March Matrix Notes

I could do a follow up on why I'm a MACROVALUEQUANT, but who has time, its time to unload my thoughts and unplug from the matrix. I do a lot of reading on the train and listening to the radio and have started taking notes. In the past few weeks, I've tuned into the following discussions and readings:

Ray Dalio (find his discussion on CNBC)
Mr Dalio is the hedge fund titan who runs Bridgewater Associates and rarely makes tv appearances (I heard). After a few moments of defending his unusual methods running his firm, the man behind the world's largest hedge fund was very open about the cycle of leveraging and deleveraging and where the US is at in its cycle after the crisis. He talked about the following subjects:

He noted US Equities are cheap and will benefit from currency devaluations
The money flows will benefit equities
Portfolios are not properly weighted, too much in dollar denominated currencies
Gold is a currency that many are underweight
Stimulus will last through the 4th quarter, and private credit growth will be needed

Where Did Your Toxic Assets Go, Mr. Bank...

That's the question for an accounting group that sets up standards for companies reporting financial information. They have a standard that determines how to account for assets on companies books. Well today they decided to give companies more room when valuing these assets, and this could give a big lift to those banks we have grown to hate.

The group is called the Financial Accounting Standards Board and they are supposed to be independent when establishing these rules. But it appears they may have caved to the pressures of Congress and Wall Street when it came to political pressure around the somewhat unpopular rule.

The rule, called mark-to-market, is supposed to increase transparency for investors because we can see what these assets are valued by today's standards. But the problem some critics say is what happens when the market tanks (like it has been) and their is NO VALUE. Well, what happens is the financial statements of the banks become horrible.

My Opinion - Keep the rule because it provides transparency and uncovers assets that are beginning to decline in value. But as the rule has been adjusted I won't cry I will just buy and that is the BANKS for a short period of time. The assets are still bad on the banks books the difference is now they don't have to tell is they are!!!!


BUY: Direxion Shares Financial Bull 3x Ticker: (FAS) - This gives you 3x the returns for the banks going up. But just buy a little cause it will take you for a crazy ride!

Wall Street - The PULSE

Hey everybody I am back to hit you with a quick post to keep you in the loop with what's going on in the stock market. By now, I know the average person is paying attention on a daily basis because I get a weekly call from my sister asking me about why things are falling or more importantly what should I be doing with my money. And if you recall when you don't hear much from me I am usually doing one thing and that's reading. I am constantly reading about what everyone has to write and listening to what everyone has to say...to get a feel of the market's temperature. How can you do this?!?! Well simply start by tuning in here as often as you can to get a pulse, not always daily but a frequent pulse as to what may be changing out there. And if you get tired of reading, check out CNBC's homepage and select the VIDEO tab for very frequent video posting of their on air show.

Wall Street's Pulse - Awhile back I compared Wall Street to a prized fighter that was down and out, maybe like one of my favorite fighters Roy Jones Jr. The latest prognosis is still not that good...the patient needs help getting up in the ring right now and the count keeps going to about 8 (get to 10 and the fight is over). For those of you that don't know what a knockout blow is for Wall Street, well its would be a depression. And the trainers right now are the Obama Administration, The Treasury Department, and The Federal Reserve. They are constantly looking at the fighter, checking its vitals, and assessing how to help him keep fighting. But right now the vitals of Wall Street do not look good:

• Unemployment numbers continue to rise and have now been estimated to reach over 10% within the next year or so.
• Companies continue to cut jobs left and right and give not so rosy outlooks for the rest of 2009
• Consumer Savings rates were above 5%, which is at levels that we haven't seen in a long time!
• Retail Sales numbers are barely off their lows, which means people ain't buying!
• The consumer and companies are still having difficulty getting access to capital.

Investors (who are like the fans in the stands) have sobered up to these realities and almost given up on the fighter, but the trainers keep working. And their work seems to be helping the fighter get a little bit better:

• Banks are receiving more and more capital
• The stimulus plan and housing bills are aimed at helping home owners and generating jobs
• There is talk about adjusting mark to market (how banks place a value on assets they own)

What this has done is given the investors a little bit of hope that the fighter may come through and still win the fight. So they have started cheering louder and louder and the fighter has responded. The stock market has rebounded off of its March 9th lows and the banks have come back roaring. But its almost as if the crowd (investors) forgot that the fighter is still hurt and hurt badly. That's why may believe that the stock market is in a BEAR RALLY. This means alot of people think the fighter is healthy but in reality he's not. And soon those cheering fans will see the fighter get knocked down again and they will not cheer as loud.

Now onto what I believe and what I'm doing:

I believe the fighter is still hurt badly which means don't cheer (or buy stocks just yet). I truly believe that safer alternatives are out there and should be evaluated for your portfolio. I still like OWNING CASH, and not doing a whole lot especially in your retirement portfolios...don't be the hero or the only one cheering when the fighter just got knocked down again. Invest in safer alternatives:

Cash
Gold (GLD)
High Yield Corporate Debt (LQD)
Municipal Bonds (TFI)

And if you feel like you need to be in the markets, be careful and be a bottom feeder...the nastiest thing out there. Wait until things gets really bad and nibble on the most beaten down sectors. For instance I do this when the banks look really bad, like when everyone though Citigroup was going out of business and I buy just a little bit of the bank stocks ETF on steroids (FAS)...it gives me 3X the returns of bank stocks, but I bite just a little. And when things start to look like they are on a roll I sell. I don't panic about selling to early because in a few days I start to look for a point to be a top feeder and bet that things will come back down and buy the FAZ, which bets the banks will fall...TIMES 3X! But don't stick around to long in these trades or else you'll be writing me with heartburn as I have often had, but irrational fans sober up eventually.

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!

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)

$700 Billion - Wall Street Hits the Jackpot

Yeah Baby!!! That's what I always imagined I would scream if I hit the jackpot in Vegas or if I won the lottery and now that is what Wall Street is screaming. $700 Billion is the amount that Wall Street is looking to claim for their winnings. Now they won't call it winnings but let's try to look at how this situation looks from my perspective. I have sat back, trying to not judge how the situation is being handled and I just want to determine what this means for me as an investor.



As an investor, the first thing that I would say is that a $700B move like this tells me that the Henry Paulson, head of the Treasury department is serious about this issue. It would signal that he believes that liquidity is drying up for financial insitutions and this bailout package allows them to right their balance sheets. My next observation is that if these companies are allowed to remove these toxic assets from their balance sheets they will see a few quarters where these assets will need to be marked down...if Mark to Market Accounting still exists and then they would have sparkling balance sheets with no direction to go but up. This leads to my next conclusion that the best investment for the short term will be the Financial Sector and you will see that through an addition to my STOCK TRACKER PORTFOLIO through the exchange traded fund, UYG.

Since I wrote this post much has changed and I will write from the prespective of Main Street, however this was written from the view of what this bill means to me as an investor.

Class Is In Session...

and when I blog you listen, readers please don't doubt the need for you to pay attention. Now that wasn't a complete freestyle, because I took a few words from one of my favorite artists. But I do want you to take a few words from the Urbanomics "Throwback Movie of The Day". It is the one and only movie "Wall Street" starring Charlie Sheen and Michael Douglas. The line is from a high powered, ruthless, and greedy investment broker Mr. Gordon Gekko. And it goes a little something like this:

"I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought."

And even though Gordon Gekko is a cunning individual, he has one thing correct, I don't throw darts either...although there is no such thing as sure bets, we must put in work to win the battle before its fought. And that's what I am doing here for you folks. The battle is won with hard work and doing things you love. Now some people keep count of your victories, others will say lucky guess, and others may call you crazy but you gotta believe. So if you read the post I created just yesterday you may say a few of these things in disbelief. Now I am not ruthless like Gordon Gekko in "Wall Street" because he cheated to get ahead. He used information that wasn't accessible to the public and benefitted from trading the stock. Yes ladies and gentlemen, ala Martha Stewart he was participating in 'Insider Trading'.

The difference is I gave you the reasoning behind why I believed in GPS stocks yesterday. I gave you the basic principles that I learned from Peter Lynch so that you can follow along with me. Invest in what you know...right in front of you're eyes.

What unfolded right before our eyes was kinda crazy, not only were we on the money but Nokia must have been listing to what we were saying...because they have arranged to acquire Navteq in an 8.1 billion dollar deal today. See my post from yesterday. The following release was taken from Navteq website:

Nokia to acquire NAVTEQ

The combined entity would create a leading global player in the fast growing location based services marketNAVTEQ to support existing customers as before .
October 1, 2007 -- Nokia and NAVTEQ today announced a definitive agreement for Nokia to acquire NAVTEQ. Under the terms of the agreement, Nokia will pay $78 in cash for each share of NAVTEQ including outstanding options for an aggregate purchase price of approximately $8.1 billion (€5.7 billion), or approximately $7.7 billion (€5.4 billion) net of NAVTEQ existing cash balance. The acquisition has been approved by the board of directors of each company and is subject to customary closing conditions including regulatory approvals and NAVTEQ shareholders’ approval.
The navigation area is a fast growing business, and with location-based services expanding rapidly into mobile communications devices, the industry is poised for even further growth. NAVTEQ brings a number of key assets to Nokia: a great team with best-in-world maps and navigation industry expertise, a strong customer base and an industry-leading map data and technology platform with the broadest geographical coverage.

I will leave you with another memorable quote from "Wall Street":

The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you.

Let's all own and make the rules, the right way ~URBANOMICS