Bud's Poem Page

We are posting on a daily basis again.

Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
Bud: 312-925-5248       Kathy: 630-323-8422

31 December 2008


Model Portfolio Value As of 31 December 2008

$ 503,988

Our Model 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’ fees.

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 November.

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 to DELL.

Stocks closed higher on the last day of the year. Volume was light.


30 December 2008


Model Portfolio Value As of 30 December 2008

$ 486,667

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 vehicles.”

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


Model Portfolio Value As of 29 December 2008

$ 469,525

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


Model Portfolio Value As of 26 December 2008

$ 478,550


24 December 2008


Model Portfolio Value As of 24 December 2008

$ 474,017

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 high 586.000.

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 downtrend.


23 December 2008


Model Portfolio Value As of 23 December 2008

$ 472,896

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, said General 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


Model Portfolio Value As of 22 December 2008

$ 481,215

Asian markets were 2% lower overnight and European markets are mixed at midday. Oil is at $42 and Gold is up $15.

GM and Ford have company:

Toyota 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


Model Portfolio Value As of 19 December 2008

$ 503,510

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 day.

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 banks. Yawn.

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 profit.

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

$ 506,098

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 on General 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

By Tony Crescenzi

RealMoney.com Contributor

12/18/2008 9:06 AM EST

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 5.4%.

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 course:

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 business.

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


Model Portfolio Value As of 17 December 2008

$ 517,454

"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.

U.S. futures indicate a pullback this morning. That will be a good test for the bulls- and the bears.

Investors 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.

We did 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 selling Intel.

We have 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 year low.

We also 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:

Newell Rubbermaid, 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 downturn.

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.

This comment on the Fed action yesterday is from Diane Swonk, chief economist at Mesirow Financial.

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).

Of greater 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 front.

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

$ 510,055

“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 what?

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 0.25%.

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 advice.





We think it is too late to worry.

The 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.

Since 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 that.

The 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)

The value of your house and rental property have also dropped and yet you aren't asking about selling them.

We 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.

By 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.

Nothing 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
Arne Alsin
RealMoney.com Contributor
12/16/2008 10:01 AM EST
: http://www.thestreet.com/p/rmoney/investing/10453453.html

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 liquidity squeeze.

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 three-fold.

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

$ 472,209

Today Barack Hussein Obama was elected President of the United States by the Electoral College.

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 money deposited.

If it looks too good to be true, it is.

There's no such thing as a free lunch.

An emperor without clothes is just a naked man.

We know that untrustworthy people are often greedy. We can protect against that to some extent.

It's harder to legislate against greed and willful stupidity on the part of those doing the trusting.

When 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 portfolio's downside."

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 as "ridiculous."

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 bit naïve."

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:

Goldman Sachs also had the enviable record of never losing money, and of also having the supposedly smartest guys in the room.

Yet 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.

Next week, Goldman Sachs reports.

We'll see if they are still the "smartest guys in the room."

Someone 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!

But isn't that the definition of a ponzi scheme? Get money from other investors, so you don't have to show investors your books?

At least with the banks, the Government is in on it.

But 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 demand deteriorates.

The 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.

In 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.

But both groups saw prices recovering in the near term.

Murti's 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.

"We 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 runs deepest.

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

$ 492,688

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 tomorrow.

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 folks.

At 9am the Treasury said that it will prevent auto maker bankruptcies until the new Congress reconvenes in January.

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 Condition
By Dick Arms
RealMoney.com Contributor
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 oversold.

We should be getting close to a resumption of the advance that began on Monday.

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 ago:

Winterland 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 ability.

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 just yet.

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 the employees.)

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. FitzSimonshttp://i.ixnp.com/images/v3.59.2/t.gif, 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 Citigrouphttp://i.ixnp.com/images/v3.59.2/t.gif and Merrill Lynchhttp://i.ixnp.com/images/v3.59.2/t.gif, 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 Stanleyhttp://i.ixnp.com/images/v3.59.2/t.gif, 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 release.

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 folk’s money.

John Thain 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 ago.

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 all.

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 ago.

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 declining."

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 natural-foods chain.

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 trading yesterday.

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 incidentals.

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.

Crist's 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


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 stabilizing act.

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.

The uptick 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 among investors.

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 everyone else.

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


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 headquarters.

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 said.

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 its investments.

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. Miller.

[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 Mac.

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 a share.

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 both.

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 us."

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' shares.

Mr. Peters stopped accumulating Freddie shares. Mr. Miller kept buying them for his Opportunity Trust portfolio.

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.

New Rules

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 saying.

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 comment.

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 losses.

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

$ 481,854

10 December 2008

Model Portfolio Value As of 10 December 2008

$ 506,258

9 December 2008

Model Portfolio Value As of 9 December 2008

$ 496,586

8 December 2008

Model Portfolio Value As of 8 December 2008

$ 511,780

5 December 2008


Beginning this 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 gasoline?

We are back and loaded for bear.

(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 $9.3 billion.

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 recover.

"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 investment.

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 mortgages.

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 Vegas."

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 away.

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 younger.

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 week.

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 families.

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.

Estimates for 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 1%.

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 economy.

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.

The Parable of the Mustard Seed
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 be reaped.

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:

  • stability 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;
  • credit improves;
  • stocks react more positively to poor news; and
  • the 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, for now).

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 institutional investors.

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.

From http://boards.fool.com/Message.asp?mid=27207603 :

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 feels like.

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. 4-573
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: http://oldprof.typepad.com/a_dash_of_insight/2008/01/will-bear-stear.html. Like 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 stocks.

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 Bloomberg News.

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% in November

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
By Scott Rothbort
RealMoney Contributor
12/1/2008 4:29 PM EST
URL: http://www.thestreet.com/p/rmoney/etf/10450667.html

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.

There 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.

We need to look at these phenomena from three perspectives: ETF construction, trading activity and non-futures-related ETF/stock manipulation.

ETF Construction

ETFs 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.

For 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.

A 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.

The 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.

Most 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.

Trading Activity

Many 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.

For 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




38.75 billion





Short S&P 500 ProShares

0.23 billion





Ultra S&P 500 ProShares

5.29 billion





UltraShort S&P 500 ProShares

14.14 billion





Emini future

132.5 billion





Source: LakeView Asset Management, LLC

It 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.)

I 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.

Most 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.

Non-Futures-Related ETF/Stock Manipulation

There 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) .

Moving 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.

For 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.


  • Market volatility tends to be a result of futures activity rather than ETF activity.
  • Index ETFs and derivatives are more likely to impact the indices and are not targeted at individual stocks.
  • Sector-specific ETF trading can have an impact on individual stocks.

At the time of publication, Rothbort was long the Ultra S&P 500 ProShares and Ultra Financials ProShares, although positions can change at any time.

Scott 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.

Immediately 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 article:

Jim Cramer Blog
ETFs Are Too Powerful
By Jim Cramer
RealMoney Columnist
12/2/2008 10:35 AM EST
URL: http://www.thestreet.com/p/rmoney/jimcramerblog/10450841.html

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.

From www.slate.com:

Who's the World's Worst Banker?

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 2004 for
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 slumping.

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 tale.)

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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