Dead Cat Bounce?

Wall Street traders like to give names to everything, and this week, the phrase has been "dead cat bounce". As the saying goes, even a dead cat bounces when it hits the pavement. It is a reference to a phenomenon that as stocks tank, there are times that there will be a quick revival upward before a continued drop.

The past month, the Dow Jones Industrial Average is up 17.5% (including today's decline). Some would suggest that this week's decline is continued fall of the last 3 week's of the cat bouncing.

I disagree.

Unlike other situations, there are good fundamental reasons for a general uptrend. First off, the unemployment rate is still rising, but it is getting to a high point where it becomes difficult to understand where new job cuts will come from.

Second, the Financial Accounting Standards Board (FASB) passed new rules relating to how impaired assets are reflected on bank balance sheets and especially at valuing assets that currently only have "distressed transaction" prices. This I believe will improve bank balance sheets.

Third, the general market feeling is of awakening rather than fear.

Citigroup: The fall of a giant

Unbelievable.

Citigroup, once the world's biggest financial services firm, still with 300K employees worldwide, will announce their 4Q 2008 earnings Friday. It is expected to be dismal. Their stock today hit a low of about $4.50 a share. They are planning to cut themselves down to a third of their formal glory.

And all this, while receiving TWO bailouts from the US TARP fund totaling $45 Billion.

As a former employee (I left over a year and half ago), I am amazed. When I joined the company, it's stock was at about $35/share. Its future looked bright and landing a job at the company meant a lifelong career, if you played your cards right.

Today? People still want to go, but that lifelong career option is quickly fading.

However, Citigroup is representative of many companies in the US. Sure, while the CDS issues and general stock market malaise has contributed to Citigroup's downfall, just like the other failing/failed companies (GM, AIG, Chrysler, Lehman, etc), the root causes of the problems came from within.

Its management never fully integrated any acquisitions. Management was paid to maximize annual profits, and they did. Unfortunately, too often, annual profit maximization led to wild speculation and taking on mountains of undeterminable risk.

And so the government came up with a great plan: keep management in power but give them more money.

No.

The problem isn't the lack of money. The problem is the lack of management.

Why doesn't anyone see this?

Nearing Bottom

As we approach August, the signs are pointing to a bottom or near-bottom for the market. Small upswings in oil are causing fears that are unprecedented. Banks are failing but the FDIC is stepping in and protecting individuals. Freddie and Fannie's debt is secured.

Now we just have to wait out this week's job and housing reports and we could see greener pastures in Septemeber.

Market stabilizing?

I don't want to sound too optimistic yet, but we are seeing oil heading toward more fundamentally stable prices at $125 a barrel. Many analysts are predicting a floor of $120 where it will hover for some time.

Definitely, while a lot is behind us, we are not out of the woods yet. Banks need another positive quarter. We need to see the housing market bottom out. Oil and dollar needs to stabilize. Then, we can finally call an end to this mini-recession.

"Naked" Market Outlook

Don't be fooled by the last two days of positive momentum, nothing fundamentally has changed in the US economy to validate such positive behavior.

While certainly banks having given themselves some more breathing room and oil has been dropping like a paperweight, macroeconomic characteristics such as GDP growth, unemployment, and housing starts do not show any sudden changes.

More than likely, we are seeing a quick response to the government's new short selling rules, which no longer allow "naked" shorts on 19 financial stocks. Traders now have to prove they have arranged for these shorts before they can do so.

Many consider this rule to effectively prevent shorting of these 19 stocks, and certainly a good reason why the financial sector is suddenly doing so much better.

Here is a link to the list (See Appendix A): SEC Release
Comment: It's surprising how hard it was to actually find the full list.

Get ready for Monday madness!

Okay, so not football season quite yet, but with Friday's gigantic across-the-board stock index drops and oil price's rocket upwards, I can only imagine that tomorrow is going to be another wild and rocky day.

There's really two ways I see Monday shaking out:

1) Investors are still jittery and continue to sell off
2) Investors realize we are at a bottom and a huge rise will occur

In my opinion, with the amount of positive economic news out there and with many major blue-chips trading at lower than normal P/E ratios, it will more likely be #2.

Consider for a moment the causes of Friday:

1) A record one-day rise for Dow the previous day (taking quick profits)
2) Oil's sharp rise (there's only so much higher it can go before speculators pull out, magic number? $150)
3) Unexpectedly more negative unemployment numbers (seasonal adjustments are not being properly factored in, and even if they are, the numbers still reflect no new news about the economy)

All three reasons that pushed me over the edge on Friday to buy at the end of the day.

Stock Market

With oil prices rising, and Dow Jones component AIG reporting 100% greater losses than analyst estimates, the market is looking difficult to stay in the black tomorrow. However, I am still optimistic.

Today's jobless claims data was very positive and the overall daily rises in oil prices has actually been decreasing. On top of this, both the Fed and the Bank of England have decided to hold interest rates steady, suggesting the world economy is turning around.

Right now appears to be a great time to jump into the market. I've just sat on the sidelines and bought in during big down days and selling on the inevitable pop a few days later.

Try it out.

Investment Update

On Thursday, after the Fed announced a rate cut and indicated future rate cuts were on a hiatus, the market reacted unexpected, crashing after about 30 minutes of upward momentum. I thought this was the wrong way to react to such a positive economic indicator, and I bought more Dow Jones Industrial Average ETF Call Options.

Today, the market thought about the news, and reacted very positively, ending over 13,000! This helped me make a quick one-day profit. The following is my current position:

In the month of April, I've netted $555.24 in trading profits, or about 6.5% of my original loan, surpassing my monthly 6% return goal.

I will be taking my profits out around middle of May to pay back principal, and fees on the loan.

Borrowing cheaply to fund investments - Pt. 2

After a year of posting, I'm always hesitant in posting my ideas. Primarily, the ideas are met with some mixture of disbelief and outright anger. I don't quite understand why people are not capable of providing some coherent or rational additions to this conversation I'm having with the world. After all, the money I use in my ideas are my own, and I take nothing from any reader who themselves may feel far more risk-adverse than I.

But to answer anonymous questions, and as I stated yesterday, I will be adding the next portion of my analysis today, which is calculating true return I need, post taxes and brokerage costs.

As a starting point, I will use the 4.25% annualized rate from my calculations from yesterday. Short term gains are taxed @ 35% (assuming maximum tax rate). Brokerage fees for me are minimal, but I will say 1 cent per investment dollar.

Therefore: ($8,500 * 99%)*(1+0.65R) = $9,564.11

[translation: (Take Original funds and take out brokerage fees) * (Rate of return discounted by tax rate) and then solve for R to find the break even point for the loan]

where R is the required return for the duration of the 36 months.

R = 21.0%

Annual rate of return to break even is 6.6%.

That rate of return is not that tough to achieve, even just using index funds. However, I will add a third part to it tomorrow that may throw a wrench into this decision: investment funds are declining as I pay interest every month.

Risk-based Wealth Accretion

Creating wealth has always involved some combination of risk and luck. This weekend, I had one high luck event and an unrelated opportunity for a high risk event.

My lucky event was that I went to the local casino, threw some quarters into a slot machine, and had it spit out 10,000 quarters. That's $2,500 for those of you without calculators. This is a nice boost to my bank account and to my overall poker fund.

My high risk event came in the form of another "use this check for anything" offer. They are providing me $8,500 at 0.99% interest for the next 6 months, or 6% APR for the life of the loan. Additionally, they will be charging a 3% fee.

While normally I discuss that these fees prevent any good use of the close to free capital, I think the stock market is at a point where I could invest short-term with the funds and make some good returns.

I will be spending the next few days hashing out the details here, and making a decision by the end of the week.

Bear Stearns and the Market

Sometimes, I wish I had more money when I see a sure thing. Last Wednesday, I blogged about the recovering markets, and the affect Bear Sterns' buyout offer had. Never did I think though that Bear would help as much as it has.

The market has not been up 4 of the last five trading days. Bear's stock is up 600% from JP Morgan's initial buyout offer. JP raised their offer 500%.

It's insane, and it continues to indicate to me that the markets are definitely due for full recovery by summer time.

The only thing now is if we can get the Fed to steady its hand, and stray away from more rate cuts, then we can ensure the gradual upward climb for the dollar, and the US economy as a whole.

Markets Recovering?

I have wavered back and forth on the outlook of the market, but I think this week's Bear Stearns announcement, coupled with the Fed rate cut and the huge positive reaction from the market suggest that the markets may be slowly getting back on its feet.

Let's break down the three situations:

1) Bear Stearns' stock, even with a clear buyout deal, orchestrated by the Fed, from JP Morgan has continued to climb from the buyout price of $2 / share to almost $6 / share today. This indicates to me that market participants are realizing the buy out is way too cheap, suggesting that people do have a bottom to their recession / subprime fears, and $2 is certainly way below it.

2) The Fed discount rate was widely believed to be 100bps, and by taking a surprising move of 75bps, showed the market two things. (1) The Fed has a backbone and is capable of making monetary policy without bowing to Wall Street and (2) The Fed believes we are in a better situation and therefore believes the additional 25bps is unnecessary.

3) Looking at the 3-4% increase in all major indexes, one has to ponder that the Fed minutes were all good news, and that market sentiment is veering to bullish.

What does this all mean in the end? I think we have another 2 months of the market's volatility smoothing out, and by early summer, it will be the right time to buy in again.

Big Blue helps market see green, but beware

IBM raised its earnings estimates today, just in the nick of time, as the market was still soaking in the sharp rise in inflationary indicators as well as record-breaking oil futures at $101 a barrel or more. Yet, this should really make any saavy investor pause to question the market reaction.

Is it really as financial media outlets say, that IBM's outlook is better and therefore the global market itself is better or, is it that investors are still very optimistic about the market and any reason for celebration is taken? I would suggest the latter.

If you look carefully, IBM's executives point out most of the earnings per share (EPS) increase of 5 cents is attributable to a giant $15 billion share buyback. This change in IBM's earnings is really just a pure mathematical increase, rather than some economic indicator.

Why?

Think of this as a simple fraction. If you hold the numerator the same, and decrease the denominator, the final result is a larger number. The numerator, earnings, is not expected to change. However, the stock buyback with affect the number of outstanding shares, and therefore decrease the denominator.

Frankly, I expect IBM's stock to fall back from today's bump.

But, for investors looking to jump in, it does seem like a good time. Other investors are just as optimistic as you, and maybe you can get in on a big bump day like today.

Market troubles signals good times for some

The market helds its breath today, waiting to hear word on S&P ratings of bond insurers (such as MBIA and AMBAC). When it found out S&P was affirming the AAA ratings, markets soared.

This makes me laugh.

The very same institutions that are blamed for this subprime mess, rating agencies, still hold the same credibility?! It doesn't make any sense to me. I would think at this point, S&P would have very little value to investors, considering its ridiculous blunder.

But speaking of mortgages, this mornings report on existing home sales and prices was pretty glum for sellers, and continuing great news for buyers. Prices are down 4.6% compared to last year. At this rate, summer '08 is looking like a great market bottom to buy in.

For students graduating this year, this is excellent news. They are getting out at a time when interest rates are low, prices are low, and market is desperate to get rid of a 10-month glut of homes.

For myself, I am thinking about switching from leasing to buying as well. The tax benefits and equity are significant, IF I can foot the initial down payment. More to come later on this subject.

Bernake talks, markets tank

Pretty much, that's the pattern. Whenever Bernake speaks, he causes panic on the Street, and with good reason. He does see the economy weakening. He is predicting that the Fed needs to continue being aggressive in its tactics, which translates to more rate cuts.

When the man in charge of one of the largest economies in the world says he's worried, people are VERY worried.

I expect this bad market to continue well into the summer, especially as the housing market continues to slump, with no sign of bottoming out.

Feeling better, but the market isn't

I think I gave the market what I had, and it didn't take it well at all. Oddly enough, most people blamed today's giant drop on a lower than expected ISM Services index, or more accurately, non-manufacturing businesses. However, I don't believe this report was the entire reason the market fell.

I think a larger reason is the rising furor of voices demanding the government NOT bail out bond insurers and let the businesses who made bad loans suffer the consequences. This is very different than last week when a government bailout and possible stimulus package was met with much enthusiasm and applause (along with a rate cut).

However, even without a bailout, this narrowly-scoped issue should not be carrying over to the technology sector, where the high profile hostile bid from Microsoft to Yahoo still sits on the table, and with Google behind the scenes trying to grab its own pieces of Yahoo.

I think tomorrow can be a new day for the markets IF we see no unusual movements in crude inventories and we continue to hear renewed talk about a government bailout.

Pats lose, markets tumble, and I'm sick

Coincidence?

Maybe, but it certainly has been a triple whammy.

Its never fun to have a sure thing turn into an upsetting lose, a week-long bull rally turn into a big red bear bath, and finding yourself requiring sleep 80% of the weekend. And yet, it all happened.

My prediction for tomorrow? The market is going to get better because I'm feeling better.

That's right, no technical, economic, or any remotely intelligent reason why, other than I feel lucky.

Big cuts and big drops

Well, Bernake took the big 50bps plunge today, and how did the market react? I think right along the lines I was thinking. Initial bump followed by the long term realization that a) Fed thinks economy is getting worse and b) the value of dollar is falling dramatically. These two thoughts along bad earnings reports from UBS and Yahoo helped to propel the nosedive downward.

Big Day a-comin'

Every time the market sees a Fed announcement coming, it gets antsy, if not downright crazy. Sometimes the market soars in anticipation. Sometimes, the market fears the rationale behind the announcement.

Tomorrow's announcement will probably be a make-it or break-it moment for Bernake. The economy is on the rocks. The dollar is at all-time lows. Oil is still in the high $80s. Numerous companies have announced mixed earnings this week. And, not to forget, last week's heavy-handed Fed emergency 75 bps rate cut.

So is the economy really ready for the market anticipated 25 bps cut?

I think it is a terrible idea. We have now cut too much, and inflation should be a huge worry. The worsening situation for the dollar should far outweigh any benefits of a temporary economic stimulus, such as a rate cut.

The unemployment rate is still relatively low at 5%. The market appears to have bottomed or bottoming. At this point, the Fed should leave things along and let bottom side of the business cycle play out.

Woah Nelly!

Spent the past week on the road for work, so it's nice to finally be home and blog from the comfort of my sofa.

Plenty has happened this week, both for me and the market. Personally, I had fun on the road and then going back to my college to hang out with some buddies who are still there.

For the market, it was a fun rollercoaster event. The week started with a headlong plunge into the black abyss, saved by an emergency Fed rate cut and smoothed out with three solid days of gains.

What will this week bring? More than likely, another 25bps rate cut on Wednesday. However, I still believe the markets are rattled and last week's gains are only temporary. We aren't clear of the bears yet.