Archive for July, 2008

Absolutely amazing!  China is limiting share sales to prop stock market.   It’s only a matter of time before the whole thing plunges and falls apart; what will be the catalyst?

Aug. 1 (Bloomberg) — China is restricting approvals for share sales to keep new supply of equities from putting additional pressure on the world’s worst-performing major stock market, two people familiar with the matter said.

The China Securities Regulatory Commission is delaying the issuance of written approval documents, the final regulatory stage, to companies preparing initial public offerings, said the people. They declined to be identified because they aren’t authorized to speak publicly on the matter.

“Controlling share sales is an important tool for CSRC, and it’s effective in the short term,” said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. “More stock sales in a bear market is bad news” for investors.

Everything is a “short term” solution to the world wide economic meltdown right now.   The Fed’s lending facilities, “short term,”  the SEC’s short selling rules are of course, “short term”,  the Fed’s artificially low rates are “short term” as well as Congress’ “give blank check to Treasury” is “short term” and “temporary.”

It’s over people.  The writing is on the wall and it reads, short term.

Now that the Fed, US Treasury, Congress, SEC, and Wall Street have all conspired to keep the market afloat, the only logical thing that can happen next is a market collapse.   I’m guessing that late September or perhaps October will result in a dreaded “black __day” event.

I’m wondering why the new housing bill didn’t include a provision to shore up FDIC.  If the Fed and Treasury want to protect the banking system, it would seem the best way would be to boost FDIC reserves.   Oh well, I expect some more banks to fall this or next Friday.

Be careful out there.   I’ll try to sell out at the next big rally.

I had an interesting discussion with my friend a few days ago. About a year ago he borrowed $40,000 (at 0%) on credit cards to invest in the stock market. He had asked me about investing in the market and I advised him AGAINST borrowing credit card money. He asked me why I could do it but not him and I told him that I keep huge cash reserves to be able to pay everything back if something goes wrong. I told him that if he was dead set on borrowing the money, he should just invest the money in a bank paying high yield interest (3% to 5%) like HSBC Direct or ING.

He did the math and figured that $1200 return in a year simply wasn’t worth it but he was dead set with investing in the stock market. After more discussions, I advised him if he was dead set in investing in the market he should do so as conservatively as possible. I even suggested ETF Covered Calls as a strategy. He asked me how much he could earn with this strategy and I told him about 20% in a good case scenario maybe more maybe less. He still wasn’t happy with that potential.

He opted to invest in call/put options and risky/volatile penny stocks. Things actually went well initially. He bought a hundred thousand shares of some no name penny stock for $0.03 and it went to $0.15. I begged him to cash out and sell the stock, I told him he got lucky and that was a once in a lifetime scenario but he wouldn’t sell! He said no. He was going to “ride” this stock all the way to $15.00 and retire.

This is when things turned for the worse. That penny stock nose dived a week later from $0.15 to $0.002; yes, that’s less than a penny and it’s stayed there for the better part of the year.

Not to be deterred, he borrowed an additional $20,000 and bought stock in a major auto company. I begged him not to do it because gas prices were rising dramatically and that would hurt ALL automotive industries. Wouldn’t hear any of it and went and bought hundreds of shares of this auto stock. Needless to say the stock dropped 50% within months and things started to go really bad.

He figured he would roll over all this credit card debt (borrowed at 0%) to more zero pct credit cards but now we’ve entered the credit crunch cycle and banks are balking at lending more money at zero pct to him. Time is running out, he can’t roll over and the zero percent time frame is running out on the existing debt. He’s done the math and figured he’ll be able to survive for 12 months max before the tidal wave overwhelms him.

He called a bankruptcy lawyer and got some advice and now he’s trying to concoct all sorts of schemes to win out some how. He’s talked about borrowing one more time from some sucker credit card company and pouring all the cash he has into his home. The bankruptcy lawyer told him that they can’t/won’t touch his home. He’ll use any other proceeds from bad stock sales to pay off his car and hold on to it through bankruptcy.

He called me and asked me what he should do. I told him at the very minimum, he needs to wait till after the election to see how things pan out. He is of the belief that we’re about to enter the next Great Depression and he’s not bothered one bit about filing for bankruptcy.

When I asked him why he didn’t listen to me over the past year and a half of this he stated he was angry that Wall Street goons got to rip off America, walk away with millions and now tax payers have to foot the bill. He’s opted to “get back” at Wall Street & Congress through a “scorched earth” attitude taking anybody and everybody down with him.

We finished the conversation with him asking me if he should go through with the bankruptcy. I told him to wait till after the election before he takes any action. Should he file for bankruptcy? I’m not sure he has much of a choice.

I’m convinced that young investors should focus on leveraged index funds. There simply isn’t any question in my mind about it now. Take a look at this chart.

DDMvsDow.png

The chart above compares the Dow Industrials with DDM (Dow 30 leveraged). As you can see from the chart, when the Dow rallies, DDM spikes right with it and when the Dow drops, it drops significantly in a leveraged manner.

Now look at this chart:

2008_Half_Mini.png

This chart is from my mini account from which I decided to exclusively focus on DDM and selling covered calls slightly out of money. The difference in returns from the two is amazing. Selling calls helped cushion losses during downturn and provided phenomenal returns on the upswing. I plan on sticking with this plan on this particular account for the next decade so we’ll get to see what ten year returns look like but so far it’s looking good even in today’s horrible market.

This post is dedicated to Brandon, my favorite antagonist commenter.   A couple of months ago in this post, I outlined my investment strategy to help bring focus to how it works and why it works, at least for me.    It’s all about exit strategy and I exited OIH a while back when the ETF rallied way above my expectations.    Now, OIH has pulled back significantly to where it was back in the winter of 2007.

Without any type of exit strategy with the market, you’re perpetually buying, never reverting to a cash position.   During the recent market drop, I found myself holding a rather large cash position because of my ability to exit the market.   I still have holdings at a paper loss but that’s all temporary and the down swing has been cushioned by profits from selling short.

If OIH drops back down to $170, I’ll be knocking on opportunity’s door.    In the meantime, UYG and XLF are looking mighty delicious but I’ll wait till August to see how things turn up.

According to BizJournal, Mervyns will file for bankruptcy soon. Wachovia and CIT Group on the hook for loans.  This on the heels of Bennigans filing for bankruptcy (hat tip The Travelin’ Man).   It’s getting ugly out there. Glad I moved cash out of the system. Good luck.

Mervyns LLC will file for bankruptcy protection this week unless it gets a last-minute cash infusion, according to a report late on Monday.

Mervyns is owned by Sun Capital Partners, along with other partners. Two of Mervyns biggest lenders are CIT Group Inc. and Wachovia Corp.

Calculated Risk had a nice link to an article summarizing all the retail bankruptcies so far this year and I have no doubt there will be a few more. I’m anxiously trying to find a way to let my family know that I don’t want any gift cards (of any kind) this year for birthdays or holidays.

Let’s face reality here, the instant you receive a gift card, you’ve already lost some money. In order to use a gift card, you typically have to drive to a retail outlet and at todays gas prices that will eat up at least $4 to $8 dollars of the “value” of the gift card.

That’s not the worst part because if the retail store files for bankruptcy then you’ve lost the value of the card outright. So who’s filed for bankruptcy or closed down stores? Here’s an impressive list: Linens ‘n Things, Steve & Barry’s, Sharper Image, Starbucks, CompUSA, The Disney Store, Wilson’s Leather, Talbots, Ann Taylor, Bombay Co., and Bennigans.

Update:  Mervyn’s near bankruptcy too!

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Do you remember the musical chairs game?

The FDIC Game of Musical Chairs is similar:

FDIC Musical chairs is a game played by a group of people (usually clueless consumers), often in a panic setting purely for defensive purposes such as a classic bank run. The game starts with any number of banks and a number of “chairs” (a.k.a FDIC coverage) one fewer than the number of banks; the “chairs” are arranged in a circle (or other closed figure if space is constrained; a double line is sometimes used along with heavy police presence) facing outward, with the people standing outside a bank waiting for their money. A non-playing individual (FDIC Chair Sheila Bair) plays recorded media sound bytes. While the sound byte is playing, the players waiting for their money walk in unison around the bank hoping chairs will be left for them. When the sound byte controller suddenly shuts off the sound byte, everyone must race to sit down in one of the chairs. The player who is left without a chair is eliminated from the game and subsequently left insolvent, and one chair is also removed to ensure that there will always be one fewer chair than there are players. The sound byte resumes and the cycle repeats until there is only one player left in the game, who is the winner. Everyone else loses.

The kids were spending the weekend with their aunt so my wife and I were left alone for the weekend. We opted to go out on a “date” on Saturday and settled on dinner & a movie. We figured it would be an inexpensive night out since this Brazilian steak house sent us a two for one dinner voucher but that wasn’t the case.

The dinner ended up costing about $85.00. We had Brazilian meats, a glass of wine and a dessert and weren’t too impressed with the meal. The actual cost would have been $127.00 had we not had the two for one voucher.

We opted to go see The Dark Knight flick. Tickets to movie theater: $18.50. Popcorn & a Drink: $11.75. I’m not factoring in other expenses too since we used at least a couple of gallons of gas to get to/from the restaurant and movie theater. We got dressed up so we’ll have to add the dry cleaning bill to the festivities.

So much for an inexpensive night out.

Right now isn’t the time for complacency with your banking; your paycheck should be flowing into at least two bank accounts.   The FDIC just reported two more bank failures and things aren’t looking good for some of the big banks.

The main issue you want to avoid is not having access to any of your funds should your bank go under.    Yes,  you may eventually recover your money but you may have to wait in long hot lines for three days, ala IndyMac, before you get access and Murphy’s Law will kick in to conspire against you in a moment of crisis.

A couple of years ago I had four banks that my paycheck was distributed to but now I’ve reduced it to three since I no longer qualify for Roth IRA contributions.   So how should you distribute your paycheck?   That depends on your income and expense situation but something that’s worked well for me has been to break my paycheck down into three major categories:  Mortgage, Auto/Other Loans, Emergency (Savings).

Generally, I’ll deposit enough money into Bank A (mortgage) to cover the monthly mortgage expense.  In Bank B, I’ll typically deposit an equivalent amount to Bank A to cover mortgage expenses should I not have access to Bank A.   Normally, Bank B pays for auto and other loans (credit cards, student loans, etc).    Bank C stores emergency funds for….emergencies!

The scenario here is to be able to cover mortgage first above all if Bank A fails.   If Bank B fails, then emergency fund kicks in to cover payments on loans and other debt.   If Bank C fails, then you’ll simply have to wait to get you money but you’ll have Bank A and Bank B to fall back on.

I don’t have an account for other expenses because generally speaking, I charge almost everything.  All my bills (cell phones, electric bill, satellite bill, gasoline, food, dining, land line, etc) are all charged to credit cards which are handled by Bank B and covered by Bank C in case of emergency.