It's Now or Never
Bank of America (BAC) is down 13% as I write, and Citigroup (C) is down 20%. Both are tanking to new lows, and for all practical purposes the two banks are almost gone. With America's largest banks crashing and the market on thin ice at support, we are now at the most critical junction in this financial crisis.
The government has one last chance to react, or we will see the stock market collapse. This weekend should be a very busy one for Washington. Either we suck it up and save America's capitalist system by having the FDIC take these two banks now, or we will have our chance to relive the 1930s.
I sure hope Mr. Obama and his team do the right thing before it is too late. Remember, if they do nothing and the S&P 500 breaks support at 750, the stock market could easily lose another 25-80% of its current value. If the stock market reacts as it did in the 1930s financial crisis, the S&P 500 would fall to 160; it is 772 right now. You do the math! The Dow Jones Industrial Index lost around 90% of it value during the Great Depression. For the S&P 500 to lose 90% of its record high which was just under 1600 in 2007, it would have to drop to 160. And that is not something any of us want to happen.
Right now cash is king, as you don't want to be left with no cash to take advantage of the buying opportunities that we will have in the next few years if the S&P 500 does break support. I increased my portfolio's cash position on Wednesday by selling some of my S&P 500 and large cap fund holdings. Either the S&P 500 is bottoming now, or it is getting ready to dive through support at 750. If Washington doesn't address BAC and C now, my put the odds of breaking support at way over 50%. It's pretty bad when a bear gets scared, isn't it?
We will know more by Monday. Until then, Happy Investing.
Gregory Guest
Nationalize Now, or Forever Hold Your Peace
Market Update: 2009-02-17
Now, right on cue, we find ourselves testing of the stock market’s November 2008 lows.
As I mentioned in last week’s Market Update “The Danger of America’s Free Market Infatuation”, I don’t believe that anything less than the full-fledged, FDIC-initiated nationalization of America’s largest insolvent banks, such as Bank of America and Citigroup, will stop America from falling into the abyss. I specifically said in that posting that “If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s.”
Mr. Obama has had one month to skirt around the banking issue, and it is the free market that apparently doesn’t like his administration’s resistance to bank nationalization (check out the new low on the BKX banking index today). The bank stocks are in freefall now because the free market knows that the banks are worthless and the government is going to resist nationalization as long as it can.
With a little more time, maybe more Americans will warm up to the idea of using bank nationalization as a means to attempt to save our capitalist system rather than insisting that nationalization is wrong while we watch our economy go to hell in a hand basket. This past Sunday even U.S. Senator Lindsay Graham (R-SC) admitted that nationalization may be the solution. On ABC’s This Week (2/15/2009), he said Senator Graham said, "This idea of nationalizing banks is not comfortable…But I think we've got so many toxic assets spread throughout the banking and financial community, throughout the world, that we're going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I'm very much afraid any program to salvage the banks is going to require the government... I would not take off [the table] the idea of nationalizing the banks."
In my opinion, the Obama administration may only have several weeks to several months left to do what is right. If they continue to skirt around the issue, and continue to inject taxpayer dollars into insolvent banks just so that the banks’ shareholders and top managers can benefit financially while the country’s financial system bursts apart at the seams, then that is wrong and will never work! The American taxpayer should not have to take on all the risks just to allow the banks to remain independent and be profitable again. That is beyond not fair, it’s just plain wrong!
America, and the world for that matter, is now teetering on the edge of a financial depression. In my opinion, the only chance we have to salvage our economy, our way of life, and our national security (both externally and internally, i.e. to prevent widespread panic and social unrest), is for America’s government to throw its full weight behind our banking system. Anything less than the full faith and credit of the United States will not work.
Even nationalization of the big insolvent banks won’t magically fix things and make it all better. But at least it could make the next few decades a little easier to endure. The United States has an unprecedented debt bubble and that debt bubble is going to collapse. It will likely take 20 years or more for the massive amount of debt to fully unwind. The unwinding will be difficult for us all, but it has to happen. But how it happens, and whether or not the government is willing to soften the blow, is the decision Mr. Obama and all Americans have to make now.
Nationalization is not communist, but rather it is patriotic. As an American, I want America to succeed and for our capitalist system to live on. I think that the FDIC takeover of insolvent banks is necessary to save America’s capitalist system. Remember, capitalism must have capital to work; right now our banks don’t have any capital! America cannot sustain its capitalist system without a trusted and capitalized financial system.
America’s banks have failed us. Their greed and imprudence helped to create the problems we face. And now no one in America, or the world for that matter, has faith in our banks because of their track record of gross mismanagement and countless stupid decisions along the way. If we just sit back and continue to watch the banks falter, then our economy and stock market will most likely continue to fall. (For more insight on what failure to act now could mean for your portfolio, please read my January 20, 2009 Market Update “The Black Swan of 2009.”)
If, and most likely when, we nationalize the insolvent banks, I hope that our economy will be able to stabilize. After a period of time (say 20 years) the debt bubble will work itself out. Once America’s economy and our balance sheet are back to a more normal level, it will be in our interest for the government to sell the banks back to the private sector. By then, hopefully our banking system will once again be strong enough that it will be worth a good chuck of change and the government will be able to use the spinoff IPO proceeds to help pay down some of our federal debt. And hopefully next time around, when the banking sector has rejoined the free market, our government will do a better job of regulating the banks and ensuring that we don’t find ourselves in another mess decades later.
Nationalize now, or forever hold your peace. We will no more later. Until then, Happy Investing!
Gregory Guest
The Danger of America's Free Market Infatuation
Market Update: 2009-02-11
The XAU Gold & Silver Mining index is back to resistance again today and attempting to get above it, with a 7% rally this morning. Gold is getting interesting, as this battle with resistance will likely be very volatile. The gold ETF that I own and recommend accumulating is GDX. But as with anything, don’t dare buy it all at once….just nibble over time. Gold mining is very, very volatile. Since the XAU bottomed a few months back, it has already doubled, with lots of big swings during that time.
In the meantime, crude oil was moving the opposite direction of gold this morning so I picked up a little more USO at $26.50. This is my third purchase of USO in the past three weeks. I expect that the actual commodity will bottom in $20-35 range, but my best guess is that the bottom will be in the upper half of that range. Oil has already been as low as $34 a month or so ago, and has fallen back to $37 today after rallying back to $48 just two weeks ago. Once again, oil is very volatile right now as it is searching for a bottom. In my opinion, oil under $40/barrel is a great deal longer term (i.e. 2-10 years).
Banks are looking shakier by the day. Even so-called socialist Obama is scared to seize Band of Amercia (BAC) and Citigroup (C). I think anything less than a full-fledged FDIC takeover of some of these clearly insolvent, big banks won’t work. Bottom line is, just like the Bush administration, no one really knows what the heck is going on in the U.S. financial system and what needs to be done to help stabilize it. Americans apparently have it stuck in their heads that nationalization of banks is a socialist move and bad for our country. But what they don’t realize is that the “free market” that America so claims to be about has failed our financial system. The free market is not fixing or willing to fix this serious problem.
Tax-evading Treasury Secretary Geithner’s talk about a public-private buying scheme for “toxic” assets is a joke. Pretty soon all assets on the banks books will be “toxic” because not even the rich guys on Wall Street are going to have any jobs left to pay their jumbo mortgages and fancy car loans. If private citizens and corporations wanted to buy bank loans, they would already be doing it. That is the problem. No one other than the government is able or willing to take on these banks’ assets. And the U.S. government (both parties) is tip-toeing around the issue and pretending as though they can fix the problem by avoiding the nationalization of these insolvent banks.
As always, people don’t want to admit when they are wrong. Americans can’t stand the fact of admitting that our banks were run down the hole by a bunch of greedy, “free-market-loving” free wheelers. And now apparently we are just going to sit back and watch the country fall apart rather than to back up our banking sector with the full faith and credit of Washington. It the taxpayers are going to take on the risky assets of these banks, we should own the banks. We should not continue to pour money down a bottomless “John Thain $1400” trash bin.
It is like everyone knows the patient is dying and in intense pain, but they don’t want to give the patient morphine because that is an opiate and opium is a drug. Drug use is bad, so you shouldn’t use drugs even if someone is screaming in pain. Give me a break!
If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s. Job losses could soar and everyone will suffer. If you don't believe that, then read up on what happened between 1928 and 1934 to the unemployment rate (it went from just over 4% to 25% in just a few short years!).
Since “supposedly” the government can’t do anything right, my suggestion is this: Why don’t we just go ahead and sell the U.S. Army to Bank of America and let Ken Lewis direct the war against the terrorists in Afghanistan. Let’s sell the U.S. Department of Transportation to General Motors and let Rick Wagoner decide how many roads your town requires and whether or not a road leading from your home to your job is really necessary. And let’s sell the U.S. Department of Education to Sirius XM Radio and let Mel Karmazin ensure your kids get a free K-12 education.
Let’s face it, if the U.S. government is not capable of doing anything right, except when it comes to mismanaging America, why don’t we just go ahead and sell off all government-run agencies and use the proceeds to pay off our national debt. If we would just let the banks run the military to protect us, allow GM to pave our roads, and Sirius XM Radio to educate our children, America’s problems would be solved. After all, the private sector is so much better at doing things right.
What a joke! Wake up America, before it is too late!
We will know more about how spinning off all government-run programs will end up working out later. Until then, Happy Investing!
Gregory Guest
Don't bail out the banks, rather bail out of the banks!
Quick alert. I just sold all remaining shares of KBE, the banking sector EFT. Sold these at an average loss of 50%+, but that is history at this point. My concern is that the large banks like Citigroup and Bank of America are in bigger trouble than they are willing to admit and that full-fledged nationalization is very likely the only measure that can be taken to save our banking system. Nationalize will wipe out the shareholder equity in any bank that is taken. Since the big banks make up the BKX index (thus KBE), I say the risk is to the downside at this point. There are much safer risk-adjusted returns to be had elsewhere in the market, even if banking stocks rally from here. After yesterday's big rally on KBE, I thought this morning was a good time to unload the rest of my position in KBE. If they rally from here I don't care, because I have other good places to but these proceeds to use.
I am a realist, or at least I like to think I am. I also try to be rational in my decisions. For me it is fine to take a loss and admit that a bet was wrong, and that is exactly what I am doing here. Most people don't like to sell losers, but I am not going to keep watering a tree that refuses to put on any new leaves. Just the same, most people do not like to sell their winners when they are going up, but I will pick some fruit off the tree even before it is fully ripe, just in case. That is what I did with my big China winner in 2007 when Chinese shares were still soaring.
We will know more about banking's fate later. Until then, Happy Investing.
Gregory
Oil has slid down a slippery slope...Buy USO today!
The Black Swan of 2009
Happy New Year!
This is my first Market Update of 2009. You may have wondered why I haven’t posted anything since November 23, 2008. The reason is quite simple. Until today, nothing really material had changed since then. Everything that I expected to happen was happening. But today something changed!
On November 20, 2008, I proclaimed that this could happen: “If we get another rally, it could be big, say another 20-30%. But I doubt it will hold either. Now that we are below 800, I think we will have to test this level again after any rally that does occur to ensure that we made a bottom.”
Talk about timing! The S&P 500 made its 2008 low on that day, November 20. And as expected, the market had a big rally since then, another 20-30% (24.2% to be exact). And also as expected, the S&P 500’s rally did not hold and it is now once again approaching the November 20, 2008 closing low of 752.44 to test that level again, in the hopes of ensuring that that level was the bottom. Today the S&P 500 closed at 805.22. It has now given back most of its big winter rally!
So what has changed since November 23? Everything the past two months has played out exactly as I expected it would, except for one little detail. Banks changed. In the past week, and capped off by today’s 19.7% crash, the BKX banking index has unsuccessfully tested it November low of 32.96. As of today’s close it sits at only 25.34. Banks are in the tank…you might as well go ahead and flush them (or rapidly move to nationalize them, Mr. Obama).
If you recall, during the first half of last year I loved the contrarian play offered by the banking sector. But as of the early fall, I had done an about face and recommended that everyone sell some of their KBE because the problems and proposed government fixes were scaring me. In my 10/10/2008 Market Alert “Banks are in big trouble, but the communists are coming to the rescue!” I reiterated my stance on this when I proclaimed that I had unwound over 50% of my stake in KBE. Since then I did not buy anymore. In retrospect, I wish I would have sold more!
As of today, the banking sector is clearly not a place that my money should be. The BKX has broken it support and is falling to a new low. Where the BKX ends up is anyone’s guess now. The BKX has fallen back to where it was in 1993 when the index was created. Yep, it is now at the lowest level it has ever been. But the banks that make up the BKX were around before 1993, so today I looked back at some of their charts for some technical guidance. And it isn’t pretty! Basically, the BKX could lose 75% of its current value and I would not be surprised. Another 50% loss would be easy. Luckily, I don’t have too much of my portfolio dedicated to the banking sector now, so I am not going to worry too much about it. This just goes to show why diversity in one’s portfolio is so very important. For instance, many of my other picks are still well above their 2008 lows, including XES (oil and gas services), EWJ (Japan), FXI (China), and GDX (gold mining), etc. As a matter of fact, the XAU gold mining index is up 58% since the last time I told you I was buying more shares (of GDX) on October 22, 2008.
So the BKX is not acting as I had hoped, but it is acting according to one scenario I laid out. If you recall, I mentioned on November 19, 2008 that the BKX could fall to 30, and that there was support in the upper 20s to 30 area. Today we fell to that support, so if it doesn’t hold here, all bets are off. The reason I am writing this today is to state what could happen if banks break down from here: the S&P 500 may not hold support at 752. Yep, you heard me, the banks may be getting ready to drag the whole market down with them! And if the S&P 500 doesn’t hold support at 752, then things could get really, really nasty. The S&P 500 could easily fall to 400-600. Even if it stopped at 600, that would mean a whopping loss of 25% of today’s close of 805. Are you prepared to lose another 25%? And better yet, are you ready with cash to buy some stocks if the S&P 500 does fall to new lows?
I am not saying that the S&P 500 is going to fail this test of 2008’s low of 752; I am just saying that it may fail and that the odds of making a new low in this bear market are rising by the day. The banking sector is critical to what happens next. I hope President Obama can get a good night’s sleep tonight after all the balls and parties end, because when he wakes up tomorrow morning the problems that America created during the Bush years will be his to clean up. I wish him luck!
Speaking of which, I would congratulate President Obama today, but I already did that in my October 8, 2008 Market Update “Congratulations, President Obama.” I just hope that someone will forward him a copy of that Market Update and a link to my Sinocentury.com, because I want to make sure that he understands that America’s economic problem is not a mortgage problem, not a housing problem, and not a stock market problem. It is a debt problem!!! And the only fix to this problem is America spending the next 20 years or so paying off our existing debt. Throwing more money that we don’t have at the banks, housing, troubled assets or whatever else isn’t going to fix anything (but it may temporarily patch it). Quite the contrary, taking on more debt is only going to make the eventual economic adjustment harder for us to endure.
The S&P 500 falling to 600 or lower could be the Black Swan of 2009. We will know more later. Until then, if you don’t already own some, buy a little GDX; I expect gold will shine later on in this crisis. And, oh yeah, Happy Investing!
Gregory
Great Deal on Christmas Gifts at HGpearls.com
If you are looking for the perfect Christmas gift, or a new piece of jewelry for yourself, I wanted to let you know that I am selling beautiful pearls that I handpick in China. As you all know, I speak Chinese and lived in China for several years. What you may not know is that I have spent several years learning about pearls and making contacts in the industry there, and began selling jewelry via word of mouth in SC. The pearls were so popular that I knew I had to take it a step further and sell them online after I ordered from several competitors and realized that I had a huge advantage in terms of quality and presentation. The name of the company is HinsonGayle…it is named after my mother.
Please visit the store at www.HGpearls.com. The pearls are great quality and very affordable compared to retail stores. To help spread the word, I am offering my friends an additional 20% off of all Christmas orders! If you or anyone else you know would like to buy pearls, just enter the promotion code “HG” at checkout and receive 20% off the order thru 12/31, plus free shipping. Anyone can use this code, so please feel free to pass this email along to your friends and family!
All orders come with a 30-day guarantee and return policy, and beautiful jewelry boxes that make great presentations for anyone giving the pearls as a gift (you can see a picture of my earrings box on the site). My goal is to build a brand, not just sell pearls. So I am going the extra mile to make it look like it is an established brand from the get go.
Thanks!
Gregory
The "Citi nevers sleeps", but it may rest in peace
Market Alert! 2008-11-23
I am wondering what is going to happing to Citigroup, the 3rd largest U.S. bank. The stock was in free fall this past week, losing more than 20% for three days in a row on Wednesday, Thursday, and Friday. My guess is that the government will do something by tomorrow morning.
Whatever happens should be interesting. We will know more later!
Gregory
Winter is fast approaching, isn't it about time to hibernate?
Market Update: 2008-11-20
Well, it has been a long trip, but it looks like we have finally arrived. As I write, the S&P 500 is trading at 786. We are now officially testing the depths of the 2002 market bottom! The S&P 500 index is trading below 800 this morning, which is where it bottomed in October 2002 after the "New Economy", tech-bubble market burst during the first years of this millenium.
Early on this year I began saying that the S&P 500 index technically looked a bit scary. The chart appeared as though it was making a secular double top. As the year progressed, and the market continued to fall, it became more and more apparent that a return to the 2002 lows was completely "in the cards". And now, that "worse case" scenario has come true. No one, other than yours truly (and my Dad), thought it was even possible. I sure as heck know that Jim Cramer wasn't talking about it (please correct me if I missed that episode, not that I watch him much anyways)! It amazes me how much a simple stock chart can tell you about what may happen to stocks in the future.
Now that the S&P 500 has fallen below 800, a new question comes to mind: "What next?" This is more challenging to answer, because no one really knows. But there are really only two possible answers which I will explain next.
Possibility #1) The stock market has bottomed. Wow, finally we can relax! Under normal circumstances, I would expect that the S&P 500 would not breach its previous cyclical bear market low. The S&P 500 has major, long-term technical support at 775, and that means that it should not fall below that level for any extended period of time. Sure, it could fall below 775 for a week or so, and then as long as it quickly bounced back above that level I would not consider that a breach of support. However, the economic fundamentals that in the long run help us decide the true value of stocks are anything but normal right now. That leads us to the other possibility.
Possibility #2) The stock market is getting ready to fall off a cliff! Assuming that the S&P 500 is not able to hold support at 775, then the coming market action will be horrible. In what I would consider a worse-case scenario, the market could lose up to 50% of its current value. Now, calm down, I am not saying that will happen! But, the reality is, if the S&P 500 falls below 775, there really isn't much support below until you get to the 400-500 level. The market would have to lose another 50% of its current value to drop to 400! All odds are that, if we do break down from here, the market will end up catching itself before falling all the way back to its early 1990s valuations. Maybe it can stop at 600 or 700. However, that still won't be any fun. But, if you have cash in the bank right now, any breach of 775 will equate to the buying opportunity of your lifetime. As I said yesterday, now that we are back to the 2002 lows, it is smart to consistently and unemotionally buy into the stock market over the next 6-12 months. Don't buy all at once, because there is a chance you will be able to buy even more shares at a cheaper price later if things get really, really nasty. The fact that the banks appear as though they are breaking down, isn't a good sign either. At this point, banks could easily lose another 25% of their current value. Given that financials make up around 16% (i.e. the biggest share) of the S&P 500 index, if the financials do lose another 25% that means that the S&P 500 will shave off another 4%. Based on yesterday's close of 807, that will take the S&P 500 to support at 775. And that is assuming that all other sectors in the S&P 500 don't fall any futher! So, could the S&P 500 break below 775? As one famous former Vice Presidential candidate would say, "You betcha!"
In summary, the next few days, weeks and months are going to be very interesting. We are living in what could be historic times for the US stock market. It is likely, but not guaranteed, that the market could have a total collapse. In the meantime, I expect that the S&P 500 will not give up 775 without a fight, so I expect more volitility in the near term and a lot of bouncing around between 775 and 900 or so. If we get another rally, it could be big, say another 20-30%. But I doubt it will hold either. Now that we are below 800, I think we will have to test this level again after any rally that does occur to ensure that we made a bottom. If we do start to break down below 775, watch out below. I would not be surprised to see panic selling with heavy moves to the downside and the odds of a stock market crash would be raised as well. Hold your breath, it is gonna be a wild ride!
We will know more about when this bear will finally hibernate later. Until then, Happy Investing!
Gregory
Stocks have hit bottom....just kidding!
Market Update: 2008-11-19
On October 22, 2008, I penned the following: "I still think that the stock market is ripe for a relief rally, and I anticipate it could rally by 20-30% by early January. But I don't expect the rally to be anything more than a sucker's rally." Well, we had that rally, and we have since lost it all. Suckers!
Yep, between the intraday low on 10/27 and the intraday high on 11/4, the S&P 500 rallied 23%. Even if you just look at the closing levels on those two days, the rally was a nice 18.5%. Now all of those gains are gone. But that outcome was expected.
Now the question that everyone is asking is "Have we bottomed? Did we successfully test the October low this past week?" And now for my answer...drum roll, please..."No!"
Although it is (not so) possible that we have already bottomed, I still believe the odds are that the S&P 500 will drop to 800 or below. The October 2002 low on the index was in the 770s, and this schizophrenic market is most likely not going to let this bear go until we test that multi-year low. Of course, as of October 27 the index fell to 818 intraday, which is really darn close.
One of my biggest concerns is that the banking sector now appears to be totally breaking down. Call it capitulation or what you will, but it doesn't look good! Over the last week or so, the BKX banking index has been testing its July intraday low of 46. I first saw signs of trouble last week when two of the three largest US banks, Citigroup (C) and Bank of America (BAC), broke below their previous lows even though the BKX was still holding up above 46. My gut feeling was that both BAC and C were getting ready to pull the rest of the banks down with them (misery loves company), and as of yesterday and this morning, it looks like that is finally happening. Yesterday the BKX closed at a new low of 45.68, and now this morning it is continuing to spiral down another 5.5% to 43.15 as I write. The problem is, if this trend holds and we do break support, then I don't see much support below. There is "Support Lite" in the low 40s, but after that there is absolutely no support until you reach the upper 20s to 30. If the BKX were to fall to 30, that means that banks could lose another 30% of their current depressed values.
Banks and financials in general still contribute a nice chuck of change to the S&P 500 portfolio. So if they continue to fall as looks likely, then news lows in the S&P 500 are going to be easy to accomplish. This morning US markets are once again testing keys support levels. The Nasdaq is making new lows this week. Banks are in need of life support. Homebuilders are going up in flames. Oh, and did I mention, we are in recession! And it is getting deeper! At this point, I think we are not that far away from seeing the S&P 500 under 800. Once we get there, I will reevaluate the situation and write again. It will be very interesting too, because then the question will be, "Will the S&P 500 hold support and bottom around 775-800? Or will it break the lows of 2002 and go off into the abyss?"
We will no more later. Until then, I am buying the S&P 500 (i.e., S&P 500 index fund or SPY) once a week to ensure that I accumulate stocks while they are searching for the bottom. I plan to do this for the next 6 months by steadingly unwiding my cash position into the market in weekly, equal amounts (aka dollar-cost averaging in). I most likely won't be able to find the exact bottom, but I will be sure to buy as many shares as possible now that we are substantially closer to the bottom than we are from the top! I am not buying banks or homebuilders right now, but am holding on to the shares that I still own in those sectors. And oh yeah, Happy Investing!
Gregory