Tufar on Finance and Economy

Congress voted against the plan, Dow is down 777 points, end of quarter is coming, hedge funds face huge redemptions. When is it going to end?

VIX

INDU

A mortgage securities resolution trust is established. Short selling is prohibited until Oct 2. A flight from money market funds was observed, so the plan also insures main capital and not the interest of money market funds deposits.

Though the plan bears moral hazard, it is touted as the laset evil compared to what would have happend otherwwise: a total economic collpase with a total withdrawal of credit and finance.

3-Month US Treasury bills hit the absolute low record of 0.06% yield. Investors lost their faith in equities and flee to safety in treasuries, almost zero yield notwithstanding. What drives them? I have no idea. Good time to sell them if you have any.

US Treasury 3-month Bills Yield

Yesterday, Lehman Brothers filed for Chapter 11 bankruptcy and Merrill Lynch got acquired by Bank of America for $50 billion all-stock transaction.

The Demise of Lehman Brothers

Financial Times reports that Russian companies face $45bn backlog to be paid or restructured before the end of the year. Cost of refinancing and borrowing for Russian companies increased by 2-3 percent due to political risks.

Meanwhile Russian stock market is being decimated and lost half of its value in last 3 months! Russian indices are in freefall and recently government announced that it is contemplating using Russian sovereign investment fund to stop the fall of share prices.

While it is an incredibly short-sided idea, there is some merit to it since no other measure can stop the fall. Also, monies from sovereign fund will be necessary to help Russian companies pay back the debt to foreign banks.

Russian sovereign fund is held not in cash but in government bonds so that it would bring profit while it lies there idle. They are spread between US, European Bank and UK treasuries but for the simplicity we will assume that they are held in US treasuries, half of trillion of them.

So, soon Russian government will rush to the market to sell half a trillion worth of treasuries. As we all know too well, a world-wide liquidity crisis is ravaging for the good part of the year. Selling half-a-trillion worth of treasuries for hard cash is going to be a difficult task.

Furthermore, as it is usually happens, Wall Street broker houses will be waiting for this move of government of Russia with an eager anticipation. They are getting wet at the mouth at the idea that Russia will have to dump this amount of treasuries on their market all at once. They will agree among themselves and keep the prices of treasuries artificially low. Then, after buying them, they will turn to the Fed discount window and borrow hard cash to pay the Russians. They can do it against collateral of treasuries, thanks to the extended lending rules announced in March. Well played Wall Street, well played indeed.

What can Russia do? Sure, they can go to China or Saudi Arabia, or any other dollar-rich country to sell US treasuries for the hard cash. But I doubt that these countries would pass the opportunity to profit handsomely even like their Wall Street colleagues.

Russia is cornered and by the New Year it is going to lose almost all of its foreign currency reserves: it is going to be spent on paying back the loans. The Russian Stock market will collapse, Russian economy will collapse. This is the cost of war and aggression on Georgia.

Well played, indeed, well played.

It finally happened, government is all but takes over Fannie May and Freddie Mac. Shareholders are wiped out, government will inject liquidity, take over the management and gradually unwind the investments until the entities dissolve.

It was expected, Fannie and Freddie could not survive by themselves. This may mark the end of banking crisis of 2008, a definitive bottom and a start of recovery. Why? Because there is nothing else to fail. When there is nothing els to go down,  the only way to go is up.

I spent all August following Russia’s aggression towards Georgia and could not dedicate as much time to the markets. Nothing has moved in the markets in August.

As we came into September, price of oil fell, dollar strengthened, euro collapsed, commodity and fertilizer companies got decimated. China, which drove commodities surge, is submerging into recession.

But, do not fret; September is historically a losing month. This fall is a good opportunity to load up on shares and be ready for September surge.

Jim Cramer says that this 5-day sell-off was due to hedge funds redemptions that have to be honored within five days of application (September 1)

S&P 500 Seasonal Pattern

S&P 500 Seasonal Pattern

1. Stay Diversified . Cramer said diversification is the only free lunch in investing. He advocated not having more than 20% of your portfolio in any sector and avoiding having "two-of-a-kind" at all costs.

He recalled investors losing fortunes in the past when they sank all their money in hot stocks of the day such as dot.coms, telcos and energy merchandisers like Enron .

2. Buy and sell slowly . Never buy or sell a position all at once. he said. Instead, buy into a position slowly, taking advantage of weakness, and take profits on the way up.

3. Your first loss is your best loss . "If your thesis on a stock changes, take the loss and sell," Cramer told viewers. Don’t let a trade turn into an investment by being afraid to sell. If the reason you bought a stock is no longer valid, you have to sell it, he said.

4. Dividends limit losses . Look for stocks that consistently grow their dividends year after year. As a stock’s yield increases, it attracts new investors and helps limit the downside risk. You need only ask yourself, "Is the dividend safe?"

5. It’s always good to have some cash . Professional investors always have cash on hand. Cash is a tool that should be used to buy quality companies after big market sell-offs.

6. Don’t own too many volatile stocks . More than one volatile stock in a portfolio is not being diversified. Be honest and ask yourself if you can handle the wild price swings before investing in a volatile stock.

7. Know what you own . Knowing what a company does will help distinguish between a broken stock and a broken company and prevents panic selling.

8. Don’t own low-dollar stocks . Stocks don’t go to $2 and $3 a share because they’re doing well. Speculating on low-dollar stocks can wipe out a portfolio.

9. Accounting irregularities equals sell . Stocks with accounting problems should be sold immediately and are off-limits until the issues are fully resolved.

10. Stay away for two good quarters following an earnings shortfall . It takes at least six months for a company to turn itself around after a big earnings miss. Investors should not wait it out.

11. When your broker stops talking about a stock, it’s time to sell . Silence isn’t golden when it comes to stocks. If your broker stops pushing a stock, its time to move on.

12. After a big run, get defensive . Check the S&P Proprietary Oscillator, a paid product, to determine if a stock is overbought or oversold. Plus or minus 5 is the key number to look for. Also check the Investor’s Intelligence Bull/Bear Ratio, another great indicator of market sentiment on a particular stock.

13. If a stock’s dividend yield is twice that of Treasuries, sell it . Dividends that reach that level should be a warning sign that the yield may be in jeopardy. There are two exceptions: oil tanker stocks, whose yield is based on their day rates, and master limited partnerships.

14. If a company has a new CEO, stay away . New CEOs need time to settle in and develop a plan, and that’s not the time to own the stock.

15. Never turn a trade into an investment . If you bought a stock because of a specific catalyst, sell it when that catalyst changes or disappears.

16. Never sell call or put options . Selling a call option just gives away your upside. Selling a put option limits your upside, while still exposing yourself to all of the downside.

17. Never use margin . Buying stocks on margin is just dangerous. Once you get in the hole, you will never get out. Don’t use it.

18. Never buy a stock at its all-time high . Be prepared to miss a stock rather than reaching to buy it at the high. Instead, wait for a 5% to 8% pullback before pulling the trigger.

19. Play with the house’s money . Take money off the table as stocks go up until you’ve recovered your initial investment, then it doesn’t matter as much what happens later.

20. Keep your head clear . When times get tough, it’s OK to consider selling. You can always buy them back later at lower prices.

21. Contribute to retirement accounts throughout the year . Don’t invest in that 401k all at once. Instead spread the payments out during the year and contribute more during the months when the market goes down.

22. Mutual funds should be diversified, too . If you have money in multiple funds, make sure they don’t all invest in the same kind of stocks.

23. Playing defense is crucial in volatile markets . Don’t wait for down stocks to recover. Bad stocks are likely to go even lower. Move on.

24. Invest in stocks with buyback programs . Companies that buy back their own stock offer a cushion to investors, helping to limit the downside risk.

25. Don’t stop looking at your monthly statement . If you don’t look at your monthly statements, you won’t know how bad things really are. Keep your eyes open and stay current.

Source: http://www.thestreet.com/s/cramers-mad-money-recap-how-to-play-solid-defense/funds/madmoneywrap/10431744.html

Source: Washington Post (http://www.washingtonpost.com/wp-dyn/content/graphic/2008/07/26/GR2008072601566.html?sid=ST2008072601558&pos=list)

This is a usefull list of key industries used by ShadowTrader to watch the markets.