Cash Is King...

I know people always ask the question what are you doing right now?!? And that is a difficult question because many of us out there are so confused. So I always tell everyone to remember one of the most important rules that we have here at Urbanomics and that is "keep your ear to da streets". Read, read, and when you're tired read some more. Find out what smart people with big money are doing. For example, let's take our friends over in the hedge fund industry who many wonder what they are doing with their cash during these tumultuous times. I began to do my research looking to hear how these kings of cash are managing their money. Thanks to the Wall Street Journal we got an insight into the management of 3 of the industries best, Steven Cohen, Israel Englander and John Paulson. The reason why we are off on this search is to either confirm my initial sprint to cash and short term bonds or to rethink where I may have gone wrong.

To make a long story short, The Wall Street Journal reported the hedge fund managers have come to a similar conclusion we made here and Urbanomics by deciding to take a TV timeout and MOVE their funds to "money-market funds and other short-term securities". There recent reallocation is summed up here in the following points:

• Steve Cohen’s SAC Capital Advisors will leave 1/2 of their $14 billion money markets until year-end.
• John Paulson's Paulson & Company’s is moving a large chunk of their $35 billion into cash.

The reason why this story peaks my interest is because it's good to see that some of the smartest guys in the business agree that these are very unusual times. With so many things not clearly understood such as the bailout program, mortgage crisis, liquidity issues, and rise in unemployment its best not to be to heavily exposed. That is why my earlier recommendation for your 401K program is to take a similar approach and move to the sidelines. I have been following closely and do believe that I have seen a support level that will eventually allow us to get back into the markets at the end of the year or sometime next year. However, I do believe the turbulent times are providing an EXCELLENT opportunity to find and own individual stocks.

Everyone should tread very carefully and wait for extreme undersold levels in some of the best companies in their industries or stocks trading at irrational levels. I often like to analyze historical price patterns to determine where support levels exist. A few names that have come to mind at this point are:

National City (NCC) - After reviewing the historical price and charts, I loved this stock at $1.25 and 1.75 with the first target being the 52 week low. Three weeks ago I picked up NCC when it approached the 1.75 and from that point on it has been a thing of beauty. I sold a majority of my stake when it crossed $3 and the rest last week after the announcement of the merger with PNC Bank.

Visa (V) and Mastercard (MA) - Now you may question why I would mention these names when I took a moment in previous posting to blast Capital One (COF). Well V and MA are a little different in they just process transactions and have limited exposure to the credit risks of having actual bank customers. They may and are projecting a decrease in the number of transactions they will process but the trends are in their favor. We live in a world that is moving away from cash and onto plastic. And what's even more dynamic is they continue to see a dramatic increase in debit transactions. These transactions are essentially cash like transactions because the customer swipes their debit card, which takes money out of their bank account, to pay for goods.
I have seen support at the price level of 47 for V, but the initial public offering (IPO) price of around 44 would allow you to own this stock as if you were an initial owner a year ago!!!
MA is a little more difficult and looking at charts, I would expect to see support at the price level 145.

Discover Financial (DFS) should also benefit from its ownership of the PULSE network which handles debit card transactions, however like other pure credit card companies like COF a slowdown in the economy will like affect this industry. DFS also see brighter days after the recent settlement with V and MA for antitrust practices. I would expect to see initial support and levels near the 52 week low of 7.50.

Disclosure: I own or am actively looking to add shares of the firms mentioned above at the recommended price points. As noted above, NCC has been sold last week.

What's In Your Wallet...

Its for damn sure not a Capital One credit card and I can tell you that. Now I have nothing against Cap One but they may be cutting back on their crazy commercials pretty soon. The reason why is because I have been posting for awhile now that our economy is showing signs of the dreaded "R" word recession. Yup, I am proud of myself today as I used the "search" feature on the site to determine when was the first time I began identifying a spiraling trend of distress for the average American and found out that my postings almost bring us back to exactly a year ago!!! Check it out: http://urbanomics.blogspot.com/2007/10/welcome-to-good-life.html

Notice, a year ago I began mentioning the developments of financial institutions currently plummeting or no longer in existence as a public companies.


And for you lazy folks, here is a quick excerpt from OCTOBER 24, 2007:


Let's see, we have major financial companies, Bank of America, Merrill Lynch, Citigroup, and Wachovia Bank all getting hammered by the weakness in the credit markets and the mainly through the bad investments that were made. Add to that the mortgage crisis in the US which has led to homeowners everywhere defaulting on their homes. All the companies in these areas, which were once living the "Good Life" are singing the blues and laying people off. Then there is that pesky thing called energy...it currently sits at levels that are unthinkable. Oil is reaching levels of roughly 90 dollars a barrel and predicted to continue to rise. Now maybe I am too young to really know what I'm talking about but there has been the "R" word thrown out by some analysts and that would be RECESSION and from what I am seeing in the markets I don't think that some of the whispers are too far off.I am no mathematician but poor financial markets + bad consumer debt + rising foreclosures + declining property values + layoffs = something is wrong (possibly RECESSION). I am not comfortable with the volatility in the market because as companies are beating earnings or being upgraded they go up and then immediately the market brings them right back down due to all the negative news.


Now you see why I say if I am able to logically come to this conclusion over roughly a year ago where were the geniuses in the Federal Government who are supposed to put policies in place to navigate us through these difficult times! Good question, but we really want to know where do we go from here and the likely answer is probably down or sideways. I haven't put that much thought into it but logic now tells you that the perfect storm has been created. All forms of creating wealth have been completely taken to the woods and shot and now there is not much left to do but clean up the mess. This is what I mean, some may argue there are three main avenues for wealth creation in the United States: Real Estate, Investments, Entrepreneurship. These three avenues have been taken out in the following order:


Real Estate - The first area to get hit and many felt the pain from real estate brokers to new homeowners. The worst may not be behind us unless something to do something to stabilize foreclosures. This decline in real estate lead to the decline in Investments.

Investments - The crumbling real estate market blazed a path of destruction that has hit the stock market with breathtaking speed. Banks, investment banks, insurance companies and other institutions have been impaired. This is leading to the decline of the American economy and entrepreneurship.

Entrepreneurship - The impact of the real estate market and now the stock market is leading to layoffs and a slowing down of the economy. There are less investments to start businesses and every day workers like you and me are cutting back on our spending. This will now impact businesses and franchisees across the country. The next decline in my mind will be Retailers, Consumer Services, Restaurants, and Travel and Leisure sectors. I say this from experience as I am not eager to travel, cut back on my credit card spending, limited eating out, and even if my clothes don't fit they will have to be good enough for now.

This means that the pain in the stock market, your 401K portfolio is not over. We will now see companies start to feel the effects in these sectors:

Credit Cards - Capital One
Retailers - Saks, Nordstrom
Restaurants - Brinkers International
Travel and Leisure - Hotels, Airlines

Short these sectors as the recession will now enter a downturn.

Jim Rogers ~ Market Expectations

When trying to gauge how low the markets can go, I often do a couple of things, and that is to try to find out what is the worst cause scenario and an have an expert tell me in their words. When their are folks like Larry Kudlow telling the people to buy into a falling economy I like to hear the other end of the spectrum so that I can come to my own conclusion. So my interest in understanding how bad the economy is took me to statements recently made by famed investor Jim Rogers. Here are recents comments compiled from Bloggingstocks, Moneymorning, and CNBC:

"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks the economy desperately needs. "

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."
Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."

Where he expects the pain to be most intense is on Wall Street. He says he hasn't covered his short positions on the investment banks or Citigroup (C, Fortune 500) and won't for a while. "Those things are going to go way, way, way down," says Rogers. "The investment banks are down now because of the problems in the credit market. Wait until the effects of the bear market come along. If you just go back and look at other bear markets, investment bank stocks have gone down enormously. We haven't gotten to that stage yet. It's going to bring their balance sheets under duress. This is going to get much worse. But that's where there have been excesses for the past decade or so. And whenever you have a bear market come along the great excesses of the previous period are the ones that get cleaned out the most."

Markets do not trust the governments' plans to keep struggling banks alive and investors will only calm down when the companies with bad assets are allowed to go bankrupt, legendary investor Jim Rogers, CEO of Rogers Holdings, told CNBC on Friday.

"The way to solve this problem is to let people go bankrupt," Rogers said. "Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren't sound and we will start over. This is the way the world has worked for a few thousand years."

The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Rogers warned. "We're setting the stage for when we come out of this of a massive inflation holocaust," he said. And the plans are unlikely to fend off a severe economic downturn, as the crisis starts affecting all walks of life. "We had the worst excesses we had in credit markets in world history. We're going to have to take some pain," Rogers said.

Economies who did not take part in the subprime bonanza are likely to suffer along with Wall Street and the developed economies as the crisis unfolds, he warned. "What about all the people in countries that minded their manners, saved their money, didn't get overextended and now all of a sudden they're being asked to bail out a bunch of guys on Wall Street who were incompetent at best and some of them crooks?" "I thought it outrageous that anybody has to step in a bail out a bunch of 29 year olds driving Maseratis," he said. There are not many safe havens in the volatile markets, he said. "I have an enormous amount of cash and I've been using it to buy more Japanese yen, more Swiss Francs, more agricultural products… there's a liquidation phase going on, where everything is being liquidated. They're selling everything in sight."
"In a period like this the way you make money coming out of it is to own the things were the fundamentals have not been impaired," Rogers added.

Government, Policies, and Wall Street...

We often forget how government policies and Wall Street impact our lives.

One of the biggest adjustments in everyone's lives was the shift towards everday American's funding and managing their futures. Policies have created new instruments such as 401K plans, 529 plans, and individual retirement accounts to move Main Street America into funding and managing their family's future. In the past, you may have had a pension that rewarded your hard work and productivity but now that is often not the norm. All three instruments mentioned above empower you and I, as investors, to take full advantage of what the stock market offers. However, the downsides to these instruments are there are often limited investment choices, cumbersome rules, and not enough financial planning advice. This is very evident as we see sharp declines in the current market. 401K plans, 529 plans, and individual retirement accounts are the very things that were created to ensure our cushy retirement and reduce the burden of the rising costs for college.

Due to the fact that these instruments are so important to so many people, you would like to believe that we would be equipped with all the "tools" to make safe, sound, and educated investments. However, there are a few potential conflicts that lay underneath the surface:

Limited Investment Options - 401K plans are managed by your employer and often there is a slight conflict because an employers main goal is to manage costs and meet quarterly earnings projections. An area that is often adjusted for costs is the management and availability of "OPTIONS" given to you and I to make the necessary choices to fund our retirements. Hank Paulson often talks about needing the necessary tools to assist the country in getting out of this crisis. Well I want to throw one OPTION out there, why not give each of us unlimited OPTIONS to manage our retirement portfolios. I have a standard brokerage account and the options available to the investing community are different that the limited choices in my 401K plan. I have the ability as an investor to make money or simply hedge my portfolio during periods when the market is down...however those choices are not made available to me in my 401K plan. And if you are wondering can it be done efficiently...the answer is yes as Exchange Traded Funds (similar to mutual funds) can be used for that purpose.

And to assist us with these new OPTIONS, I would recommend that additional financial education be given to assist American during periods where there may be many questions. Of course, you can always turn to websites and blogs like this for everyday questions.

Million Dollar Question - Why do you have this view?

Well I have noticed that as an investor, when I began blogging almost two years ago about the beginnings of a RECESSION, I shifted my portfolio to a direction that was heavily weighted in Technology and Dividend companies and recommended that you do the same. However, I didn't have the option in my 401K plan and often in my IRA account to make this type of decision. And things were not yet as such a difficult state as they are now, so I left my accounts unchanged because moving to cash accounts (Money Markets and Treasury Bills) would have been to drastic. But when the market turned negative very quickly, I did not have the OPTION to use Exchange Traded Funds to benefit from funds that make money when the market is negative. At a minimum level, I would like to use these funds to hedge against what I have just witnessed for the last month. And how critical is the availability?!?

Well I want to offer an example: Most of our portfolios are in line with the markets and are down roughly 30-40%. Look at my PORTFOLIO TRACKER and over the span of 1 and 1/2 days I recommended picking up the Exchange Traded Fund, DXD. DXD goes up every time the Dow Jones goes down and it doubles the amount that you make during that period. So the markets each day were down on average 5-10% and buying the DXD could have returned in excess of 20% while the stock market was declining! This is a great hedge until the markets return to normal, however, you do not have that option in your 401K plan but I do as an investor. As government uses this opportunity to reform a hard look should be given across the board at ways to improve the process.

Dark Knight ~ The Economy

Or should I saw dark nights and days are hovering above the economic horizon (the only idiot that can't see this is Larry Kudlow...who thinks this is just a blip in an economic "Goldilocks" rally) What do I mean by this...well I won't act like the politicians and keep telling you about my record on how I got this right (but if interested see my last post)! Because at this point in the game, pats on the back won't do because I believe we are in a seriously bad spot right now in the economy. I am going to continue to break course from my usual buy and hold mantra and say that we are in turbulent times and with the actions taken by the federal government make it difficult to take a historical perspective and apply it to today's situation. The fact of the matter is things are changing very rapidly...in ways that we haven't seen before and even your smartest people are having trouble getting this right.

Backdrop:

And I know that you are often told if you are young investor then just weather the storm and it will be alright. But as a 20 something that has seemed to be ahead of the curve of the direction of this unbelieveable storm that is now upon us, my interpretation is to head to safer ground until the storm passes. Why because we've been ahead of the game a few times now: I have written posts using logic and my very basic understanding of Econ 101 to identifiy the potential for a housing bubble...then we were ahead of the curve when we combined the everyday realities ofsoaring energy and food prices to point out that the average person on MAIN STREET (i hate this term) was already feeling the effects of inflation!

The Federal Reserve finally caught on and to their credit took some action to combat the inflationary pressures of soaring food and energy prices, however, one problem was still left unaddressed and that was the housing bubble. Limited action was taken to help main street solve the mortgage crisis which spilled over into Wall Street. Wall Street felt the effects through deteriorating mortgage backed securities and a rising waves of credit default swaps (basically insurance to investor when toxic securities began to crumble). You may call it karma but our inability to help main street has seriously crippled wall street. In my last post, I tried to highlight this problem and indicate that I believe that even with a much needed bailout package we haven't truly explored all of our options to begin to resolve this crisis and a 360 degree approach my be needed. To make a long story short, I believe the Fed now sees the need for some of the points that were raised in the last post, such as stepping in and being an intermediary for short term lending to companies (basically being a bank & lending companies money b/c the banks don't to and can't do it right now).

If you weren't aware companies are having trouble getting short term loans (for supplies, payroll, etc) and many get their loans through a market called commercial papers. We have previously raised a point in the previous post that the Fed may need to "act" as a direct lender and today, the Fed, concerned that the commercial paper market has dried up look to breathe life back into this market by basically providing companies with short term funding.

Current Environment:

I believe the storm is just setting in because of the aggressive and unprecedented steps that the Fed (some listed above) has had to take along with the most recent words from the Fed Chairman, Ben Bernanke. I know you don't think words are important but when one of the most financially informed persons on the earth believes that the economic outlook has "worsened", economic activity is likely to be "subdued", and the financial turmoil may "lengthen weak economic performance" we must all take heed. I am hear to tell you that the Fed Chairman never wants to scare us but he must paint an accurate picture...and when he uses words like subdued economic activity then we are probably going to experience some serious economic pain for a period of time.

Supporting Evidence:

~ Fed Chairman's recent words
~ Today's global rate cut by the US and other major central banks
~ Commercial paper markets (corporate short term funding) has dried up and the Fed has announced that is will step in and create a market to revive this much need source of funding
~ The economic slowdown and financial crisis is spreading GLOBALLY
~ The bailout will take time help financial firms solve their liquidity problems
~ Rate cuts along with other things historically push INFLATION higher

Problem Solving (Only my recommendation):

~ If you are an older person nearing retirement, you are in a very difficult situation and I don't have many solutions here

~ Middle aged people and people with children: you have a few other responsibilities that will need your immediate attention, so capital preservation will be very important (see below).

~ Young people, I am going against the grain and telling you to be concerned and focus on capital preservation also! Move 401K balances, IRAs and brokerage accounts into safer grounds and due to inflationary concerns that appear to be surfacing I would reallocate your portfolios in this order (if possible):

• Gold (as fears continue this is a global safe house and great inflation play)
• Treasury Inflation Protection Securities (this security give you the Treasury yield and accounts for the rise in inflation)
• Treasury and Money Market Securities (safest investment out there, but inflation will eat away at your savings, eventually)
• Bonds (even bonds have lost money but obviously a better option than stocks)
• Smart Dividend and Value Stocks - At this point I am recommending this only for your brokerage account and don't go for the highest yielding firms b/c they may be the first to cut their dividend (i.e., Bank Of America), which means that stock will then fall sharply. Look for the the stocks that will continue to pay a dividend and increase their payments (Kinder Morgan - Jim Cramer pick, Enterprise Partners - Urb pick, GE - Urb pick are names that will help you pay yourself during this tough economic period)

I'm Out!

Bailout ~ What This Means To You / Plus Other Solutions?

Alright, I have been very busy in the last few weeks and I can't believe that I haven't had an opportunity to write about what has been going on lately. It took a good friend to send me his write-up about what has been going on for me to get myself in gear and update you on what is up with the country, economy, and your portfolio. I had written a post on what the Bailout of 700 Billion dollars means to me as an investor and now I would like to trade hats and tell you what this means to me (and you) as consumers.

The first theme I would like to address is, if I could see the downturn of the housing market in February 2006 (http://urbanomics.blogspot.com/2006/02/huff-puff-blow-houses-down.html), why didn't the government see this coming. And if I could see the developments of a recession coming (http://urbanomics.blogspot.com/2007/10/welcome-to-good-life.html), why didn't the government acknowledge the recipe for a recession. This is what I wrote in the second post:

I am no mathematician but poor financial markets + bad consumer debt + rising foreclosures + declining property values + layoffs = something is wrong (possibly RECESSION). I am not comfortable with the volatility in the market because as companies are beating earnings or being upgraded they go up and then immediately the market brings them right back down due to all the negative news.

This theme is raised because in October 2007 I saw poor fundamentals developing and I believe the government had the opportunity to see these fundamentals and take action - mainly against housing and foreclosures! Limited action was taken against this crisis and no bailout plans were developed, so as a consumer this $700 Billion dollar plan is slightly one sided and leaning to aid the financial institutions as opposed to Main Street.

The next theme is who came up with the price tag! I am talking about this $700 Billion dollar amount and why do taxpayers have to foot the bill. This amount is a huge sum that may not be enough. Let's look at how much money has already been injected in the financial markets: $200 Billion for Fannie and Freddie, $85 Billion for AIG, billion dollar backstops for other firms and finally billions being injected into the financial markets to increase liquidity frequently. Once you total the sum, it easy tops a Trillion and this bill is ultimately footed by taxpayers! Not a good equation.

So if you are a regular person on Main Street you quickly recognize that this bill is focused on Wall Street and doesn't address all of the problems that the everyday person is experiencing and has been experiencing for a very long time. I would have preferred a bill targeted at both helping people (subprime, adjustable rate mortgages, high gas prices, declining jobs) and Wall Street (liquidity and toxic assets) equally!

So what are solutions other than a $700 Billion Bailout:

- Well how about the proposal posted by MKinya below, it advocates the government buying these assets and possibly selling the assets to Main Street investors. (JGOTTI RESPONSE: This could be a possibility, however I wouldn't see why investors/taxpayers would want to buy these assets when the government just bought them with their own money. In addition, these assets are so complex that if Wall Street can't understand and price them, then I would be hesitant to buy them, because I am not a well informed investor...and if there were well informed investors (or some argue there are) they would have stepped in and bought these assets already...instead of the government having too)

- How about a package that takes care of consumers. We could inject money into consumers who would use the funds to buy goods, pay bills, invest, save or pay on their mortgages. All these things help spur the economy and add to the liquidity for financial firms.

- How about a package that assists people distressed with the possiblity of foreclosures and adjustable rate mortgages combined with the possibility for the government could buy foreclosed property. A measure like this would stabilize the declining rate of foreclosures, keep people paying fixed amounts they can afford, stabilize home prices for people across America, and spur growth for investors on the sidelines who are now willing to buy in a stabilized housing market.

- How about having the Treasury/Federal Reserve stop or limit the endless pumping of money into these major banks to jumpstart liquidity. Major banks are not lending directly to each other and definitely not lending to consumers so a different practice may be needed and that could be to have the government become a direct lender (buypassing these huge banks) and funding liquidity into regional and small banks that will jumpstart liquidity and ensure that consumers are getting the loans they need.

- How about allowing the Market freely resolve its own issues. Some argue that this is needed as a cleansing or purging if you wish of what has taken place. The excesses or greed on both Main Street and Wall Street need to be brought back down to normal. Further, we might be seeing that as deals continue to get done to acquire banks that have been severely affected such as Washington Mutual and Wachovia. Deals got done at discounted prices to buy the assets of these firms. Even Lehman Brothers and AIG assets are quickly being swallowed up by the markets. What this tells me is that there is capital for deals to get done however the value of some of these firms where in excess and now that the purging is taking place they are being acquired at current market values (taking into consideration the toxic debt they hold). And possibly the same is happening on Main Street as housing prices continue to fall...and they will fall until investors on the sideline have determined that those (toxic) inflated prices have been reduced to what the market truly values them at.

Ultimately I truly believe that all of these measures need to be incorporated into a package to address all of the true issues that are out there. We need a package that helps consumers, distressed mortgage owners, major banks, small regional banks, investors, and the government and the best path is to take the best from all of these points and addressing the issues from all angles.

Thanks

Alternative Bailout Solution - Reader Response

This analysis was provided by a good friend and reader MKinya:

They are about to pass or look like they will probably pass a bill to pay out 700 billion dollars to bailout Wall Street. While I don’t really know how much the taxpayer should take on to pay for this ordeal, I do think that there is a solution that will work out for quite a few people.
How about after the government putting up the money - however much it is - offering the general public a piece of the action on any profit to be made by the deal. This would be in the form of raising money much like the same way campaigns raise money. Tell the American people that if they want to invest in the bailout (which there may be quite a few of us out there willing to bet that this will end up being a profitable investment like most other bailouts the government has undertaken).
The idea would be that after the government spends the 700 billion dollars then they should set up a way for Joe six pack to invest ($25 -$10000). Maybe even $25 dollar stock with a maximum of $10000 investment. The investment Joe six pack gives the government would go back to the treasury and reduce the taxpayers liability in the bailout. Just like any other investment it is voluntary and there is a possibility of losing money. What this does is that the people who are willing to put up the money can then also make money out of the deal. If the investors don’t put in the whole 700 billion dollars then whatever shares are left go back to the taxpayers (They have already put up the $700 billion)