Saturday, January 30, 2010

Pivital Point

The Dow Jones Industrial Average is down 6% from its high of 10,725 on January 19th and down 3% since the beginning of the year. This means the Ithaca Experiment portfolio is up approximately 12% from the high on January 19th - a nice run, but nothing to get excited about because it is still down 34% from the initial investment in July of last year. I've been juked out before since the market began running in March of 2009, but think this is the long awaited correction I've been writing about. The question for you to consider is do you think this is a pause in a bull market run or that pull back in a bear market rally that I believe in? Because January was a down month, I think we have to revisit an earlier post I made in December that highlighted the January Barometer. The following quote is supplied by Wikipedia: "The January Barometer is the hypothesis that stock market performance in January predicts the performance of the rest of the year...Historically if the S&P 500 goes up in January, the trend will follow the rest of the year. Conversely if the S&P 500 falls in January, then it will fall for the rest of the year. Since 1969 this trend has been repeated 32 of a possible 39 times.".

I think the odds are in my favor that this will be a down year. The January Barometer just gives added ammunition to my thesis that the damage is not done yet and we will retest the lows of March 2009, if not go considerably lower once Uncle Sam's stimulus programs are finished. In fact, the January Barometer could be a near-term catalyst and accelerate the timeline for that 10% -20% correction I have been looking for because the smart money will start to get defensive if it isn't already. I don't mean to sound naive about my losses, they are real and they do bother me, but within 2-3 months, I could be back in the black. It doesn't take too long when you are leveraged as much as I am. So for the mean time, I will continue to put my holdings on ice and wait it out. To refresh your memory, the ETFs I currenlty own are ProShares Ultra Short S&P 500 (SDS) and the Direxion Small Cap Bear 3X Shares (TZA). I realize this portfolio is a high-wire act without a safety net, but as PIMCO's Mohamed El-Erian frequently says, the market is on a sugar high and once the rush wears off, there is no telling how far down it will go.

Wednesday, January 27, 2010

Too Much Monkey Business

Joseph Stiglitz is the 2001 winner of the Nobel Prize in economics and recent author of Freefall: America, Free Markets and the Sinking of the World Economy. With a pedigree like that, I expected a lot out of the book, but feel he did too much armchair quarterbacking and moralizing to make this a very good read. Sure, the denizens of finance have feathered their nests with some of the TARP money and Mr. Stiglitz and I both think that something should be done about it, but he tended to grandstand too much about the sandbagging the bankers gave us. This is not to say the book is without merit and I like the way he advocates for the under privileged, but this guy is a Nobel Prize winner. I wanted more from someone of his stature. Despite his ankle biting at all the shortsighted behavior on Wall Street, he does come out with some great observations like: "Only executives in financial institutions seem to have walked away with their pockets lined - less lined if there had been no crash, but still better off than, say, the poor.".

Stiglitz really gives it to the banking tycoons with both barrels: "The bankers gave no thought to how dangerous some of the financial instruments were to the rest of us, to the large externalities that were being created. In economics, the technical term externality refers to situations where a market exchange imposes costs or benefits on others who aren't party to the exchange.". In a later chapter he expounds on this issue once more: "When gambling - speculating - on corn, gold, oil, or pork bellies didn't provide enough opportunities for risk-taking, they invented 'synthetic' products, derivatives based on these commodities. Then, in a flurry of metaphysical ingenuity, they invented synthetic products based on synthetic products.". Freefall leaves nothing in doubt as to where it stands on the issues: "The world had changed, or so the financial whiz kids had convinced themselves. They thought they were so much smarter, so much savvier technologically.". And finally: "Bankers are (for the most part) not born any greedier than other people. It is just that they may have more opportunity and stronger incentives to do mischief at others' expense.".

Mr. Stiglitz offers some solutions to the problems the banking system is experiencing, like reinstating the Glass-Steagall Act or something to the equivalent (which the Obama administration has attempted to do last week with the Volker Rule), but never quite convinces me he is the authority on the subject because I've read it all before from different economists. And this is the problem with Freefall, it's all been said by some of his colleagues in a more definitive way. When I'm reading a finance or economics book, I'm looking for ways to increase my portfolio and although Stiglitz cautions about the imminent collapse in commercial real estate, lingering problems with residential real estate and credit card debt, he really doesn't go far enough. You really have to slog through a lot of material to get to what you are looking for and to me, that's just not good enough. Unless you are an academic, I would skip this one.

Sunday, January 24, 2010

Duck and Cover

The market corrected about 5% the last 2 weeks and that's a significant haircut. I don't know if this will be the 10%-20% correction that's been percolating for some time, but the clock is ticking. Resistance levels have been breached and assets may be steamrolled if you are long. I needed this pull back. I've been sweating bullets as the market reached nosebleed valuations the past six months. I may sound cavalier about the losses the Ithaca Experiment portfolio has experienced since July of 2009, but this is real money we are talking about and it is a concern. After all, who likes losing money? But the question has been bandied about as to how long this correction will last. It's anybodies guess, but I'm of the belief that if the market keeps losing ground this week, it will be a domino effect for securities. This is a big week for earnings, so hang onto your hats.

Now what if you are on the long side and think the economy is in a V shaped recovery, that this 5% haircut is merely a bump in the road? Where do you find the casino stocks investors have been bidding up the last 10 months? I would look no further than Investor's Business Daily. William O'Neil has been publishing Investor's Business Daily 5 times a week since the early 1980's and is also the author of How To Make Money In Stocks among other books. He is strictly a momentum player using volume spikes and technical analysis, two techniques I don't utilize, but many do and quite successfully. The main reasons I read Investor's Business Daily is to see what IPOs are on the horizon, to monitor the hot stocks and most importantly, they have the best articles on information and medical technology bar none.

To write in depth about Investor's Business Daily would take a book, so I'll try to do the best I can with a Cliff Notes version here. Firstly, it is a newspaper geared for traders more than investors, but if you take the perspective of a long-term investor, you can find eons of stocks that you may not be aware of trading at discounts. Investor's Business Daily doesn't cover stocks under $10, so you are immediately limiting your downside because stocks under $10 are priced in that range for a reason. The newspaper also devotes a great amount of attention to foreign ADRs that trade on the New York Stock Exchange and NASDAQ. This is important because it enables you to discover securities that are easily traded and are more transparent in hot markets as opposed to going to an overseas exchange. Another nice feature of the paper is its daily listing of the hot and cold sectors in the market. Jim Cramer likes to say that 50% of a stock's movement up or down is based on its sector rotation and with Investor's Business Daily, you can either buy individual stocks in a hot sector or purchase that specific sector's corresponding ETF to take advantage of areas that are running up.

I don't read Investor's Business Daily every day, just the weekend edition because so much of the information they give is geared toward traders and it gets redundant if you are not trading every day. But in the weekend edition, they list the IBD 100, the top 100 movers in the market based on their proprietary ranking system. This ranking system includes an amalgamation of relative price strength, earnings growth, volume and profit margins. You can discover some gems in this list, but beware, most of these stocks are not for your widows and orphan fund. They run up fast and I've seen many can't miss securities get cut in half by being short on an earnings call. If you are a subscriber to Investor's Business Daily, you also have access to their Web site where you can screen for investments. I have never used the Web site, but if you are interested, they offer a two week trial for both the print and Internet version of the paper. Although I am short the market, I still read Investor's Business Daily every weekend to keep my watch lists up-to-date in anticipation of what I may decide to invest in when I jump back into long positions. Used in conjunction with Value Line makes for a very powerful investing resource.

Wednesday, January 20, 2010

The Big Nowhere

Along with being a leading economic journalist, J. Irving Weiss amassed a fortune in The Great Depression of the 1930's. Following in his father's footsteps, Martin Weiss is also an economic journalist and the New York Times bestselling author of The Ultimate Depression Survival Guide. The depression Martin Weiss writes about is not from 80 years ago, but what he believes is happening all over again here today in the United States. Published in April of 2009, The Ultimate Depression Survival Guide could almost be co-authored by J. Irving Weiss because the book is peppered with his writings from almost a century ago. As is demonstrated in the book, there are many similarities in the two eras: "After the crash, the stock market rallied for almost six months, and nearly everyone on Wall Street thought the crisis was over...From its peak, the Dow Jones Industrial Average fell 89 percent. Compared to the Dow's peak in 2007, that would be tantamount to a plunge of more than 12,600 points - to a low of approximately 1,500.". And that's what Martin Weiss thinks is going to happen because the speculative bubble in U.S. homes was as extreme as the Dutch Tulip Mania, the South Sea Bubble, the Crash of 1929 and the Tech Wreck of 2000-2002.

Mr. Weiss cautions the reader that: "...history shows that, no matter how many companies may be going bankrupt or how gloomy the news may be, the stock market can often stage vigorous, but temporary, rallies...These rallies can be explosive. They can last for months. And they can give traders the opportunity to make money on the way up and even more money on the way back down.". I believe we are currently in one of these rallies that is giving investors a false sense of security because market valuations are on the threshold of the absurd. I also believe like the author that there is plenty of opportunity to make money on the downside and I have invested accordingly albeit a few months early. The Ultimate Depression Survival Guide devotes an entire chapter to shorting the market with ETFs and in that chapter lists numerous holdings offered by ProShares, Rydex and Direxion. However, he does caution that using these ETFs is a double edged sword in that if you invest too early as I have, you can get burned in the short term.

In combating the coming or current depression, the author's ace in the hole are short-term U.S. Treasury Securities, commonly referred to as Treasury bills or money market funds that own exclusively short-term Treasury securities. Reason being that in a depression it's not enough just to avoid losing money and preserving your savings, you must also have liquidity. "Even in the 1930's, when a record number of Americans were unemployed and when we had a head spinning wave of bank failures, owners of Treasury bills never lost a penny. Even in the Civil War, Treasuries were safe". Mr. Weiss provides a comprehensive list of short-term Treasury only mutual funds which I found helpful. The reason that you want liquid assets is to take advantage of blue chip stocks that will be selling for pennies on the dollar once the bottom is reached. You can buy them for a song.

Besides shorting the market with ETFs and buying Treasury bills, another strategy to make money in a depression as advocated by Mr. Weiss is to invest in the U.S. dollar: "During periods dominated by deflation, which is expected to prevail during America's Second Great Depression, concentrate on betting on a rising dollar. Use primarily PowerShares BD US Dollar Index Bullish Fund (UUP)...During perioids dominated by inflation, concentrate on betting on a falling dollar. Use primarily PowerShares DB US Dollar Index Bearish Fund (UDN).". The author states many times throughout the book that he is leaning on the deflationary scenario. Will the 'Great Recession' morph into 'Depression 2.0'? That outcome is yet to be determined, but I'm still of the belief we will retest the lows of March 2009, if not go lower. If you are familiar with Harry Dent's research, then The Ultimate Depression Survival Guide will be old news. But if you are not, this is a good starting place to find out how to protect and increase your assets in what will be a very volatile marketplace in the next few years.

Sunday, January 17, 2010

Willie Sutton

One day does not make a trend and neither does a week for that matter, but the Ithaca Experiment portfolio was up almost $1,000 this past week. No great shakes, but at least I caught a break. For months there has been nothing but bad economic news and yet the market continues to rally which really spanked my holdings since I am in short positions. There is no doubt the market is priced for perfection and earnings expectations have been ratcheted up so we could be in for that correction I and others have been talking about during this earnings season. As has been discussed in previous posts, I take a lot of risk in my portfolio, but according to William Bernstein in The Investor's Manifesto: "Investors cannot earn high returns without occasionally bearing great loss. If the investor desires safety, then he or she is doomed to receive low returns.". Well, I chose to do a little gambling and so far have have a sizable paper loss of about 40%, but my enthusiasm for where I believe the market is going has not been tempered by what I consider no more than a bump in the road. I know I am flirting with disaster, but nothing ventured, nothing gained.

The Investor's Manifesto is old hat to anybody who is experienced in investing. It extols the virtues of index investing and gives guidance as to how to allocate your portfolio holdings with a bond/stock mix dependent upon your age and time horizon. One thing that struck me about the book is the author's disdain for stock brokers and money managers: "It is rare to meet a hedge fund manager or mutual fund executive who has a vision of the world that extends very far beyond his or her own self-interest. It is not grossly unfair to observe that most seek employment at brokerage houses, hedge funds, and mutual funds for the same reason Willie Sutton supposedly offered for robbing banks - 'Because that's where the money is'." Bernstein goes on to say: "It turns out that stock brokers are very highly trained - just not in finance. Their employers teach them very well indeed the art of the soft sell.".

I am not going to trash the entire universe of brokers and money managers, because if you have an enormous amount of assets in your portfolio, sometimes professional shepherding is warranted. However, if you are an individual investor with a portfolio of under a million dollars, my advice is to only have an account with a discount broker and if you are not inclined to do your own homework, only invest in index funds. As Bernstein states: "The reason why 90 percent of investors and fund managers cannot pick stocks is simple: Whenever you buy or sell a stock or bond, there is someone on the other side of that trade, and that someone most likely has a name like Goldman Sachs, PIMCO, or Warren Buffett.". If you are not familiar with index funds and don't know where to begin to look for good recommendations, The Investor's Manifesto provides you with detailed charts listing index funds of both stocks and bonds, domestic and foreign which includes a sampling of both ETFs and mutual funds.

Bernstein is adamant about his preference for which firms to invest with and number one on his list is the Vanguard Group because they have: "no publicly or privately owned shares and is instead held directly by the mutual fund shareholders...Next on the list are privately run firms, the largest being Fidelity Investments, Dimensional Fund Advisers and the American Funds.". Other than those outfits, he doesn't like anything because he thinks they are a bunch of crooks. The Investor's Manifesto isn't a bad book, but like I've written about other publications featuring index funds, you are better off by reading something by John Bogle who in fact invented the index fund and was the entrepreneur who started Vanguard. If you are an investor and are already interested in index funds, but need a some guidance on which ones to select, this book would be a good purchase just for the charts which list most of the offerings available.

Thursday, January 14, 2010

The Rainmakers

I wanted to review Wall Street Revalued: Imperfect Markets and Inept Central Bankers by Andrew Smithers for this posting, but found the book to be aimed at academic economists and the before mentioned central bankers, so I've decided to skip it. However, Mr. Smithers does make an interesting point in his introduction: "It has been well remarked that the most successful sellers of snake oil believe wholeheartedly in the virtues of their product, and in recent times bankers became the quintessential sellers of snake oil...Human nature doesn't change quickly, and people respond to opportunities and incentives. Bankers and other financiers will always hang themselves, and us with them, if provided with sufficient rope.". Well we gave the bankers enough rope when we repealed the Glass-Steagall Act and sure enough they hung us out to dry. As the old adage goes, when you are up to your ass in alligators, it is difficult to remember that your initial objective was to drain the swamp.

This week some of the masters of the universe were on display in front of the new Financial Crisis Inquiry Commission in Washington. Market mavens Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America all testified about their roles in the financial crisis. According to the New York Times: "Commission members repeatedly brought up the consequences of the downturn for the American people. Nearly seven million Americans have lost their jobs in the downturn, and 17.3 percent remain unemployed or underemployed. More than two million families have lost their homes to foreclosure in the last three years and households have seen $13 trillion in wealth evaporate.". Make no mistake about it, the financiers were grilled, especially Mr. Blankfein and rightfully so. I'm not suggesting draconian measures for these heavy hitters, but they should be held accountable for their actions, or the actions of the companies they represent. After all, they get paid tens of millions of dollars to take the heat.

The Financial Crisis Inquiry Commission Chairman Phil Angelides is now the cop on the beat and I believe he and the committee members did a good job of getting an apology from the bankers, but I feel an apology is just not enough. There is something inherently wrong with the system and changes must be made. What was most disappointing to me was the fact the smartest people from the best American business schools couldn't see what was very obvious, not only in hindsight, but from a forward looking perspective the way that people like John Paulson who made a killing betting against the housing market did. The Financial Crisis Inquiry Commission will be ongoing for the next year and we will be monitoring its recommendations to the president. Outlandish bonuses were paid out in the financial services industry in 2009 and this has got to stop. I know you can't take steps backward with an interdependent global financial system, but banks should be banks and not casinos.

Sunday, January 10, 2010

A Big Unknown

The death spiral continues as the Ithaca Experiment portfolio got kneecapped a few more percentage points to the downside last week. I'm still all in although it's been a nail-biter as the market valuations have gone from the the ridiculous to the sublime. Things are really out of whack when truly negative employment numbers were released on Friday and the market surged straight ahead, albeit by only a few points, but still it keeps going up or is consolidating. The unemployment rate is now 10.2% with total underemployment even higher at 17.3%. That's a lot of people out of work. Those statistics coupled with the fact consumer credit is contracting can only bode for a lower GDP in the coming months, but I've been singing that tune since the inception of this blog so as I have stated in previous posts, follow my advice at your own peril. The far more thornier question is how long can I stay leveraged and short? That I just don't know because I'll be quite frank, it's tough right now. For the time being, it's damn the torpedoes.

One of the reasons I write these missives on a regular basis is for accountability. Although I do back of the envelope analysis, I'm still in the ballpark with any profits and losses incurred and as the gravy train on Wall Street begins to slow, I will be gaining ground. Earnings season for the 4th quarter of 2009 begins this week and although year-over-year comparisons will be relatively easy, it is the P/E ratio of the S&P 500 that will be important. With a flick of the switch the negative trajectory of my portfolio could be reversed. Sure, there will be some technology companies in the smartphone arena with good earnings, but even companies like Google (GOOG) and Apple (AAPL) have gotten ahead of themselves on a P/E basis. The market reeks of 1999 all over again as a handful of big-cap technology companies lead the NASDAQ.

A good portion of the news this week on the blogs, in the financial press and on CNBC was about the battle brewing between Google and Apple in the smartphone wars. There was little mention of Research In Motion (RIMM) with their Blackberry phones, but they too are in the mix with a stranglehold on the corporate market. However, in the consumer market it appears to be Apple's iPhone vs. Google's Android operating system and consumer adaption is where the growth will be in the upcoming decade. There is rampant speculation about who will be crushing whom like MS-DOS destroying the old CP/M operating system in the PC space or VHS trouncing Betamax in the video cassette wars of yesteryear. My bet is on Apple because of the iPod and the iTunes store. They've already got the cool factor built in and an established base of millions of happy iPod and iTunes users in place. Like Steve Jobs says: "Do you know anyone who has a Zune?".

I'm like the majority of Americans and don't want to leap through burning hoops to use my technology. I prefer plug and play and Apple has made it very easy with the intuitive nature of their products for even a technophobe to use their offerings. Sure, there will be a place for Android, but I don't think they will dethrone Apple in the convergence of the cell phone and the MP3 Player and the computer. I rarely make comments about the weekly business stories because they blow hot and cold - one week's treasure is the next week's trash. But the smartphone saga is the overall theme for the next 3-5 years in not only technology, but in our day-to-day lives. Smartphones are currently a luxury, but they are productivity tools and not just expensive toys. Just like the PC and cell phone, eventually the majority of the population will own a smartphone or be trampled under foot. Does that mean I think you should buy Apple? Not necessarily at $212/share with a forward P/E ratio of 25.5 and a growth rate of 25% which translates into a PEG ratio of 1. However, when the market corrects, it would be a very nice technology holding in any portfolio.

Thursday, January 7, 2010

A Bone to Pick

Steve Forbes has been one of the high priests of free-market capitalism for as long as I can remember. Recently he teamed up with Elizabeth Ames to write How Capitalism Will Save Us which can be summarized as a modern manifesto for the Austrian School of economics which, quite frankly, surprised me. I knew that Mr. Forbes was conservative, but I didn't realize how far out to the right he stood until reading his most recent publication. The book covers an array of current economic topics which include: cap and trade, the gold standard, flat tax rates, universal health care, executive pay, globalization and outsourcing. Because The Ithaca Experiment is an investing blog, I'm not going to cover most of the authors' arguments, just the ones that make the most sense from an economic viewpoint. I'd like to stay within the realm of my expertise and some of these topics are beyond the scope of the speciality of this Web site.

How Capitalism Will Save Us states: "Thirty years ago, only about 13 percent of Americans owned stock. At least 50 percent of American households do today.". This can only mean that more people have skin in the game with their IRAs and 401Ks and individual holdings whether it be in securities or mutual funds or ETFs. That's why there is such an outrage over the 2008 market collapse - over half the country lost significant amounts of retirement income. People want to tar and feather these bankers who were partly responsible for those losses. According to the book, it wasn't the bankers fault, but government intrusion that caused the financial system to to implode. Forbes and Ames believe that "the financial crisis was a by-product of not one but three government-created disasters.": monetary policy, a succession of regulatory failures like mark-to-market accounting and GSEs like Fannie and Freddie helped inflate the bubble.

I'm from the school that ascribes to the theory it was lack of government intervention that enabled the bankers, insurers and mortgage lenders to run wild, sometimes being leveraged debt to equity as much as 40:1. It all started with the repeal of the Glass-Steagall Act in the early 1990's. The Glass-Steagall Act went into law in 1933 to help ease speculation by bankers and once repealed, gave the bankers a licence to do whatever they wanted. Give these financiers an inch, and they'll take a yard. It's just the name of the game on Wall Street and they need to be under someone's thumb because left on their own accord, they'll gum up the works. What is troublesome about How Capitalism Will Save Us, is that throughout the book they keep saying that we need less and less government in all aspects of the economy, but they admit that if the government hadn't interceded with the bail-out program, "the impact on the world-wide economy, on billions of people, would have been cataclysmic.". I think the operative word here is cataclysmic. It seems that Mr. Forbes and Ms. Ames want it both ways.

The authors of How Capitalism Will Save Us admit that: "Several of the nation's financial institutions were nationalized in all but name.". They also concede: "The financial sector is not just another industry. It is the lifeblood of our system. Without banks and other credit providers you don't have an economy.". And yet, when it comes to executive compensation, they seem to feel that the nefarious impresarios that ran the banks into the ground should be paid top-shelf dollars despite the awful jobs they did. No wonder the nation is hot under the collar when it comes to the bonuses being paid with TARP money. It's a good idea President Obama imposed a $500,000 cap on the pay of top executives of banks that received bail-out funds. They are government employees now and should be paid accordingly. They had their chance in the free-market system and failed miserably. A palace revolt is under way.

I agree with some of the tenets of supply side economics, like the theory of creative destruction. How Capitalism Will Save Us describes it very well: "Joseph Schumpeter, the great twentieth-century Austrian economist, recognized the disruptive power of innovation. He understood that advances wrought by entrepreneurs and others are not only beneficial, they also shatter the old order. Schumpeter called this process 'creative destruction' and explained that it is essential to a healthy economy.". Hyman Minsky believed this, too, as we have covered in earlier posts, but Minsky also believed that the financial industry should be regulated by the government. Forbes and Ames should unlock the chains of 20th Century thinking and come on into the new era. They may be stuck in a time warp.

Monday, January 4, 2010

Urge Overkill

In the arena of financial writing Burton Malkiel and Charles Ellis are considered two of the heavyweights. Malkiel is famous for writing A Random Walk Down Wall Street and Ellis is the bestselling author of Winning the Loser's Game. Now the two have teamed up together and co-authored The Elements of Investing. I first saw The Elements of Investing in an ad in Barron's a few weeks ago and then Money magazine just printed an excerpt from the book in their January issue. I thought I'd take a flier on it because the article in Money was interesting, but that's about as far as it goes because a little advertising and some decent PR work suckered me in for what was a very disappointing book. I knew when I bought it that it was a beginning investor's book, but there are a lot of investing primers out there that even an experienced investor can get a few pointers from - this is not one of them.

The first thing that struck me about the book is how puny it is. It's a sparse 150 pages about the size of a paperback with very large page margins which translates into not very much in print. I bought it sight unseen on Amazon and assumed it would be full of all sorts of facts and figures, but there is very little of the sort. What the authors give you is some common sense advice about saving for your future and an endorsement of investing in index funds. That's the essence of the entire book and Burton Malkiel and Charles Ellis keep repeating their investing principals throughout the entire tome. A big problem here is that both subjects have been done much more effectively by Suze Orman with her books on personal finance and John Bogle with his texts about index funds. For the same price as The Elements of Investing you can pick up a copy of John Bogle's The Little Book of Common Sense Investing and come away much more the wiser.

Both John Bogle and The Elements of Investing caution investors about the evils of trading too frequently and the benefits of diversification. That's why they champion index funds. I've talked about index funds at length in other posts, so I won't rehash old material, but they are the best way to go for investors with a long-term time horizon and the need for a hands off approach to wealth creation. If you are a new investor and wish to broaden your horizons with some reading then you can not go wrong with "The Little Book" series which has been published over the past year and a half. Along with John Bogle's The Little Book of Common Sense Investing, Joel Greenblatt, Louis Navellier, Christopher Browne, Peter Schiff, Jason Zweig and Pat Dorsey have all contributed very good books in the series. You can buy them on Amazon for about $11 each.

If you are a beginning investor and are on a budget and can only afford to purchase one investing book, I would highly recommend Jim Cramer's Real Money by James Cramer. No matter what you think about Jim Cramer the television personality, Jim Cramer the writer is very good and he is an experienced investor and hedge fund manager. The book isn't as kinetic as his show Mad Money on CNBC and he explains how to value stocks. He even gives a plug for index funds if you are leaning towards the laissez-faire approach. Jim Cramer's Real Money was originally published in 2005 so it is relatively new and has recently been reissued as a mass market paperback. Although I would caution you about watching his show because perhaps he trades too much, his book puts things in perspective so anybody can understand it in clear concise language. You can't go wrong with this one.

Friday, January 1, 2010

Up Against It

Death by 1,000 cuts. That's what it's been like the past six months since I started the Ithaca Experiment. Almost every day the downward spiral of my holdings has been amplified by being leveraged to the short side and the steady drip, drip , drip of a Chinese water torture has slowly eroded my confidence. However, we are not talking about a postmortem scenario here, just down for the count on a temporary basis. I still find flaws in the logic that we are in a new bull market and that the lows last March was a generational buying opportunity. I'm of the belief that we will retest those lows and go further down to a P/E of around 8 in the S&P 500 once the government subsidies run out. Right now we are experiencing a resiliency in price action while downbeat consensus forecasts permeate the economic landscape. Sure, there are those that think we've still got another leg up, but by only 10% for all of 2010 if you listen to the bullish pundits. I try to stay focused and listen to both sides of the argument, but I'm just not buying what the bulls have to sell. Eventually a correction has to come and I'm willing to sit on my holdings until that time arrives.

On December 29th on Bloomberg there was an article about a hedge fund manager from Canada, Mr. Eric Sprott, whose fund has returned 496% the past nine years compared to the S&P 500 which has lost 32% over that same time period. Sprott is saying that the S&P 500 will retest the lows and then some so I am not alone in my stance. In fact, there is a dichotomy right now in the investing world so my projections aren't as far flung as you may be led to believe. I just got in too early, which certainly hurts my wallet, but let's not forget where we were last March - falling deeper and deeper into a black hole. This black hole is depicted in Andrew Ross Sorkin's Too Big To Fail which might be too big to read since it runs 550 pages. The book is not for everybody because quite frankly, it's just too long, but it did galvanize my convictions that we are still not out of the woods as far as the financial crisis is concerned. It may seem that way because the market has rallied significantly the past nine months, but we are still teetering on the edge of catastrophe.

Too Big To Fail is about the collapse of an investment banking system run by "fat cats", but they more accurately can be called vultures or sharks. They eat what they kill and Mr. Sorkin makes this very clear in his book. It's a take no prisoners world on Wall Street and these bankers can smell blood and take a carcass to the bone like a school of piranhas when one of their competitors is wounded. When the world-wide economic system was on the brink of collapse, these investment bankers zeroed in on the wounded and cherry-picked the assets they could salvage which during normal times would be the prudent thing to do, but not when they are getting bailed out with a trillion dollar TARP program. Is there any wonder why we are on the verge of class warfare in this country with the bonuses and golden parachutes that are being offered on the tax payer's dime?

The implosion of the investment banking system was a worst-case scenario with no regard for moral hazard as these pariahs used leverage and financial engineering to commandeer whatever profits were available. When the government implements its "exit strategy" somewhere down the road, heads will roll once more as the system just can't accommodate all of the toxic debt. Should the government have stepped in and bailed them out? Yes. It would have been a lot worse if things would have been left to decline on their own accord, but maybe we are avoiding the inevitable. In whatever case may ensue in the upcoming year it will be interesting and I'm looking forward to it. I've done my due diligence.