the United States majority injured (did you see Citigroup’s stock price?), it is tough to say what will happen once its all said and done.

Government Economic Policy
The US has arguably the most sophisticated system in handling fiscal policies and the country.  Before the financial crisis, everyone would say that the country has been doing a pretty good job at taming inflation and spurring economic growth.  However, these days, it’s not as clear that our government knows what they are doing.  China’s stimulus plan creates jobs, cuts taxes and creates growth.  The United States’ plan?  It gets people putting more money into failing banks, buying more TVs and maybe some iPods too.

Currency
Throughout history, the US dollar has been the currency in the world.  It is commonly accepted to be one of the only currency that most countries accepted.  Transacting business in the US dollar was considered to be a powerful statement back in the days.  These days however as the US government borrowed massive amounts of money from China, the US dollar is simply over owned.

Another huge threat to the US currency is the creation of the Euro.  In the old days, there just weren’t a currency backed by a stronger economy.  Now with a currency handled and governed by the European Union, there is now a currency that is also widely used around the world.

Going Back to Stocks
So are stock markets still going to follow the United States’ lead, meaning that if our markets go up, they will and vice versa?  We will see.  I really hope so.