Friday, February 27, 2009

Doubling Down

I can't count the number of times I've heard an investor say, "I bought some at 30, its down to 20 so I will buy more." In trading, that's simply dumb(er). Just because you were wrong at 30 doesn't automatically make you right at 20. Never double down.
I wish the term, "average down" were banned from investment speak.

Well we're about to do it on a scale unseen before. Let me repeat. You never ever add to a losing position. Not so long ago, Hank Paulson, on behalf of the American taxpayer bought a 7.8% stake in Citigroup for $$25 billion dollars. Then he guaranteed 90% of future losses on $301 billion in assets. Then he tossed in another $20 billion just to sweeten the pot. For that princely sum, we bought 7.8% of a company worth $50 billion. For 100% of the value of Citigroup, plus guarantees worth 500% of the value of the company we received 1/10th of a company worth 1/5 of our investment. Pretty clever eh? Our $45 billion is now worth slightly more than $1 billion.

And now we are going to convert our preferred shares to common? Are you on crack?!

In the words of Oliver Twist, "Please Sir, may I have some more?"

Full Faith and Credit

The recurring theme of the banking crisis is that the system cannot work until confidence returns. Perhaps the most fundamental confidence would be that those which failed are permitted to fail. It is the necessary corollary of allowing those who succeed to succeed. One cannot exist without the other, very zen

Citicorp and Bank of America have too many tendrils to let go in a disorderly fashion, so put it order and put them into receivership. This boiling the frog method is eroding confidence globally.

John Barnyak

Eye on the Ball

With all the words this week about stimulus packages, multitrillion dollar "budgets" and the beginning of a political donnybrook in congress in coming months it is easy to get lost. Cutting through the clutter makes decisions about investment easier. Listening to politicians has never been terribly profitable. At least not as profitable as talking to them and filling there wallets.

Last week the Chinese spent an enormous amount of money. We may be jaded about billions of dollars lately, but a billion is still a lot of money. That is, until inflation sets in. Last week the Chinese spent 10 Billion on Brazilian oil, 25 billion on Russian oil, and 22 billion on australian minerals. What does it tell us?

The week before, the chinese ministry of finance said about the US economic policies, "We hate you." Pretty clear statement that meant, "we are tied at the hip with you and your policies. If the US dollar drops in value, our two trillion dollar reserves go down in value as well. If we stop buying US treasury bonds, the global wheels fall off. Don't fret, we're going to buy your damn debt issues, even if the ink is still wet. We'll discuss terms later!"

The dollar is strong at the moment. The Chinese have a boatload of them and likely to need more to help finance the US debacle. "We better spend some of this monopoly money" Looks like they will be effectively trying to exchange clownbucks for something tangible like oil and iron ore.

We still have a short term deflationary pressure. Never fear, there will be trillions of new bucks coming down the pike soon enough. Enough to unlock credit, enough to make foregoing purchases a wrong behaviour, enough to put upward pressure on US interest rates. But there will be opposite pressure to keep rates competitive and the dollar weaker to encourage exports from a consumer sated domestic economy.

Buy umbrellas (and glittery metals) when the sun shines.

John Barnyak

Thursday, February 26, 2009

I just don't get it

Okay, I give up! Everyday I awake thinking perhaps THIS is the day I understand what the US Treasury Department is going to do about the banks. Everyday I feel a little more puzzled. This week I was let off the hook. Paul Krugman who last year won the Nobel Prize for economics stated, "I keep not being able to understand either what the plans are, or why they're supposed to work. And I don't think it's me."

I admit it there is something very comforting about being as clueless as a Nobel Prize winner.

The term "nationalization" keeps being thrown around in such a way that I'm not sure anyone agrees on the definition. The taxpayer has put $45 Billion into Citicorp in return for $52 Billion in preferred convertible stock. If converted, the taxpayer would suddenly own over 80% of Citi, but according to Bernanke, that isn't nationalization. The government has put in $45 Billion in cash and $300 Billion in guarantees into Citi, a company with a market capitalization of $12 Billion. The President said nothing being done about the banks is FOR the banks. Well it sure feels like it.

As convincing an orator as President Obama is, his treasury secretary seems to be dancing to different puppeteers. Citicorp stock is no longer a stock at all, it is an option on Secretary Geithner. It is the market price of the belief that Citicorp will not be allowed to fail.

The words that keep running through MY mind are, "if it is too big to fail, it is too big to exist." Maybe behind all the blithering is an ongoing process of unwinding the bank in an orderly fashion and we'll all breathe a sigh of relief that they are smarter than they sound. The "Geithner Put" is a dangerous concept as it draws investors into the comfort that eventually this will work out. With Citi Preferred shares paying over a 20% dividend currently it is tempting to believe the line that nationalization is not happening. But a voice in my head keeps saying, "but it should."

This is like rearranging the Titanic's deck chairs while assuring the passengers the iceberg is melting. When Paul figures it out, I hope he'll call.