are posting on a daily basis again.
Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
31 December 2008
Portfolio ended the year down 14%. Most of our larger managed accounts were
down 10% to 18%. Some of our smaller accounts were down about 25%. Over the
last ten years The Model Portfolio has doubled in value for a 7% average annual
return. Over that same period the S&P 500 is down even if dividends are
included and down 25% on an absolute basis. (S&P 500 closed at 1229 on
12/31/98 and 904 on 12/31/2008)
And we are well
positioned in good quality stocks.
The S&P 500 ended the year down 38%. Most of Europe was down 50% or
more as was most of Asia. The Ghana stock index was up 58% for the year. Who
would have thunk that? Iceland was down 94% and of
course folks who had money with Bernie Madoff were down 100% plus lawyers’
The World Federation of
Exchanges, which tracks stock markets in 53 developed and emerging economies,
said some $30 trillion in market value evaporated through to the end of
First-time applications for state
unemployment benefits fell 94,000 to a seasonally adjusted 492,000 in the week
ending Dec. 27, the Labor Department
said, citing seasonal factor volatility to explain the surprising drop.
We switched ADCT
Stocks closed higher on the last day of the year. Volume
30 December 2008
Asian markets were mixed
overnight and Japan closed 42% lower for the year. European bourse indexes are
mildly higher at midday. Oil has a $39 handle.
GMAC received $6 billion from the Treasury.
Ford has a new car that parks itself. Just
what the country needs.
Surprise, unlike the banks, GMAC is going to increase its lending:
GMAC said in a statement that it would modify its credit criteria to
include financing for customers with a
credit score of 621 or above, a significant expansion of credit compared
with the 700 minimum score put in place two months ago. GMAC had significantly
cut back on the number of loans it offered as it struggled to stay afloat.
And General Motors said Tuesday that it would begin to offer
zero-percent financing on some models as it tries to jump-start sales.
“That brings a lot more customers into play for us,” Mark LaNeve, G.M.’s vice president for North American sales
and marketing, said on a conference call. “It’s a strong signal that GMAC is
back in the game, and that G.M. dealers are back in the game of financing
75% of the folks in this country have a credit score above 620. 50%
have a score above 700.
Stocks closed higher on the day. Oil ended at
$39.19. There is one more day to mark’em up or down. We’ll be here.
29 December 2008
Friday’s trading was a non event
even with the markets closing higher. Volume was too light to suggest a trend.
Asian markets and European bourse indexes were higher overnight and Gold and
Oil are higher on the Israeli/Gaza conflict.
We switched Dillard
to Whole Foods in accounts.
Stocks closed lower in light
trading. Oil closed with a $40 handle.
26 December 2008
24 December 2008
We have been watching our accounts make yearly percentage
moves every week. It is disconcerting, to say the least. While most folks
remain bearish and can only see the trouble that we saw a few years ago we now
see the other side of the chasm. How we reach the other side is the question
but we do believe that Obama is a large part of the answer. The impetus for the
recovery will be a change in psychology and many traders are underestimating
that part of the equation. The last eight years have been a mess and a new
administration can go a long way to instilling hope instead of despair.
And so we wish
everyone a merry Christmas and a happy Holiday.
We are going to
take Friday off but will be back on Monday.
Asian markets were lower overnight and London and France were lower
with many European markets closed.
Investors Intelligence has bulls
rising to 35% from 27% in the latest week. Bears
are 38% down from 47%.
Initial Jobless Claims for the latest reporting period were a too
We bought shares at $1.60 in a hospital company Health Management Assoc that is down
from $8 this year and $25 last year. We think the Obama health plan will
benefit hospitals since 7% to 10% of hospital admissions are folks without
insurance. At $1.60 the risk is worth it for the potential reward
Oil ended at $36.68. We guess
last week’s number wasn’t an anomaly.
Stocks closed higher in light trading breaking the six day
23 December 2008
Asian markets were off 2% and
more overnight and European bourse indexes are lower at midday. Oil has a $39
handle and Gold is $846.
There are few investors left as
these paragraphs from the WSJ explain:
There are myriad reasons traders say they are selling stocks, and two
of them -- window dressing and tax losses -- are spurring options buying.
In a situation commonly played out at large "bulge bracket"
financial companies and other types of money managers, there is a significant
push to sell positions by the end of December. Traders are trying to get the
year's bad assets off their books before filing year-end financial reports with
the government and/or their investors, in hopes of preventing further
redemptions in early 2009.
William Lefkowitz, chief options strategist for vFinance Investments,
Electric is a good example of
this type of tax loss and window-dressed selling. The global industrial
conglomerate is off 57% for the year, though it remains one of the most stable
companies in the world.
3rd Quarter GDP down 0.5% versus
up 2.8% in the 2nd Quarter.
Toyota announced its first loss in 70 years yesterday and all of a
sudden some- but not all- of the talking heads realize that some of the
problems at GM and Ford are not from dumb decisions by management but are the
result of the economic slowdown and the rational decisions of consumers not to
consume large ticket items in times of uncertainty. Duh!
We sold JPM
for a plus scratch and placed the funds in an equal number of shares of the SPDR Major Bank ETF (KBE) and also NVDIA. That gives us more bangs for our
bucks going forward since both are more volatile and down much more percentage
wise than JPM.
We sold General Growth
and placed the money in Liz Claiborne and
also sold Pacific Sun and placed the money in JDSU. Both actions improve quality while not sacrificing
gain potential. .
Oil finished at $39 and Gold was
$840. European bourse indexes closed lower.
Stocks have been trading lower all day after an early pop
right after the opening. We are heading out early today. Volume is low and
breadth is 5.4 negative as we leave at 2pm.
the major measures are off slightly.
Tomorrow is a half day but we will have a post.
22 December 2008
Asian markets were 2% lower
overnight and European markets are mixed at midday. Oil is at $42 and Gold is
GM and Ford have
Motor, the Japanese
auto giant, announced Monday that it expected the first loss in 70 years in its
core vehicle-making business, underscoring how the economic crisis is spreading
across the global auto industry.
Buy high, sell low:
Investors pulled a record $72
billion from stock funds overall in October alone, according to the Investment
Company Institute, a mutual-fund trade group. While more recent figures aren't
available, mutual-fund companies say withdrawals have remained heavy.
We took a short profit in Aeropostale and switched the money to Dell.
They got theirs and some from us too:
John A. Thain, chief executive of
Merrill Lynch, topped all corporate bank bosses with $83 million in earnings
last year. Thain came to Merrill Lynch in December 2007, avoiding the blame for
a year in which Merrill lost $7.8 billion. Since he began work late in the
year, he earned $57,692 in salary, a $15 million signing bonus and an
additional $68 million in stock options. Merrill
tapped taxpayers for $10 billion on Oct. 28.
Lloyd Blankfein, president and
chief executive of Goldman Sachs, took home nearly $54 million in compensation
last year. The company's top five executives received a total of $242 million.
This year, Goldman's seven top-paid executives will work for their base
salaries of $600,000, with no stock or cash bonuses, the company said. Goldman received $10 billion in taxpayer
money on Oct. 28.
Richard D. Fairbank, the chairman
of Capital One Financial Corp., took a $1 million hit in compensation after his
company had a disappointing year, but still got $17 million in stock options.
The McLean, Va.-based Company received
$3.56 billion in bailout money on Nov. 14.
Gold closed up $8 at $846. Oil
was $39.83 down $2.52. European bourse indexes ended 1% to 3% lower on the day.
The DJIA closed lower for the fourth day in a row. The
DJIA was down 60 at 8520. The S&P 500 dropped a greater percentage down 15
at 871 and the NAZZ lost 30 to 1535.
Volume was light and breadth was over 2/1 negative. There
were over 200 combined new lows.
19 December 2008
Asian markets were lower
overnight. Gold is down $20. European bourse indexes are lower by 1% at midday.
Oil has a $34 handle but the
talking heads are saying that the true price of oil is higher because the NYC
trading price has to do with expiration of the December contract and other
esoteric facts. So don‘t expect gasoline to go any lower. Of course when Oil
was making highs there were no reasons not to raise the price of gasoline every
A talking head says “Oil is not $34. That is a fluke from a
contract which expires today. February is the current contract at $41.72
this moment and green on the day. Don't expect $34 in your gasoline price yet.”
Research in Motion (Blackberry) announced good sales and earnings
last night and is higher in morning trade.
S&P lowered its rating on
The White House on Friday unveiled a $17.4 billion rescue package for
the troubled Detroit auto makers that avoids
bankruptcy. President George W. Bush said allowing the auto companies to fail
would worsen the recession.
The deal would extend $13.4 billion in loans to General Motors Corp.
and Chrysler LLC in December and January, with another $4 billion likely
available in February. The deal is contingent on the companies' showing that
they are financially viable by March.
The deal generally tracks key provisions of the bailout legislation
that nearly passed Congress earlier this month. But it is somewhat more lenient
in judging their viability.
The deal appeared to represent a relatively modest step in the
administration's efforts to put the auto makers on a long-term path to
viability. By forsaking a trip to bankruptcy court, the White House gave up its
most powerful weapon to extract concessions from the companies and their
workers, suppliers, dealers and creditors.
GE has had enough bad news for the
present. The S&P potential down grade mentioned in yesterday’s post caused
the shares price to drop 10% and we are using the opportunity to reestablish a
position. We have a love/hate relationship with the company. The parts are worth
more than the whole and GE has been battered so much that a holding at this
time is warranted. We are selling some SPDR Financial for the cash necessary.
Europe closed lower.
This fellow is having a bad year:
Eliot Spitzer, who as New
York attorney general was known as the “Sheriff of Wall Street” for his crusade
against investment fraud, has acknowledged that his family was swindled by the
man accused of running what could be the largest Ponzi scheme in history.
According to a National Public Radio
report, Mr. Spitzer revealed at a holiday party this week that his family real
estate firm had invested money with Bernard L. Madoff, the
financier who authorities have said confessed to a $50 billion fraud.
The Bushies were the ones who wanted to invest the Social
Security Trust Funds in the Stock Market. That is basically what the government
is doing except they are buying low instead of buying high. The profits from
these transactions should be earmarked for Social Security.
Micron gained almost $1 (50%) in the
last three days and with earnings scheduled for Tuesday we took our 80 pennies
The DJIA closed down 25 at 8575. The S&P 500 was up 2
to 887 and the NAZZ gained 12 to 1565.
Volume was light for the end of a Quadruple Witch and
breadth was flat with less than 200 combined new lows.
18 December 2008
Model Portfolio Value As of 18 December 2008
Asia was higher overnight.
Gold is higher. We have never
understood owning gold. Supposedly it a store of value in case the world ends.
But since all the gold that folks buy is stored in NYC, if the world ends how
will the folks who own the gold get it? The Will Smith special effects movie of
this summer comes to mind.
Oil has a $39 handle. Several
years ago we said the markets couldn’t rally until Oil got back down to $40. They
rallied none the less but gave it all back. The rally from here over the next
few years may be for real. For the last year we have been saying that the Oil
spike was the result of market manipulation and too many hedge funds trying to
play the same game. The drop back to $40 seems to bear out our claim. There
never were any gas lines or oil shortages as in 1974. Even with OPEC saying it is going to cut
production by 2 million barrels a day Oil drops in price. The manipulation of
oil prices was similar the manipulation of electricity prices in 2001.
We sold our spec holding in Rite Aid as they announced another large loss today and predicted a
substantial loss in 2009. They have too much debt even for a penny stock for us
to be comfortable holding.
The Euro traded at $1.47 this
morning and then reversed lower to close at $1.42 in NYC. That is a huge move
and suggests that a hedge fund or two was/were caught in a short squeeze of
some sort. The move in the euro in the last two weeks does not forecast the end
of the dollar as a reserve currency. The move suggests the same chicanery that
was occurring in the oil markets this summer.
Women's apparel retailer Chico's
FAS is improving its merchandise
and cost-cutting efforts but weakness in the sector remains, according to an
analyst Monday. Friedman, Billings, Ramsey & Co. analyst Adrienne Tennant
wrote in a note to investors that a tour of Chico's and White HouseBlack Market stores with management was
"encouraging," and showed improvements in merchandise, store-level
execution, lowering inventory and cutting costs. However, sales are still weak,
Tennant wrote. The women's or "missy" sector has been among the
hardest hit in retail as consumers cut back on spending in a recession. Chico's
same-store sales -- sales at stores open at least a year -- declined 13.4
percent across the company during the third quarter, which ended Nov. 1. "The
company is still experiencing extreme top-line weakness, especially at the core
Chico's, and we have yet to see the company's inventory reduction plans
actually positively impact the business," Tennant wrote. Fort Myers,
Fla.-based Chico's is likely several quarters away from returning to positive
same-store sales, Tennant said, and reiterated her "Market Perform"
rating on the stock.
That’s why the share price is at
$4. When same store sales turn positive the share price will be at $10.
European bourse indexes closed
mostly higher. Gold was down $12.
Oil dropped $3.75 to
$36.22. Say what? Oil dropped $3.75 to $36.22.
Say what? Oil dropped $3.75 to $36.22. The shenanigans in Oil on the
upside and now on the downside were/are ridiculous.
Jim Cramer’s take is I think that major pension funds are now
liquidating the oil commodity right here to raise cash. I think that they are
distorting the market in the near term. I would have thought demand would have
kicked in by now, but without some radical moves by our trading partners, who
still must cut rates and stimulate more, I don't see the demand rallying back. It
is a strange time. I can't recall how a commodity could go straight down $110
without some industrial demand raising its head and holding the line. Earlier I
thought I was entitled some grace period here, as it hung in at $38-$39, and
the new contract that starts momentarily will show a very big up leg if is
trades next week like it is right now.
With oil at $36 stocks
are on their lows. With oil at $150 stocks made their highs for the year. Does
that make sense? No. $36 oil would be worth about $440 billion to the American
economy versus $140 oil. (12 million barrels a day times $100 a barrel lower
price times 365 days in back of the envelope figuring.)
Stocks fell off the proverbial cliff (down 300 on the
DJIA at 2:15pm CST) beginning about 1pm when S&P announced that it was
considering GE for a downgrade. Now
they tell us. The timing makes no sense but then everything the ratings
agencies do makes no sense and hasn’t for a while.
Standard & Poor's Ratings
Service took the first step toward potentially lowering its AAA credit ratings
Electric Co. because of concerns about funding at its capital unit.
Credit analyst Robert Schulz
warned earnings and cash flow at GE Capital could decline enough over the next
two years to warrant a downgrade, and revised the company's ratings outlook to
negative from stable. However, the agency added GE's recent financial policy
actions have been consistent with what it would expect of a company with the
highest credit quality.
Today and tomorrow are Sextuple Witching Days and so any
type of action is possible.
The DJIA lost 220 to end at 8605. The S&P 500 was down
19 at 885. NAZZ was down 27 at 1552.
Breadth was 2/1 negative and volume was moderate. There
were less than 200 new lows. Today’s action was just fun and gems by the big
boys and girls.
Jobless Claims Fall
Jobless claims decreased 21,000 to 554,000 in the week ended Dec. 13,
falling from a 26-year high. Last week's 26-year high reflected both the deep
weakness in labor market conditions and special factors.
The Department of Labor told Market News last week that three
special factors boosted claims. First, claims in the week after Thanksgiving --
which last week's data were for -- tend to post their largest increase of the
year. Second, "there was some administrative backlog" from states
catching up after the Thanksgiving weekend. Third, last week's seasonal
adjustment "was a relatively low hurdle" because it looked for an
increase of just 144,000 claimants but the actual increase was 221,735. Today's
figure supports the DOL's claims, although it remains clear that the labor
market remains very weak.
Reinforcing the poor picture on employment are recent readings on
continuing claims, data which lag initial claims by a week. A week ago,
continuing claims increased a whopping 340,000 to 4.431 million, its highest
level since December 1982. The two-month increase, which totals about 700,000,
is consistent with decreases of more than 400,000 a month in payrolls. The current
level of claims is also consistent with monthly job losses of in that realm.
A key metric that helps keep the jobless claims statistics in
perspective by accounting for population growth and more specifically growth in
the size of the labor force is the unemployment rate for insured workers. Last
week it increased to 3.3% from 3.1% to its highest since August 1992. It
remained at 3.3% in the latest week. In the 1981-1982 recession, it reached
The rate of job losses has sped up to a pace consistent with forecasts
for a plunge in GDP during the current quarter. Many forecasters are penciling
in forecasts for GDP to post an annualized decline of 5% or more, with a number
of forecasts of about -8%.
And so the move from a non benevolent dictatorship to a pretend
democracy to a ? dictatorship begins:
Up to 35 officials in the Iraqi
Ministry of the Interior ranking as high as general have been arrested over the
past three days with some of them accused of quietly working to reconstitute Saddam Hussein’s Baath
Party, according to senior security officials in Baghdad.
And these are the guys and gals
who say they know how to manage folk’s money- for a fee and commissions of
From the NYT
For Dow Kim, 2006 was a very good year. While his salary at Merrill
Lynch was $350,000, his total compensation was 100 times that — $35 million.
The difference between the two amounts was his bonus, a rich reward for
the robust earnings made by the traders he oversaw in Merrill’s mortgage
Mr. Kim’s colleagues, not only at his level, but far down the ranks,
also pocketed large paychecks. In all, Merrill handed out $5 billion to $6
billion in bonuses that year. A 20-something analyst with a base salary of
$130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be
a mirage. The company has since lost three times that amount, largely because
the mortgage investments that supposedly had powered some of those profits
plunged in value.
Credit Suisse Group AG's
investment bank has found a new way to reduce the risk of losses from about $5
billion of its most illiquid loans and bonds: using them to pay employees'
year-end bonuses. The bank will use leveraged loans and
commercial mortgage-backed debt, some of the securities blamed for generating
the worst financial crisis since the Great Depression, to fund executive
compensation packages, people familiar with the matter said. The new policy
applies only to managing directors and directors, the two most senior ranks at
the Zurich-based company, according to a memo sent to employees today. ``While
the solution we have come up with may not be ideal for everyone, we believe it
strikes the appropriate balance among the interests of our employees,
shareholders and regulators and helps position us well for 2009,'' Chief
Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo. The
securities will be placed into a so-called Partner Asset Facility, and affected
employees at the bank, Switzerland's second biggest, will be given stakes in
the facility as part of their pay. Bonuses will take the first hit should the
securities decline further in value. Credit Suisse said earlier this month it
would eliminate 5,300 jobs and cancel bonuses for top executives after it had about
3 billion Swiss francs ($2.8 billion) of losses in October and November. Unlike
larger Swiss rival UBS AG, Credit Suisse hasn't received a government rescue.
Banks and securities firms are struggling to pay employee bonuses after taking
more than $800 billion of losses on mortgages and corporate loans.
17 December 2008
"Once you have
lived on the land, been a partner with its moods, secrets, and seasons, you
cannot leave. The living land remembers, touching you in unguarded moments,
saying, 'I am here. You are a part of me.' When this happens to me, I go home
again, in mind or in person, back to a hilltop world in southwestern Wisconsin...
I was born there, cradled by the land, and I am always there even though
I have been a wanderer."
Ben Logan, The Land Remembers
Asian markets did not share the enthusiasm for the Fed rate
cut. Most were higher but only mildly, and India dropped 2%. European bourse
indexes are also fractionally higher at midday. Oil has a $42 handle and Gold
is up another $15 in the early going.
futures indicate a pullback this morning. That will be a good test for the
bulls- and the bears.
Intelligence had 27% bulls and 47% bears in the latest weekly survey.
Apple is down 10%
this morning on news that Steve Jobs will not be attending Mac Expo. The company
says his absence has nothing to do with his health but traders are worried
since there have been rumors for months that Jobs has cancer.
some switching today as Newell
Rubbermaid dropped $3.50 or 30% on the day and 75% for the last twelve
months on lowered guidance. We bought shares and also added Liz Claiborne with funds derived from
been fine tuning accounts for the past few weeks. Because we are fully invested
we need to sell something if we wish to buy something. Newell is a great
company that has been having a tough time. It is now selling at book and a 20
sold half our Motorola and bought Tellabs with the proceeds. That
improves quality while spreading the risk.
This is the Newell Rubbermaid announcement:
Newell Rubbermaid (announced today that in light of the
continuing significant deterioration of global economic conditions and the
resulting impact on many of its retail customers, particularly in recent weeks,
the company is currently estimating 2008 fourth quarter normalized earnings of
$0.06 to $0.10 per diluted share, compared with previous guidance of $0.29 to
$0.34 per diluted share. For the full year 2008, the company expects normalized
earnings of between $1.17 and $1.21 per diluted share, compared with previous
guidance of $1.40 to $1.45 per diluted share. Net sales for the fourth quarter
are expected to show a year over year decline in the low teens percentage
range. The company anticipates it will generate full year operating cash flow
of $375 to $400 million, in line with previous guidance.
We haven’t been in NWL for a while so here is some info:
Inc. engages in the design, manufacture, packaging, and distribution of
consumer and commercial products. It operates in four segments: Cleaning,
Organization & Decor; Office Products; Tools & Hardware; and Home &
Family. The Cleaning, Organization & Decor segment offers semi-durable
products primarily for use in the home and commercial settings. Its products
include indoor and outdoor organization, home storage, food storage, cleaning,
refuse, material handling, drapery hardware, custom, and stock horizontal and
vertical blinds, as well as pleated, cellular, and roller shades. The Office
Products segment provides permanent/waterbase markers, dry erase markers,
overhead projector pens, highlighters, wood-cased pencils, ballpoint pens and
inks, correction fluids, office products, art supplies, on-demand labeling
products, and card scanning solutions. This segment also distributes other
writing instruments, including roller ball pens and mechanical pencils for the
retail marketplace. The Tools & Hardware segment offers hand tools and
power tool accessories, propane torches, solder and accessories, manual paint
applicator products, cabinet hardware, and window and door hardware. The Home
& Family segment provides aluminum and stainless steel cookware, bakeware,
cutlery, and kitchen gadgets and utensils. It also offers infant and juvenile
products, such as swings, high chairs, strollers, and play yards, as well as
hair care accessories and grooming products. The company markets its products
under the Sharpie, Paper Mate, Dymo,
Expo, Waterman, Parker, Rolodex, Irwin, Lenox, BernzOmatic, Rubbermaid,
Levolor, Graco, Calphalon, and Goody brand names. It serves discount
stores, home centers, warehouse clubs, office superstores, and commercial
distributors. Newell Rubbermaid has operations primarily in the United States,
Canada, Europe, and Central and South America. The company was founded in 1903
and is based in Atlanta, Georgia.
Macy's announced it entered into an agreement to
amend its existing bank credit agreement. The size of the company's credit
facility ($2 bln) and its maturity date (Aug. 31, 2012) remain unchanged,
providing substantial liquidity for the company to weather the current economic
That news has placed a bid in the retailers as shorts cover
since the Macy’s news suggests a losing of credit for higher quality retailers.
Oil closed down $3 at $40.25. Gold gained $20 to $870.
European bourse indexes closed lower small.
After dropping 125 points lower on the opening the DJIA
clawed its way back to even then drop in the last 10 minutes of the day on sell
programs to close down 105 on the day at 8820. The S&P 500 had the same
journey and closed at 905 down 10. The NAZZ dropped 9 to 1580.
Breadth as 2/1 positive and volume was moderate.
comment on the Fed action yesterday is from Diane Swonk, chief economist at Mesirow
Fed Gears Up to Drop Money from the Heavens
The Fed set history,
abandoning a specific fed funds target, and instead opting for a target range.
The fed funds rate will now be "allowed to trade between 0% and
1/4%," which is where the rate has been in recent weeks anyway. Moreover,
the Fed stressed that it plans to hold interest rates in this zero percent
range for a long time (read: all of 2009).
importance is the shift in the Fed's statement, emphasizing the use of the Fed's
balance sheet to heal credit markets over the use of the fed funds rate alone.
Not only will the Fed increase its purchases of agency (Fannie and Freddie)
debt and mortgage-backed securities, it will also begin a new program to purchase long-term Treasuries.
The last part of this announcement is the real news. Lower long-term Treasury
rates will make it even more difficult for investors to hold cash, which should
eventually force them from the sidelines back into investing.
Separately, the vote
to do everything possible was unanimous, which means that Bernanke has wrestled
control from dissenters. He has learned from his past mistake of letting us see
the sausage being made -- letting the debate over Fed policy be seen. Now, he
is adding to instead of subtracting from confidence by showing a more united
The Bottom Line:
Economic data today confirm that the economy is still deteriorating, with the
housing starts statistic dropping to its lowest level in the post-WW II period,
and inflation continuing to moderate. Moreover, conditions will continue to get
worst before they get better. The prospects for more of a "V" or
"U" shaped recovery, however, are increasing. We may even be
overshooting on the downside in housing. The outlook for 2010 is particularly
good, given the amount of fiscal as well as monetary stimulus that is likely to
be hitting the system by then. The question is whether we can move any of the
gains up a bit to the latter part of 2009. That is not the most likely
scenario, but at least it is a possibility now.
16 December 2008
Model Portfolio Value As of 16 December 2008
“The louder he talked of his
honor, the faster we counted the spoons.”
Ralph Waldo Emerson
Asian markets were mixed
overnight with Japan giving back 1% of yesterday’s 7% gain.
Goldman posted a loss of over $4.50 per share but is trading higher
on relief that the loss wasn’t higher. Best
Buy reported better than numbers. Apple
reported a 1% decline in Mac sales for November and traders are worried. Say
Consumer prices posted a second straight record decline
last month, falling 1.7% on a seasonally adjusted basis. That is the
largest drop since the government started compiling the figures in 1947 and
well in excess of the 1.3% decline Wall Street economists had expected.
Excluding food and energy, prices were unchanged. Housing starts decreased
18.9% from a month earlier to a seasonally adjusted 625,000 annual rate, after
dropping 6.4% in October. The November decrease was much bigger than expected
We are now Japan in 1990; the Fed set a target interest rate of 0% to
European stocks finished up Tuesday, with the auto sector shrugging off
dismal European new car sales on hopes that a bailout for U.S. auto makers may
be announced as early as Wednesday.
Our guru suggests a move above
888 on the S&P 500 that holds will suggest a move to 950 by year end and a
move to 1040 by Inauguration before a pullback test.
Oil lost 84 pennies to $43.60. Gold gained $20 to $858. The dollar
weekend considerably and ended at $1.39 to 1 euro.
The DJIA closed up 365 at 8930. The S&P 500 was up 45 at 914 and the
NAZZ jumped 81 to 1590. Volume was active after the Fed annuncemnt
and breadth was more than 3/1 to the good.
We get mail
I have a question for Bud.
I am not sure if he will be able to answer, but maybe a little advice would
help regarding my 403 b Retirement Plan.
I was wondering if maybe I should
try and move the funds to a personal IRA if possible, or move into treasury
bonds if possible, or any other suggestion he may have. I do not know
much about either but after hearing everything in the news, attending a lecture
in Indy by our local Senator and another professor, and
losing several thousand dollars according to our last statement, I am
afraid of losing it all.
As you know, I do not know much
about investing and have been having the 401/403 B money taken out of my check
since 1988. I have never moved or changed any of the funds. I was
even considering stopping having the money removed from my check for a year,
but this is probably not a good idea, but I fear everything is going to get bad
and I don't want to lose it all.
Just curious if Bud might have a
little advice. I am planning on calling the company who handles this, but
want to feel like I know a little of what I am talking about. Right now,
my 403 B is with American Funds.
Please let me know if he has any
it is too late to worry.
markets have gone nowhere in the last ten years and that lack of movement
higher is making up for the move of the DJIA from 700 to 10,000 that
occurred from 1982 to 2000. The pendulum swings and everything always reverts
to the mean whether it is the economy, the stock market or our emotions.
1900 stocks have returned on average 9% a year. The above average returns
in the 1980s and 1990s had to be countered and the last decade has done
value of your accounts has probably dropped most of what they are going to
drop. Since you have been contributing money on a monthly basis now would be
the wrong time to stop since the dollars now are buying more than they did when
the markets were 100% higher than they are now. (A 50% drop retraced is a 100%
gain in the magic of percentages)
value of your house and rental property have also dropped and yet you aren't asking
about selling them.
don't know the future but we do think that Obama will figure it out and that
there will be a recovery. The old saying of it is darkest before the
dawn probably applies right now.
nature and experience we usually are not long term investors. We trade stocks
and look for long term increase in the value of our accounts by taking short
term profits (which have been short term losses this year). But now for the
first time in twenty years we think the stocks we now own are worth
holding for a longer time frame.
is for certain but we have not felt this good about the values in stocks since
the early 1980s.
Don't believe everything you read
except this note.
Keep the faith.
You're Witnessing the Stock
Sale of the Century
By Arne Alsin
12/16/2008 10:01 AM EST
The hellish bear market that ended Nov. 20 was phony
-- at least in part. A sizable chunk of the 52% decline in the S&P 500
shouldn't have happened. The market should have dropped by 10% to 15% because
of the economy and, perhaps, another 10% to 15% for the emotion-based selling
that typically accompanies big declines.
Ironically enough, the stock
market got smacked more than it deserved because it's damn good at what it
does. Other markets were miserable failures, gumming up when they were needed
most -- for commercial paper, high-yield bonds, investment-grade bonds,
mortgages and CDOs, among others. When other markets
became paralyzed, investors who wanted cash turned to a market that stayed open
and fully functional: the stock market. There was, of course, one stipulation
for sellers of stock: You had to be willing to sell at any price.
Because of the extraordinary
damage wrought by liquidity-induced selling, we've just witnessed the worst
U.S. stock market in history. Carnage such as the 50% drop in the Russell 2000
in just 45 trading days (ending Nov. 20) has no parallel. Market volatility has
been so extreme, it's breathtaking.
The 50-day average change in the
S&P 500 reached 4% in November. In years past, a one-day 4% change in the
market would be a headline grabber. To average a 4% daily change for several
weeks is mind-boggling. The 1932 market got up to a 3.5% average change for 50
days, but all other bear markets are cubs in comparison. Only in 1938 and 1987
did the market volatility get past a 2% average daily change for 50 days.
Don't listen to those who say the
52% loss in the S&P 500 ranks third among bear markets, behind the
1929-1932 and the 1938 bear markets. The 1929 decline started at stratospheric
levels, after a skyrocketing 497% eight-year bull market. And, similarly, the
1938 bear started after a 372% six-year bull market. Going into the 2007-2008
mega-bear market, the market was up 63% over the prior six years and even less
for the prior eight years.
Although the 1929-1932 low was
made below book value, the recent low in the market, at 1.5 times book, is
arguably comparable. That's because capital-intensive industries dominated the
landscape back then -- American Smelting & Refining, Bethlehem Steel and
General Motors -- required an asset-heavy manufacturing base. The bedrock of
value in modern companies, like Pfizer (PFE) , Microsoft (MSFT)
and Proctor & Gamble (PG) rests in their brains and brands --
intangible assets not reflected on balance sheets.
Dreams do come true, even in the
investment arena. Although you probably weren't investing during the last sale
of the century, in 1932, you're looking squarely at the 21st century's
rendition. So consider yourself blessed. There will be many more bear markets
in the decades to come, but chances are good that we won't have the same
unhappy confluence of variables: economics, emotion and an aberrational
According to some observers, a
new bull market commenced Nov. 21 because the S&P has met the technical
requirement of a 20% increase. If true, that fits the framework of market
rebounds historically. That is, new bull markets typically occur at around the
midpoint of a recession. Since the current recession is already one year old,
we're at the midpoint if the recession lasts for another year.
How should you be positioned for
the new bull market? In general, stocks that suffered the most from
liquidity-induced selling will rebound the most. That means, of course, that
you'll make the biggest return from smaller, less liquid stocks. It's already the
case -- since Nov. 21, small stocks have outperformed big-caps by nearly
Note, too, that all
companies crushed by 80% or more are not created equal. An 80% drop in a
big-cap is more likely to be for cause, while an equivalent decline in a
small-cap is more likely due to liquidity pressure. Since dozens of analysts
follow the big-caps, they tend to be more efficiently priced than smaller
companies, many of which have no analyst coverage.
15 December 2008
Model Portfolio Value As of 15 December 2008
Today Barack Hussein Obama was elected President of the United States by the
Asian shares ended higher, as hopes the White House would
let U.S. auto makers tap the TARP fund helped offset some downbeat economic
data. Tokyo jumped 5.2% and Seoul was up 4.7%.
Oil ended at $44.58 down $1.70 and Gold was $838 up $18. The Euro was
$1.36. European bourse indexes closed lower on the day. US stocks closed lower
with the DJIA down 60 at 8570, The S&P 500 down 10 at 869 and the NAZZ off
32 at 1508. Volume was light and breadth was 2/1 negative. There were about a
combined 200 new lows and 10 new highs.
Bernard Madoff and the missing
$50 billion is the financial story of the day/ week/ month. The lost trillions
in the stocks markets of the world are the financial story of the year. Reports are surmising that the $50 billion
figure may include phantom gains that clients were told they had accrued when
in reality Madoff never made any money. Opposite to the reality of whether a tree falling in the forest makes any noise, in Madoff’s accounts the gains were real to the investors when in
reality there were none.
It is important to understand that
Madoff was able to get away with his scam because he arranged his business so
that he avoided being audited by any governing entity. Our clients’ securities
and funds are held at Mesirow Financial and we have no access to the securities
or the cash. That is the way most financial management firma are established,
we can execute trades in accounts but we have no control over the repotting of
those trades or cash distributions. Mesirow Financial has custody and control
of Lemley Yarling & Co clients’ assets. Mesirow’s accountants, Mesirow
auditors, SEC auditors and NASDAQ auditors (auditing both LY&Co and
separately Mesirow) all check the accuracy of the statements and all
transactions on at least a yearly basis in the case of the Mesirow auditors and
accountants and usually a once every two years or more often in the case of the
SEC and NASDAQ auditors.
When blaming the
SEC for missing the Madoff scam folks are missing the point that until 2006 the
SEC had no authority to audit Madoff’s Investment Advisory business. Madoff
knew the rules and buy having other hedge funds gather the assets of clients he
was able to keep the number of clients of his firm under that minimum number
that would have triggered an SEC audit. By limiting his actual clients he was
able to remain unregistered. And if he did his trades overseas and not through
his own Madoff broker dealer then even when the NASDAQ and SEC audited his
broker dealer they would have had no idea that the Investment advisor existed.
We have criticized hedge funds for charging a 2% management
fees and 20% of the profits. Madoff went them one better. He was nice enough
not to charge a management fee but then to make up for that he took 100% of the
it looks too good to be true, it is.
no such thing as a free lunch.
emperor without clothes is just a naked man.
know that untrustworthy people are often greedy. We can protect against that to
harder to legislate against greed and willful stupidity on the part of those
doing the trusting.
commonsense takes a back seat to greed, it's a con-man's market.
Barron’s had this story in 2001:
Two years ago, at a hedge-fund conference in New York,
attendees were asked to name some of their favorite and most-respected
hedge-fund managers. Neither George Soros nor Julian Robertson merited a single
mention. But one manager received lavish praise: Bernard Madoff.
Folks on Wall Street know Bernie Madoff well. His brokerage
firm, Madoff Securities, helped kick-start the Nasdaq Stock Market in the early
1970s and is now one of the top three market makers in Nasdaq
stocks. Madoff Securities is also the third-largest firm matching buyers and
sellers of New York Stock Exchange-listed securities. Charles Schwab, Fidelity
Investments and a slew of discount brokerages all send trades through Madoff.
But what few on the Street know is that Bernie Madoff also
manages $6 billion-to-$7 billion for wealthy individuals. That's enough to rank
Madoff's operation among the world's three largest hedge funds, according to a
May 2001 report in MAR Hedge, a trade publication.
What's more, these private accounts have produced compound
average annual returns of 15% for more than a decade. Remarkably, some of the
larger, billion-dollar Madoff-run funds have never had a down year.
When Barron's asked Madoff Friday how he accomplishes this,
he said, "It's a proprietary strategy. I can't go into it in great detail."
Nor were the firms that market Madoff's funds forthcoming
when contacted earlier. "It's a private fund. And so our inclination has been not to
discuss its returns," says Jeffrey Tucker, partner and co-founder of Fairfield
Greenwich, a New York City-based hedge-fund marketer. "Why Barron's would
have any interest in this fund I don't know." One of Fairfield Greenwich's
most sought-after funds is Fairfield Sentry Limited. Managed by Bernie Madoff,
Fairfield Sentry has assets of $3.3 billion.
A Madoff hedge-fund offering memorandums describes his
strategy this way: "Typically, a position will consist of the ownership of
30-35 S&P 100 stocks, most correlated to that index, the sale of
out-of-the-money calls on the index and the purchase of out-of-the-money puts
on the index. The sale of the calls is designed to increase the rate of return,
while allowing upward movement of the stock portfolio to the strike price of
the calls. The puts, funded in large part by the sale of the calls, limit the
Among options traders, that's known as the
"split-strike conversion" strategy. In layman's terms, it means Madoff
invests primarily in the largest 20 stocks in the S&P 100 index -- names
like General Electric , Intel and Coca-Cola . At the
same time, he buys and sells options against those stocks. For example, Madoff
might purchase shares of GE and sell a call option on a comparable number of
shares -- that is, an option to buy the shares at a fixed price at a future
date. At the same time, he would buy a put option on the stock, which gives him
the right to sell shares at a fixed price at a future date.
The strategy, in effect, creates a boundary on a stock,
limiting its upside while at the same time protecting against a sharp decline
in the share price. When done correctly, this so-called market-neutral strategy
produces positive returns no matter which way the market goes.
Using this split-strike conversion strategy, Fairfield
Sentry Limited has had only four down months since inception in 1989. In 1990,
Fairfield Sentry was up 27%. In the ensuing decade, it returned no less than
11% in any year, and sometimes as high as 18%. Last year, Fairfield Sentry
returned 11.55% and so far in 2001, the fund is up 3.52%.
Those returns have been so consistent that some on the
Street have begun speculating that Madoff's market-making operation subsidizes
and smoothes his hedge-fund returns.
How might Madoff Securities do this? Access to such a huge
capital base could allow Madoff to make much larger bets -- with very little
risk -- than it could otherwise. It would work like this: Madoff Securities
stands in the middle of a tremendous river of orders, which means that its
traders have advance knowledge, if only by a few seconds, of what big customers
are buying and selling. By hopping on the bandwagon, the market maker could
effectively lock in profits. In such a case, throwing a little cash back to the
hedge funds would be no big deal.
When Barron's ran that scenario by Madoff, he dismissed it
Still, some on Wall Street remain skeptical about how
Madoff achieves such stunning double-digit returns using options alone. The
recent MAR Hedge report, for example, cited more than a dozen hedge fund
professionals, including current and former Madoff traders, who questioned why
no one had been able to duplicate Madoff's returns using this strategy.
Likewise, three option strategists at major investment banks told Barron's they
couldn't understand how Madoff churns out such numbers. Adds a former Madoff
investor: "Anybody who's a seasoned hedge- fund investor knows the
split-strike conversion is not the whole story. To take it at face value is a
Madoff dismisses such skepticism. "Whoever tried to
reverse-engineer, he didn't do a good job. If he did, these numbers would not
be unusual." Curiously, he charges no fees for his money-management
services. Nor does he take a cut of the 1.5% fees marketers like Fairfield
Greenwich charge investors each year. Why not? "We're perfectly happy to
just earn commissions on the trades," he says.
Perhaps so. But consider the sheer20scope of the money
Madoff would appear to be leaving on the table. A typical hedge fund charges 1%
of assets annually, plus 20% of profits. On a $6 billion fund generating 15%
annual returns, that adds up to $240 million a year.
The lessons of Long-Term Capital Management's collapse are
that investors need, or should want, transparency in their money manager's
investment strategy. But Madoff's investors rave about his performance -- even
though they don't understand how he does it. "Even knowledgeable people
can't really tell you what he's doing," one very satisfied investor told
Barron's. "People who have all the trade confirmations and statements
still can't define it very well. The only thing I know is that he's often in
cash" when volatility levels get extreme. This investor declined to be quoted
by name. Why? Because Madoff politely requests that his investors not reveal
that he runs their money.
"What Madoff told us was, 'If you invest with me, you must
never tell anyone that you're invested with me. It's no one's business what
goes on here,'" says an investment manager who took over a pool of assets
that included an investment in a Madoff fund. "When he couldn't explain \
how they were up or down in a particular month," he added, "I pulled
the money out."
For investors who aren't put off by such secrecy, it should
be noted that Fairfield and Kingate Management both market funds managed by
Madoff, as does Tremont Advisers , a publicly traded hedge-fund advisory firm.
From the web: an observation on Goldman Sachs:
Sachs also had the enviable record of never losing money, and of also having
the supposedly smartest guys in the room.
nobody checks their level 3 assets, and nobody at Goldman tells us what their
assets are really worth. Maybe that's why they have 25 guys with PHD's telling us their value.
And nobody at Goldman seems to be
able to make money in any of their public hedge funds,
while Goldman's proprietary trading desk seemingly never has any losing trades.
week, Goldman Sachs reports.
see if they are still the "smartest guys in the room."
could ask what is the difference between Madoff, with no money, and an
Investment Bank, with undisclosed losses that exceeds it's
capital? It makes all the difference in the world when you can go to Treasury
for funding to keep your opaque derivative and Level 2 and Level 3 asset scheme
going! Just ask Citigroup how it felt having the government backstop $270
billion of their most toxic assets. Too bad they didn't throw in their credit
cards. But then again, banks never recognize losses, unless they are in their
rear view mirrors!
isn't that the definition of a ponzi scheme? Get money from other investors, so
you don't have to show investors your books?
least with the banks, the Government is in on it.
then, when did our Government keep balanced books?
Ooops only off by $155 per barrel.
Goldman Sach’s energy equity research team, which predicted a crude oil spike to $200 a
barrel earlier this year, slashed on Friday its 2009 forecast to just $45 as
team led by Arjun Murti, who made waves in 2005 by calling crude's ascent to
$100, also said prices would bottom out early next year and that a shift from
"demand destruction" to "supply destruction" would ultimately
revive oil's rally.
a separate report, Goldman's commodities research team also cut its 2009
forecast to an average $45 and predicted world oil demand would fall by 1.7
million barrels per day (bpd) and help drive oil prices down to $30 a barrel in
the first quarter.
"We expect that an
additional 2 million barrels per day (bpd) of OPEC
supply cuts will be required in 2009, along with a 600,000 bpd reduction in
Non-OPEC production, in order to rebalance the market," the team led by
Jeffrey Currie wrote.
both groups saw prices recovering in the near term.
team predicted a return to positive demand growth and shrinking non-OPEC supply
would lift prices to $70 a barrel by 2010 and to $105 by 2012.
do not believe oil markets are on-track for a decade-plus period of weakness
like seen in the 1980s and 1990s," they wrote.
In a move that provides relief to
thousands of renters who face eviction but draws the federal government even
deeper into the housing market, the loan giant Fannie Mae
said Sunday that it would sign new leases with renters living in foreclosed
properties owned by the company.
Goldman downgraded Apple and AT&T this
morning and Mother Merrill
downgraded JP Morgan to sell and
those actions are weighing on the major market measures. Why anyone listens to
either of these entities anymore is beyond our comprehension but they do and
the action in the markets is the action in the markets.
We added Ingersoll Rand at $15 down from $50 in the last 12 months with a 4%
plus yield to some accounts this morning.
When is a thrown shoe not just a thrown shoe?
From NYT: Across much of the Arab
world on Monday, the shoe-throwing incident generated front page headlines and
continuing television news coverage. A thinly veiled glee could be discerned in
much of the reporting, especially in the places where anti-American sentiment
Muntader al-Zaidi, 29, the
correspondent for an independent Iraqi television station who threw his black
dress shoes at President Bush, remained in Iraqi custody on Monday.
While he has not been formally
charged, Iraqi officials said he faces up to seven years in prison for
committing an act of aggression against a visiting head of state.
Hitting someone with a shoe is a
deep insult in the Arab world, signifying that the person being struck is as
low as the dirt underneath the sole of a shoe. Compounding the insult were Mr.
Zaidi’s words as he hurled his footwear at President Bush: “This is a gift from
the Iraqis; this is the farewell kiss, you dog!” While calling someone a dog is
universally harsh, among Arabs, who traditionally consider dogs unclean, those
words were an even stronger slight.
13 December 2008
By popular demand we will return to daily comments on 12/15/08.
12 December 2008
Thoughts during the week
Model Portfolio Value As of 12 December 2008
Stocks opened 300 points higher on the DJIA on Monday and then sold down by half
before rallying into the close to end up 300 on the day. Volume was the only
negative on the day. Hong Kong was up 8%.
On Tuesday the
DJIA opened down 150 points moved to up 50 after two hours of trading and then
faded into the close to fish down 250. With the move the markets have had over
the past two weeks a pullback was to be expected.
We took a $2 per share profit on Dell on Wednesday and placed the profit in Unisys, Rite Aid, etrials Worldwide, and RF Micro. All are pennies stocks now while all four traded over $5
per share in the last 12 months. One of the packages of four might not make
survive but the other three should; and the percentage gain potential from
those satisfies the risk involved. We are also buying half in Corning and half in Marvell Tech with the balance of the money.
Wednesday saw stocks open higher with the
DJIA up 150 in the first two hours only to fade as Senate Neanderthals
threatened a filibuster. After moving to down 50 points an hour before the
close storks rallied with the DJIA up 70 at the bell.
Jobless claims for the prior week
released Thursday morning were up to 58,000 to 573,000. The House passed an
auto bailout Wednesday night and now it is up to the Senate. We read reports
that the Dems are proposing former Fed Chairman
Volker as the Grand Pooh Bah of the bailout. That is a great idea and they
should place him in charge of the TARP also.
It looks like the auto rescue is
going to fail as there will not be a vote today, Thursday. It will be tomorrow
morning and when it fails the Congress will go home. The Repubs
are OK with money for bankers but money for auto workers is not in their
basket. The true hourly earnings number on UAW workers if their health and pensions
are included is $55 an hour versus $45 an hour for non union U.S. Toyota/
Nissan workers. The hourly earnings number for the bankers who got us into this
mess and who have been rescued exceeds $1000 an hour. $15
billion versus $700 billion, what is fair?
With the failure of the auto
rescue package on Thursday we sold a few issues to raise
a bit of cash to put to work in the eventual sell off on the final news
Oil gained $4 on Thursday
and is back at $47 and the dollar weakened with the Euro at $1.32. Stocks sold
off with the DJIA closing down 200 at 8572. This is a short term pullback.
The auto bill is supposedly dead
and stocks around the world were off 5% Friday morning in reaction. That is a
mere trillion dollars of value for beginners. And so senators from states with
a population of less than 30% of the entire country have decided that it is OK
to throw away $15 billion a month in IRAQ for the past five years but not OK to
throw away $15 billion once to maybe help companies that employ 3 million
At 9am the Treasury said that it
will prevent auto maker bankruptcies until the new Congress reconvenes in
As can be seen from
the daily posting of the value of the Model Portfolio the percentage moves up
and down on a daily basis are enough to take our breath away. Hopefully by the
New Year the volatility will die down although we are certainly not mortgaging
the farm to make that wish come true.
At midday the markets saw
pressure due to comments by Senator Dodd that no new TARP funds are likely to
be released. Obviously the Democrats want to control these funds and will try
to wait until Obama is in office. Insurance companies that were looking for
funds took quite a hit on the news. This news will be a good test for the bulls
who were regaining control into the afternoon session.
The world did not end on Friday as the DJIA gained 65 and the S&P 500 was up 6. Volume
could have been better but we will take a positive close.
The CBO says the recession began a year ago. We think
November and December 2008 are the nadir of the recession. Obama’s
stimulus package which will pass at the end of January coupled with all the
money currently being thrown into the economy will end the recession by next
year at this time. Stocks markets usually anticipate the end of recession by
six to nine months. That is why we have been buying good stocks at good prices.
Alcatel-Lucent (ALU), the world's largest maker
of telecommunication equipment said it plans to cut 1,000 management jobs as
part of an effort to
save one billion Euros over the next two years. The firm also announced that adjusted
operating profit will be around break-even next year. Also, Nortel, one of ALU’s main competitors is contemplating bankruptcy.
Still Working Off an Overbought
By Dick Arms
12/12/2008 7:01 AM EST
The further pulling back in the markets that was suggested here two days ago
seems to have developed yesterday. But this comes after an extremely important
advance on Monday. That move brought about a penetration of the prior high and
gives us, for the first time in months, a pair of higher highs and higher lows.
That was a bullish development, but it came as the very short-term
five-day Arms Index moving average was quite overbought. It seemed likely,
therefore, that some short-term pulling back would develop. That overbought
condition has been partially eliminated in the last two days, and the offsets
are such that the next two days are likely to completely eliminate it.
Moreover, the longer-term Arms Index moving averages remain very
We should be getting close to a resumption of the advance that began on
We are audited by the SEC and
NASD almost every year and this guy Madoff steals
multi billions from clients over the same time period. Go Figure?
Bernard Madoff confessed to employees this
week that his investment advisory business was "a giant Ponzi scheme" that cost clients $50 billion before
two FBI agents showed up yesterday morning at his Manhattan apartment. "We're
here to find out if there's an innocent explanation," Agent Theodore Cacioppi told Madoff, 70, who is considered
a pioneer of modern Wall Street. "There is no innocent explanation," Madoff told the agents, saying he personally traded and
lost money for institutional clients. He said he "paid investors with
money that wasn't there" and expected to go to jail. With that, agents arrested
Madoff, according to an FBI complaint. His 8:30 a.m. arrest capped the stunningly
swift downfall of Madoff and businesses bearing his
name that specialized in trading securities, making markets and advising
wealthy clients. Many questions remain unanswered, including whether Madoff's clients actually lost $50 billion. The complaint
and a civil lawsuit by regulators describe a man spinning out of control.
We enjoyed a winter storm on
Tuesday and the new look on Wednesday reminded us of our poem of a few years
Now winter lays upon the land
The blanket sprayed is nature s hand
That shields the earth from too much cold
So fragile folks may venture bold
The chickadees cluster close
Beneath the elder tree below
Hung with seeds and suet fat
The field mice too, soon join the show
It's time to strap the snowshoes on
And call our little dog to heal
We'll head out to our favorite path
And wend our way to wonderland
Hoarfrost clings to tinseled trees
And milkweed wears a shiny glow
Hungry hawks circling high
Look for creatures in the snow
The coyote tracks are everywhere
Where squirrels and rabbits make their mark
That big ole buck they missed last year
Has rutted off the cedar bark
The suns so bright it hurts our eyes
As trunching over land we go
Our fortunes here for us to know
The pure white joy of winter's glow
BL Feb 2002
The Tribune Company filed bankruptcy on Monday last because of its debt
load. This action will revive the death
of newspapers talk that has permeated the media for the past year.
Newspapers are in trouble but the Tribune’s problems are the result of a
leveraged buyout that was ridiculous. And the folks who will suffer most are
the employees. Sam Zell who put up about $400 million
of the $7 billion buyout will probably wind up owing the whole shebang. So what
else is new? By the way, we don’t see him on CNBC as we did right after the
buyout. At that time the talking heads were marveling at his money making
Discussion of Zell’s
investment in Tribune that gave him control:
In many Tribune autopsies yesterday, there was some suggestion that Sam
Zell was feeling the company's pain: He put $315
million of his own money into the buyout, after all ($315 million of $13
billion of debt), and surely he had just lost it. Well, don't go crying for Sam
Sam's $315 million didn't go to buy Tribune stock, which will likely
end up nearly worthless. Sam's $315 million went for subordinated debt with a warrant to buy 40% of the company if
and when he chose to do so. For obvious reasons, Sam hasn't chosen to do so.
This means that Sam is standing far ahead of common shareholders in the line as
the company gets chopped up.
And who are those common shareholders?
Tribune employees, of course.
And how did Tribune employees end up owning the stock?
Because Sam Zell financed the buyout deal
partially by borrowing
against the employees pension plan and using this
money to buy them stock.
Tribune employees will now get demolished, while Sam
and the company's other creditors divide up the assets. Sam probably
won't get out whole, but he could end up not losing much, either. Especially
since the Tribune is still generating cash (the bankruptcy was triggered by the
company's earnings falling below a specified level, not by a default).
The NYT's Andrew Ross Sorkin explains:
Mr. Zell financed much of his deal’s $13
billion of debt by borrowing against part of the future of his
employees’ pension plan and taking a huge tax advantage. Tribune
employees ended up with equity, and now they will probably be left with very
little. (The good news: any pension money put aside before the deal remains for
As Mr. Newman, an analyst at CreditSights,
explained at the time: “If there is a problem with the company, most of the
risk is on the employees, as Zell will not own
Tribune shares.” He continued: “The cash will come from the sweat equity of the
employees of Tribune.”
And so it is...
Mr. Zell isn’t the only one responsible for
this debacle. With one of the grand old names of American journalism now confronting
an uncertain future, it is worth remembering all the people who mismanaged the
company before hand and helped orchestrate this ill-fated deal — and made a lot
of money in the process. They include members of the Tribune board, the
company’s management and the bankers who walked away with millions of dollars
for financing and advising on a transaction that many of them knew, or should
have known, could end in ruin.
It was Tribune’s board that sold the company to Mr. Zell
— and allowed him to use the employee’s pension plan to do so. Despite early
resistance, Dennis J. FitzSimons, then the company’s chief executive, backed
the plan. He was paid about $17.7 million in severance and other payments. The
sale also bought all the shares he owned — $23.8 million worth. The day he
left, he said in a note to employees that “completing this ‘going private’
transaction is a great outcome for our shareholders, employees and customers.”
Well, at least for some of them.
Tribune’s board was advised by a group of bankers from Citigroup and Merrill Lynch, which walked off with $35.8 million and
$37 million, respectively. But those banks played both sides of the deal: they
also lent Mr. Zell the money to buy the company. For
that, they shared an additional $47 million pot of fees with several other
banks, according to Thomson Reuters. And then there was Morgan Stanley, which wrote a “fairness opinion” blessing
the deal, for which it was paid a $7.5 million fee (plus an additional $2.5
million advisory fee).
On top of that, a firm called the Valuation Research Corporation wrote
a “solvency opinion” suggesting that Tribune could meet its debt covenants.
Thomson Reuters, which tracks fees, estimates V.R.C. was paid $1 million for
that opinion. V.R.C. was so enamored with its role that it put out a press
The top creditors listed by
Tribune in its court filing include big banks like JPMorgan
Chase, Merrill Lynch and Deutsche Bank.
JPMorgan listed some of the firms it had syndicated
its debt to as well; that list comprises private investment firms like Kohlberg
Kravis Roberts’s KKR Financial, Highland
Capital Management and Davidson Kempner Capital Management.
These are the guys and gals who
are supposed to be sophisticated investors who earn big bucks for managing
of Mother Merrill wants a $10 million bonus for saving the company by selling
it to Bank America. Nice work if you can get it.
Monday last the three-month
T-bill auction yielded a new low of just 0.005%, down from 0.05% a week ago and
0.15% in the two weeks before that. Today's auction of six-month bills yielded
0.30%, down from 0.43% a week ago, 0.49% two weeks ago and 0.84% three weeks
Underscoring expectations for
continued low money market rates was the 0.51% yield on 52-week bills, a yield
that essentially represented a bet on where the six-month rate would be --
twice. In other words, the 52-week bill is priced for the six-month bill to
yield an average of 0.51% over two six-month periods, say by yielding 0.30%
over the next six months and 0.71% in the subsequent six months.
Dow Chemical to cut 5000 jobs. InBev will cut 2500 jobs at Budweiser after merger. And the
beat goes on.
The story below indicates some
folks with big bucks are scared to the point where they are willing to take no
return. Our guess is that the bidders for the four week treasury bills were
hedge funds that would normally by four week bank CDs for funds they are holding for
investment/redemption but are now so shell shocked that they want no risk at
Investors gave the U.S. government 0% financing and the yield on other
Treasury bills fell below 0% on Tuesday. The Treasury sold four-week notes at a
0% yield for the first time, with investors in effect giving their cash to the
government for safe-keeping until 2009. This rush to safety occurred last year,
too, when investors wanted only to own the very safest, most liquid investments
when they closed their books at the end of the year. The same nervous investors
snapped up three-month Treasury bills, pushing their prices up and yield down
below zero for a brief period. Theodore Ake, head of
U.S. Treasury trading at Mizuho Securities USA Inc. in New York, one of the 17
primary dealers of U.S. government debt, said
some investors bought three-month Treasury bills from his firm with negative
yields of 0.01% to 0.02% Tuesday. By the end of active trade, the yield had
inched back up to positive 0.02%.
In round numbers, the investors were willing to pay $100, knowing they
would get $99.99 in return, in the belief that a small but guaranteed loss was
preferable to investing in stocks, corporate bonds or other securities.
Treasuries have been flirting with 0% yields since the Lehman Brothers
bankruptcy nearly three months ago.
NEW YORK, Dec 2 (Reuters) - U.S.
women's apparel retailer B. Moss
Clothing Company Ltd filed for bankruptcy protection on Tuesday and said it
plans to liquidate, becoming the latest retailer to succumb to the credit crisis and downturn
in consumer spending.
The company is seeking court
permission to begin going-out-of business sales at all of its stores on Dec. 5.
and shutter most stores by the end of the year,
according to court papers filed on Tuesday in the U.S. Bankruptcy Court for the
District of New Jersey. The family-run retailer, which was founded in 1939,
runs 70 stores throughout the United States and employs more than 700 people,
according to court papers.B.Moss had tried to sell itself, but a potential purchaser
told the company in November it was unable to get financing to complete the
deal due to a lack of availability of credit, according to court documents. The
company also said it had suffered from sales declines and a failed attempt to
diversify its merchandise.
It listed assets of $13 million
and debts of $10.3 million.
We are sorry for the folks who
lost their jobs and for the family that lost its business but the retail
environment have always been a survival of the fittest and will remain so. Also
it is now a survival of those that can obtain working capital.
From 12/9 NYT:
Whole Foods Market Inc. launched a rare corporate counterattack on
a federal agency, appealing to Congress and filing a lawsuit to stop a
continuing Federal Trade Commission challenge to a merger that closed a year
The lawsuit, filed Monday in U.S.
District Court in Washington, alleges prejudice and due-process violations
against Whole Foods by the FTC, which challenged the grocer's $565 million
buyout of Wild Oats Markets Inc. The agency initially lost before the federal
court, and the companies merged in August 2007.
John Mackey, the chief executive
of Whole Foods, accused the FTC of running "a rigged game" that
handcuffs retailers and other companies under its jurisdiction. In an interview,
he said, "The FTC has already condemned the deal. How can we get a fair
trial when they've made up their mind?" He added that the company would be
better off if it hadn't bought Wild Oats.
The import of Whole Foods'
lawsuit reaches beyond the deal because it spotlights divergent standards that
companies sometimes face at the FTC and the Justice Department, which share
jurisdiction for merger reviews. The Justice Department must quickly make its
case in federal court, and it usually walks away from a case when it loses. The
FTC has an added administrative process that the agency can use even if it
loses its initial court case.
The lawsuit and lobbying effort
on Capitol Hill is the latest twist in the battle between the FTC and Whole
Foods, which says it has already spent more than $12 million on legal fees and
millions more upgrading and rebranding dozens of Wild
Oats stores. The FTC won the latest round in November when the court of appeals
in Washington denied a request by Whole Foods for a rehearing in federal court,
not a trial before the FTC. "The merger is unlawful and should be
undone," David Wales, the agency's competition chief, said after the
appeals court ruled last month.
"Now," Mr. Mackey said,
"instead of concentrating on our business, we are forced to focus on
dealing with regulators in Washington at a time when business is
A spokeswoman for the FTC
declined to comment. The agency has based its continuing case against the
company on the argument that there is a "premium and natural"
supermarket category dominated by Whole Foods.
The FTC has also cited tough
language by the company's combative chief executive,noting
his plan to "avoid nasty price wars" and his assertion that buying
Wild Oats would "eliminate forever" the possibility that a big
conventional grocer such as Kroger Co. could create a competing national
The brawl with the FTC comes
during one of the most trying stretches in the 28-year-old company's history.
"If I could get the money back, I'd take it," Mr. Mackey said.
"We would be better off today if we hadn't done this deal -- taking on all
this debt right before the economy collapsed."
Bob Summers, an analyst with Pali Research, said Whole Foods has "a long list"
of other challenges that have plagued the company besides the battle with the
FTC. He added: "The case has gotten a little personal on both sides."
Indeed, in its complaint, Whole Foods cited the role of one FTC commissioner,
Tom Rosch, by name. "The FTC lawyers are
spending taxpayer money and Mackey is spending shareholder money, and both are
probably wrong," Mr. Summers said.
Until just a few years ago, Whole
Foods consistently registered double-digit increases in same-store sales, a key
measure, and became a Wall Street favorite.
However, not long after the
company began building larger, costlier stores and agreed to buy Wild Oats, the
economy began slipping, causing shoppers to cut spending on discretionary items
such as the gourmet goods sold at Whole Foods. The grocer also has encountered
tougher competition from conventional chains, which are stocking more organic
and natural foods.
Last month, Whole Foods announced
a sharp decline in its quarterly profit, along with anemic same-store sales
growth. The company's stock has fallen more than 70% in the past year. It rose
0.19% to $10.62 a share in 4 p.m. Nasdaq
But the company got a lift when
private-equity firm Green Equity Investors V LP agreed to invest $425 million
in exchange for preferred stock equal to a 17% stake. That gave Whole Foods
cash to continue to service debt and grow through the downturn. It is also
working to change the perception that it is an expensive place to shop,
offering discounts and other promotions.
Whole Foods was co-founded by Mr.
Mackey and operates about 280 stores in the U.S., Canada and the U.K. Revenue
was $8 billion in the fiscal year ended Sept. 28.
Politicians want the auto
executives to drive to Washington while:
As Florida suffers
from a $2-billion deficit, the governor sees Europe:
Gov. Charlie Crist
took a pricey 12-day trip to Europe this summer, hitting taxpayers with a
$430,000 bill amid a sagging economy, a newspaper reported. Crist
flew to London, Paris, St. Petersburg and Madrid to drum up business in July on
a trip that was supposed to cost $255,000, but the tab came in much higher, the
Sun Sentinel reported today. Expenses included Crists'
entourage of more than two dozen, including a photographer and nine bodyguards,
who alone spent more than $148,000 on meals, hotels, transportation and
State money was not used to pay
for Crist's roughly $30,000 in expenses. Business
executives who went on the trip picked up that bill - which included a $2,179 a
night London suite, where he conducted meetings. First class tickets were about
$8,000 round-trip, room service and minibar tabs were
more than $1,300. And $320 was spent on electric fans to keep him cool while
giving speeches, the newspaper reported.
fiancée, Carole Rome, and her sister also went along. The couple met Prince
Andrew at Buckingham Palace and Prince Charles at Clarence House and sipped
cocktails with the British Foreign Office minister.
Ask Chuck. He agrees with us:
Restore the Uptick Rule
By CHARLES R. SCHWAB
The last time the stock market
suffered from extreme volatility and risk of market manipulation as severe as
we are experiencing today, our grandparents' generation stepped up to the plate
and instituted the uptick rule. That was 1938. For
nearly 70 years average investors benefited immensely from that one simple
Unfortunately, in a shortsighted
move, the Securities and Exchange Commission (SEC) eliminated the rule in July
2007, just as we were about to need it most. Investors have now been whipsawed
by what appears to be manipulative trading, what we used to call "bear
raids," which drive stock prices down without warning and at breakneck
speed. Average investors feel the deck is stacked against them and are losing
confidence in the markets.
For the sake of our children and
grandchildren, and to avoid a needless future repeat of a bad situation, it is
time to restore the uptick rule.
rule may seem far from a kitchen-table issue, but it is critically important to
ordinary investors. With more than half of all U.S. households invested in the
stock market, either directly or through a retirement plan, it matters a great
deal. The average 401(k) retirement account has lost 20%-30% of its value over
the last 18 months -- more than $2 trillion in retirement savings has been
wiped out. Behind those numbers are real people who planned and saved, and who
are suddenly facing an uncertain retirement and the prospect of working longer.
In the wake of the Great
Depression, the uptick rule was established to
eliminate manipulation and boost investor confidence. The rule said that short
sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short
selling process making it more expensive and limiting the ability of short
sellers to manipulate stocks lower by piling on, driving the share price quickly
down and quickly profiting from the downdraft they created. In July 2007,
however, the SEC repealed the uptick rule after a
brief study. Manipulative short sellers couldn't believe their luck.
The SEC's study took place during
a period of low volatility and overall rising stock prices in 2005 through part
of 2007 and didn't anticipate the kind of market we are experiencing today. We
live in an environment now where 200 point drops or more in the Dow Jones
Industrial Average are increasingly common, where a stock losing 20%, 30% or
even more of its value in a single day barely warrants a second glance at the
ticker. Ironically, it was just this sort of volatility that inspired the
regulators of the 1930s to implement the uptick rule
in the first place. Without this vital control mechanism, short sellers have
been having a field day, betting heavily on lower prices and triggering
panicked investors to sell even more.
Don't get me wrong. Legitimate
short selling where a trader has borrowed shares for future delivery and
believes those shares will lose value over time plays an important and
stabilizing role in our markets. It provides a check on overexuberant
prices on the upside, and provides natural buyers on the downside. The uptick rule, however, prevents short selling from turning
into manipulative activity. Reinstating it will help smooth out the markets and
reduce the speed of price drops. It will limit the ability of a small number of
professional investors to trigger fast dramatic price drops that create panic
The SEC has an opportunity to
make a real difference in helping to control future market stability and
restore confidence in the fairness of our capital markets. But the SEC has been
strangely silent as the crisis has worsened. It did step in earlier this fall
to implement short stock borrowing restrictions and a temporary ban on short
selling, first on 19 stocks in the financial services sector, and later in a
broader swath of 900 stocks across several sectors. But these steps were a
temporary half-measure and didn't fix the problem for the long term.
Clearly, the SEC will need to
work on some of the mechanics of reinstating the uptick
rule. Regulators should act quickly to establish a framework and solicit public
comment, then reinstate the rule and remain flexible and willing to fine tune
it if necessary.
Ordinary investors' expectations
for investing are reasonable. They want a fair playing field. They want to be
successful. They want to provide for their families, support their children's
education, have a comfortable retirement, and maybe even leave a little bit for
future generations. But they can't succeed when the markets are gripped by fear
and manipulated by those who want to profit from that fear, at the expense of
It may be too late for the
restoration of the uptick rule to have much impact on
where we are today. But there is no reason to wait and we need the protection
in place for the future. It is time to restore it. It's what our grandparents
did for us in 1938, and it worked for nearly 70 years. With that kind of track
record, we should tip our hats to the regulators of yesteryear and acknowledge
that they had it right all along.
From the WSJ:
DECEMBER 10, 2008
The Stock Picker's Defeat
By TOM LAURICELLA
William H. Miller spent nearly
two decades building his reputation as the era's greatest mutual-fund manager.
Then, over the past year, he destroyed it.
Fueled by winning bets on stocks
other investors feared, Mr. Miller's Legg Mason Value Trust outperformed the
broad market every year from 1991 to 2005. It's a streak no other fund manager
has come close to matching.
Mr. Miller was in his element a
year ago when troubles in the housing market began infecting financial markets.
Working from his well-worn playbook, he snapped up American International Group
Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares
continued to fall, he argued that investors were overreacting. He kept buying.
What he saw as an opportunity
turned into the biggest market crash since the Great Depression. Many Value
Trust holdings were more or less wiped out. After 15 years of placing savvy
bets against the herd, Mr. Miller had been trampled by it.
Read the rest of the series:
The financial crisis has created
losers across the spectrum -- homeowners who can't afford their subprime mortgages, banks that loaned to them, investors
who bought mortgage-backed securities and, as financial markets eventually
crumbled, just about everyone who owned shares. But it has also brought low
contrarians like Mr. Miller who had been lionized for staying a step ahead of
the market. This meltdown has provided a lesson for Mr. Miller and other
"value" investors: A stock may look tantalizingly cheap, but sometimes
that's for good reason.
"The thing I didn't do, from
Day One, was properly assess the severity of this liquidity crisis," Mr.
Miller, 58 years old, said in an interview at Legg Mason Inc.'s Baltimore
Mr. Miller has profited from
investor panics before. But this time, he said, he failed to consider that the
crisis would be so severe, and the fundamental problems so deep, that a whole
group of once-stalwart companies would collapse. "I was naive," he
A year ago, his Value Trust fund
had $16.5 billion under management. Now, after losses and redemptions, it has
assets of $4.3 billion, according to Morningstar Inc. Value Trust's investors
have lost 58% of their money over the past year, 20 percentage points worse
than the decline on the Standard & Poor's 500 stock index.
These losses have wiped away
Value Trust's years of market-beating performance. The fund is now among the
worst-performing in its class for the last one-, three-, five- and 10-year
periods, according to Morningstar.
"Why didn't I just throw my
money out of the window -- and light it on fire?" says Peter Cohan, a management consultant and venture-capital investor
who owns Value Trust shares. Mr. Miller's strategy, he says, "worked for a
long time, but it's broken."
Mr. Miller's picks read like a
Who's Who of the stock market's biggest losers: Washington Mutual Inc.,
Countrywide Financial Corp. and Citigroup Inc.
"Every decision to buy
anything has been wrong," Mr. Miller said over lunch at a private club
housed inside Legg's headquarters. In the 16th-floor dining room, Mr. Miller
sat with his back against the wall, a preference he says he picked up as a U.S.
Army intelligence officer in the 1970s. "It's been awful," he said.
Mr. Miller is chairman of Legg
Mason Capital Management, a group of six mutual funds. He personally oversees
Value Trust and the smaller Opportunity Trust. Although Mr. Miller's group
accounts for only about $28 billion of Legg Mason's $840 billion in total
assets, the firm's reputation is intertwined with that of its marquee star.
Legg's stock is down 75% this year. The firm's woes have weighed on
private-equity firm Kohlberg Kravis Roberts &
Co., which took a $1.25 billion stake in Legg early this year.
Questions now swirl about whether
Mr. Miller will quit or be replaced. He says his group's board of directors
will decide whether he stays or goes, but he's not planning on calling it
quits. Mark Fetting, Legg's chief executive and
chairman of the board that oversees Mr. Miller's funds, said he supports Mr.
Miller and his plans to improve performance.
Early Bet on RCA
Growing up in Florida, Bill
Miller took an early interest in the market. As a high-schooler
in the late 1960s, he says he invested the money he earned umpiring baseball
games in stocks like RCA, making enough to buy a broken-down Ford. In the
mid-1970s, in Germany during his Army stint, he visited a brokerage office in
Munich to buy Intel Corp. shares. He studied philosophy in graduate school, but
left to join a Pennsylvania manufacturing company where he eventually oversaw
By the early 1980s, Mr. Miller's
then-wife worked at Legg Mason. Through her, Mr. Miller met the brokerage's
founder, Raymond "Chip" Mason. Mr. Mason said he was thinking of
starting some mutual funds. Mr. Miller jumped. He joined Legg Mason in 1981.
Value Trust launched in 1982, with Mr. Miller as co-manager.
In 1984, Mr. Miller paid a visit
to influential Fidelity Investments manager Peter Lynch, who suggested Mr.
Miller take a look at Fannie Mae. Much like today, the mortgage company had a
portfolio full of troubled loans. Traders were betting it would go bust.
Mr. Miller found Fannie's case
compelling: The bad loans would soon roll off its books, he recalls, the government-backed
company would be able to borrow at preferred rates and its low cost structure
could make it hugely profitable. "Is this thing really trading at only two
times what it's going to earn in three or four years?" Mr. Miller recalls
asking Mr. Lynch in a follow-up phone call.
Mr. Miller figures that by the
time he sold out of Fannie in 2005, he had made 50 times his money.
All or Nothing
Such all-or-nothing bets would
come to define Mr. Miller's style. He usually holds about three dozen stocks at
a time, compared with a hundred or so in a typical mutual-fund portfolio. He
has welcomed negative sentiment about companies, which has let him buy stocks
as their prices fall, "averaging down" the
per-share price he pays. The strategy can net him big stakes in companies -- an
enviable position if shares rally and a sticky one if he needs to sell.
When asked how he would know he
made a mistake in buying a falling stock, Mr. Miller once retorted: "When
we can no longer get a quote." In other words, the only price at which he
was unwilling to buy more was zero.
Mr. Miller's swing-for-the-fences
approach makes even other value investors flinch. Christopher Davis, a friend
of Mr. Miller's and a money manager at Davis Funds, recalls discussing his
investment strategy with Mr. Miller in the early 1990s. "One of my goals
is to just be right more than I'm wrong," Mr. Davis recalls telling Mr.
[Stock Picker's defeat]
“‘That’s really stupid,' “Mr.
Miller countered, according to Mr. Davis. "Bill
said, 'What matters is how much you make when you're right. If you're wrong
nine times out of 10 and your stocks go to zero -- but the tenth one goes up 20
times -- you'll be just fine,' " Mr. Davis
recalls. "I just can't live like that."
During the savings-and-loan crisis
in 1990 and 1991, Mr. Miller loaded up on American Express Corp., mortgage
giant Freddie Mac and struggling banks and brokerages. Financials eventually
made up more than 40% of his portfolio.
He looked wrong at first. But
these stocks eventually propelled Value Trust to the top of the performance
charts. In 1996, Value Trust gained 38%, outpacing the S&P 500 by more than
15 percentage points. By then, Mr. Miller was loading up on AOL, computer
makers and other out-of-favor tech stocks.
His good bets more than made up
for the bad. Between 1998 and 2002, 10 stocks in the Value Trust portfolio lost
75% or more. Three, including Enron and WorldCom, went bankrupt.
As his winning streak grew, Mr.
Miller's name was often preceded in press reports with the word
"legendary." He was mentioned alongside the likes of Fidelity's Mr.
Lynch. Legg Mason, meanwhile, grew from a regional brokerage house into one of
the planet's largest money managers.
In 1999, he cut an unusually
lucrative deal with Legg Mason to take the reins of Opportunity Trust, a new
fund. The fund's management fees went to an entity half-owned by Mr. Miller. From 2005 through 2007, Opportunity Trust
paid the entity $137 million. In 2006, he bought a 235-foot yacht, named "Utopia."
(We bought a $1000 horse)
In a series, The Wall Street
Journal profiles leading figures in the business world whose fortunes have
taken a big hit in the financial crisis since the Great. See profiles of other
professionals who have suffered in the downturn.
Investing is Mr. Miller's
obsession, friends say. On visits to Manhattan, he convenes chief executives,
stock analysts and other money managers for steak dinner at the Post House to
discuss investment ideas. His yacht aside, these friends say, Mr. Miller pays
little attention to wealth's trappings: His work shoes are a pair of black
loafers, purchased at Nordstrom, that he gets resoled again and again.
In 2006, Mr. Miller's outperformance streak finally broke when he missed out on
big gains in energy stocks. His performance suffered again in early 2007,
thanks to losses in home-building stocks he had bought following signs of
trouble in the real-estate market.
Seen It Before
In the early summer of 2007, two
Bear Stearns hedge funds that made big bets on low-quality mortgages imploded.
The stock market whipsawed in July and August, as investors worried that
housing-market troubles could spread.
Mr. Miller thought investors were
too pessimistic about the housing and credit markets. In the third quarter, he
bought Bear Stearns. In the fourth quarter, as financial stocks fell, he took
positions in Merrill Lynch & Co., Washington Mutual, Wachovia and Freddie
Explaining his moves to his
shareholders in a fourth-quarter update, he compared the period to 1989-90,
when he had also bought beaten-down banks. "Sometimes market patterns
recur that you believe you have seen before," he wrote. "Financials
appear to have bottomed."
In 2008, Mr. Miller continued to
accumulate Bear Stearns. At a conference on Friday, March 14, he boasted that
he had bought just that morning at a bargain price, north of $30 a share --
down from a recent high of $154.
Bear Stearns collapsed that
weekend. In a takeover brokered by the Federal Reserve, J.P. Morgan Chase &
Co. acquired the storied investment house in a deal that first valued it at $2
Mr. Miller and his team spent the
following days and evenings trying to figure out what had gone wrong. Mr.
Miller, who also owns J.P. Morgan shares, says he called J.P. Morgan Chief
Executive Jamie Dimon to run his Bear Stearns
valuations past him.
Mr. Miller says the conversation
with Bear Stearns's new owner left him satisfied that he'd fairly valued the
investment house's troubled mortgage holdings. But his team had missed Bear Stearns's
vulnerability to a "run on the bank" collapse: The heavily leveraged
firm was borrowing huge sums to function day-to-day, and when lenders walked
away, it collapsed. Mr. Miller says he was also surprised that the Federal
Reserve would play an active role in a transaction that would let stockholders
be largely wiped out.
Mr. Miller worried that Wachovia
and Washington Mutual were vulnerable to a similar squeeze on capital. He sold
But he didn't abandon financials.
During the second quarter, he added to Freddie Mac and insurer AIG. In an April
letter to shareholders, he wrote that the rebounding stock and bond markets
suggested a corner had been turned. "The credit panic ended with the
collapse of Bear Stearns," he wrote. "By far the worst is behind
By the end of June, Mr. Miller's
group held 53 million Freddie shares -- about 8% of the company.
Financial stocks continued to
fall though the spring and summer. Many value investors, such as John Rogers at
Ariel Investments, sold or at least stopped buying the sector.
“The thing I didn't do, from Day
One, was properly assess the severity of the liquidity crisis… Every decision
to buy anything has been wrong.” Bill Miller, manager, Value Trust
With Freddie and Fannie under
particular pressure, some at Legg Mason Capital Management were worried that
group-think had set in. "There were hedge-fund guys out there arguing that
Fannie and Freddie were going to zero," said Sam Peters, a fund manager in
Mr. Miller's group.
Red Team's Report
Mr. Peters, whose fund also owned
Freddie Mac, suggested putting together a team of Legg research analysts to
argue the case against Freddie. In early-August meetings devoted to the
mortgage giant, the so-called "Red Team" said Freddie may need to
raise substantial capital, which would massively dilute existing stockholders'
Mr. Peters stopped accumulating
Freddie shares. Mr. Miller kept buying them for his Opportunity Trust
The risk, as Mr. Miller saw it,
was that the housing market could perform worse than he expected. But he
dismissed talk that the government could nationalize Freddie and Fannie. He
took comfort in Treasury Secretary Henry Paulson's mid-July statement that the
government was focused on supporting the agencies in their "current
form." If anything, he believed, Freddie would recapture market share as
private-sector competitors failed.
By the end of August, declines in
AIG and Freddie left Value Trust down 33% over the previous 12 months -- 21
percentage points worse than the S&P 500 over the same period. Mr. Mason,
Legg's founder, received complaints from brokers about Mr. Miller. Mr. Fetting, Legg's chief executive, fielded questions about
whether Mr. Miller would be replaced.
The news got worse on the weekend
of Sept. 6 and 7. The Treasury announced it was taking over Fannie and Freddie,
rendering private shareholders' stakes nearly worthless. On Monday, shares in
Freddie, which had started the year at $34 and entered the weekend at $5, were
trading at less than $1. A government takeover was the one outcome for which
Mr. Miller hadn't prepared.
He realized then that his old
playbook had failed him. He began to bail out of AIG, which insured the debt of
many troubled financial firms. How could his group managers invest in
financials if "we don't know the rules," Mr. Peters remembers him
In September, the Baltimore
police and fire retirement pension board reportedly fired Mr. Miller from their
$2.2 billion fund. A representative for the board did not return calls seeking
Mr. Miller and his staff, who
invest alongside shareholders in their funds, have also felt the pain. For the
first time, Mr. Miller's group fired staff, an experience he calls
"devastating." Mr. Miller won't disclose his personal worth or
The fund manager says he's
adjusting his stock-picking screens for a new world, in which he expects
investors to be risk-averse for several years. He's re-reading a biography of
John Maynard Keynes, focusing on the famed economist's experience as a money
manager during the 1930s. He says he's scouring markets for industry-leading
companies with big dividends. He thinks there are also opportunities in
battered corporate bonds.
But improving performance will
take a long time, he says. "I can't accelerate it."
Mr. Miller notes that in the
final years of his winning streak, people often asked him why he didn't quit
while he was ahead. Asked over lunch whether he wished he had stepped aside
then, he looked out the window, over Baltimore's Inner Harbor. "That would
have been a really smart thing to have done," he said, adding he has no
plans to step aside.
"The idea of him retiring to
the Riviera just isn't him," says his friend, Mr. Davis. "The money
has meaning, but the record is a lot more meaningful."
Mr. Davis continued: "He
wants to win."
11 December 2008
Model Portfolio Value As of 11 December 2008
10 December 2008
Model Portfolio Value As of 10 December 2008
9 December 2008
Model Portfolio Value As of 9 December 2008
8 December 2008
Model Portfolio Value As of 8 December 2008
5 December 2008
week we are going to go to a once a week Friday afternoon posting of our
thoughts. We will continue to update the Model on a daily basis. We will try
this format for a while. This week marks 25 years for the Model Portfolio and
25 years of writing our thoughts on a monthly and with the advent of computers
and DSL a daily basis. Moving to commenting on a weekly basis seems sufficient
and more comfortable as we enter our 66th year.
$40 Oil, $1
We are back and loaded
(Definition: To be full of energy. To be prepared for any
eventuality; to be over-prepared. Explanation: When hunting bears, or carrying
a firearm to defend one against bears, one has to load the weapon with large
caliber/high energy ammunition. Thus, literally speaking, being 'loaded for
bear' means someone carrying a weapon that is loaded with something powerful
enough to kill one. The phrase has come to mean that someone has lots of
energy. Can be positive: someone is feeling energetic and confident enough to
wrestle a bear. Can be negative: someone is very angry and prepared to unload a
lot of emotion on a person.)
For the past months
individual stocks and the markets have been experiencing weekly and sometimes
daily moves that represent months or years of price movement in ordinary times.
We have been focusing on buying and improving portfolios as these moves have
occurred and we are now invested in a manner that we find comfortable. That
does not mean that our accounts will not suffer in market downturns but we own
good stocks at good prices and we believe that overtime we will recover our
losses and earn an excellent profit.
On Friday December
5 the AP ran the following story:
Stock intended to eventually earn taxpayers a profit as part of the
Bush administration's massive bank bailout has
lost a third of its value — about $9 billion — in barely one month, according
to an Associated Press analysis. Shares in virtually every bank that received
federal money has remained below the prices the government negotiated.
Even as stocks dropped steadily at the opening bell on Friday in
reaction to a larger-than-expected number of job losses, a top Treasury Department official told the Mortgage Bankers
Association that the tax dollars are being invested in "very high-quality
institutions of all sizes."
"We're not day traders, and we're not
looking for a return tomorrow" said Neel Kashkari, the director of
Treasury's Office of Financial Stability, which
oversees the $700 billion financial rescue fund. "Over time, we believe
the taxpayers will be protected and have a return on their investment."
Most of the Treasury Department's
investments since late October have been in preferred
bank stocks, more than $180 billion worth, with investments in giants
like Citigroup and JPMorgan Chase, and many small
community banks. But the government also negotiated options to buy up to 1.2
billion shares of common bank stock that was valued at $27 billion.
The Treasury Department said it did not
expect these common stock options to be
profitable immediately and negotiated them so taxpayers could share in the
wealth if the bank stocks recover.
Now, however, the value of that common stock is worth less than $18
billion. If the government exercised all its warrants to purchase the stock
today, it would lose money on 51 of its 53 agreements. Taxpayers would be out
The government can exercise its options to buy the common stock anytime
over the next decade, but the options were "immediately exercisable,"
according to banks' securities filings.
"The markets are saying this plan isn't going to work for the
banks," said Ross Levine, Tisch professor of economics at Brown
University. "They're asking where this plan is going."
Potential losses among these common stocks
include more than $3 billion for the administration's biggest deal, a $45
billion injection into Citigroup Inc. The
government gave the New York-based giant $25 billion on Oct. 28. In addition to
preferred stock worth $1,000 per share, the deal included warrants to pick up
210 million shares of common stock at $17.85. In late November, the White House
put together a plan to give Citibank another $20 billion. The deal also
included warrants to pick up 254 million shares, with the price set at $10.61.
Citigroup stock has since fallen below $8.
The government would only earn a profit if the share price eventually
exceeds the negotiated warrant price. Under the bailout plan, the common stock warrants — effectively treated as stock
options for non-employees — would allow taxpayers to share the wealth as banks
"We're not exercising the warrants today," Treasury
spokeswoman Brookly McLaughlin said. "We have 10 years to exercise the
warrants, so it's more accurate to look at what the market believes are the
10-year prospects for these banks."
The Treasury Department projects that the
$180 billion in preferred stock will generate roughly $9 billion per year
during the first five years and $16.2 billion per year afterward, assuming the
banks remain solvent.
The preferred stock has a fixed value of $1,000 per share, and a 5 percent
annual dividend for the first five years of the investment.
Treasury Secretary Henry M. Paulson Jr. describes the cash infusion as "an
investment, not an expenditure."
So far, however, only two of the 53 banks can be considered a good
The AP's analysis found that only HF Financial
Corp. of Sioux Falls, S.D., and First Niagara Financial Group of
Lockport, N.Y., would make money for taxpayers if the common
stock options were exercised today. According to records filed with the Securities and Exchange Commission, both are small
banks, far removed from the wheeling and dealing of federally insured giants
that ravaged the global economy by making bad bets on subprime
The South Dakota bank, for example, has a market value of $54 million,
a fraction of the size of JPMorgan Chase, the
nation's largest. The Treasury Department gave
$25 million to HF Financial on Nov. 21 in exchange for 25,000 shares of
preferred stock and warrants that allow taxpayers to buy 302,000 shares at
$12.40 within the next decade. For now, it's a good deal; the bank's stock is
trading around $13. If the government exercised its option to buy HF stock
today, taxpayers would collect $63,500.
More companies would be in the black, but the government used a 20-day stock price average to set the warrant price, meaning
it willingly negotiated to pay roughly 25 percent more than the stock was worth
on the day it signed the deals on behalf of taxpayers.
Nara Bancorp, created in 1989 to serve Southern California's growing
Korean-American community, borrowed $67 million from taxpayers on Nov. 21, when
its stock was trading at $7.50 per share. But the government negotiated the
option to buy 1 million shares of Nara common stock at $9.64, higher than its
stock is currently trading.
"It's a complete mistake to think this is a good investment for
us," said Paola Sapienza, a finance associate professor at Northwestern University's Kellogg School of Management,
who spearheaded a September protest of the bailout by more than 200 of the
nation's leading economists. "It's a gamble. It's like going to Las
Our take is that the
rescue will make big bucks for the public in the long run as long as the
politicians can keep their hands off the funds as soon as they show a profit.
News while we were
GE warned and promised and the markets liked the promises more than
it feared the warnings.
Stocks stage a 4 day rally
Thanksgiving week and then tanked the Monday after. We aren’t getting any
Goldman Sachs is going to lose $2 billion in the latest quarter
according to the WSJ.
J Crew guided lower after beating for the quarter. The conference
call was reassuring and we think this stock will be a four bagger for us.
We have continued to add to our
retail package. The markets are pricing for extinction and we don’t think that
will occur with most of the stocks we own. Black Friday sales were up 3% year
over year after the talking heads were predicting lower sales. With the news of
higher sales the talking heads adjusted their spiel to profitless higher sales.
Citi was saved for the time being and rallied 50% in the last two
weeks. Of course it is still done 90% from its high.
Ford’s CEO drove to Washington last week for the bailout money as did
the folks from GM and Chrysler. We wonder why Congress didn’t
demand that they carpool.
For November Toyota’s sales dropped 34 percent which was the greatest percentage
drop since 1987. Chrysler’s total
fell almost in half to its lowest in 14 years of Bloomberg data. GM dropped 41 percent, and Ford declined 31 percent.
Investors Intelligence had 23% bulls and 49% bears in the latest
From the NYT: College tuition and
fees increased 439 percent from 1982 to 2007, adjusted for inflation, while
median family income rose 147 percent. Student borrowing has more than doubled
in the last decade, and students from lower-income families, on average, get
smaller grants from the colleges they attend than students from more affluent
Harvard University's endowment suffered investment losses of at least
22% in the first four months of the school's fiscal year, the latest
evidence of the financial woes facing higher education. The Harvard endowment,
the biggest of any university, stood at $36.9 billion as of June 30, meaning
the loss amounts to about $8 billion. That's more than the entire endowments of
all but six colleges, according to the latest official tally.
Harvard said the actual loss could be even higher, once it factors in
declines in hard-to-value assets such as real estate and private equity --
investments that have become increasingly popular among colleges. The university is planning for a 30% decline for
the fiscal year ending in June 2009.
the price of oil for 2009 have been cut to $50. Oil will average about $105
this year. If it were to average $55 next year (subtracting 55 from 105 is
easier), times 20 million barrels we use every day, times 365 days would be a
"tax cut" of $365 billion to the U.S. economy!
On Thursday last, the European
Central Bank cut interest rates by 75 bps and the Bank of England cut rates by
The Employment number for
November was a dis-employment number of 533,000 jobs lost in November. The last
time a number was so large was back in December 1974. That fits with our
bottoming scenario. But back in 1974 500,000 lost jobs was about twice as
negative. Friday’s number is the 41st worst monthly report as a
percentage of jobs lost. There are about 130 million jobs in the present
Shareholders of Merrill Lynch
& Co. Inc. have approved the company’s acquisition by Bank of
America Corp. The deal is expected to close
by the end of the year. We own both. The exchange is about 85 shares of BAC for
every 100 MER.
The media mavens continue to
castigate GM and Ford and Chrysler as being run by folks who don’t know what they are doing.
We think Mulally at Ford is one
smart fellow. Nardelli and Waggoner are fair. But we would note that Toyota,
which is held up as the paragon of auto smarts is also suffering an equal drop
in car sales as Ford is. And Toyota introduced the lumberous Tundra pick-up
truck right at the top of the market for those vehicles. And the multibillion
dollar plant in Texas sir now underutilized.
Parable of the Mustard Seed
By Doug Kass
RealMoney Silver Contributor
12/4/2008 11:59 AM EST
This blog post originally appeared on RealMoney
Silver on Dec. 4 at 7:59 a.m. EST.
"It is like a grain of mustard seed,
which a man took, and cast into his garden; and it grew, and waxed a great
tree; and the fowls of the air lodged in the branches of it."
-- The Bible, Luke 13:18-9
On CNBC's "Kudlow &
Company," Larry Kudlow is fond of bringing the financial world's attention
to the mustard seed parable, which, in a religious context, is often
interpreted as being a prediction of Christianity's growth around the world.
Jesus compares the kingdom of heaven to a mustard seed. The parable is that
mustard is the least among seed, yet grows to become a huge mustard plant that
provides shelter for many birds.
In an economic context, Larry believes the
mustard seed parable has some merit, as the "shock and awe" from the
recent policy moves geared toward stimulating the economy could sow some good
economic results in 2009. Given the painful market action over the past six
months and the extremely negative sentiment, which seems almost antithetical to
investors' enthusiasm a year ago, Larry feels a rich investment harvest might
While Larry's optimism has some
virtue, I have argued
that we are not in a "garden variety" business/market cycle, as the
wealth destruction of lower home and stock prices will retard growth -- similar
to the notion held by some religious scholars that the birds in the mustard
seed parable represent an undesirable presence capable of eating up any new
seeds the farmer sows in his field and preventing the trees (Christianity and the
stock market) from bearing fruit.
Moreover, I have opined that it is hard to
have conviction until:
returns to the hedge fund community, as redemptions slow down, some large
hedge funds fail, and the money is re-circulated to other investment managers;
- the slope of
the domestic economy's downturn is better understood, as the possible
recovery is seen with better clarity;
- stocks react
more positively to poor news; and
volatility in the capital market diminishes.
I now must recognize that my concerns,
which are currently weighing on our credit and investment markets and on the
world's real economies, have now been fully embraced by the media and by nearly
every investor and strategist and that, to some degree, stocks have reflected
the gross economic and credit realities. This is in marked contrast with
conditions a year, six months or even three months ago, when I saw a plethora
of short opportunities framed in a variant and negative view.
http://secure2.thestreet.com/cap/prm.do?OID=009933Time and (lower
stock) prices cure all, so even before credit improves, hedge fund redemptions
decelerate, and signs emerge that the current forceful policy measures are
remedying the downside economic spiral and an engaged President-elect
surrounded by an experienced and intellectually gifted corps of advisers enacts
his own policies, the market's downside influences could recede as stock prices
might advance well before the all-clear economic signal is embraced.
Given the above, my investment blueprint
over the next several months is taking a more positive tint. We seem to be
moving toward the following paradox:
1. Investments that are
deemed to be safe (e.g., 10-year notes, 30-year bonds) are increasingly unsafe,
and I am shorting.
2. Investments that are deemed to be risky
(e.g., selected equities) are becoming safer, and I am buying them (gingerly,
I have concluded that we have likely seen
the year's lows, but the harder issue is trying to define the slope of the
recovery in stocks. Given the headwinds (especially in credit), it should be
frustratingly modest at first -- we still seem to be in a very broad trading
range -- but the trajectory will hopefully gain steam as the year progresses
and clarity regarding the depth/duration of the recession develops, the hedge
fund redemption issue is left behind us and stocks increasingly react more
positively to bad news.
Already some of Larry's mustard
seeds are being ignored. For instance, take a look at housing,
in which a combination of targeted and aggressive policy efforts aimed at
reviving this beaten down sector of the economy, a marked reduction in home
mortgage rates, better affordability and an extended period of low production
of new homes (vis-à-vis population and household formation growth) argue that
the balance between housing supply and demand might move closer in balance
earlier than expected.
In conclusion, I am not yet in a rush to
buy aggressively, but I am increasingly confident that investments made in the
next three to six months will look terrific one to two years from now.
I am also convinced that the current
negative groupthink on the part of the hedge fund community (and others), which
is manifest by their current low invested positions amid fear of further
investment losses and additional redemptions, will cause them to miss the bulk
of the early advance in equities when it comes. As such, the potential is for
hedge funds to become the new marginal buyer that is capable of extending the
market's initial gains in 2009.
Shopping lists should now be made for both
holiday gifts and for stocks, as they are both being discounted.
Doug Kass is the author of The
Edge, a blog on RealMoney
Silver that features real-time shorting opportunities on the market.
Below are market opinions on the comparison of the 1973/74 market action to
the present market action. As we have been saying for the last year we think
the comparisons are striking. The lows in 1974 and 1987 were made on December 6
and 7 respectively
From http://www.fiendbear.com/bear1973.htm :
THE TOP: The last moon landing
occurred in December of 1972. This was the era of the "two tier"
market when large-cap "nifty fifty" or "one decision
stocks" powered the Dow ahead as other smaller issues languished.
Incumbent Richard Nixon defeated George McGovern in landslide victory in
November of 1972 and to celebrate, the Dow closed above the mythical 1000 level
for the first time about one week later. The Dow first challenged the 1000
level back in 1966 and it was a momentous event for it to finally exceed it.
Many major magazines including Time, Business Week, and Newsweek had feature
stories covering the Dow's amazing run and the lack of participation by smaller
non-Dow stocks was not perceived to be a serious problem. The Dow suffered a
brief 4% correction near the end of 1972 but it successfully tested the key
1000 level which was very encouraging to the Bulls. The Dow proceeded to shoot
up another 5% in less than three weeks and its final closing peak of 1051 would
not be beaten until November of 1982. From mid October to its January peak, the
Dow jumped 13%. Near the Dow's January peak, Barron's ran an article titled,
"Not a Bear among Them" to describe the bullish consensus of
THE BEAR: Gas lines such as this
were common after the 1973 oil embargo. The Dow's initial move down in January
of 1973 was very sharp and within a month, it was off 100 points or almost 10%.
As it is apparent from the chart above, the Dow's slide was extremely volatile
with big losing streaks often followed by sharp rallies. In the meantime, the
Watergate scandal was beginning to grow as top Nixon aides resigned at the end
of April amid charges of obstruction of justice. The Dow's fall continued until
late August when it finally bottomed at 857 to complete a seven month loss of
almost 200 points (over 18%). From this point, the Dow surged ahead so rapidly
that the Bulls were likely lulled into believing that a new leg up was
occurring. Amid October's Yom Kippur War, Vice President Spiro Agnew's forced
resignation, and an Arab oil embargo, the Dow closed at 987 near the end of
that month for a gain of 15% off of its summer lows. The huge, two month rally
left the Dow just 6% below its all time high set back in January but the NYSE's
advance/decline line was still in shambles. In addition, higher interest rates
were taking their toll on the economy which officially entered a recession in November.
The divergence between the large-cap stocks and smaller-cap stocks was resolved
over the next five weeks as the "nifty fifty" experienced a brutal
reckoning and the Dow plunged 200 points or over 20%. The Dow bottomed at 788
in early December of 1973. After jumping back above 850 in early 1974, the Dow
remained in a trading range as impeachment hearings against Nixon began. Nixon
finally resigned in early August but this did not bring any relief to the Dow
which continued to trade near the 800 level.
THE BOTTOM: Richard Nixon resigns
his presidency in August of 1974.After Nixon's resignation in early August of
1974, the Dow began another terrible decline which slaughtered the remaining
Bulls. Over the next two months the Dow would drop from 797 to 584 in early
October for a loss of 27%. During the plunge, the Dow was hit with a losing
streak of 11 straight sessions for a 13% total loss. After hitting bottom, the
Dow shot up 16% to 675 in early November, but those gains were quickly lost as
the Bulls finally capitulated in despair. The Dow fell to a new low of 577 by
early December which was to mark its final bottom in the 1966-1982 secular bear
market. The Dow's close of 577 (45% off of its peak) was its lowest level since
October of 1962 and sentiment at this bottom was absolutely grim. The same
major publications that cheered the Dow at 1000 two years ago were now
overwhelmingly pessimistic. Articles such as "Dow below 400?" from
Forbes and "Is there no bottom?" from Newsweek were typical of the period.
As the Dow began to rally off of its second drop below 600, it became apparent
that the selling over the past couple of years had finally played itself out.
The Dow was trading at 25% below its 200 DMA and the subsequent rally was so
strong that it managed to get back to its 200 DMA in just two months with a
close of 717 by February of 1975. The recession which began in late 1973
officially ended in March and the Fed was now easing interest rates. By May,
the Dow was trading at 855 for an astounding gain of 48% off of its lows from
just five months ago.
Markets will behave in such a way
as to disappoint the greatest number of people. Sometimes a bear market will
set an early low, maybe on very strong volume and dramatic moves. We saw this
in October. But bears love to punish. They give you an early strong kick in the
face and then tease you with hope. The market may rally, but eventually there
is yet another low. The Dow closed at 8,175 on October 27, rallied, fell again,
and closed at a new low today, November 19, at 7,997.
The only market in my adult lifetime that even compares to today was in 1973
-1974. In 1974, the first low was set on October 4, 1974. The market then
rallied, and fell again to the final low on December 6, 1974; a pattern very similar to what we are seeing now.
After the second low in 1974, the market marked time for a short period before
moving strongly up, hitting 1,000 by March 1976.
The same thing happened in 1982. On July 18, 1982, it set a low of 788,
rallied, and fell to a new final low of 776 on August 12, 1982. From there it
rose quickly to 1,287 in November, 1983.
On October 19, 1987, the market crashed to 1,738. It never closed lower than
that, but got close on December 7, 1987
when it closed at 1,766.
Now, I know that there always is a penultimate low, and you can see in the
charts what you want to see. And I am not saying that this is the bottom, ( but if it is, you heard … ) but it feels much more like a
bottom than October 27. Whether it is or not, this is what a bottom looks and
This type of pattern makes sense. It is like the market is searching out the
last pockets of optimism and methodically destroying them. Those not dissuaded
by the first low are encouraged back in, only to receive one more gigantic dose
of despair. Investors can only take so much of this kind of punishment. How
many times can you be crushed, rekindle hope, and be crushed once more before
you stop coming back?
Jan. 2 is the day that the SEC reports its
findings on the impact of mark-to-market
on the financial crisis. Potentially, this report, followed by action to alter
the accounting procedure, could serve as a nice jump start to 2009. Why are we
waiting? My thought is that the government wanted to get all of its TARP stock
warrants finalized so it gets the full benefit once the financials rally. Hank
is running the Treasury as if it were a hedge fund instead of doing what's in
the best interest for the country. Europe got mark-to-market taken care of in
seven days! Europe has been surprisingly innovative on this crisis, and we have
been slow to follow.
Subject: File No.
From: Jeffrey A Miller, Ph.D.
Affiliation: Investment Manager, former Professor
October 28, 2008
I am a former public policy college professor who
is now an investment manager.
I have written extensively on the problems in
implementing FAS 157. (See this article as an example:
many other critics of the death spiral induced by the implementation of this
plan, I strongly embrace market pricing when it generates accurate values.
The problem is that these values do not
accurately portray the actual performance of the underlying loans.
Many others have noted the liquidity issues, so
my comment takes a different approach.
I hope that the SEC will examine carefully the
interaction between trading in the Credit Default Swap market and the resulting
marks for "innocent" financial institutions. Some of the marks,
including the ABX, are drawn directly from the CDS markets. If these markets
are flawed or manipulated, the widespread implications should be considered.
As an experienced market professional, trading
equity options for over twenty years, I have noted a pattern of trading. This
pattern targeted various firms through the CDS market, included the purchase of
put options, and probably included short sales in the targeted financial
There are two problems:
1) The trading in the specific companies,
possibly involving manipulation. I can only observe what I see. The resources
of the SEC can investigate this.
2) The implications for "innocent"
institutions, whose holdings are marked down, despite performance of the loans
and the ability to hold to maturity.
The failure to accurately evaluate assets of
financial institutions is a contributing cause for the massive, and possibly
exaggerated, de-leveraging in financial markets.
It is possible that these factors have
contributed to a misplaced loss of confidence in the entire financial system.
The cost to the average retirement investor is enormous.
I understand the principle of mark-to-market, but
the implementation must be done accurately. A wise accountant told me that if
this had been introduced fifteen years ago, there would have been no problem.
Perhaps it is time to suspend
this process while we learn how to do it right.
Farallon Capital Management, one
of the largest hedge fund companies in the world, has taken measures to slow
redemptions in its largest fund, according to a letter it sent to investors
obtained by Dow Jones Newswires.
Farallon, which runs more than
$30 billion, put up a "gate" on redemptions in its Farallon Capital
Institutional Partners LP fund, meaning it has set a limit on how much money
investors in that fund can withdraw.
The news was reported earlier by
Farallon joins Tudor Investment
Corp. as large hedge fund firms taking measures to halt or slow investors
trying to get out of hedge funds, something that's been happening all across
the hedge-fund universe since September. Nearly 100 funds have limited
redemptions in their funds.
From the WSJ
Citadel Down 13%
By Gregory Zuckerman and Jenny Strasburg
A bad year for hedge-fund titan
Kenneth Griffin got much worse last month. Mr. Griffin's Citadel Investment
Group lost about 13% in November, bringing the Chicago hedge fund giant's
investment decline this year to 47%, according to investors.
Citadel's mounting losses have
come from declining values of convertible bonds, bank loans and other
investments as global markets strain. Much of the losses stemmed from credit
holdings during the last week of the month, investors say.
Continued pressure on those
assets, particularly as other hedge funds fail and are forced to dump positions
to raise cash, is compounding Mr. Griffin's efforts to engineer a rebound
during what is by far his firm's worst year ever.
Citadel, which manages roughly
$16 billion, has cut about 20 employees in its trading operations in recent
weeks, including some in London, and also is trimming its back-office and
human-resources rolls by roughly the same number, according to people familiar
with the matter. Citadel has about 1,300 employees world-wide.
Mr. Griffin, 40 years old,
started Citadel in 1990 and until this year had one of the most successful
track records in the hedge-fund industry. Indeed, the reversal of fortune for
Citadel is striking, even for an industry that has gone from envied to anxious
in a matter of months. One bright spot for the firm is its $3 billion
market-making business, which has posted a gain of about 43% this year and
helped shore up the firm's total asset base amid hedge-fund losses.
At its peak near the beginning of
this year, Citadel oversaw about $20 billion in total assets. The firm was on
the path toward a lucrative initial public offering earlier this year before
putting that plan on hold.
At the start of September, Citadel had lost just 4% for the year, (that sounds familiar) and seemed in a
good position to poach laid-off bankers and traders as Wall Street suffered.
Indeed, in mid-September, Citadel lured its latest of a series of executives
from J.P. Morgan Chase & Co., a move that so rankled the big bank that it
suspended trading with the hedge fund for a short period.
But Citadel's losses soon
snowballed as the firm's credit, convertible-bond and other positions turned
into losers. Mr. Griffin has spent years focused on trying to make sure his
firm would survive in times of difficulty, and testified in Congress a few
weeks ago about risks in the industry.
The difficulties come as huge
hedge funds; including Highbridgecsco
Capital Management, deal with a rush of
investor redemptions on the heels of losses in a year that is likely go down as the worst in the business.
ETFs and Futures
12/1/2008 4:29 PM EST
Years ago, we had a simpler configuration of derivative and proxy instruments
for the markets: index futures and options. More recently, exchanges and
sponsors have introduced "emini" futures and exchange traded funds
(ETFs), which have broadened the availability of speculative and hedging
instruments to an even wider group of investors and traders.
is much confusion, speculation, lack of knowledge, etc. regarding the impact of
ETFs upon the overall market. The introduction of leveraged or
"ultra" ETFs has only resulted in exacerbating the mystery of the
effect of ETFs upon the indices, including the recent volatility that has
gripped the markets from a day-to-day perspective and, more importantly, during
the final half hour to hour of trading.
need to look at these phenomena from three perspectives: ETF construction,
trading activity and non-futures-related ETF/stock manipulation.
are created by placing assets or total return swaps into a trust. The trust
then issues certificates or fund shares that are listed on an exchange in the
form of ETFs. Some ETFs are constructed from a combination of assets or swaps.
Total return swaps are over-the-counter contracts that specify the exchange of
economic values based on the movement of an index or asset between two parties.
example, a total return swap on the S&P 500 would call for Party A
(the payer) to pay the upside price return of the S&P 500 plus dividends to
Party B (the receiver). In return, Party B would pay to Party A the downside
price return of the S&P 500 plus an interest payment, which is typically
pegged to an interest rate such as LIBOR.
plain vanilla ETF such as the SPDRs (SPY), which is targeted to provide
the return of the S&P 500, is constructed by the trust purchasing all of
the constituent stocks of the S&P 500. The more complex Short S&P
500 ProShares (SH) is constructed by a combination of short stocks and short
swaps, the ETF being Party A in this example.
ultra varieties, which are leveraged versions of the basic ETFs, will also use
stocks and swaps to obtain their desired return. The Ultra S&P 500
ProShares (SSO) uses stocks, while the UltraShort S&P 500 ProShares
(SDS) uses a combination of both. In order to obtain a properly indexed ultra
position, the swaps have to be dynamically managed so as to generate the
leveraged gearing that the ETF purports to deliver.
recently, we have witnessed the introduction of the 3x ETFs, including the Direxion
Shares ETF Trust Large Cap Bull 3x (BGU) and Direxion Shares ETF Trust
Large Cap Bear 3x (BGZ) , which triple the long or
short exposure to an index or portfolio. According to the SEC filing
for these 3x funds:
Each Bull and
Bear Fund invests significantly in swap agreements, forward contracts, reverse
repurchase agreements, options, including futures contracts, options on futures
contracts and financial instruments such as options on securities and stock
indices options, and caps, floors and collars.
intelligent professionals on this site and elsewhere hypothesize that ETF
activity -- and, in particular, the ultra or 3x funds -- is largely responsible
for the huge market volatility that we are currently experiencing. I decided to
take a look at one day's activity to analyze the massive amount of dollar
volume that is taking place to see if we can ascertain a causal relationship
between ETFs, futures and the market indices.
Tuesday, Nov. 25, 2008, the S&P 500 moved in a range between $834.99 and
$868.94 and closed higher on the day by 0.66%. The following table estimates
the dollar equivalent value of the exchange's ETFs and emini futures (after
accounting for the security or contract leverage) traded that day based on my
research and calculations:
Dollar equivalent of trades
Long or short
Short S&P 500 ProShares
Ultra S&P 500 ProShares
UltraShort S&P 500 ProShares
Source: LakeView Asset Management, LLC
is clear that there is a huge amount of money being thrown around, but the
overwhelming preponderance of traded equivalent value takes place in the
futures pits, which seem to dwarf the ETF dollar equivalent volumes. (Note:
Excluded from my table above are related instruments that also need to be
factored in such as index options, both exchange traded and OTC, and swaps.
Swaps and OTC options data are not available given the current lack of
regulation and a central clearing system. Listed options trades are available,
but the analysis would have been far too complex for this brief article. In the
end, based on my quick scan, options turn out not to be a big factor, and my
conclusion that futures are responsible for most of the current index
volatility still stands.)
would say that it is a reach to conclude that index ETFs alone (levered or
unlevered) are the tail wagging this doggy market. On the other hand, futures
appear to have a much larger footprint on the activity of speculators and
hedgers. Clearly, ETF activity can spill over to futures and/or stocks as
market participants seek to offload or hedge risk. The causal flow may also be
reversed as futures participants use ETFs and/or stocks to hedge or offset
risk. The data suggests that ETF activity is only a fraction of futures
activity, however, and thus we should look to the futures pits for indication
of market volatility and manipulation.
stocks represent a fraction of the composition of an individual index. For
example, Exxon Mobil (XOM) represents 5.42% of the S&P 500, and Procter
& Gamble (PG) represents 2.44% of that index. Using index ETFs or
derivatives as a means to manipulate either of those stocks would be a
difficult task. Therefore, a causal link between index activity and individual
stocks cannot be ascertained from index derivative and ETF activity alone. Put
another way, index activity affects portfolio beta returns but not individual
stock alpha returns. We have to search further to see how individual stocks can
be impacted by ETF activity.
are a multitude of ETFs for which no futures are available. These tend to exist
in the class of ETFs (levered or non-levered) that are sector specific.
Examples of these ETFs would be the Semiconductor HOLDRs (SMH) , Ultra Financials ProShares (UYG) or the UltraShort
Oil & Gas ProShares (DUG) .
these ETFs in a particular direction will have an offsetting movement in the
underlying shares of the ETF, the options on the ETF or the options on the
underlying stocks. It is far easier to manipulate the price of Intel
(INTC) , Citigroup (C) or Exxon Mobil with
those ETFs than with the broad array of S&P 500-related index ETFs.
example, on Nov. 25, 2008, 10.5 million Semiconductor HOLDRs shares traded,
with an approximate value of $168 million. Approximately, 23.2% of the
Semiconductor HOLDRs' holdings is in shares of Intel.
Thus, the amount of Intel represented by the Semiconductor HOLDRs' activity on
Nov. 25 was about $39 million, or nearly 3.0 million shares. Intel traded 84.2
million shares on the day. While this represents only 3.5% of Intel's volume,
carefully placed Semiconductor HOLDRs trades could have a second-order effect
on shares of Intel.
volatility tends to be a result of futures activity rather than ETF
- Index ETFs
and derivatives are more likely to impact the indices and are not targeted
at individual stocks.
ETF trading can have an impact on individual stocks.
time of publication, Rothbort was long the Ultra S&P 500 ProShares and
Ultra Financials ProShares, although positions can change at any time.
Rothbort has over 20 years of experience in the financial services industry. In
2002, Rothbort founded LakeView Asset Management, LLC, a registered investment
advisor based in Millburn, N.J., which offers customized individually managed
separate accounts, including proprietary long/short strategies to its high net
worth clientele. He also is the founder and manager of the social networking
educational Web site TheFinanceProfessor.com.
prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was
instrumental in building the global equity derivative business and managed the
global equity swap business from its inception. Rothbort previously held
international assignments in Tokyo, Hong Kong and London while working for
Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the
Stern School of Business of New York University and a BS in economics and
accounting from the Wharton School of Business of the University of
Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist
for the Stillman School of Business of Seton Hall University.
Jim Cramer’s take on the above
Jim Cramer Blog
ETFs Are Too Powerful
By Jim Cramer
12/2/2008 10:35 AM EST
Are ETFs forcing stocks down at
times? Scott Rothbort had a fantastic article yesterday afternoon on the role of
ETFs and whether they can really affect the market.
I think it is somewhat
persuasive, but it does not answer the question that someone can use
these instruments, particularly the Bear Ultra Funds, to manipulate the close
of the market given that there are market on close orders that must be placed
at 3:40 because of the nature of the project. If you come in with guns blazing,
you are directly going around the margin rules to be able to blast out stocks
to accentuate the direction of the market. You get 3-to-1 leverage on top of
the 50% leverage you can use, allowing for some serious firepower to take the
market down. I understand the notion that the "solution" these funds
use is to employ swaps, but as always, the swaps are simply the stocks all over
again in a different form, one that the stock market by the way simply can't
handle owing to the velocity of the moves.
Put simply, I regard these
products as a derivative of portfolio insurance, a direct cause of the 1987
crash, because the market could not handle what was then known as dynamic
hedging. That's the same as these ETFs -- weapons of mass destruction that
retail investors and institutional investors can use both as a hedge and as a
way to take the market down after putting on massive shorts all day.
If you combine these with a
targeted approach that can move Exxon (XOM) , one of the biggest players, and
Chevron (CVX) , another important portion of the index, through shorts and puts
and the oil ETF, you can push the market down even faster, as Rothbort admits
that the sector ETFs have big impact.
I am simply saying that if I
wanted to do so, I am confident that with little cash I could collapse the
market using these triple pro-bear products in conjunction with other ETFs to
take this market apart at 3 p.m., with the real damage coming after the adviser
to the fund puts in the market on close orders that can then be run ahead of,
causing additional chaos.
It's just too easy. The
instruments should not have been approved. They are too powerful with too much
leverage at a time when we are trying to eliminate the leverage. Of course, you
could argue that you could blast things out with S&P futures themselves,
but these pro-bear instruments have tremendous firepower and can lead to these
amazing closes that we have seen.
At the time of publication,
Cramer was long Chevron.
Who's the World's
By Daniel Gross
Posted Monday, Dec.
1, 2008, at 6:27 PM ET
In the past couple of years, the entire global lending industry has
covered itself in shame. Virtually every banker was suckered by the credit and housing
bubble. But who made the sorriest choices? Who forced shareholders and the
public to bear the highest financial cost? Who, in short, is the Worst Banker
in the World?
There's no dearth of candidates. Richard Fuld of Lehman Bros. and James
Cayne of Bear Stearns presided over the remarkably disruptive failures of their
respective firms. But Bear and Lehman weren't banks, properly speaking: They were
hedge funds lashed to investment banks. And their demises didn't require much
of a public bailout. The failures of AIG, Fannie Mae, and Freddie Mac necessitated
massive bailouts, but they weren't exactly banks, either. Iceland's bankers
have effectively brought their entire country to ruin. But since Iceland's
population is a mere 300,000, they're off the hook. In an interview Monday,
Nobel laureate Paul Krugman nominated the gang that ran Citigroup into the
ground. But Citi was so big it took three CEOs-Sandy Weill, Chuck Prince, and
Vikram Pandit-to bring it to the brink of disaster.
No, my nominee is someone whose name may not be familiar to American audiences.
He's Fred Goodwin, who until October served as CEO of the Royal
Bank of Scotland. Goodwin (here's the Wikipedia entry about him) took the helm
of RBS in 2000 and proceeded to turn it into an international
powerhouse. Known as "Fred the Shred" for his willingness to cut
costs-and jobs-he emerged as Britain's leading banker. He was even knighted in
services to banking. But the bank, which this summer was Britain's largest, is
now neither Royal nor Scottish nor much of a bank. RBS's slogan is "Make
it happen." A review of the record shows that Goodwin indeed made it
happen. He aced every requirement for a hubristic CEO.
Let's review the record.
Carrying off mergers and acquisitions and calling them growth? Yes.
After buying British bank Natwest for about 26.4 billion pounds in 2000,
Goodwin used RBS's cash and high-flying stock as a currency for more deals.
Among the biggest was the $10.3 billion purchase of Charter One Financial, a Cleveland-based
bank, in 2004, thus expanding the bank's footprint in the Rust Belt.
Ill-advised, history-making, massive merger precisely at the top? Yep.
In November 2007, RBS and its partners, Fortis and Banco Santander, completed their
acquisition of Dutch bank ABN Amro. As proud adviser Merrill Lynch noted, the
$101 billion deal was "the world's largest bank takeover and one of the
most complex M&A transactions ever." And it closed almost precisely when
the air started to come out of the global lending bubble.
Massive commitment of capital to investment banking, trading in funky securities,
and poor credit controls? Yes, yes, and yes. As this excellent Bloomberg
postmortem notes, by June 2008, RBS had become Europe's largest lender.
"Under Goodwin's tutelage, RBS also became Europe's biggest backer of leveraged
buyouts," reporter Simon Clark notes. Goodwin also jacked up the bank's
trading, "boosting derivatives assets 44 percent to 483 billion pounds in
the first half of 2008," which was greater than the bank's net deposits. "Meanwhile,
its reserves of Tier 1 capital, a measure of financial strength and the vital
reserve set aside to cover losses, was the lowest among its U.K. rivals at the
start of 2008." In other words, Goodwin designed a house that would teeter
when the slightest ill wind began to blow.
Building an expensive, self-indulgent new headquarters building just in
time for the collapse? Right-o. In 2006, RBS started construction on a huge new
headquarters in Stamford, Conn., which would house its expanding U.S. investment
banking and trading operations. The centerpiece of the 12-story, $500 million
building is one of the largest trading floors in the world. It should be ready
for occupancy (or, given recent job cuts, partial occupancy) next year.
Telling shareholders you don't need more capital, and then raising
it-and then having that capital lose value rapidly? Yep. In February 2008,
Goodwin said, "There are no plans for any inorganic capital raisings or
anything of the sort." But in June, RBS sold 12.3 billion pounds (about
$20 billion) in shares at 200 pence per share, which was a significant discount
to the then-market price. By October, as this chart shows, the stock was
And finally: Dump problems on fellow citizens by messing things up so
badly the bank has to be nationalized? Bingo. With the stock continuing to
slip, RBS staged another rights offering, giving brutalized shareholders an opportunity
to add to their sharply discounted holdings at a sharp discount-in this case at
65.5 pence per share. But shareholders passed, and the government last Friday
had to step in as buyer of last resort, ponying up 20 billion pounds and
assuming an ownership stake of about 60 percent. (The Guardian tells the grim
The result? RBS's stock (here's a two-year chart) has
lost 91 percent of its value since March 2007 and retains value thanks only to
massive government intervention. A job well-done, Sir Fred!
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