What goes down ain't Depression always...

One of my friends asked me my views on the current state of the markets...

Any advice for someone like who's baffled by the downturn in markets and spooked by recession fears? Is it gonna be recession at all or is it all fear mongering? Or as some people say, could this be a depression?

Let me say that I am no market expert or an economist e.g. one of the JPM lead economist who said we are in period of slow growth and growth will pick after second quarter. And one month later he says we are in deep recession. I can't see what changed in month that wasn't apparent in previous months. Anyway ...

So here are my views...
This is the best time to buy stocks (not any stocks though :-) ) Both the market environment and interest rate environment is helpful for stock buyers. Mostly the last 4-5 years were years of rapid growth and were periods of unsustainable growth for the very reasons revealed today like subprime, CDO, lot of use of leverage. So this is period of so called "correction" or self-healing. Basically people have realized the "true" value of assets they own. And this correction will cause the fall of a few more hedge funds and banks.

As for fear mongering, Nathan Rothschild made a fortune by "fear mongering" by calling the Battle of Waterloo. He made a fortune. So when people tell you that all hell is going break loose, think of Nathan Rothschild. These are the best times to make a fortune. You take calculated risk. You are right if your numbers are right. Don't speculate in stock market. Bet on your right numbers.

"Depression" ha ha... Look at the numbers coming out of most companies. They are still making profit... well most of them... Financial markets have made similar messes in the past (think LTCM, asian bank crisis) and this too will pass (w/o depression). Its going to be slow growth. Thats all for some time. Some hedge funds and banks will fail but that shouldn't drag the entire economy into a recession. It sure will create some panic and fire selling. When you are drowning (in this case hedge funds/banks) you want to create so much fear that the entire world is going to drown. So the entire world (reserve banks, governments etc.) rescue you instead of calling your bluff :-)

Tale of two cities: Ambac and Citi

Forbes is reporting "Ambac Is a Downtrend"
In a silly move Ambac is trying to raise capital in the markets upto $2.3b and similarly Citi is trying to sale its bonds for $3b which it is underwriting itself. Most investors are avoiding these 2 companies like these are land-mines that will explode if you step on them.

Also on CNBC (The prime hype-hoopla channel) Olstein says Citi shares would double in 2 years. Looks like its just a ploy to at least recover some of his 2x investments in 2007. They know they are holding a explosive waiting to go bust. Its amzing how people appear on CNBC at the "right time" to say the "right things". CNBC amazes and amuses me :-)

Should I go up, should I go down?

Analysts see breakup of UBS as more likely

http://www.iht.com/articles/2008/03/03/business/invest04.php

UBS is standing on a land mine that will explode if it doesn't raise more capital. Citigroup and UBS will need to split up into "bad bank" and "good bank". The "bad bank" businesses will eventually go down to be survived by the "good bank" business. These are the very likely scenarios for these banks given that both are already contemplating asset sales. Looks like most analyst are still sugar-coating the situation (compared to few brave ones, read Whitney) and buying the banks some time and in turn keeping the markets guessing. Wish more analysts were more forthright.

Bottom of subprime crisis not yet reached, study suggests
http://www.iht.com/articles/2008/03/03/business/rtrcol04.php

The study suggests much gloomier picture of the US economy. The banks face big loan losses - "far more dramatic" than most bank executives and ratings agencies have forecast, said Whitney of Oppenheimer. If her forecast/analysis were to come true ,like the last quarter forecast, it would cause a market crash or DOW would drop at least another 10-15%.

Mr. Market's whims

For last 2 days Mr. Market (read Dow) couldn't decide where should it exactly go. It was so confused. For today it decided to stay almost close to where it started? With the earnings season beginning to start and Ambac's future AAA rating in jeopardy (??) , will Mr. Market visit 11500?

Thought of the Day

If a man begins with certainties, he shall end in doubts;
But if he will be content to begin with doubts,
He shall end in certainties. -- [Francis Bacon 1561-1626]

Today :- Alice In Wonderland

Today's breakfast on fox news -
http://www.foxbusiness.com/markets/market-overview/article/citigroup-casts-shadow-wall-street-dow-tumbles-150_504851_42.html

Yesterday's Warren Buffet comments about US being in recession reminded me of Natahan Rothschild who made a fortune on the "Battle of Waterloo". Curious souls would like to read http://www.rumormillnews.com/cgi-bin/archive.cgi/noframes/read/39506. Its a classic example of how fear mongers could cost you fortune and make theirs while they are at it. Although Buffet's remarks, I truly believe, were more informative and not misleading at all.

UBS faces further writedowns -
http://www.bloomberg.com/apps/news?pid=20601085&sid=ahzF530iZp90&refer=europe
If you start salivating after reading "lowest since 2003", beware... its most likely to go down further. So wait and watch before you join the party. Its usually never too late to join the party...
There always some other party in town ...

Hedge fund sues WB/C -
http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-23521247.htm

From this story -

C - $1.66 1Q 2008 $3b write-down $1.05 for 2008 30,000 job cuts
WB - $2.50 for 2008

Reading http://www.businessweek.com/investor/content/mar2008/pi2008034_305072.htm?chan=top+news_top+news+index_businessweek+exclusives

Citi (that never sleeps will never sleep :-) )
- $1.66 loss for 1Q 2008
- $15b subprime $3b misc. troubled loans
- $1.05 for 2008
- 30,000 job cuts

Whitney thinks Citi may have to sell $100b in assets and with the recent credit crunch when the flood-gates open will it create LTCM like havoc in the market? Bye bye dividend.

Will Citi go to sleep forever? Looks unlikely. However it will and has ceased to be the largest bank in the world. Well the worst case scenario puts the Citi stock at $15.19.

Beware of what you wish for.
Before I read anything meaningful on security analysis, I would look at the charts on Google finance and wish that I could buy at this point 10 years ago and sell at the peak 10 years after. Things do look beautiful and intuitive in hindsight. I am sure some such theory exists and may even being practiced. Well now that such prices seem to have created in some securities, my views have completely changed on the technical (chart) analysis.

S&P 5 star stock ADSK/AMT

(ADSK) The puzzle:-

A company who has not been able to grow its earnings more than 2% for the last 10 years
when bought at $30. Somehow its worth $51 using DCF and P/E according to S&P analyst.
For $30 to grow into $51 in next 10 years will need an annual growth rate of about 6%. At 2% it will grow to $36. How can a company which can grow its earnings 2% multiply the shareholder's equity by 6%? Maybe money does grow on trees. Well if a greater-fool is willing to pay you $51 for this stock, thats a different story.

Should I call it the folly of the S&P 5-star ratings ? Anyway, by definition it has no value if you are looking to be a long term investor since the 5-star rating is projection only for a year.

(AMT) a sure folly:-

A company who according to S&P analyst is 31X free cash flows. Somehow with positive free cash flows in the last 10 years the company managed to produce negative earnings most of the time :-) Its like $1 comes in and $1 goes out and to produce that $1 outflows of cash the company has to 20cents. Its amusing that this stock trades at $32 and is S&P % star.

Banks should seek more capital

http://www.reuters.com/article/businessNews/idUSWBT00848420080228?feedType=RSS&feedName=businessNews

Banks should seek more capital. The obvious question comes to mind is why would banks need to seek more capital if the current ratios are adequate. In periods of expected weak economic growth there are going to be less opportunities to deploy such capital and in turn harder for the banks to pay high interests on such borrowed capital. So why seek more capital? Maybe there are more losses that are going to impair the banks capital ratios further. When Bernanke says it and doesn't explain why this is the only explanation I can find.

WYSIWYG err... VIWYGPIWYP

UBS -

US reference linked note $12b

Reference:- http://www.businessweek.com/investor/content/feb2008/pi20080229_909242.htm?campaign_id=yhoo

JPM -

Tanona's earnings estimate for $3.30. When in the past JPM had such earning's it traded as low as $20. A little perspective :-)

Reference:-
http://seekingalpha.com/article/66619-goldman-analyst-more-rough-waters-ahead-for-j-p-morgan

As I look at more and more balance sheets I find earnings not growing even at moderate 6% at most companies at today's prices. So even at today's prices most Wall Street firms look overvalued. Trailing P/Es, forward P/Es don't fancy me much either. Years going back to 2002 were the most prosperous years for most corporations. so you are most likely going to get blind sighted if you look at the balance sheet figures of those years. These are not years of sustainable financial growth for most companies. So beware what price you pay.