Too Soon

I must admit I was a bit too soon to get bullish. Those ten stocks got hammered pretty good, except Q only a little and XOM went up a bit. The October 1929 crash didn't bottom out until the summer of 1932 (and the market peak was earlier in 1929). Three years from the October 2007 peak would be late 2010 - another two years away. I hope it's not that bad, but hey could be.

My seven year old daughter is mad for Skechers shoes. They are very cheap, sold at JC Penny's and outlet stores. The company is SKX, founded not too long ago and run out of Manhattan Beach. Their shoes are made in China, most or maybe all. SKX is trading well below book value and has a P/E of 6. People can only put off buying shoes for so long, and I should think cheap ones would be attractive in a recession. SKX traded today just under $10.

Feeling bullish

Ticker Price EPS08 EPS09   Div   Book PE
DELL  $15.21 $1.44 $1.65 $0.00  $1.44 11
Q      $2.74 $0.41 $0.43 $0.32  $0.29  7
MSFT  $25.50 $2.12 $2.39 $0.52  $3.96 12
ADSK  $27.77 $2.28 $2.61 $0.00  $5.60 12
BMC   $27.31 $2.14 $2.41 $0.00  $5.14 13
NOK   $17.12 $2.22 $2.22 $0.78  $4.29  8
IBM   $92.21 $8.73 $9.42 $2.00 $20.86 11
XOM   $73.08 $9.00 $8.96 $1.60 $24.03  8
CHK   $20.20 $3.81 $3.93 $0.30 $17.58  5

The above are some current stocks that look good to me on a fundamental basis. Look at those P/Es -- nice and low at long last. The market crash has perhaps created some bargains. Another bargain may be the electricity producer RRI, which is selling well under book value - and we're going to go on using electricity I'm pretty sure. Also the railroad BNI. Railroads use much less energy to move things than trucks, and so with ongoing high energy prices they may be a good bet. So far my favorite is IBM, no longer really a computer company but more a business services company, with customers worldwide, a real blue chip.

Wall Street in Turmoil: What To Do

I'm going to resist the temptation to delve into politics and criticize the big mess on Wall Street. There's plenty to criticize but no one (in power anyway) cares what I think.

What is an individual investor to conclude from the situation? I see these things:

1. The rating agencies who handed out AAA ratings like candy are not to be trusted. The paranoid among us note that they are paid by the issuers of securities and a good rating helps sell them. Giving a AAA rating to investment banks with 30:1 leverage ratios is clearly bogus, as a 4% drop in asset values wipes them out. Like most people, they simply thought that real estate prices would rise forever. Repeat after me: Trees don't grow to the skies. Anytime anyone asserts that a market will never fall, run for the exits.
   It is actually safer in invest in lower rated securities, assuming you have diversification as in a mutual fund. There you get a higher interest rate to compensate for the higher risk. AAA securities may or may not be safe, but you can be sure they will pay a low rate.
   Trust your own instincts as to what is safe and what is not.
2. Now that we are into a bear market, it's time to check on asset allocation. One rule of thumb I like to use is to have a certain percentage of your assets in common stocks, declining as you get older and less able to recover from a loss. I like the rule of 110 minus your age for the percentage of your net worth in stocks. If you've been managing your asset allocation, the market drop may mean that you now have too little in stocks. In other words, it may be time to buy. How can you buy with all these screaming negative headlines? Well, that's a good sign for a buyer. When everyone is patting themselves on the back, that's the time to sell.
3. What to buy? I've noticed that our old friend the tech stocks have taken a pretty good pounding, even though sales are holding up and they rarely depend on borrowed money. I'll be looking them over for bargains.

Capital One gains by spurning mortgages

Interesting Dow Jones article yesterday interviewing the CFO of Capital One. They have deliberately spurned having mortgage debt on the books in favor of unsecured debt. They figure the unsecured debt is actually safer, as credit is extended on the basis of the borrower's ability to pay. Mortgages have been granted based on the security of the underlying asset, and when that falls in value, the holder is in trouble. Capital One has done relatively well in the credit crisis, and perhaps is a buy. Capital One Finance (COF) trades at about $46.

UAL Stock Takedown

I think this story about UAL is fascinating. Apparently, an old story (2002) about United Airlines (ticker UAL) filing for bankruptcy got enough hits on a Florida newspaper's website to have it appear in their list of top stories of the day - generated automatically by the web server. Then because it appeared in this list, it was picked up by Google News as an important story of the day - again, this happened automatically by the Google news computer program. Then because it appeared in Google News, UAL was sold and sold short by automated trading programs - again, without human intervention.

The UAL stock price plunged, and then later when the truth came up, mostly recovered. So far, it appears that this snafu was just coincidence. For some reason, this old article got some hits, and the ball started rolling from there. But obviously, it could be used to manipulate stock prices - in a new way, and there aren't too many of those. It certainly shows up the flaws in using computers to process what ought to be done by humans.

UPDATE: Today's WSJ says that the whole thing was triggered by ONE HIT on the old article. It was during the middle of the night, when there was little traffic but it was enough to put the story in the top 10 of the hour and start the whole debacle rolling.

Housing prices

Many homeowners have a peek at Zillow every now and again to see how much their home is worth. Maybe not so often these days as it is apt to be falling! By conventional standards, families can afford a home priced at two to three times their annual income. In our neighborhood, houses are $600,000 and up. And I know most people are not making $200,000 to $300,000 a year. Of course, most bought years ago when prices were lower. But for prices to stabilize, people must be able to afford to buy at current prices. And I don't see that happening yet. I think housing will fall an additional 40 to 60 percent from current levels.

Oil prices

While I am still a believer in peak oil, oil prices have risen too far, too fast. The prices north of $140 a barrel could not be maintained and have fallen back. I'll go out on a limb and predict that oil will fall below $100 a barrel in the near future (spot price today is about $115). This will be good for the economy and the stock market, but don't be fooled. The long term trend is up and we'll see $140 oil again.

Financial stocks

I've sold my Citigroup stock (C). Big whoop, you say, the financial crisis has been all over the news for months? Well here are my thoughts on the matter: I think it's best not to invest in financial stocks at any time, because the CEOs get paid for short-term results while the shareholders are left holding the bag for long-term losses. Citigroup and Merrill Lynch CEOs walked away with a bundle during the go-go years just past, leaving their companies loaded with bad debts. Surely these financial experts knew very well that all those subprime loans were going down, but it didn't matter - they just needed a few quarters of paper profits to pocket millions in bonuses.

The big problem with financial stocks is that they make their money borrowing short-term and lending long-term, and for this to work requires a conservative approach. Whereas maximizing the CEOs bonus requires a speculative approach. This fundamental disconnect makes the stocks a bad bet.

Tighter Immigration

The business papers have well noted the bearish effects of the housing meltdown. The tightening immigration situation is another bearish factor that is not often considered. Illegal immigrants work and produce things in this country, and they spend money here. They also need houses and apartments to live in. Deport them or make it harder for them to come here in the first place, and you reduce GNP. I'm just saying.