Stocks for the Rest of Us
Archive for September, 2008
How To Handle The Bear Market Volatility
Sep 16th
Simple, don’t do anything. Now by that I dont mean bury your head in the sand and pretend like nothing’s happening. If you’re trapped long wait for the inevitable bounce and make a respectful exit. There have been at least 2 chances to do this since the market turned south. Unless you’re a daytrader there’s no reason to try to be hero down here and call a bottom. Why is it that everyone always has to try and call a bottom? Why do we feel so compelled to be in the market and catch the absolute bottom that we risk our precious capital? There’s nothing wrong with admitting that this market is simply too volatile to try and time. I subscribe to the notion that as individual investors we don’t need to call the bottom. In fact, we’re much better off waiting for a new uptrend to emerge rather then attempt bottom-fishing the stock market. How many bottoms have we had this year? Everyone thought the Bear Stearns bailout was the bottom. Nope. Then we had another bottom in July. Still wrong. How many more bottoms do we have to have before people give up? That’s probably the magic question because when that happens we’ll truely have a bottom.
Having said that I have to admit that today felt a little bottom-ish to me as panic and uncertainty were everywhere and we had a huge reveral today with a strong close. I wouldn’t be surprised if we rally off the lows but I say sell into it. There’s no reason to think that the worst is over and that we can’t head lower. How many more institutions can we nationalize? How much worse can it get? No one really knows so until the market starts acting better, decrease your positions and trade small if you must trade.
Nucor, NUE raises guidance
Sep 15th
Through all the financial muck today, steel maker Nucor raised Q3 guidance today. I would keep an eye on this one. It’s been beaten down pretty badly and could be ripe for a rally. Today’s news could be a catalyst for re-newed interest in the steel names. Keep an eye on the September lows.
Wall Street Sell Off Ends Badly
Sep 15th
The selloff today ended terribly. Usually those washout gap down openings lead to a higher close but not this time. This is an indication that investors are starting to realize the magnitude of “the great unwind” as Bob Marcin over on real money likes to call it. At this point if you’re fully invested you have no choice but to ride out this storm and maybe buy some downside protection on the next bounce. It’s pretty clear that we are not out of the woods yet or even close to being out of the woods. I would continue selling the rallies. Having said that, wall street will recover, it always does. For me, it’s not a matter of catching the bottom, it’s much more important to protect my capital and ride the trends. The pundits on TV have been calling the bottom since March and it simply just hasn’t worked. Sometimes the hardest thing to do is nothing. That’s what I did today. Not a single thing. I’m 60% invested in my retirement account and about 10% invested in my trading account, it’s been this way since December. It’s been hard resisting the temptation to do something but there just isn’t enough clarity to make me feel comfortable putting my capital to work. Sure I’ve missed some big rallies but I’ve also missed a whole lot of downside. If we get a few more bad days ahead of us we’ll be setting up for a nice big bounce that could last for several days or even weeks. I’ll be looking to pick at some of the global growth stuff such as infrastructure and energy. I like COP, XTO, JEC, SGR, NUE, and RIO.
Kudos To John Thain
Sep 14th
I have to give it up for John Thain over at Merrill. According to CNN, Merrill Lynch has reached a deal with Bank Of America to be acquired for $44 billion, or $29/share. That’s nearly a 50% premium over the last trade on Friday. I’ll bet Lehman could have done the same thing several months ago had they had the foresight. I think Thain realized that once Lehman was gone the spotlight would turn to them. I wouldn’t be surprised if he’s had this deal in the back of his head for awhile now. Although Thain has been very aggressive in raising capital and selling assets it’s simply not enough, the bears smell trouble brewing and have been hammering the stock. With both Lehman and Merrill out of the way the spotlight will now turn to Goldman Sachs and Morgan Stanley.
Monday’s Open Is Going To Be Rough
Sep 14th
With Lehman Brothers facing bankruptcy protection and Washington Mutual teetering on the edge it looks like we’re going to be testing the July lows sooner rather then later. Monday should provide for some extraordinary trading opportunities as we will most likely open down 3% on all the major averages. If you’ve got the stomach, you’ll be able to pick up some Goldman Sachs on the cheap. So far, my best trade to date this year was buying Goldman Sachs the day Bear Stearns collapsed. It was an 18% trade overnight. This Lehman debacle will undoubtedly produce the same opportunity but whether or not the outcome is going to be the same is anyone’s guess. Let’s not forget that Goldman Sachs is actually still quite profitable. If you’re going to trade tomorrow be sure to keep those stops tight.
Washington Mutual Could Fail
Sep 11th
Washington Mutual, ticker symbol WM, appears to be the next big failure. The stock is getting hammered and their ability to raise capital is diminishing. If you’ve got any accounts there over $100k now is the time to get that out. Luckily, if you’re poor like me and you don’t have 100k in liquid cash it’s not a concern. I’m still thinking about locking some money up in that 1 year 5% APY CD that they’re offering. As long as it’s FDIC insured you should be good to go.
UPDATE: I wouldn’t be surprised if it’s Jamie Dimon to the rescue. I’d actually be kind of glad. I like JPMorgan. I’ll bet the WM board members are wishing they took that $8/share offer Dimon made several months ago.
How To Raise Your Credit Score
Sep 10th
As I watch a barrage of personal finance shows on television everyday it appears that the number one thing people ask is how to raise their credit scores. It’s actually pretty simple. You need to eliminate debt and keep your credit utilization ratio low. The first thing you need to do is go to annualcreditreport.com and pull your credit report from all three bureaus. It’s free to do on a yearly basis. Here’s a breakdown of how your FICO score is computed.
Fico Score Breakdown
The main thing is of course your payment history. Unfortunately, if you have some delinquent payments those records stay with you but paying them off will obviously help. There’s nothing more you can do about that.
Next we have amount owed. When you apply for a loan the potential creditor takes a snapshot of all your accounts and looks at how much debt you have as a percentage of your credit limits. Ideally you want this to be under 30%. So if all of your credit card limits add up to $10,000 you want to have no more then $3000 as a total balance due on all cards. If you’re like me and you charge just about everything to get airline miles and pay your balance off at the end of the month then you might want to consider calling your credit card companies and asking them to bump up your limits. You’re not actually going to use the additional credit but it will decrease your credit utilization ratio effectively raising your FICO score. This is why it’s important to NEVER CLOSE AN OPEN CREDIT ACCOUNT. Closing available credit will increase your utilization ratio and decrease your credit score.
The last major portion of your credit score is your credit history. This is simply how long you’ve had your credit lines open. Unfortunately Fair Isaac corporation has done away with being able to inherit credit history from other accounts to which your name is added so time is the only thing that can help here. However, getting your name added to an account with a large credit limit appears to still help as it will raise your utilization ratio. Hope that helps.
Fannie Freddie Takeover Rally Was Short Lived
Sep 9th
The fannie/freddie takeover rally was short lived and is causing some serious pain in numerous sectors. Most notably the commodities are still getting slammed. I tried to bottom fish FCX in a previous post but got stopped out almost immediately. This type of environment empahsizes the need for discipline and objectiveness. No matter how bullish you are or how cheap you think something is, IT CAN ALWAYS GET CHEAPER. Using stops, trendlines, and support lines will inject discipline into every trade and keep you from losing tons of money. For now, I’m still sitting with extremely high levels of cash waiting for an uptrend to appear. Until then, I’m sticking with smaller trades and tight stops.
Thoughts On Fannie Mae Freddie Mac Takeover
Sep 7th
While I’m normally more of a free marketeer I have to say that I’m glad the government has decided to takeover Freddie Mac and Fannie Mae. Yes, I understand they will be using taxpayer money to do so (most likely in the form of preferred stock) but I think it will be worth it. Fannie Mae and Freddie Mac are vital to our housing market. Because of there implicit backing by good ole’ Uncle Sam they have the ability to borrow money at an extremely low rate. This in turn, allows them to buy mortgages from banks and brokers who can then pass on the savings to home buyers. This liquidity in our mortgage market keeps the cost of borrowing money lower then it would otherwise be.
I think Hank Paulson may be executing the greatest trade in modern history. According to this CNN article, Pimco’s Bill Gross believes that as taxpayers we might even be able to make money on this whole deal. The Treasury will effectively be buying low and hopefully selling high once the housing market finally recovers (which it eventually will). As long as Uncle Sam has the money to backstop the two institutions for several years while the business (and stock price) recovers, he’ll be able to sell that preferred stock at a huge gain. Don’t forget, in a normal market, the business of packaging and selling mortgages is quite profitable. However, at the moment they simply lack the capital to continue operating through the housing depression. When you think about it, It’s really no different then a huge private equity firm coming in, taking out management, fixing up the business and selling it for a profit once it’s all done.