Capital Preservation

Hi Pop, glad to see you are working with some brokers and getting the ball rolling. Here's my thoughts on what's going on in the market and a few investment ideas on the bottom...

In my opinion the politician's are playing russian roullete with the credit markets. Forget the stock market the credit markets is a much more dangerous and complex animal. An animal growling in the closest... no one is really able to quantify the size of the beast yet though.

But here's what I know... In terms of Housing prices to Gross Domestic Product (this is all the products and services the country makes, and essentially this is what backs the dollar since being off the gold standard) this is the biggest bubble in history. Bigger then 32' (on an GDP adjusted basis).

Good news - There is some talk of getting around the red tape of congress and the house and just using the FDIC to bail out and structure deals like they did today with Wachova and Citi. FDIC sweetened citi deal by limiting there potential loss on a portfolio of 213bil to only 42bil...

I got to say the NPR news clearly anticipated the log jam in the house/senate this morning I wish I would have acted on it... (buy SDS's)

More good news - There are some technical indicators that might indicate a bottom new HILO ratio, Selling volume verse buying volume was at 98% (wow), and the VIX a general indicator for option premium (aka - "Fear" or how expensive the insurance component is of all S&P 500 options) at record levels...

Bad news: Perception drives the market...The govie looks incompetent (bush needs to get up and explain this thing and push it through).

My girlfriend called me wanting to know what's going on w/ the market? (in any other market I would call this a buy signal, b/c when the novice gets out this is when the experts get in). There is however a very different dynamic here, when the general public gets nervious is exactly when this thing may become a real crisis- when the credit market contracts to a halt.

Lets get technical (technical anaylsis that is):
Past: we had a strong bull run in stock from 1981 to 3/10/2000... During that time the market averaged 16% up per yr even with 1987 when it lost 36.44% in a matter of a few weeks. After september 11th the market tumble 50% over the coarse of two years.

Reversal patterns: Both market bottoms where determine when the market retested lows price and THEN slowly built up steam (in 87' the market went down to 214 during the panic and then retested at 219 to build a base before taking off on an uptrend). After 2001 fall, the market had three BIG trading days that touching 775, 768, & 788 each one the low of the days trading. Once the market esablished a base it took off upward. General speaking the market is like a ocean liner it turns slowly...

Present: The market is down 30% over the coarse of almost exactly a year. Typically the markets find support in the past around the golden ratios 30ish, 50ish % down (as above). Right now it's a 1106 which is right about 30ish (if this is the turning point you'll see price bounce tomorrow or very soon only to revisit that price area again a few week or even months later).

Future: I think the govie MIGHT have been able to make 1106 the bottom, but what I think is actually more likely is the S&P will retrace 50% t0 768 (Scary I know). I think this crisis is more proportional in scope to the post Sept 11 (actually mostly proportional to the tech bubble). Although September 11 had a huge psychological effect, you could draw far more paralells to the rapid expansion of technology sector creating false (non productive) value and post 2001 goverment stimulas (fed reducing rates to 1%) and spending (war in iraq, without the spoils) creating false value.

Key levels to look for support on the way down: 1171, 1077, 768... (based on fibonacci numbers, the numbers represent perfect proportions based on natural systems. Abit mystical I know but they hold up especially if the markets can't fundamentally determine value).

Tip bits
The new york times reported that, post lehman collapse, Blankfein (goldman sachs CEO) was the only wall street chief exec to attend a meeting at the NY FED with a group of regulators and bankers led by Paulson (former CEO of goldman) to discuss what to do about AIG. The conflict of interest is that Goldman has reportedly 20billion insured by AIG.

Walking away with the cash: Paulson when asked to join the treasury had to cut ties with any corporation. So he was able to exercise all his goldman stock options for a cool 500mil (lucky bast*rd got out near the top of $200, currently 120), here's the best part No taxes...

I'm not questioning the mans actions b/c i think the were good... but wow!

ETFS vs MUTUAL funds
Basic discription:
http://www.fool.com/etf/etf02.htm
Argument for ETFS:
http://biz.yahoo.com/pfg/e09etf/art012.html
There is 3 pages read all three
(aside: I don't care how we'll you know the guy, if your broker says he doesn't know what an ETF is he is either not qualified, or he is lying. I would not hesistate to bet the farm that the guy has ETFs in is own portfolio).

Investment Idea: Below are regional banks and thier price to book ratio (For example Nat City stock costs .06 cents for every dollar of break up value- Yet just another indication that no one knows how to value these mortages.) If an these guys can pull thru should have nice returns.
NATL CITY CORP 0.06

SOVEREIGN BANCOR 0.19

REGIONS FINANCIA 0.29

FIFTH THIRD BANC 0.54

KEYCORP 0.59

MARSHALL &ILSLEY 0.72

ZIONS BANCORP 0.73

COMERICA INC 0.90

SYNOVUS FINL 0.99

1) IAT (ETF):
iShares Dow Jones US Regional Banks Index Fund is an exchange-traded fund incorporated in the USA. The Fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones US Select Regional Banks Index.

2)I sent you a story on Nat City this afternoon, based on that story I bought 200 shares at 1.50... I figured it's worth a $300 gamble when the upside has got like 5 bucks or more the a 200% return... If I'm wrong and that bank goes under, news like that would have to push up my gold position higher.

Good night and lets talk tomorrow...

Strategies...

COVERCALL/BUYWRITE: If there is any stock that your waiting on it to get to a target price before you sell consider this strategy. Sell a call options against shares of stock in portfolio. Selling a call option will create a credit to brokerage account (premium), that premuim represenst the cost the buyer is willing to pay you to hold a contract that allows them to buy 100 shares at a set price prior to expiry of the contract.

Example: I have 100 shares of ait at 26 and a target of 31. I can put in a limit order to sell at 30 (my target) or sell 1 30 feb call for 1.75 (thats a 30 strike, febuarary expirary). Price goes up (past 30) - you recieve 31.75 per share as the stock gets called away from you. Price stays the same- you make 1.75 and continue to hold the stock. Price goes down- you make 1.75 and you loss money in the stock you still hold... Can you say Win-Win-Win situation...

Also: per our converation a few nights back I found a good ETF for you: PFM
PowerShares Dividend Achievers Portfolio is an exchange-traded fundincorporated in the USA. The Fund seeks investment results that correspond to then Broad Dividend Achievers Index, which tracks stocks that have increased their annual dividend for 10 or more consecutive fiscal years.

Their top 10 holding
Wal-Mart Stores Inc, General Electric Co, Exxon Mobil Corp, Procter & Gamble Co, Johnson & Johnson, AT&T Inc, International Business, Chevron Corp, Bank of America, CorpPfizer Inc

Insurance

Ok, there are two types SIPC (protect brokerage accounts) and FDIC (deposit accounts)...

SIPC up to 500k if the brokers goes bankrupt (100 of that amount covers cash as well). This is meant to protect segregated funds at a broker. The regulations mandate the equity in investments your own is yours and banks must not "commingle" thier own funds with customer funds for any reason. So if the bank is on the level you equity should always be readly available and never used to finance any of the banks activities. How commingling of funds is not unprecidented, Refco definitely did back 2 years ago.

FDIC- Banking cover up into a 100k... If you have more the a 100k in cash in a deposit account open another account at another bank.

Game Plan...

It's time to put pen to paper and get over any inertia that may prevent sound action. It is my belief you plan for the worst first aways. When you have that plan on paper then you can act more rationally whatever your veiw point is... Traders know that fear is the most distorting and dangerous emotion. I have a plan in place and you'll sleep better (even if it's on the coach in front of the TV).

What's your plan?

Here's how I'd would start:

1) By the end of this week you should have a brokerage account that allows you to trade on margin and buy and sell uncovered option. A margin account allows you to short stock and options allow you to take advantage of market volatility strategies. By no means should you be trading anything on margin or option strategies unless you know what the risks are (that why it is good to have a son that know's those markets and builds those apps). Contact you current electronic broker and let me know who it is... Might want to avoid etrade, some how they got caught up in this subprime a few months back.

2) You have to start evaluating how your going to fund these accounts. I suggest you start looking at you losers that will give you the most tax benefit. Let go of the notion, that I know haunts you, of capital gains A) Your paying cap gains b/c you made money let the govie have thier due (holding on makes you slow and bloated) B) embrace the idea of liquidity (flexibility) and diversification (resiliance)... Get me your stock's I get us some stuff to look at. Do this soon...

3) Go to http://product.half.ebay.com/Conquer-the-Crash_W0QQtgZinfoQQprZ2296498 and buy this book. "Conquer The Cash - You can SURVIVE and PROSPER in a Deflationary Depression." By Rob Prechter ... It's the ultimate safe money guide. Read Charpters 10, 11, 13, and 33 and in 30 minutes you know more about how to protect your wealth in the worst market environment then your broker... Then go sign up to the website to get newsletters sent to your emailed http://www.elliottwave.com/conquerthecrash -> key word "buying" to get a login...

4) We have to get investment Ideas and the symptoms of the worst case scenerio's written down. I'm starting to do this via Blogs. Checkout http://www.marketsmove.blogspot.com/

5) No trades until you have a plan

I want a concrete plan in place by next week.

We're seeing history... It might very well be the kind of history that only academics remember and in retrospec the masses say "Oh I remember that Lehman thing" or it might be the kind of history where people say "how could this have happened?" I'm planning for the second and hoping for the first. I think that is the most prudent thing to do... I believe the downside trumps the upside. I'd rather lose out on the potential profits of a rally then lose my savings. Forget greed (even though "its good") and be happy with what we have. Make this your #1 on the to do list. Regardless of what happens you won't regret it. You'll sleep better. Love ya

Assessing the situation

Hi Dad, this is a blog. This blog is only priviledged to be seen by you and I at this point. You can can contribute to the blog. I try and make it a point to read and pay attention to the markets more now then every b/c I feel we are witnessing history. Like a soap opera there are some interesting plots playing out right now. 158 yr old Banks (Lehman) are going in bankrupt, Bear and Merrill as well. All these banks had one thing in common they were NOT diversified, all were investment/trading trading banks and had no exposure to the retail deposits like our checking accounts. They were also aggressively leveraged. Lehman was geered 30-1. 30 dollars of dept to every 1 dollar of firm assests, pretty insane! You can see the streets concern for Investment banks like these by watching the stock prices of Morgan Stanley (MSCO) or Goldman Sachs (GS) both with no retail arm. These banks know it and both have mentioned that they are open to acquiring a retail banking ("Morgan Stanley's Mack Said to Consider Merger With Wachovia"). What's more disconcerting is that the credit crunch has floated over to more retail based firms like AIG ($70 to $4 in a yr) and Wachovia ($50 to $9 in a yr).

Enter the FED and TREASURY stage right: "holy intervention batman!"... Wait, a newswire just came through, the FED just bailed out Ford motor company. They wanted to diversify their portfolio... just kidding. But the Govie's interaction with market place is extremely unprecidented. Quick recap, the Treasury has now bailed AIG (85 billion to own 80%) and Bear Stearns, nationalized Fannie and Freddy, bought up some toxic dept, while the FED continuosly injects 10s of billions into the credit markets overnight, go back a couple months the fed cut rates without warning and outside of usually schedule (what was interesting is that the following day it hit the press that a Society General trader was able to unload a massive futures trade, 5 billion $ losser, If the market did not prop up, a trade like that could of created a panic! Hum- coinsidence?) And for the latest in good old govie intervention about 4hrs ago the fed annouced they will not allow short selling on a selected list of stocks. I don't want to get preachy - so I'll say this and move on. I think the FED and regulation (not the lack of it) is the reason why we are even in this mess. I can elaborate later... Now they have socialized this countries debt and in doing so are creating more debt. There is no such thing as a free lunch. There is a chance some of us are going to have to pickup someone else tab.

Ok... 0n to your portfolio vs the market
The broad equity market is down 20% over the past yr 7.61% over the past 5 days.
Your mutual funds 25% and 6.43% over the past 5 days.

I'll fax you over some report or hopefully attach them to blog...

For the short term the market is very excitable and nervious. Question has become is this going to be a recession or is this a great buying opportunity? I feel based on the actions of the Fed, the fact that in terms of % of dollars to lost GDP this is the largest bubble in record history, and the likelyhood that more companies may fail... I think the downside is still greater.

I going to throw a few projections at the wall for the very short term... The market is emotional (maybe at some points irrational). I would think when that happens certain techical indicators (price oriented) become useful. The fundamentalist, the values guy, can't come up with an accurate value in this market. How can you come up with an accurate value for Google when you can't even come up with a how the underline economy is going to grow. So will look at support and resistance, the most basic of basis. The are pervious highs (peak prices) and lows (troughs) to determine were price would tend to gravitate. Based on that:

Tomorrow the S&P 500 should be down to 1135 or 1.7%. With next solid resistance is 1060 or 8.1%.

On friday the S&P should get knocked down again and probibly harder, with this much uncertianty no one is going to want to hold a position they don't have to going into the weekend. Let us not forget Lehman happened last weekend.

Stop loss: If the market closes tomorrow in the upper range (1182-1210) of the previous trading then I would consider my view point up above wrong...

The plays:
ETFs (Exchange Traded Funds- trade just like an equity, just like buying a stock, same fees and everything...):

1) DXD - Replicates the price movement of selling the Dow x2. (For every dollar down in the DOW you make 2)
2) SDS - Selling the S&P x2
3) DGP - Buy a gold fund x2. Flight to quality... This on was already up 20% today but if I had to put a target on this on 15% from today close before it hits its first real resistant (22.80ish)

So we'll see...

Going to bed. Will add more soon. Let me know how you would like this to evovle.