Thoughts on last week
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Economics

   This Week’s Data

   Other

    This week starts big with the long awaited announcement of toxic asset purchase plan from Mr. Geithner.  He has an editorial in the WSJ; and here is the Treasury’s fact sheet on the plan:
    http://www.treas.gov/press/releases/tg65.htm

Politics

  Domestic

Creeping protectionism:
http://article.nationalreview.com/?q=YjM0MDU0Y2E5YzA0NGExZWQwNzkwZjA3MDUwZGZlNTg=

  International War Against Radical Islam

The Market
    
    Technical

    The Averages (DJIA 7278, S&P 768) remain within their October 2008 to present downtrends whose boundaries are currently circa DJIA 5541--7823, S&P 537--789.  Support exists are DJIA 7146, S&P 741.

    I noted in a Subscriber Alert last week that the (our) financials had broken above their respective October 2008 downtrends.  The Market’s Thursday and Friday pin action notwithstanding, virtually all of those financial stocks remain above those downtrend lines.  At the risk of looking like I am rationalizing, the fact that financials had led stocks up off the March 2009 lows, broke through their downtrends and then held those gains in the face of a technically overbought Market, a quadruple option expiration (normally a negative event in recent months) and an almost indescribably moronic week for the political class (see below) is, in my opinion, a positive and presages a similar move by stocks in general.  Fueling this rationalization (?) process is that more than one half of all the stocks in our Universes (84 out of 161) have decisively broken out of their respective October 2008 to present downtrend.

    As you know, our Portfolios reduced cash by 1.5% in anticipation of a further move up in equity prices.  On the other hand, cash remains at roughly 31-32% and I won’t take it below 30% until the S&P breaks its own downtrend.  When (as and if) it does, our investment strategy will move back to a cash position of 20-30% from  30-50%.   

    Update from TraderFeed:
    http://traderfeed.blogspot.com/2009/03/indicator-update-for-march-23rd.html

   Fundamental
   
    The two events that defined last week’s Market action was:

(1)    the Fed’s announcement that it intended to buy an additional $1.1 trillion in Treasuries, Agencies and mortgages.  It is a positive in that it (a) addressed specifically [via a $750 billion in mortgage backed securities] one of the basic problems in the economy--the lousy housing market and (b) strongly implied that won’t matter how much money it takes, the Fed will do everything possible to avoid deflation/depression.  While that may have a number of negative implications for the long term, short term, it was a big step towards insuring that the economy doesn’t nosedive.  It had the further benefit of boosting investor confidence and perhaps cementing the March stock market lows as a bottom.

http://www.ibdeditorials.com/IBDArticles.aspx?id=322354900340862

This is why I am more optimistic about the short term.

(2)    the capricious actions of our elected representatives in their attempt to respond to the public’s outrage over the AIG bonuses.  Let me stipulate at the outset of this comment that I think it is horribly unfair that those responsible for the creation and sponsorship of those toxic assets which have nearly destroyed our financial system should go unpunished much less rewarded.  That said, I think it unjust that any of the  Detroit Lions players get paid a nickel; but no one is attempting to pass legislation to tax their salaries in excess of $250,000 out of existence..  Life isn’t always fair; and one way to make it more unfair is to try to correct one wrong with another. 

That said, this bonus tax bill passed by the House is the most moronic, self defeating steaming bag of populous crap that I have ever seen.  To wit:

(a)    the contracts under which those bonuses were paid were signed before the TARP money was ever given to AIG.  One can certainly demand a renegotiation of contract terms as a condition for providing funding.  But after the money has been dispersed, one can’t go back and void the contract just because one doesn’t like it.  Last time I checked, the only way of abrogating an existing contract was through bankruptcy and that is not happening.  Not to wax too philosophical, but the capitalist system is grounded in the rule of law, one of which is that you can’t break a valid contract just because you are pissed off.  The unintended consequences of politicians having the power to undue any legally binding agreement after the fact would be, in my opinion, devastating to our economic system.

(b)    a corollary to the above point is that the political class just can’t keep changing the rules [i.e. altering the terms of a mortgage, voiding contracts, abrogating treaties {see NAFTA--Mexican truckers}] and expect anyone with capital to make a long term investment.

(c)    this bill applies not just to those in the financial services division of AIG who helped cause the toxic asset problem but to everyone at AIG and to any other financial institution who takes government money.  Remember is you will that the point of TARP, TARF and all the other recently enacted government funding programs is to encourage financial institutions to take the money and then lend it to you and me for the purpose of kick starting the economy.  Now tell me what institution in its right mind would take those funds knowing that our elected officials could change the terms of the agreement at some time in the future and penalize that institution and its employees?  Indeed who would even work for such an institution? 

Furthermore, Tim Geithner’s new bank bail out program  could be dead on arrival if this legislation becomes law.

(d)    by focusing on bonuses, it destroys the financial incentives that draws a lot of very bright people to the capital markets and keeps them working hard  Most financial institutions I know pay their operating personnel on salary plus bonus.  But the salary part is deliberating set at such a low level that no can survive on it.  Hence, the incentive to work really hard to get a piece of the profits at the end of the year.  I worked under such a system at Bear Stearns; and while it was at times nerve wracking, my job had my undivided attention everyday.  Granted this system got perverted in the recent mortgage/derivative debacle.  But amending the system seems a lot more constructive than destroying it.

(e)    Finally, I know that $160 million sounds like a lot of money--and it is.  But compare it if you will to the size of the toxic asset problem.  We have already spent $1 trillion on trying to solve it.  The Fed is about to throw another trillion at it; and it looks like the Geithner plan will be equally as large.  So in the scheme of things, at least as related to the magnitude of the problem we are facing, $160 million is a wart on a goat’s ass.  Instead of huffing and puffing for the cameras for hours on end, our elected representatives time would be much better spent trying solve the real problem we face.

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/19/AR2009031903041.html

        Yet another reason why I am not optimistic on the long term.





Posted 03-23-2009 8:18 AM by Steve Cook