Financial mayhem

[Brant Gaede]

How to invest in stocks:

Have a LOT of cash on hand. Right now I'm over 90 percent cash.

The world is a building--big time. There is a huge contraction coming, then, absent stupid government interventionism and nationalistic trade wars, buy companies that are into things like roads, construction, farming equipment, seeds, fertilizer, steel, copper, mining, energy, etc. In technology, Hewlit-Packard (sp?), Cisco and Corning. Other: Cat, Cummins. Buy GE after its equity price discounts its financial unit. McDonalds and Yum (China). Boeing now (dollar cost averaging). Wal Mart, now or soon. (It's going to eat Target's lunch.)

--Brant

Edited June 19, 2008 by Brant Gaede

[Brant Gaede]

How to buy bonds:

Don't. A general statement with exceptions in distressed debt of some troubled companies.

Why buy debt when you can buy gold? Especially in an inflationary environment. Drying up in credit (Right Now!) is Not the same as deflation, price or otherwise. Absence of price inflation is Not the same as absence of inflation. However, for investments price inflation is enough consideration.

--Brant

Edited June 19, 2008 by Brant Gaede

[tjohnson]

Brant, we are not all professional investors here, could you use a little less jargon? I find your comments very interesting but I don't know what they mean often. For example, what does this mean?

Never, ever, short oil unless your position is hedged. (This is not a reference to oil companies.)

[Brant Gaede]

Brant, we are not all professional investors here, could you use a little less jargon? I find your comments very interesting but I don't know what they mean often. For example, what does this mean?

Never, ever, short oil unless your position is hedged. (This is not a reference to oil companies.)

Selling short is a bet that a price will go down. A hedge is a complimentary investment, insurance, that will pay off if the price goes the other way (up). You will lose some money if prices don't move because these instruments cost money.

Selling short--borrowing something from someone then selling it hoping to buy it back at a lower price and returning it to whom you borrowed it from--can be effectively done by buying put options. This limits your risk to the price of the options. Options expire over time, likely worthless, so timing is everything.

If I borrow 1000 shares of Microsoft stock and sell these at $20 I now have $20,000 in my account. If MSFT declares a special (or any other) dividend of say $1 a share, $1000 will be deducted from my account by the broker and paid to the the guy I borrowed the stock from--remember, I never owned it so that dividend is not mine. If MSFT then doubles in price overnight because General Electric announces it is buying MSFT, buying back those 1000 shares will cost me $40,000 and I'm out another $20,000, or $21,000. But if I hedged by buying MSFT call options for 1000 shares, I'll roughly, make $20,000 to balance out that loss. If GE doesn't drive up MSFT with the buyout offer and the price of a share of MSFT goes down to $15 a share, I can cover my short for $15,000 and make some serious money.

I try to avoid shorting personally because I don't have time enough to focus down on that type of investing. It is potentially very dangerous and generally only for well capitalized professionals. I only do small positions in stocks and not very often. My primary motivation is learning as I go. I lost several thousand dollars last fall in a "short squeeze"--investors short the stock panicked out driving up the price. I didn't panic but doubled down near the top cutting my losses. Now I won't short heavily shorted, thinly traded stocks.

--Brant

[Brant Gaede]

The reason I wrote in "jargon" is to keep people who don't know what they are doing from doing something without further study and research. My posts are actually to warn people who are heavily invested that they may be making gross errors that may significantly cost them. For instance, running out and buying as much gold as one can is insane. The $900/ ounce you paid may decline in dollar value to $600/ounce short-term.

--Brant

[tjohnson]

Wow, it sounds like you would indeed have to monitor the market very closely to play at that game!

[Brant Gaede]

Stocks that are NOT to be owned now and the rest of the year, perhaps longer:

FINANCIALS--any! Period!

RETAIL--with Wal Mart and Costco being the only possible exceptions.

They can only be owned through very broad-based low-cost mutual funds where the inevitable losses will be cushioned by other equities. If you have a portfolio with, say, 100 shares of Bank of America or Citigroup--sell, sell, sell. They might subsequently prove me wrong, but you don't cross the street when there's a 75% chance you'll be run over. The toxic waste on financials' balance sheets continues to reveal itself. Refs: Goldman Saks, James Cramer, Bill Fleckenstein and Mr. Mortgage.

edit: Sell into strength if you can.

--Brant

Edited June 20, 2008 by Brant Gaede

[Brant Gaede]

The S & P, as I write this, is down 17% from its Oct. 2007 high. At that time the Dow was about 14100. Now the Dow is 11,544 down, so far, 268 for the day.

The prognosis for major equity averages world-wide, and in the U.S., is DOWN. The heart of the recession has not yet arrived. That will happen in one year and continue on that bottom for at least another.

Four big reasons, not to say there aren't more:

1) Higher oil prices.

2) The financials haven't yet bottomed. Their balance sheets are either opaque or full of mis-information. Massive numbers of banks must/will go out of business, mostly through forced mergers.

3) The Fed can't raise or lower interest rates. The first would accelerate our collective journey to a recession. The second would stoke inflation. Inflation, BTW, is much higher than official figures.

4) The collapse in real estate will accelerate with more foreclosures due to home equity lines of credit (HELOC) going bad.

Buy: energy stocks (but not refiners or major oil companies except Petrobras). Drillers, explorers, servicers, coal.

Buy: gold

Buy: steel companies for multi-decade hold.

Don't buy: financials, real estate, retailers, technology, commodities generally, international companies, index funds, foreign markets except, maybe, Brazil.

Hold: large cash position.

In one or two years investments can be broadened out, I hope. If so it'll be pedal to the metal in commodities and infrastructure plays.

--Brant

Edited June 26, 2008 by Brant Gaede

[Brant Gaede]

Appropos the previous post of mine, I wouldn't buy anything now except some gold. The larger the cash position the better, especially in FDIC insured banks, not brokers.

The only weapon the Federal Reserve has left is to substantially raise interest rates shoring up the value of the dollar. This would cause a "V" shaped collapse in financial markets and a relatively quick recovery. In other words, the lowering of interest rates was essentially a mistake that added eight more months of misery to the general situation. All that the Fed has done has only kept the S & P from declining substantially more than the 20% it did since October. At 2% the Fed funds rate has essentially no where else down to go. Zero? Markets already know that 5 and a quarter to 2 percent left markets 20 percent lower. They now know that that enterprise is worthless. Fed liquidity has gone to shore up financial's financial reserves, not the equity markets, but inflation.

A truely stronger dollar would encourage some of those trillions of dollars abroad to invest in dollar demoninated assets including US markets and cause commodity prices to come down, especially oil, to some extent. It won't do much, however, for imploding real estate assets, wherever they are, and general destruction of US financial assets.

I mentioned HELOC problems coming up to destroy banks in the next year or even two. More generally (broadly) speaking, are Alt-A mortgages. Humonguous amounts were issued in this century. Essentially, if you had a high credit (FICO) score, you could lie your way into a mortgage, albeit one with a higher rate than prime and with no money down. The downward cycle in real estate prices will now accelerate as those mortgages default. Foreclosed properties will come to dictate actual real estate prices. Subtract 30% from official real estate comps.

Let's say that a few years ago your home was worth 250,000 dollars. Then its dollar value shot up to 400,000. Now it's worth 300,000. How low will it go? It could go to 150,000 then gradually rebound to the line of progression represented by the old 250,000 price LESS the greater cost of fuel to drive. That is, if you could afford 1500/month mortgage but your gas cost is 300/month higher, subtract some of that--the amount is variable for different factors--from what you can afford for a mortgage. The 250,000 point of reference may be readjusted to 200,000. Sin loy.

--Brant

Edited June 30, 2008 by Brant Gaede

[Brant Gaede]

Equity traps

Consider two companies.

--Microsoft

No debt.

--General Electric

Over 500,000,000,000 total debt.

When you think of GE what comes to mind? It's a giant manufacturuing company. In fact, it has a huge financial arm. There are 10 billion shares of GE stock outstanding. GE currently sells for 26.50/share and pays a nearly 5% dividend. I've been ignoring GE for years because half its earnings came from financials. Today I read of its gigantic indebtedness and couldn't believe it wasn't a typo so I went to find out for myself. It was no typo.

It only has a little over 160 billion in revenue to help service that debt.

Nine years ago when GE was a 500 billion dollar company, I wrote that it wasn't worth half its stock price. Now it may be worth next to nothing except what might be realized through a bankruptcy restructuring. It's reputation and high dividend are only baited hooks to snare naive investors.

--Brant

[Brant Gaede]

When will it make sense to buy real estate again?

2015.

Unless you can buy a foreclosure 30% below standard comps. (Does not apply to condos.)

It will take about three years from now for the devastation caused by pay-option adjustable rate mortgages to properly be represented in home prices. Right now there is relatively little of this in housing markets for they haven't yet reset.

With the economy on the floor people generally won't be running out to buy, especially in the face of exploding inventory.

If you can stand your landlord--or just a landlord--renting will be the best place for housing money for the next dozen years.

I kid you not.

--Brant

[Brant Gaede]

Self-defense ref gold and cash assets

I just read in a magazine about all these super-duper safes for home use. One cost 159,000 dollars. One cost just under a thousand. They are all handsome.

Safes are good for fire-protection of important papers. For when nobody is home. For guns.

But if somebody puts a gun to your or your wife's head, you're going to open that safe up for him.

I do not live in a high-crime neighborhood, but less than two blocks away a year ago a couple from India suffered a home invasion. They were tied up while their home was ransacked. They didn't get free until morning.

The wife had gone to a flea market to sell gold. She was followed home.

I don't have gold in my home. Just a dog and bullets.

--Brant

[Brant Gaede]

Just a reminder: Equity markets are probably going to get much worse. They can't bottom if the financials don't bottom first, but those are sinking like ships with no bottoms. Buying equities using dollar-cost averaging buttressed by a very large (huge) cash position won't hurt very much as long as they aren't financials and are otherwise broadly diversified. That's also the way to buy gold today. The Dow may go down to 8,000. Wait for hundreds upon hundreds of banks to consolidate or go bankrupt, then wonder if there is yet a market bottom. (Maybe not!) Remember, you don't have to get the bottom, or near the bottom, to make a lot of money in a true bull market, but the next bull market will be built much more on savings than credit. So save.

--Brant

[Brant Gaede]

Because the market was strong today it is tempting to run into it and buy. That's maybe okay for traders. Equities might ramp somewhat into the end of the year, maybe, but that'll be a sucker's rally. Buying equities using dollar-cost averaging and retaining a very, very large cash reserve is the best if not only rational way to go long at this time. Shorting equities is now much more you-damn-well-better-know-what-you-are-doing.

--Brant

[Brant Gaede]

Because of Fannie Mae and Freddie Mac troubles and confusions there may be something of a market meltdown tomorrow. Or not. It's possible that our great government will make some kind of announcement before markets open that will cause financials to go up--at first. Doesn't really matter. While a lot of investors have a lot of cash on the sidelines many others, especially hedge funds, are still trying to get money out of various financial instruments. Some of their stuff has no good market, stuff cinnected to imploding real estate, so if they have good stuff and need cash they'll sell the good stuff. Bottom line: There is not one good reason yet for the start of another bull market in equities except down sentiment. Sentiment cannot in itself move these markets up. And sentiment can get a lot worse. The bear market that started in 1929 didn't bottom until July 1932. Many investors who prematurely called a bottom before then were crushed.

Now the Dow has gone from about 14,100 last October--it's all time high--to about 11,000 currently. Roughly 20%. The damage in the financials is much worse. So much worse that further significant declines in them would not have significant effect any more by themselves on the Dow. Will the Dow hold up from here? I don't think so because we are entering a major recession caused by consumers pulling in their horns because they've run out of the excess money and credit that was available when their homes keep appreciating in value.

While I think the Dow is going to lose another 2-3000 points before this is over, I don't know if it will take two months or two years to get there. But how can we trade a panic selloff in US equities? When people are running around screaming about the end of the world for the second day in a row and all the safety stops on the exchanges are blown through and the markets are still functioning, go and buy your favorite stocks if it's not Thursday or Friday. You don't want to be long into the weekend. You'll want to sell those stocks on Thursday and Friday for a quick profit.

For investing, ignore all this blather and merely use dollar-cost averaging against a large cash position. I'd think a backstop gold position up to 20% of investable assets is smart as a hedge against the dollar itself. Inflation is how Americans are going to pay for governement excesses and bailouts. Because of the Vietnam War and the Great Society the US had an inflation problem that bear-marketed equities from 1966 to 1982. This now is going to be worse in severity if not in time, but similarities to 1929 are what scare me. The Great Depression led to Hitler and WWII.

This is why I like stocks like Altria (MO) and Philip Morris International (PM). One is value, the other value/growth. Both have great dividends that are likely to be maintained for years and decades to come. In a panic sell-off they will snap back almost immediately for they are almost as strong as bonds. Not to say one should buy bonds, BTW.

--Brant

[Brant Gaede]

If one's object is savings and preservation of capital, I'd have to suggest a gold position now up to 25% of assets (sans real estate). This is because official government inflation figures (CPI) grossly understate inflation because the criteria used in arriving at the CPI has been grossly altered from what it was in the 70s and 80s. Imagine everybody on Social Security suddenly getting 40% more each month and imagine that that would probably still not completely compensate for the real inflation out there. The fact that so much hidden damage has been done to the dollar doesn't mean that a lot more damage cannot or is unlikely to happen.

Finally, to finance government deficits the US will have to keep issuing bonds at higher and higher interest rates. This will absolutely crush bonds with 5-30 year maturites (interest rates up = bond prices down) with the worst damage probably concentrated in the 20 year bonds. Short-term US government bonds are the best way for bond-holders to protect themselves from that. Warning: just because a fund is labeled in a way implying it holds government paper doesn't mean that it does or that it completely does.

A year from now I'll probably be suggesting up to 50% assets in gold. Note, I always suggest dollar-cost averaging. Gold can go down 10% in a very short time. It's hard, though, to imagine more of a decline than that.

You don't buy gold to generate income, BTW. Oh, gold was over 1000 dollars a few months ago and is now 975. It flirted with below 900 for a while. This means that it will probably be going over 1000 soon, maybe permanently. It's probably okay to accelerate some purchases here, especially if one doesn't own much now.

--Brant

Edited July 14, 2008 by Brant Gaede

[Brant Gaede]

If you have deposits in Bank of America accounts in excess of $100,000, transfer the excess to other banks. If you have money you need day to day in Bank of America, take it out soon. (Retirement accounts may be covered by FDIC up to $250,000 plus accumulated interest.)

--Brant

Edited July 15, 2008 by Brant Gaede

[Brant Gaede]

The Gov'mnt is playing the game of save the banks keep up home prices. Don't believe whatever bear-market rally we get in equity prices is something else. The great recession we are entering because the feds are fighting the business cycle is just beginning.

--Brant

[Brant Gaede]

It is entirely possible for the price of gold to continue going down for the next year or two which is why it is important to use dollar-cost averaging to buy it. Say X amt of dolars every month, never all at once. I'm talking about physical gold in your physical possession, not electronic computer entries. Other than that short-term Treasuries are a good investment in a deflationary environment. If you are concerned about the dollar value of your physical gold going down, you can short the GLD of equivalent value in your margin account. This way you don't need to sell the physical gold with its transaction and other costs and bother. Long term we will have terrible inflation to finance government, especially Medicare and war and gigantic financial bailouts. BTW, residential real estate--commercial too--should continue to collapse price-wise next year as bank foreclosure selling accelerates wiping out Home Equity Lines of Credit resulting in more foreclosures and foreclosure selling in a death sprial for housing prices especially in California, Arizona, Nevada and Florida but spreading to other states as well. We have not yet seen the worst in the real estate debacle, recession, and lower stock prices generally. Banking and other financial stocks will take enormous hits, including Wells Fargo, Bank of America and Citigroup to their earnings. The entire real-estate market may freeze up except for cash transactions.

--Brant

[Brant Gaede]

The FanieMae/FredieMac bailout will be an unmitigated economic disaster accelerating the country toward the greatest recession since the Great Depression. The primary bear market in equities will continue--worldwide--and will include commodities. This bailout is so massive and needs to be so much more massive than the Feds yet know but will discover when they go over the books of these effective frauds and bankrupts that interest rates will have to go up just to maintain the Feds' ability to borrow to support its own debt.

--Brant

[Michael Stuart Kelly]

Brant,

Do you think it will cost more than the war?

It surely will cause some commotion. I am not too worried about the cost (although I certainly don't like it). I am more worried about people and companies doing financially irresponsible things and knowing they can get away with it. That is not a good lesson to learn on such a massive scale. There is where I see real trouble.

Michael

[Brant Gaede]

Brant,

Do you think it will cost more than the war?

It surely will cause some commotion. I am not too worried about the cost (although I certainly don't like it). I am more worried about people and companies doing financially irresponsible things and knowing they can get away with it. That is not a good lesson to learn on such a massive scale. There is where I see real trouble.

Michael

People will massively default on their debts. First they will acquire as much addirional debt as they can thinking, ratonalizing, that they can turn everything around. It is going to cost much more than the war and if you look at the cost to people as opposed to government it already has through depressed real estate prices. That's debateable, but a year from now there won't be any debate.

--Brant

[merjet]

I began a thread on RoR about Fannie and Freddie.

http://rebirthofreason.com/Spirit/News/1970.shtml

[algernonsidney]

So, what should a guy with about $20,000 or so do right now? I have subscribed to Doug Casey's newsletter for several years. I'm about ready to throw it in the garbage. I like Doug Casey's insights, but the bottom line is that his advice has completely tanked.

I also subscribed to _Prudent Speculator_ just recently. The longer I stay in the investment game, the less I trust people.

I don't think investment is luck. I believe that a person can do well if they know what they are doing or if they follow people who know what they are doing. I don't plan on being a full-time investor--thus I have to follow the advice of others. Who knows what they are doing?

Mutual funds are a sucker's bet.

[algernonsidney]

I don't agree with you here Wolf. We have a lot of haves, but in general they are pretty quite. You can barely tell the millionaires from the guy next door, and usually if someone looks like they are wealthy, they are not. We also don't have the housing problem here like in other parts of the country, there was no skyrocket in prices and houses are still equal or gaining value. You also do not have that much of a problem with foreclosures. And yes a large part of our economy comes from natural resources, but that should continue in the near future, but the other two sectors of our economy are agriculture and trade (like you mention). While Texas has the second largest economy in the US behind California, we have the largest amount of exportation (trade) of any state.

It varies across the state. Austin still has a housing and building boom. They are still putting up condos downtown. Traffic in Austin is about as bad as any city its size--Austin still isn't that big.

My landlord works for Continental at the airport and told me that the airport has not seen many cutbacks in flights, in spite of gas prices. We did lose a direct flight to CLE, but that's probably due more to the depression in Cleveland than here.

Austin is a very entrepreneurial city. Lots of people are out there trying to become the next Dell or something like it. I just went to a meeting called Bootstrap (bootstrapping your business), and there was a lot of optimism there.

After Katrina, almost 500,000 evacuees came to Texas and any who need employment were absorbed by the economy, also every year we absorb large numbers of illegal immigrants (one reason I believe that our economy is so strong).

A guy from Houston got out of there because of Katrina. Katrina brought New Orleans's worst trash to Houston.

here in Texas we have the lowest prices in the nation for necessities.

Austin is getting kind of expensive actually. I've heard it's lower than Dallas, yet wages are higher in Dallas.

It's quite common to hear a story of someone being offered a job for $50,000 in Austin and $60,000 someplace else and staying in Austin.