Exactly two weeks ago I posted these same three stocks in a post called Holy Crud! Back then GE was at $10.06, BAC $3.93 and Citi at $2.51.I don't follow GE very closely but the looming downgrade, should it happen, will cause its costs to go up. The more notches in the downgrade the more expense in funding its operations. There also exists the possibility of an $8 billion CDS problem. According to the FT the company has $36 billion in cash and its recent dividend cut should save $9 billion per year. The company has always had a lot of moving parts, I have no idea what will happen here but avoiding this sort of extreme complexity is not a bad idea.
What is there to say about BAC? Well probably a lot I suppose. I disclosed selling the stock in the face of the merger. For the first few points down it was a smart sale then at some point on the way to $3 it became a lucky sale (actually right after I sold, they banned short selling and the stock went up a lot before going down).
Two appearances ago on CNBC I said that Citi would not go to zero as the bailout/investment by the government would take that off the table. Why would they throw billions at the problem only to then let it fail? Either my conclusion was wrong or someone forgot to tell the market.
While were at it GM is below $2, the market cap is just over $1 billion. It would seem there will be a lot more tears for people that rely on that company.
While I believe the key to capturing a turn around in your portfolio at some point will be sector and country selection (as opposed to SPY and EFA) the manner in which we access "the right" countries and sectors could pose problems. Even if a bottom in the market is coming soon there will be more horror stories like the stocks mentioned above. There are certain country and sector funds that are heavy in a couple of stocks. So it may be possible to pick the correct sector but be adversely affected by a fund's composition.
As an example the iShares Telecom Fund (IYZ) has 21% in AT&T (T). If T drops 90% (unlikely but look at the names above) then IYZ will get hurt even if the rest of telecom does well. If you are going to use ETFs you will need to look under the hood and for some sort of opinion on the construction of those ETFs, so more work not less.
20 comments:
Roger from his Mad Traders Lair in Hawaii is manipulating the market again. He's leveraged a billion to one and uses his lunch money to bounce the market up-and-down in interesting patterns to drive chartists nuts.
I've been holding GE long term but am now down 70%. It seems pretty late to sell at this point, unless there is reason to believe it is going to zero.
the comment was not sell now more like a general comment that extrremely complex companies are better to avoid. I don't know whether an owner should sell nor do i know if it is going to zero.
"Two appearances ago on CNBC I said that Citi would not go to zero as the bailout/investment by the government would take that off the table. Why would they throw billions at the problem only to then let it fail? Either my conclusion was wrong or someone forgot to tell the market."
If the government owns the company, what value is there to owning any equity? That is how it goes to zero (See AIG, FNE, FRE).
Today's UYG update...
It's down to $1.41 with over 68 million shares traded.
With the market down more than 50%, we, by definition, have to be closer to the bottom than the top!
Have I mentioned Zeno's market rule here? It's a variant of Zeno's Paradox and says that a price that has been cut in half can be cut in half again in a process that proceeds indefinitely.
So, phrases like "too late to sell" and "With the market down more than 50%, we, by definition, have to be closer to the bottom than the top!" are dead wrong.
Start from where you are and go forward.
There are significant numbers of companies that no longer (or soon will not) meet the requirements for inclusion in the Dow industrials or S&P500. I am mostly thinking capital requirements.
If the powers that care take a rules is rules approach then massive restructuring is coming to these indices. The survivor bias of the process will bring the indices up.
Not refuting Zeno's market rule; obviously, anything can be cut in half an infinite number of times. That does not, however, negate the comment, "With the market down more than 50%, we, by definition, have to be closer to the bottom than the top!" Also, how do we reach an actual bottom? Is it not where holders of shares simply refuse to sell at a ridiculously low price (not saying the current low price cannot go lower, but it cannot go less than zero); i.e., it is, in the current share holders' minds "too late to sell" and there are therefore no more sellers at that price and the price has to move up.
Seems logical to me.
Heck, the market is better to avoid, Why do you keep looking for a needle in a haystack. What difference is another ETF going to really make now? A strategy for not loosing more makes more sense.
"extrremely complex companies are better to avoid"
Yesterday on CNBC, Jim Cramer the former 'worlds best hedge fund manager'(according to CNBC) called his fifteenth bottom for this bear market. He is now screaming to be 'all in'... Last time he did this was at DOW 9000. Jim obviously doesn't read Roger's blog or perhaps Roger doesn't watch enough CNBC??
What gives?
lol, i can't be that I don't watch enough!
Roger,
I didn't mean to be so hard on you and I'm sorry if you took my comments the wrong way. I do appreciate this blog and the insights that you provide. I'm not saying you have to agree with me as we clearly don't see eye to eye on a host of things. Nor did I ask you to reiterate any past misestimations. (See http://www.cnbc.com/id/29550282.)
The only point I've been trying to make is that I think it would be helpful if you could see the ways this bear market is different from those in our lifetimes as well as the ways they are the same. The theme from your blog is that this bear is no different. Well, that's true in some ways. But in other ways it is different. Is that me just being that guy that says, "this market is different because..."? Perhaps. But like I said, every market has both similarities and differences, and it's important to appreciate BOTH.
Sounds like Cramer has called the low at 5,320. At his usual time slot on CNBC he said he calculated the 'if this happened and if that happened and if those happened' we couldn't go any lower than 5,320.
There. Don't we all feel better! :)
Roger, how can a fund like Rydex RYMFX Managed Futures hold a large cash position, over 80%?
Uncle Sam losing his credit rating?
http://tinyurl.com/8wdp3h
"With the market down more than 50%, we, by definition, have to be closer to the bottom than the top!"
Long term Dow average yield is 4.5%. Current yield is 4.5%.
On that measure we've just mean reverted and stock bought in the last decade+ were bought at relatively expensive prices.
Being at the mean means there's an equal chance of an up or down. Typically however the market overshoots, so as we're in a downtrend there's likely more of a chance of continued declines.
To put this into perspective potentially we might see a 1960's type sideways ranging. With bunny hops spanning 6% yield levels (Dow 4950) perhaps up to 3.5% yield levels (Dow 8500) over the next five years or so. There appears little if anything around the corner to reinstate previous overpriced levels.
In the spirit of "share process", and assuming we're in a traders (sideways ranging) market - one method to identify a suitable amount of stock/cash holdings at any one time is to stochastic the upper and lower price levels.
For example if I wish to be all in cash at Dow 8000, all in stock at Dow 5000 then with the current Dow at say 6000 the stochastic is
(current - bottom) / (top - bottom)
= 6000 - 5000 / 8000 - 5000
= 0.333 (cash) indicated (66.6% stock exposure).
Rebalance to the indicated levels over time and you'll add as prices decline, reduce as price rise and trade in and out in a manner that captures some of the swings in price.
Roger- FWIW, I am calling the short to intermediate bottom today for the SP. We will see a nice March/April rally now.
RYMFX does its thing with futures and swaps. so lots of cash to collateralize a small position.
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