You Have The Investing Advantage

[freddyv]

Well, I went ahead and jumped into the market, shorting it of course with SDS shares. I'm not worried about the wild daily swings in the market, mainly because I agree with much of what is said on this site. All the fundamentals point to lower prices for equities in the near-term. And the only "experts" I listen to are the ones who thus far have been right. This is a very short list and includes names such as Meredith Whitney and Nouriel Roubini. But in the case of SDS, I think the greatest risk is counterparty risk. There's a good chance that if a generational panic and crash happens when I own those shares, I may not be able to sell them. Because of this, I intend to sell my position at a gain of 10% which equates to a 5% drop in the S&P 500. This is within the levels we have seen already and would still indicate a very high historical P/E of around 18.

My question is: Is there a safer way to short the market? Is there a "safe" way at all? Or should one stick to "boring" cash?

-Rube

My biggest single concern is whether I could get my money locked up in SDS, an Exchange Trade Fund (ETF), but we have already seen some serious panic moments and SDS has become more liquid as the market drops because it is an easy way to hedge long positions. My feeling is that the SDS will likely be a safe investment vehicle as long as the market remains violatle.

One of my mantras these days is to trade the market that is in front of you and don't let fear be your guide. I really focus on facts and they give me no concern about SDS. There are almost always signs of coming trouble and the SDS shows no signs of becoming illiquid.

--Fred

[freddyv]

It looks like we are in a "relief rally" phase where we can expect the market to consolidate a bit and take a breather before the next crisis hits.

The question is, what will be the next crisis?

States going bankrupt?
http://www.yahoo.com/s/999993

The US going bankrupt?
http://research.stlouisfed.org/publicat ... likoff.pdf

General Motors going bankrupt?
(Do I even need a link here?)

...or will it be something completely out of the blue like Google suddenly showing a loss and affecting the millions (including me) who make money off of them? Or perhaps China will have to start calling in some of the debt we owe them?

--Fred

[freddyv]

Louise Yamada is one of the few analysts I respect and listen to and I thought I would pass along some very wise words I got off her website:

"There are only two losses, a loss of opportunity and a loss of capital; and there will always be another opportunity -- if
we protect the capital."

--Fred

[freddyv]

I love this article and suggest that everyone read it, pass it around and let's make it our new national (global) mantra:

Is it really so difficult to understand the current financial crisis? Many have expressed to me that they are overwhelmed by the complexity of the global financial tsunami, and are absolutely confused as to how to prepare and survive the crisis...

Read on at
http://yourmortgageoryourlife.wordpress ... -rhetoric/

--Fred

[mark]

Freddyv says:
It looks like we are in a "relief rally" phase where we can expect the market to consolidate a bit and take a breather before the next crisis hits.

I feel like Odysseus tied to the mast, as his ship passed the Sirens.

The rally the first trading day of 2009 was very seductive, but my common sense tells me it will have a bad outcome for those who pursue it....

[freddyv]

Freddyv says:
It looks like we are in a "relief rally" phase where we can expect the market to consolidate a bit and take a breather before the next crisis hits.

I feel like Odysseus tied to the mast, as his ship passed the Sirens.

The rally the first trading day of 2009 was very seductive, but my common sense tells me it will have a bad outcome for those who pursue it....

In the long term I agree but I have had a good feeling for the ups and downs of this market since we came off the highs in 2007. The recent lows of October and November were so bad that now anything short of armageddon seems like good news and so we get a "relief rally" so that all the polyanish types can get all bullish again and provide the means for the next leg down. There are plenty of catalysts on the horizon for the next panic but it will not happen until the time is right, IMO.

BTW, I am not a bear, I simply look at all of the data out there and the timing, both short term and the longer term generational type of timing, and it seems as obvious to me as anything I have ever seen that the stock market is heading lower.

I think the single most convincing thing is that housing has yet to bottom and even seems to be accelerating in its deline. This ties in with consumer credit which continues to be a big problem going forward and will be the single biggest factor in the continuing contraction of the economy and therefore, the stock market, IMO.

The government can prop up industry and banks but they can't make the public spend. The public is scared and has too much debt and no savings and what investments they have are worth much less than a year or two ago. Many of them are nearing retirement and not only won't be putting their money back in the stock market but will become a drain on the economy for a decade or two to come...who will pay all the taxes? You can see where this heads; it's all downhill for quite awhile.

P/E ratio of the S&P 500 is 20+ though the Dow is just a bit over 10, but with falling earnings and an expected bottom P/E of under 6 it is not hard to predict the Dow will fall to under 5,000 within a year and that will cause its own problems that will help to exacerbate the slide.

--Fred
http://www.acclaiminvesting.com/

[freddyv]

From Nouriel Roubini at http://tinyurl.com/axrrqe

For a few weeks since late November equity markets ignored the onslaught of much worse than expected macro news (and all the new were really worse than awful) and had a nice 25% bear market sucker’s rally. But the drumbeat of terrible – and worse than expected - macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009. So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers.

Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend. And reduction in spending and deleveraging of the US consumer will take years to rebuild the savings rate of a household sector now hit by a severe shock to its net worth (as equity and home values fall while debts have been rising) and shocked in its ability to generate income as job losses mount and the unemployment rate surges.

Our research at RGE Monitor suggests that the US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold

Keep in mind that many here have critisized Roubini for being overly-optimistic and that is probably true but he is the single individual who has identified and warned of the specifics of our current financial crisis. For my money he is on a short-list of people I really listen to, along with Meridith Whitney.

He may not understand the root causes of the crisis to be generational but from an investing standpoint that is not important. He knows the specifics and does not seems bound to being bearish or bullish but to being correct. So far he has an excellent record.

--Fred
http://www.acclaiminvesting.com

[John]

Dear Fred,

> Keep in mind that many here have critisized Roubini for being
> overly-optimistic and that is probably true but he is the single
> individual who has identified and warned of the specifics of our
> current financial crisis. For my money he is on a short-list of
> people I really listen to, along with Meridith Whitney.

I've frequently said that Roubini's "12 steps" analysis was
brilliant. My only complaint with him -- and it may simply be
jealousy -- is that he's very skillful at getting media attention,
and he appears to me to be changing is forecasts all the time to
match what the media want to hear.

** Nouriel Roubini predicts recession will end in 2009
** http://www.generationaldynamics.com/cgi ... 13#e081213

** There's never before been a day like this on Wall Street.
** http://www.generationaldynamics.com/cgi ... 11#e081011

** Blogger watch: Hellasious at SuddenDebt gets it right
** http://www.generationaldynamics.com/cgi ... 13#e080413

Sincerely,

John

[freddyv]

If you want to know how you can dramatically improve your chances of making money in the stock market just read this and see if you can spot the problem:

The company reported net profit of $1.15 billion, or 95 cents per share, down from $1.38 billion, or $1.12 per share, although revenue rose nearly 10 percent to $6.87 billion.

Excluding charges and credits, the Houston-based company earned $1.24 billion, or $1.03 per share, slightly below analysts' forecasts for $1.04 per share on revenue of $6.84 billion, according to Reuters Estimates.

The article is about Schlumberger and the problem is that historically, "as reported" earnings are what P/E is based on, yet notice that in this article the author tries to compare the earnings "excluding charges" to the analyst's estimates. That is either sloppy reporting from people who should not be sloppy about such things or it is intentional and suggests dishonesty.

Another article on Xerox...

Xerox said fourth-quarter net income was $1 million, or nil per share. That is down from $382 million, or 41 cents a share, a year earlier.

Excluding special items, including litigation charges, profit was 32 cents a share, a penny below the average Wall Street forecast, according to Reuters Estimates.

...suggests that this is how Thomson Reuters always reports earnings and if that's the case it is worse because it means that all those historical valuations we are using, which are based on "as reported" earnings, are being compared to fake earnings that do not include special charges. Now I run a business and I know of no way to make special charges disappear from my books. They are a part of expenses and must be included in earnings when figuring a company's valuation.

The real point is not whether we should use "as reported" earnings or "excluding charges" earnings, the real point is that we must compare apples to apples and oranges to orange. My understanding is that "as reported" is the standard used over the years. Needless to say, we should always use trailing earnings.

But in reporting or using dubious statistics Thomson/Reuters is not alone. Anyone looking critically at reports on CNBC and to a lesser extent, Bloomberg, will see many facts and figures that are dubious at best and are rarely challenged by the "reporters" and "journalists". Such dishonesty by those who are supposed to be providing information to the investing public will eventually be wrung out of the market. Such reporting became the norm because people wanted to believe that profits would always go up.

One does not need to be a financial genius to make a fortune in the stock market, one only needs to be a critical thinker and wait for the many opportunities that come along.

--Fred

[freddyv]

AN excellent article at
http://seekingalpha.com/article/116371- ... b_articles

...
The Paradox of Deficit Spending Bailouts and Stimulus Packages

I may be wrong in my thinking here but there appears to be a huge paradox at the heart of the stimulus packages and banking system bailouts aimed at generating economic activity and this is that the record amounts of new government debt issued has the effect of soaking up liquidity from the financial system i.e. the US is expected to issue $2 trillion of treasury bonds during 2009, how much of that $2 trillion would have gone into main street ?
...

Sounds like a good question to me.

--Fred