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Need for Rebalancing

October 7th, 2009 at 12:51 pm

I thought I would follow up on a point I made yesterday concerning rebalancing. Everyone understands the reason for diversification and dollar cost averaging. Basically, don't put all your eggs in one basket and no one can market time.

Think of it this way. Over the past 2 years you had a top and bottom. The top occurred in October 2007 and the bottom occurred in March 2009. If you were out of the market from March 2009 to September 2009, you missed about a 37% return. If you had dollar averaged you would been buying all along the way. At the top, you would have been buying less shares in your mutual funds and the bottom you would have been buying more.

Now, I rebalance my portfolio twice a year – March and September. I could have picked once a year or and other 2 months in the year that are 6 months apart. I just like March and September.

With rebalancing, you need to have an allocation in mind. Let's say simply that you are 60% stock and 40% bond. In the above example as we approach September 2007, my allocations might be approaching 70% stocks and 30% bonds. The first thing to note is that my portfolio is riskier then my original allocation. In this case, I would sell my stock and buy bonds to get the allocation back to the original 60/40.

The second thing I am doing here is taking some profit and investing into my other asset classes. I am doing the opposite of chasing performance. I am buying into asset classes underperforming and selling the hot classes.

So, in March 2009, my portfolio might be 60% bonds and 40% stock. This portfolio is a lot more conservative then my original allocation. So, I sold the stock and bought bonds to get back to the 60/40 split. Last month, I rebalance where I sold so stocks and bought bonds because of the run up from March to September.

To illustrate my point about asset classes, I have attached the picture below. Noticed in 2002, the best performer was Lehman Agg (bond index) and the worst was Russell 2000 growth. And in 2003, Lehman Agg was the worst performer and the Russell 2000 was the best. By rebalancing in 2002, you would have been selling your Lehman Agg (your hot mutual fund) and purchasing Russell 2000.

The other great thing, much like dollar cost averaging, rebalancing on set dates takes the emotion out of your investments. It just something you do.



Source: http://www.swapmeetdave.com/Bible/Callan.htm

Gamecock.. Just my thoughts

October 23rd, 2008 at 03:14 pm

Personally, I think we have hit the bottom. And the technical analysis I have done seems to support it. Does this mean the technicals will start breaking down in the future? No. It means I have some expectations of what is occurring and so far the market is behaving the way I thought.

There is a concept in investing called capitulation. This is when everyone throws in the towel and gives up. In September, there was tremendous fear in the street. The pros were bailing out and moving to cash. Hedge funds were going under because they couldn't get there inventory out of Lehman. You might of heard something about prime brokers or other risks with Lehman. This is what they are talking about.

If you believe in Elliot Wave theory and how it pertains to the market, the last wave is when retail gives up. The Q3 statements hit people's mailboxes about 10/10. So I believe that we are seeing the last of the liquidations from the retail.

Now, I mentioned 8,451 on the dow. This was the low close. Sure the lowest point was 7,773 but in technical analysis it is the close that is important. Right now, I have support at 8,451. If you look at the chart, we keep bouncing off of 8,500. This is good, because to me it seems that the market has hit a bottom.



Now if you look at the VIX, it starting to top out. In other words, the markets are not getting more volatile, just the same highly volatile level.



With these signals, I have starting buying into the market. Did I lose a ton of money this year? You betcha.

The last is a little qualitative analysis. When Paulson handed all the money to the banks, he basically signaled that the banking infrastructure will not fail. This has in my opinion started to loosen up the credit markets. Right now, all I hear about is lower profits and recession. This is a far cry away from a global problem with the banking infrastructure.

But as I have said before, you this as an opportunity to assess your risk tolerance. Do not let fear drive you to a decision. What ever you decide is your investment philosophy, that philosophy should be followed in good times and bad.

As of this posting, the market is up 200 points.

Buy American. I Am.

October 17th, 2008 at 04:29 pm

By WARREN E. BUFFETT
Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Source: http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&ref=opinion&pagewanted=print&oref=slogin

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

And that's what I am doing!!! I have been purchasing leaps (call options longer then a year)on companies that are down 80% but still have strong cashflows and balance sheets.

I just purchased some Jan 2011 call options on VMWare. I have also bought call options on some beat down financials.

If you want to be a long term investor, why not listen to greatest long term investor and a disciple of Graham?

As Buffet says, in the short term, no one knows where the market is going to go. It could drop another 1000 or go up another 5000.

But don't be foolish!!! "Be fearful when others are greedy, and be greedy when others are fearful."

General Investing

October 8th, 2008 at 01:18 pm

I thought I would blog a little about by investments and how I invest in general. So be forewarned.

Generally speaking, 85% of my portfolio is diversified as the experts say. I have a mix of large, small, and mid size companies. I have a mix of domestic, foreign, and emerging market. I have a mix of asset types bonds, stocks, money market. I have a mix od index funds and actively managed funds

I rebalance my allocations once a year in the first quarter. This in essence rebalances my risk. If emerging markets has a great year, my portfolio may be taking on bigger risks because a greater percentage is allocated to emerging markets then I initially thought should be. The other thing is that the market goes in cycles and by rebalancing, you are selling you winners to buy out of favor assets. In the longer term, rebalancing and dollar cost averaging outperform just dollar cost averaging.

What about the other 15%?

Well 10% of the 15% is allocated towards sector funds and is a little more speculative. These are funds that I think the pendulum has swung too far. In this case, I am investing in REITs and financials/banking.

The remaining 5% is more short term trading I do. I go long stocks, short stocks, and play in the option market. I have developed some quantitative models that narrow down the stocks that I research. Then I use technical analysis and fundamental analysis to determine when to make the trade and what to finally trade. So after everything is done I usually end up with a watch list of 10 stocks that I'll follow for months before trading.

One example is GS where I have been playing the volatility. I keep tight stops on this and so I don't lose much money. In general, I usually set up my day trades for the late afternoon. I try to determine what the day traders are doing and do the opposite. In other words, if I feel the day traders are short, I'll buy the stock around 1:30 or 2:00 and end the position before the market closes.

I have been following NCC trying to figure it out. I have been filling out an excel sheet detailing when I would trade it and if it would be a profitable trade. I am still not ready to trade it and may never trade it.

But let's go back to my sector funds. How do I determine whether to get into to what when?

Well I first start looking at the major indices. I try to start determining support. I had support of the Dow at 10,750 then I had it at 10,000. Now? I am still trying to figure it out. What I am looking for is the indices to find support and hold it. What this means to me is that the big players are done selling.

I also look at the VIX, which talks about fear on the street or volatility in the option market. Usually high volatility signals tops and bottoms. So, I am looking to see if the VIX starts to retrace (go down).

Now I start looking at my industry charts and I start looking at sector funds and ETFs. In the REITs, I am in a sector mutual fund. I bought ETFs for banking and financial services.

Basically, split my buys into 3 baskets. I start with a 25% investments and then a 50% investment and then another 25% investment. So let's say I am going to invest 10,000 in banking ETFs. My first invest would be 2,500 then 5,000 and then 2,500.

This year I did my initial investment of 25% in banking and financial ETFs in March. I have been waiting to put in by second allocation. I will wait until the VIX retreats and the sectors start rebounding before the second investment.

This is an over simplification, but it is a general overview of the large things I look at around investments. Also, I small percentage of my portfolio is in trading/speculative investments. And only 5% is in single names.

U.S. options fear gauge soars to record close

October 7th, 2008 at 08:29 pm

I won't be buying stocks until the VIX starts moving down. For those of you who don't know, the VIX is basically a fear measure. It looks at the volatility of options; and besides 1987, it's at an all time high.

~~~~~~~~~~~~~~~~~~

By Doris Frankel

CHICAGO, Oct 6 (Reuters) - An index regarded as Wall Street's fear gauge surged to a record close on Monday as investors clamored for protection in anticipation of more stock market turmoil on worries over the widening credit crisis.

The Chicago Board Options Exchange Volatility Index .VIX, or VIX, surged to a record high of 58.24 before easing back to close up 15.31 percent to 52.05.

"This is absolutely amazing. The elevated VIX is reflecting that people are unsure about every financial relationship they have ever known not only in the U.S. but worldwide," said Joe Kinahan, chief derivatives strategist at thinkorswim Group.

Persistent strains in the credit markets added to nervousness about the wider economic outlook, while a spate of bank rescues in Europe heightened worries about the stability of global financial institutions.

"Not only are the U.S. banks in financial trouble but it appears that the European and foreign banks may be in worse trouble due to the credit crisis," Kinahan added.

The Dow Jones industrial average .DJI dropped 369.88 points to fall below 10,000 for the first time in four years. The Standard & Poor's 500 index .SPX fell 3.85 percent to 1,056.89.

The VIX, which reflects investors' consensus about anticipated stock market volatility over a 30-day period, tends to move inversely to the S&P 500 benchmark, and spikes upward when the market posts sharp losses.

The record level in the VIX on Monday reflects a change in the index made by the CBOE in 2003 to provide a more precise reading on stock market conditions, basing the index on the prices of the more popular S&P 500 options.

The old VIX, introduced in 1993, is based on S&P 100 options, a smaller basket of stocks. That index, the VXO .VXO ,also hit a multiyear high on Monday, closing up 14.95 percent at 59.50, after scoring a new peak of 66.42.

"With today's high on the VXO of 66.42, it is safe to say the uncertainty now exceeds all times in recent history, with the exception of the crash of 1987 when the old VIX hit 150.19 briefly and remained above the current levels until about Oct. 29, 1987," said Randy Frederick, director of derivatives at Charles Schwab in Austin, Texas.

From a contrary view of the markets, the spike in the VIX is possibly a sign that investors have overreacted and the equity market is oversold.

But being a contrarian during the recent stock market decline has not been a winning strategy, said Frederic Ruffy, options strategist at website WhatsTrading.com.

He noted each time the VIX moved above key levels at 30, 40 and 50 readings, the stock market experienced a short-term bounce but the rally proved to be short-lived and the S&P 500 eventually faltered, falling to new lows.

Volatility remains exceptionally high and with the ongoing problems in the credit markets, many would-be buyers are likely to remained sidelined, Ruffy added.

"After being burned so many times during the recent market decline, very few investors are going to dive in and try to catch the absolute bottom," Ruffy said. "Instead, they might wait for signs that volatility is indeed falling and that stocks have found a solid leg to stand on." (Reporting by Doris Frankel; Editing by Leslie Adler)

Source: http://www.reuters.com/article/marketsNews/idINN0633769120081006?rpc=44&pageNumber=2&virtualBrandChannel=0

Sigh...Monster Up Day Setting up

September 19th, 2008 at 12:31 pm

The futures are currently pointing to a huge up day today on top of the 400 point surge yesterday.

As I look premarket GS is up $32 to $140. STT is up $6 to $65. WM is up a buck to $4. Hell, Apple is even up almost $8. Oil is at $97.5 probably going down today. Gold is down $54.

So what happened? Is everyone drunk? Is it like someone about to jump off the ledge and the sun comes out?

"U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution. "

and

"U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change. "

Source: http://www.bloomberg.com/apps/news?pid=20601103&sid=am.XqrSCUntI&refer=news

AIG Deal and Changes to Naked Short Rules

September 18th, 2008 at 03:18 am

AIG Deal

Just to be clear about the deal. It's an $85 billion 2 year revolving credit loan at 3 month LIBOR + 850 bps.

The loan is collateralized by all the assets of AIG which is estimated to be be about $1 trillion. Just the air leasing and foriegn life insurance division are estimated to be worth about $94 billion.

The other piece is a 79.9% equity stake in AIG, where the government can veto dividends to common and preferred shareholders.

Now the 3 month LIBOR is around 2.88. Or, the interest on the loan is 11.38%. That ain't cheap money and the government has enough power to liquidate the company and get their money first. But it did this to give AIG time to unravel and not have to put everything on a fire sale.

Source: http://www.federalreserve.gov/newsevents/press/other/20080916a.htm


~~~~~~~~
Naked Shorts - Technical

The Commission's actions were as follows:

1)Hard T+3 Close-Out Requirement;

Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller's behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer's activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.

2)Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed

The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
Rule 10b-21 Short Selling Anti-Fraud Rule

The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday.

Source: http://www.sec.gov/rules/other/2008/34-58572.pdf

Russian Markets Halted as Emergency Funding Fails to Halt Rout

September 17th, 2008 at 01:30 pm

Could be worse....

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.

The Finance Ministry attempted to stop the selloff by offering 1.13 trillion rubles ($44 billion) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.

Bond Market `Closed'

``The bond market remains effectively closed and banks are reluctant to lend to one another,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.''

Finance Ministry Minister Alexei Kudrin said on state television that the decision to increase the amount of budget funds available to three state-controlled banks would ``smooth over the shock changes'' in the markets and enable the banks to make loans to smaller competitors.

``We must soften such shock changes connected with the market falling,'' Kudrin said. ``With foreign borrowing stopping, we must soften the impact with additional funds, then the situation will stabilize.''

Sberbank, eastern Europe's biggest bank, can borrow as much as 754 billion rubles, VTB has a limit of 268.5 billion rubles and Gazprombank can get 103.9 billion rubles. About 400 billion rubles more of unspent budget funds is available to other banks.

``These are market-making banks capable of insuring the liquidity of the banking system,'' the Finance Ministry said in a statement today. The government and central bank will take more measures to improve liquidity this week, the ministry said.

Sberbank dropped 2.1 rubles, or 6.1 percent, to 32.55 rubles. VTB sank 0.44 kopek, or 14 percent, to 2.73 rubles, a record low.

``The primary objective of these measures is to inject liquidity to calm nervousness,'' Alexander Morozov, chief economist at HSBC Bank in Moscow, said by telephone. ``Hopefully other banks will be able to get this money via the interbank market and this should prevent the rise of rates,'' he said.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIRza4.azeC4&refer=worldwide

Russian Markets Halted as Emergency Funding Fails to Halt Rout

September 17th, 2008 at 01:29 pm

Could be worse....

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.

The Finance Ministry attempted to stop the selloff by offering 1.13 trillion rubles ($44 billion) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.

Bond Market `Closed'

``The bond market remains effectively closed and banks are reluctant to lend to one another,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.''

Finance Ministry Minister Alexei Kudrin said on state television that the decision to increase the amount of budget funds available to three state-controlled banks would ``smooth over the shock changes'' in the markets and enable the banks to make loans to smaller competitors.

``We must soften such shock changes connected with the market falling,'' Kudrin said. ``With foreign borrowing stopping, we must soften the impact with additional funds, then the situation will stabilize.''

Sberbank, eastern Europe's biggest bank, can borrow as much as 754 billion rubles, VTB has a limit of 268.5 billion rubles and Gazprombank can get 103.9 billion rubles. About 400 billion rubles more of unspent budget funds is available to other banks.

``These are market-making banks capable of insuring the liquidity of the banking system,'' the Finance Ministry said in a statement today. The government and central bank will take more measures to improve liquidity this week, the ministry said.

Sberbank dropped 2.1 rubles, or 6.1 percent, to 32.55 rubles. VTB sank 0.44 kopek, or 14 percent, to 2.73 rubles, a record low.

``The primary objective of these measures is to inject liquidity to calm nervousness,'' Alexander Morozov, chief economist at HSBC Bank in Moscow, said by telephone. ``Hopefully other banks will be able to get this money via the interbank market and this should prevent the rise of rates,'' he said.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIRza4.azeC4&refer=worldwide

US Govt Owns 79.9% of AIG for 85 bill

September 17th, 2008 at 01:29 am

WASHINGTON - In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an $85 billion emergency loan to rescue the huge insurer AIG.
ADVERTISEMENT

The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

"The President supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

"I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers," Paulson said in a statement.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

Earlier, Fed chairman Bernanke and Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government's option.

"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."

On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

The worries were triggered after Moody's Investor Service and Standard and Poor's lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.

"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."

Source: http://news.yahoo.com/s/ap/ap_on_bi_ge/aig

BOA buys Merrill for 44 bill and Lehman No more

September 15th, 2008 at 03:21 am

Seems that BAC bought Merrill for 44 billion and Lehman after 158 years in business is out.

Bank of America Reaches Deal for Merrill
By MATTHEW KARNITSCHNIG, CARRICK MOLLENKAMP and DAN FITZPATRICK
September 15, 2008

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion.

The deal, which was being worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation's prime behemoth even bigger. The boards of the two companies approved the deal Sunday evening, according to people familiar with the matter.

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

A combination would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

It would also show how the credit crisis has created opportunities for financially sound buyers. At $44 billion, or roughly $29 a share, Merrill would be sold at about two-thirds of its value of one year ago, and half its all-time peak value of early 2007. Merrill shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Bank of America and Merrill Lynch wouldn't comment on any discussions.

Merrill would give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive.

Dramatic Deal

A deal would be all the more dramatic because Merrill, upon the arrival of Chief Executive John Thain, did more than many U.S. financial giants to insulate itself from the financial crisis that began last year. It raised large amounts of capital, purged itself of toxic assets and sold big equity stakes, such as its holding in financial-information giant Bloomberg. That Merrill has opted to sell itself thus underscores the severity of crisis.

The integration of Merrill, known for its proud, and sometimes testy, brokerage force, could turn out to be the biggest test of Mr. Lewis's career. Typically, the bank has made one big deal and then taken time to carefully merge the two institutions. But in recent years, acquisitions have come at a furious pace. In 2004, the bank bought FleetBoston Financial Corp. A year later, the bank agreed to buy MBNA Corp., the credit-card firm. In 2007, Bank of America bought Chicago's LaSalle Bank as part of the break-up of Dutch bank ABN-Amro Holding NV. Then came this year's purchase of Countrywide.

As of Sunday evening, a deal had not yet been signed, said people briefed on the discussions. And other last-second bidders could emerge from the woodwork. Yet with news of the Bank of America talks breaking Sunday, it became all the more difficult for Merrill and Mr. Thain to rebuff a deal. Should the talks collapse, most on the Street were expecting Merrill's shares to fall even further amid widespread worries about independent broker-dealers.

Inside the Fed meetings in Lower Manhattan this weekend, there was a general worry that Merrill could be the next to fall after Lehman. Through the weekend, federal officials including Federal Reserve Bank of New York head Timothy Geithner made it clear that they strongly encouraged a deal to sell Merrill, said people familiar with the matter said.

If struck, a deal would come together at breakneck speed. On Friday, Bank of America's top executives were pushing for a deal with Lehman Brothers, scrambling to perform due diligence on Lehman's books. Just 48 hours later, they were locked in discussion with Merrill and its top executives.

During the flurry of historic dealmaking this weekend, Merrill approached Morgan Stanley about a possible deal, which would have united two of Wall Street's oldest brands, according to a person familiar with the talks. But the talks didn't go anywhere because there wasn't enough time for Morgan Stanley to review the idea and Merrill wanted to do the deal quickly, this person said. Merrill was also stepping up talks with commercial banks both in Europe and the U.S. While Mr. Thain had once orchestrated a trans-Atlantic deal for his old firm, NYSE Euronext, in this race, a U.S. deal proved the quickest, best option for Merrill.

'The Ultimate Realist'

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, illiquid assets carried on balance sheets that were leveraged at a debt-to-equity ratio of more than 20 to one. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushion. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

Merrill's one-time chief Stan O'Neal was ousted in October 2007, and his successor, Mr. Thain, tried to repair the firm's balance sheet by arranging an infusion of more than $6 billion in capital starting last December by investors led by Temasek Holdings, a Singapore government investment fund.

But as the losses kept coming this year, Mr. Thain was forced in July to sell a huge slug of more than $30 billion in collateralized debt obligations at a price of just 22 cents on the dollar. That step required the firm to raise still more capital, under painful terms that re-priced some of the December stock sales at about half the original price.

One top Merrill executive lamented the pending sale of the venerable company, saying "it's sad but inevitable." This executive said that he was pleased it was Merrill, rather than rival broker Morgan Stanley, that was hatching a deal with Bank of America.

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

In a highly volatile market, some advantages accrue to banks that can rely on those more stable deposit bases.

At Merrill, "we became convinced that for investment banking to be possible, we need to be part of a much bigger capitalized commercial bank," the Merrill executive said.

Merrill acted to avoid the same fate as Bear Stearns and Lehman, some analysts said. "Bear didn't think it could happen to them and Lehman didn't think it could happen to them either," said analyst David Trone of Fox-Pitt, Kelton. "I think management looked at Bear and Lehman and said we're not going to go down that slope, we're going to try and get our shareholders something before we end up in the same camp."

source: http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage

Wall Street Prepares for Potential Lehman Bankruptcy (Update3)

By Craig Torres and Shannon Harrington

Sept. 14 (Bloomberg) -- Wall Street readied for a potential Lehman Brothers Holdings Inc. bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy it and the government indicated it wouldn't provide funds to prevent a collapse.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight.

``The purpose of this session is to reduce risk associated with a potential Lehman'' bankruptcy, the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Treasury Secretary Henry Paulson, who has led the talks with New York Fed President Timothy Geithner, was adamant two days ago against using taxpayer funds to help a purchaser take Lehman over.

U.S. regulators are betting that the financial system will be able to withstand the failure of a large institution without severe disruptions to an already weak economy.

A benchmark gauge of credit risk that banks and investors use to speculate on corporate creditworthiness or to hedge against losses was being quoted at the widest levels ever, contingent on a Lehman bankruptcy.

Confidence Deteriorates

The Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, was trading at about 200 basis points, said Brian Yelvington, a strategist at CreditSights Inc. in New York. It closed at 152 basis points Sept. 12, according to CMA Datavision in London. The index, which rises as investor confidence falls, reached 198 basis points in March, CMA data show.

A gauge of risk in the U.S. leveraged-loan market that falls as credit risk increases was being quoted 1.75 percentage points lower, contingent on a Lehman bankruptcy, according to Goldman Sachs Group Inc. The Markit LCDX index was being quoted at a mid- price of 94.25. The index is tied to the high-yield, high-risk loans of 100 companies.

If Lehman files for bankruptcy, ``that obviously puts a lot more risk in the market, so it's definitely going to be wider,'' Yelvington said.

Paulson's Stance

Paulson opposed using government money because Wall Street has had time to prepare for the Lehman situation, a person familiar with his thinking said two days ago. That would make the case different from the Bear Stearns Cos. collapse in March, when the Fed provided $29 billion of financing to help JPMorgan Chase & Co. take over the firm.

``Treasury and the Fed have determined that markets have adjusted to the situation since Bear Stearns,'' said Gilbert Schwartz, a partner at Schwartz & Ballen LLP in Washington and a former Fed Board attorney. ``If the markets, every time a big institution went bust, expected the government to step in, no one would ever adapt.''

Paulson, Geithner and Securities and Exchange Commission Chairman Christopher Cox held talks with Wall Street chiefs from the evening of Sept. 12.

The market value for all over-the-counter derivatives swelled 50 percent last year to $14.52 trillion, with interest- rate contracts accounting for almost half of the total, according to the Bank for International Settlements.

Insolvent Banks

After the Bear Stearns episode, Paulson pushed for a resolution mechanism to shutter a failing investment bank, similar to how the Federal Deposit Insurance Corp. resolves insolvent commercial banks.

``We must limit the perception that some institutions are either too big or too interconnected to fail,'' Paulson said in a June 19 speech. ``If we are to do that credibly, we must address the reality that some are.''

Without such a mechanism in place, a failing firm has the option of filing for bankruptcy. Bear Stearns officials told the Fed in March they would have to make such a filing without emergency assistance.

Fed Chairman Ben S. Bernanke said in April that he wanted to avoid another Bear Stearns case.

``The financing we did for Bear Stearns is a one-time event,'' Bernanke said in April. ``It's never happened before and I hope it never happens again.''

Lehman Trades

The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.

The ISDA said the ``netting trading session'' began at 2 p.m. and will continue until at least 6 p.m. New York time.

``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008,'' the ISDA said. ``If there is no filing, the trades cease to exist.''

Barclays, the U.K.'s third-biggest bank, said earlier today it abandoned talks to buy Lehman, contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.

Less than three hours after the Barclays news, Bank of America also pulled out, according to a person with knowledge of the matter.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netShannon Harrington in New York at Sharrington6@bloomberg.net

source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aNMh_8NRE6QM&refer=worldwide

Got to love a recession like this

May 29th, 2008 at 07:28 pm

GDP up more then 50% of the estimate (revised up to 0.9% from 0.6%). Consumer spending up 1%. Corporate profits up 0.3% to 1.57 trillion (annualized). The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Let the Harvard guys and Canadians argue about the US economy at stall speed. Sure there is some negatives, unemployment up by 4,00 and 3.1 million receiving benefits (highest since Feb 2004).

All in all, I believe a very good report.
Also, MasterCard Inc. said consumers are continuing to reach for plastic. The company's shares jumped to a fresh high after the credit card processor said it still expects to see double-digit growth in net revenue this year. While it said gross dollar growth in the U.S. is slowing, purchasing is increasing in other parts of the world. Avoiding a big falloff in consumer spending and strength elsewhere in the world could help the U.S. economy avoid a serious downturn, some economists have reasoned. (Source: http://biz.yahoo.com/ap/080529/wall_street.html)


----------------------


May 29 (Bloomberg) -- The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.
The 0.9 percent gain at an annual pace in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month.

``It's basically like an airplane at stall speed, just skimming above the water,'' Jeffrey Frankel, an economist at Harvard University who is a member of the panel that dates U.S. economic cycles, said in a Bloomberg Radio interview. ``I wouldn't rule out going into a recession'' later in the year.

Trade remains the bright spot for an economy that is likely to slow this quarter as surging fuel and food bills and falling home values force consumers to cut back. The economy will expand just 0.1 percent this quarter as spending slows further, according to economists surveyed by Bloomberg this month.

``We are somewhere in the twilight zone between an expansion and a recession,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``We will have a poor pace of growth through the year.''

First-time claims for unemployment insurance rose to 372,000 last week, higher than economists had forecast, from 368,000 the previous period, the Labor Department reported. Those continuing to receive benefits jumped to 3.104 million in the week ended May 17, the highest level since February 2004.

Stocks, Treasuries

Stocks rose, with the Standard & Poor's 500 index up 1 percent at 1,404.2 at 12:40 a.m. in New York. Treasuries slid after benchmark 10-year note yields yesterday climbed above 4 percent for the first time since January. The yields were at 4.11 percent, from 4 percent late yesterday. The dollar rose 0.8 percent to $1.5506 per euro.

Honeywell International Inc., the world's largest maker of airplane controls, said last week it is confident in its full- year forecasts as demand outside the U.S. remained robust. Record oil prices have boosted orders for refining equipment and building projects in the Middle East, India and China has pushed up sales of its energy conservation devices.

This year ``is going to be another strong year in a more difficult environment,'' Honeywell's Chief Executive Officer David Cote said on May 19 at a conference in Florida.

Gains Abroad

Eaton Corp., the world's second-largest maker of hydraulic equipment, reaffirmed its full-year profit forecast on May 28 and projected international markets will grow as much as 6 percent. The company's U.S. markets will expand 2 percent to 3 percent this year.

Procter & Gamble Co., the world's largest consumer-products company, said last month that third-quarter profit rose on increased sales overseas and higher prices.

While a recession is often described as consecutive declines in GDP, the National Bureau of Economic Research, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.

The group says that in a recession, decreases would be visible in payrolls, production, sales and incomes, in addition to GDP.

For that reason, the U.S. is probably already ``in a mild recession,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The economy will be pretty flat on its back through much of this year.''

The Bush administration is betting the U.S. will keep growing as the economy benefits from the impact of tax rebates and seven interest-rate cuts by the Federal Reserve since September.
White House View

``We think that it will'' avoid a recession, Keith Hennessey, director of the White House National Economic Council, said in an interview with Bloomberg Television. ``We think that growth is continuing in the second quarter'' and will strengthen in the second half of the year, he said.

Today's GDP report is the second of three estimates. The median forecast of 74 economists surveyed by Bloomberg News was for a 0.9 percent pace. Projections ranged from gains of 0.6 percent to 1.3 percent.

Following a 0.6 percent growth rate in the fourth quarter, the reading was the smallest six-month expansion rate in five years.

The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1 percent annual rate in the first quarter, the same as estimated last month. The gain was the smallest since the 2001 recession.

The revisions also showed bigger gains in incomes than previously estimated, easing concern that spending will collapse.

Personal income increased at a 5.1 percent annual pace from October through December, compared with an initial projection of 4.2 percent. For the first quarter, income growth was revised up to 4.7 percent from 4.4 percent.

Income growth may slow in coming months as the labor market softens. The U.S. has lost jobs for four consecutive months this year, and payrolls may post another decline for May, according to the
Bloomberg survey.

Inventories Drop

The gain in growth last quarter would have been even larger if not for a reduction in estimates for inventories.

Companies cut stockpiles at a $14.4 billion annual rate, compared with an initial estimate of a $1.8 billion gain. The figures added 0.2 percentage point to growth, less than the previously estimated contribution of 0.8 percentage point.

A measure of total sales, which strips out stockpiles, was revised to a gain of 0.7 percent at an annual rate rather than a 0.2 percent drop. Sales rose at a 2.4 percent pace in the fourth quarter.

There are signs that demand is slowing even more. Auto sales in April slid to a 14.4 million annual rate, the lowest level since 1998, industry figures show.

Spending this quarter will grow at a 0.5 percent pace, the smallest gain since 1991, according to the median estimate in a monthly Bloomberg survey.

Fed policy makers last month trimmed their economic growth projections for this year by about 1 percentage point to 0.3 percent to 1.2 percent.

``A number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year,'' minutes of the Fed's April meeting showed last week.

Construction Slump

Residential construction decreased at a 25.5 percent pace, less than previously estimated, though still the biggest drop since 1981.

Reports this month showed declines in home building will remain a drag on growth. Builders began work in April on the fewest single-family houses in 17 years.

The figures today also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, increased 0.3 percent to an annual rate of $1.57 trillion.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aKYWc5_8EEbY&refer=home

Response to BA

May 20th, 2008 at 08:03 pm



I was looking at your target trade and thought I would put in my two cents.

The red lines I put in is the current trading channel. It has been trading in here since middle of March. I also noticed some resistance points just below 52 and 55. Over the next week or so, you should see whether it is following the red or the green area.

Personally I believe it is fallowing the top green line and the bottom red line. If this is the case, it should be setting up a classic pennant and then shot through 55. At that point, I would buy.

Thats my 2 cent thoughts. By the way, if the news was not reflected into the price of the stock, it would have gone down more then 55 cents with greater volume (probably closer to 2 or 2.5 times the 3 month average).

So, bottom line is I think you made a great pick. But I think you got in too early and out too soon. But we shall see.

Home Equity and Retirement Ratios

April 10th, 2008 at 12:51 pm

In a previous blog, I linked to an article about some quick on the back of a napkin ratio that you could quickly see if you are on target or not. These ratio are just meant as a quick sanity check,

Well, one of the ratios is savings to income. The debate then rages as to whether to include or exclude your house. The only way you could realize that equity in the house is to downsize or move to a less expensive area of the country. Neither one of these are in my near future.

The only way then to tap the equity is through a loan on the equity, which really isnt taking the equity out but securitizing the load with the equity in the house. Therefore, I dont include my home equity in the calculation.

However, if you plan on moving in the next few years and will be getting cash between the sale of the old and purchase of the new, I would include that in savings. Also, if you have investment properties, I would include that in savings.

For debt, I do include the mortgage. First, it is a debt. Second you have to live somewhere.

In my net worth calculations, I do include home equity but not cars.

I look at these as quick numbers to get a sense of where I am. If your income jumped recently, then the ratio are very different then they were last year. Maybe, you removed a huge debt and your income is far less now then you needed in previous years.

The idea is to be honest with yourself to see if you are on track. Where are you? Where are you going? And to a less extent, where did you come from?

Right now, I am in the forest and concentrating on my debt to income ratio. You may be further along on the journey concentrating on the savings numbers. Or you might be doing both.

Ratios for Retirement

April 7th, 2008 at 01:10 pm

So, I came into work this morning and it was a little slow at 7:00. So I decided to cruise the web a little and found an interesting article on retirement ratios from the Financial Planning Association.

The article talks about looking at three financial ratios. They are all based on income and are savings to income, debt to income, and savings rate. There are 2 tables in the article: one for a 5% real rate of return (think 8% return on portfolio) and 4% real rate of return.

The author doesnt include home equity into the savings ratio, which I agree with. You have to live somewhere and most of that equity is going to be tied up in that home, so better not to include it.





Anyway the article is at: http://www.fpanet.org/journal/articles/2006_Issues/jfp0106-art6.cfm

So are you on target?

Personally my savings is a half what it should be, I am carrying 50% more debt, but I am looking at saving 12% - 15% this year. I got a lot of work but I got 1 year before I hit the age milestone.

Time to get cracking!!!

Rough ride this week....

March 17th, 2008 at 02:46 am

In an emergency meeting today, the Fed cut the discount rate by a quarter to 3.25% and approved Chase's purchase of Bear Sterns.

The street is also looking at the Fed dropping the fed funds rate to 2% on March 18th (a full percent).

I personally believe this is the other shoe dropping and this deals directly with confidence in the market.

We moved from credit quality issues (sub prime, CDOs, SIVs, municipal bond insurers, and CDS where the counter party was Bear Sterns, to solvency issues (Countrywide, muni insurers which led to issues in ARS, Bear Sterns), to the fed now flooding the market with liquidity.

I still haven't rebalanced my portfolio as I have been waiting for the market to settle. I believe this is the last shoe to drop and will wait for the dust to settle.

Most of my rebalancing was selling international to invest in my US stock portfolio and my small REITs. I believe this week we will see downward pressure on stocks (especially financials) and downward pressure on the dollar.

Good luck all!!! And cash is king (just not US Big Grin ).

Source: www.bloomberg.com/apps/news?pid=20601087&sid=asg0H5x.VQ4g&refer=home

Time to Rebalance .

January 23rd, 2008 at 02:17 pm

I have been thinking of writing this for some time now. I figured today is as good as any day. A lot of you are feeling the pain of the stock market. Its been down for 6 days and looking to go down again. The Fed lowered rates from, I feel, a position of weakness and not strength. The financials are leading the markets lower (even though yesterday was pretty good for some).

So what do I do now? Bury my head in the sand? Move everything to cash and put it in a mayonnaise jar?

Did you do that when you were creating a budget? No, you took a deep breath assessed things and came up with a plan. When times started getting tough with the budget, did you abandon it? No, you worked through the pain.

So what should we do?

1) Continue to put money in your retirement accounts. Remember, this to shall pass. Dollar cost averaging is a powerful concept.

2) Review your funds. Are some of these dogs that have been under performing for years?

3) Review your allocation.

The best way to illustrate this is the internet bubble. Internet stocks are growth stocks and in the late 90s just took off. Chances are your portfolio was overweight technology and mostly likely you were taking on more risk then you wanted or intended.

It might make sense to review your portfolio and make sure your allocations are in line to your target allocations. I know for my portfolio, I am currently overweight international and emerging market, while underweight domestic stock and REITs. I reallocate every 6 months and am scheduled to do so in the next 3 weeks.

There are 2 ways to rebalance your portfolio:

1) Buy and sell shares in your accounts.

2) Tweak your buying so you buy more of your underweight and less of your overweight.

Lastly, dont panic. Come up with a game plan that works in good and bad times and stick with it.

Ambac stripped of AAA

January 22nd, 2008 at 01:55 pm

This was the other shoe I was talking about a few posts ago.

The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.

The article continues.

MBIA and Ambac both said they were surprised by Moody's decision to start a new review, less than a month after affirming their ratings. The flip-flop by the ratings companies is making investors wary of buying stock or bonds of the insurers, Giordano said.
``You have a market that has zero confidence in anything financial right now,'' Giordano said. ``You have the agencies who, in my opinion, have continued to make a comedy of errors. And you have very complex companies that are very hard to understand. It's easy for investors to just sit on the sidelines.''
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQISj8w4Z90&refer=home

I believe that the whole market will be in a panic this week. I believe that the Fed emergency rate lowering is coming from a position of weakness and not strength. I am looking at financials to start bottoming out. Besides a total meltdown of the financial infrastructure, I dont see much more bad news. I would look at today setting up some lows in the financials and then testing these lows later this quarter.

I am starting to reevaluate my list of financials looking at the strong ones like GS. Not buying yet, but getting closer. I need to make my list and then look at some entry points.

75 Basis Point Cut

January 22nd, 2008 at 01:31 pm

Breaking news....

Fed lowered rates by 75 basis points at 8:20 today. Federal Funds rate at 3.5%.

For those looking to refinance, this week might be the week to do it. Keep an eye on the treasuries.

I expect with today's meltdown, money will be flowing into treasuries causing prices of treasuries to rise and the yields to plummet (proce and yield have inverse relationship, like seesaw). So, you should see mortgage rates down this week.

Subprime, SIVs, CDOs oh my!!!

January 17th, 2008 at 03:51 pm

Merrill reported their earnings and just like Citi, the reports were not good. Merrill had a write off of $15 billion, which lead to a net loss of $9.83 billion. Or, $12 a share.

Since May, the banks and Wall Street have written of over $100 billion since May. Greatest quote - Chief Executive Officer John Thain called the results clearly unacceptable'. Do you think?

$11.5 billion was for subprime and $3.5 was related to bond insurance contracts when ACA Capital Holdings Incs ratings were sent to CCC (junk). When ACA got slashed, Credit Agricole and CICBC took write downs of over $7 billion combined. The culprit was bond insurers branching out from guaranteeing municipal bonds to getting in the structured finance products, like CDOs (basically a collection of mortgages, loans, and other things).

All the major bond insurers (MBIA, FGIC and Ambac) have been put on notice by the major rating agencies. MBIA just got an injection of $1 billion from Warburg Pincus. So what does this mean, if you have insured muni bond funds, they just got a lot riskier.
Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar. (Source: Bloomberg)
Citi also took a writedown of $18 billion and reduced the dividend by 40%.
So to recap the last 6 months, we have had write downs of over $100 billion because of subprime, we have had cash enhanced and cash plus funds caution about trading below a $1, we have CDOs write downs that could affect bond insurers and hence muni insured bond funds.
At the moment, cash is king. I am and will continue to stay away from the financials. I think there will be more write offs around CDOs. In other words, I dont think all the bad news is out there yet.
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aWfl7kVEmU_k&refer=home

Source: http://www.tradingmarkets.com/.site/news/Stock%20News/939115/

And the good news keeps coming.

January 15th, 2008 at 02:47 pm

Todays headlines from Bloomberg:

1) Retail Sales in US Unexpectedly Fall 0.4%, Capping Worst Year Since 2002
2) Citigroup Posts Record Loss, Cut Payout
3) Dollar Drops to Lowest Since 2005 versus Yen
4) Merrill, Citigroup Get $21 Billion From Outside Investors to Boost Capital

Yes, an additional $21 billion. Citi raised $14.5 billion and Merrill raised $6.6 billion. That brings the Wall Street bail out to $59 billion, mostly Middle East investors.

Citi said it was to shore up their Tier 1 capital ratio. This is the number that regulators look at to assess if a bank can withstand loan losses. With the injection of capital, the Tier 1 ratio will be 8.2%. Citi likes to see it above 7.5%.

So what does this mean? To me, US stock market should continue to be volatile with pressure to the down size. I expect to see more layoffs on Wall Street. Citi was talking about laying off 45,000 a few months ago.

I already heard that bonuses are way down. Looks like BMW and Mercedes dealership will be disappointed.

But I do expect financial to bottom out in the first half. I wouldnt buy yet. Subprime mortgages are still out there. Also, some of the bond insurers are having issues, even though Berkshire Hathaway announced they were getting into the business.

Bottom line: Cash is king. And, it an excellent time to build up your cash position and your emergency funds.

These are pretty much my opinions and what I think about the current market.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=anjGWhqi0PSE&refer=home

What's in your money market fund?

January 8th, 2008 at 02:16 pm

Top Treasury money market funds have yields at about 4.58%, but top performing prime money market funds have yields of 5.18%. What gives? Arent all money market funds created equal.

Alas, the answer is no.

To achieve the performance over treasuries, these prime money market funds, also called enhanced or plus cash funds, invest in asset backed commercial paper and SIVs.

What is a SIV? It is a fund that borrows short and buy long term securities at a higher rate. Well, there are 2 risks with SIVs: solvency and liquidity. Solvency has to deal with risk of the long term debt failing below the value of the short term debt (read subprime mess). Liquidity deals with outflows to the short term borrowers coming due before the long term assets pay (read credit crunch).

Everyone knows that a money market account wont go below a dollar, right? GE Asset Management fund (an enhanced cash fund) hit $0.96.

Other headlines include SunTrust buying SIVs for a money market account from Cheyne Finance that defaulted last month. Bank of America is planning on providing as much as $600 million to fund debt from SIVs. Blackrock sent a letter to shareholders specifically stressing that enhanced and plus cash funds were not money market accounts. (http://literature.blackrock.com/eStudioContent/public/BRLF_Cash_Mgmt_082007_Client_Lttr.pdf?PubDate=/1_8_2008_BRLF_Cash_Mgmt_082007_Client_Lttr.pdf)

So what does this mean? The higher the yield, the higher the risk. But, I am not suggesting that money market accounts are going to be imploding all over the place. I do expect that most financial institution will put capital into the funds to maintain the $1 price.

So what should you do? If you are in an enhanced or plus cash fund, you should see what type of investments the funds are. For the AAA money market funds invested in treasuries, you should have no worries.

You could also park your money in 3 month CDs. They are FIDC insured up to $100,000 (I believe) and earn around 5%. If you need the liquidity, you might want to review the holdings of your money market account.