Why BAC Goes Up on "Bad" News
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Your Daily Profit

 

May 6, 2009

 

*****Uncertainty

*****Understanding Risk

*****Newsletter Advisors Wednesday

 

Fellow investor,

 

It’s often pointed out that the financial markets hate uncertainty. Makes sense – you can’t price in what you don’t know. Take the news that Bank of America (NYSE:BAC) needs to raise $34 billion to be adequately capitalized. Sounds bad, right?

 

Unfortunately for the BAC shorts, there’s no uncertainty to $34 billion. It’s a real number. And it’s also been demonstrated in no uncertain terms that government considers BAC too big to fail. Why would anyone doubt that BAC will be able raise that $34 billion?

 

For an easy answer, check the stock price: it’s up 8% as I write this morning…

 

*****The bigger picture problem for individual investors is that you often don’t know what you don’t know. And the news flow from the financial media and Wall Street analysts that purport to be authoritative sources, are, in reality, often responding to price movements based on uncertainty. So in a sense, they make their own news, though not by design.

 

For instance, they’ve been good at explaining what happened as a result of sub-prime mortgages and credit default swaps, but the few warnings that came ahead of the meltdown, like those from Meredith Whitney who, in the fall of 2007, forecast a dividend cut at Citigroup, were voices in the wilderness. Poor Ms. Whitney got pilloried for it, until it happened. Then she was the toast of Manhattan. So much for the “experts” on Wall Street.

 

So what does one do? Actually, the hardest part has been done, I think. Investors now understand just how risky investing can be. And I’m talking about the kind of risk that long-term 401(k)/retirement investing implicitly minimizes. The fact that stocks rise over the long-term is no guarantee that you won’t suffer through a market crash. It’s exactly that anomalous event that “buy and hold” investing ignores. And there’s no way to model or otherwise quantify a crash.

 

*****Some have called the rally we’re been enjoying a “risk” rally. That simply means that investors finally feel comfortable taking on risk. And really, what’s the risk of buying stocks when the S&P 500 is at 700, or 800?

 

The crash has happened. That doesn’t mean stocks won’t head lower, but at least now when know what we didn’t know in the first half of 2008: that risk was building as stock prices went higher. It gives you a new appreciation for down-home wisdom like Buffett’s “Be fearful when others are greedy.”

 

*****Finally, I want to share a note from one of my Top Stock Insights subscribers. Paul writes:

 

All I can say is "Thank you".

I subscribed to your publication last year and it has been the best thing I've done since the market went bad. I am a novice when it come to investing in stocks and traditionally used a broker but I decided to try investing myself through an online broker. I figured I couldn't do any worse than they have. Your reports have been right on and your sell warnings have been dead on. I've invested a small amount of money on stocks that you recommended through my online account and I must say I'm having fun! My current overall return has been 25%.

 

One stock in particular that you recommended, GE, I bought in March at $7.43 and it's now at $13.04. I've got 6 other stocks that you had recommended and they all are doing exceptionally well. I've recommended your service to all my friends. Thanks again. Respectfully, Paul T., Colorado

 

Thank you, Paul. I’m really glad to hear of your success.

 

If you’re interested in finding out more about Top Stock Insights and the kind of fun and profits that Paul’s enjoying, I invite you to visit www.topstockinsights.com. You’ll find information about the service and my newest report that treats the very subject of bank profits and losses.

 

Here’s that link: www.topstockinsights.com

 

Now, on to our Newsletter Advisors interview for the week…

 

Ian Wyatt

Editor

Daily Profit

 

Amy Calistri is an investment strategist and editor of StreetAuthority’s Stock of the Month premium newsletter. Her investment strategy is the simplest way to make money in today's market. She focuses on just one great idea every month -- no matter which way the Dow moves. So far this strategy has served her well. She's up +22% in this bear market. Go here to get more of her secrets -- like the government indicator that tells you which direction the markets will take.


Last year was devastating for most sectors, if not most companies. Were you able to find any pockets of strength?

Over the decades, I've faced some difficult markets, but perhaps none as unforgiving as we saw last year. In the summer of 2007 I was concerned about the spread of the subprime crisis and put a sizable amount of my personal portfolio in cash and the iShares Barclays 7-10 Year Treasury ETF. For a few months, I wondered if I was being overly cautious. But then 2008 happened, taking the babies with the bathwater, and it convinced me that it would have been hard to have been too conservative.

Gold, as another safe haven, was a pillar of strength last year. And the biotechs were unbelievably robust. It was certainly encouraging to see the amount of M&A activity in the pharmaceutical sector, especially given the tight credit environment. The StreetAuthority newsletter, Market Advisor, had Genentech in its "Aggressive Growth" Portfolio and I know they were happy to close out their position with a 97% gain when Roche bought them out.     

Once some sense of normalcy resumes in the financial world, what sector(s) do you think will lead us out of the bear and why?

The tech sector is rallying now and I'd love to think it is the harbinger of a bull market. But I suspect we're in for a long summer, where we'll probably see as much bear as bull. And sure, some sectors will outperform when the bear finally hibernates. But I think it’s the "babies from the bathwater" that will finally lead us out of this market. When fundamentally sound companies and securities got uniformly punished last year, it shook investors. No one wants to invest in an unpredictable market. Once good companies start being rewarded in the market for good performance, I think the money on the sidelines will start to flow again. 

Name a stock you would buy today and why?

Right now, I'm focused on American Depository Receipts (ADRs). Foreign company ADRs, trading in U.S. dollars on
U.S. exchanges, got spanked with the relative strengthening of the U.S. dollar. Last year's flight to safety drove investors into dollar-denominated U.S. Treasuries and just crushed currency valuations around the world. In fact, the British pound hit a 25-year low against the dollar. But that trend is starting to unwind, and foreign currencies have been clawing their way off their lows since January.

One stock I bought recently was the London-based alcohol distributor, Diageo (
DEO). It's a company with strong brand names that include Guinness, Tanqueray, and Johnny Walker. It's a nice defensive play for this environment. People's drinking habits seldom change with the economy. Drinkers also have very strong brand loyalty, sometimes spanning generations. Consumers may "brand down" in the cereal aisle, but you won't find too many Guinness drinkers that will switch to Bud.

Diageo isn't just a defensive play. They have done an excellent job expanding their brand presence and market share in places like
Africa and Asia. And of course I love the fact that the company is based in London. As the British pound strengthens, my ADR shares rise with it.           

If you were face-to-face with President Obama, what unique perspective could you give him regarding the markets and challenges facing investors?

I think we've all seen the downside of insufficient regulation. As investors, we both want and need regulated markets and businesses. But finding the right regulatory balance is challenging; bad regulation can be just as damaging as no regulation. I'd tell President Obama that he absolutely has to work with businesses to understand the benefits and consequences of different regulatory frameworks. But they can't be the only voices he listens to, no matter how much money their lobbies bring to the table. Investors' voices -- and by that I mean 401K investors and retirees, not the Wall Street machine -- need to be represented. Every regulation should be viewed using an individual investor's benchmark -- how much it improves transparency and levels our playing field.

What areas of the market do you perceive as most safe today?

Every day in the market is a day living with risk. That's the nature of investing. But as ugly as last year's market was, it did create some areas that now have limited downside risk. As I mentioned above, I think foreign companies and funds that trade on
U.S. markets have less currency risk than they've had in a long time.

I also think that some, but not all, commodities have been oversold and represent positions with limited risk. I don't like gold or the precious metals right now, but I do like other hard assets. I also like agriculture for the same reason.

And probably for the first time ever, I'm starting to look at the convertible bond market. The spreads on bonds are high and tempting, and I think we're still a good year away before we have to worry about interest rate or inflation risk. But I'd hate to miss out on the appreciation of a recovery rally. I'm wondering if a convertible might not be a way for me to have my cake and eat it too.       

What do you say to people who are tempted to buy technology, even financial stocks at these low, low prices?

If financial stocks continue to run, I'm just going to have to miss out. I think there could be some opportunities there, but the sector's current lack of transparency is an issue for me. There is still no credible pricing mechanism for toxic assets and the recent change of the mark-to-market rule has made me even less comfortable with what I see on a balance sheet. And I don't think the stress test is going to reveal much to reduce my personal level of stress over the sector. It's just hard for me to invest in something I can't evaluate. I guess I'm just Old School that way.

I do think there are some opportunities in the tech sector. But even as cheap as I am, I wouldn't focus on price as a criterion. Some of these companies have demonstrated viable growth engines, even in this economy. For instance Google and Apple just turned in nice first quarter numbers. Also, a number of tech companies have little debt and healthy balance sheets. I think as the downside risk to the economy starts to wane, you'll see these companies start to loosen up and make some strategic acquisitions. I think Oracle's acquisition of Sun was just the beginning. But in the end, I don't think tech is a value play. You have to play it for fundamental growth.    

What fundamental strategy do you follow for buying portfolio positions?

I tend to take a very macroeconomic approach to investing. I think about buying a portfolio position like a director casts a movie. There are a lot of great actors out there, but some are better for a role than others. There are a lot of great companies out there, but some are better for the prevailing economic conditions and variables. So I definitely consider things like commodity prices, currency valuations,
GDP, consumer spending, and government policy when I'm making my selection. Macroeconomic factors can really affect margins, and there's a lot of money to be made at the margin.    

 

What investment advice would you give to someone with a 5-year horizon?

My advice to someone with this kind of time horizon has more to do with process than any specific investment idea. Stay engaged.

A lot of investors couldn't bear to look at their portfolios last year. I'm going to guess there were a lot of brokerage statements that ended up in a bottom drawer, with envelopes intact. And then there were the investors who got overwhelmed. They spent copious hours every day, listening to analysts and researching ideas. In the end, they got burnt out.

Keep it simple. One good idea is enough to transform a losing portfolio to a winner -- or a good portfolio into a great one. Try to come up with just one good investment opportunity each month. It doesn't even have to involve a purchase. Your best idea may be to sell an underperforming asset. After all, minimizing losses can be just as important as maximizing gains.

But the most important thing you can do for your portfolio is to manage it. If you let things slide last year, now is the time to get your portfolio back in control. And start thinking about your next good idea.     

 

 





Posted 05-06-2009 1:40 PM by Ian Wyatt
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