My KBE sale on 9/29/2008
Real quick, I have a correction to my posting on Monday, 9/29. I sold KBE for a nominal loss on Monday, not the small gain I had originally stated. I forgot that I sold those cheaper shares to remove some of my exposure to banking back in August, so the shares that I sold this Monday actually were at a loss. Regardless, I am glad to have taken additional money off the table this week because for the moment I believe I can get a better risk-adjusted return in others sectors. Sure, as of yesterday's close KBE was about 10% higher than when I sold on Monday, but I don't miss that little gain one bit because in my opinion the risk of keeping those shares to get that small gain were too great this week. It is quite possible that the banks made their low several months ago, but I do not expect the banks to outperform most of the other sectors I am promoting at the moment. Having said that, I do still have a nice position in KBE that amounts to around 8.8% of my tradable portfolio (i.e. exludes retirement accounts that I cannot freely choose what I want to buy, i.e. my "choose from these 15 funds-401(k) account").
Gregory
Sorry guys, no stock market crash today!
Market Alert: 2008-09-29
Pardon me for posting three times today, but I just want everyone who follows my commentary to know what I am doing at a time like this. And definitely be sure to read my obituary to Wachovia Bank that I posted this morning.
About 3:20pm today I got really excited. The major indexes had all breached their earlier lows of the day and looked set to crash. And then, they didn’t. Bummer! Both the S&P 500 and the Nasdaq Composite ended down 9% on the day, which is just a hair away from the technical definition of a crash. I was hoping today would be the first U.S. stock market crash of my adult life. The last crash was in 1987, so I didn’t have any money on the table then.
A stock market crash is generally defined as the major indexes falling 10% or more in one trading day. The reason I want a crash is twofold: 1) to really put the fear in the market and everyone who has been willing to prop up U.S. stocks and deny that we have fundamental economic and financial problems for such a long time, and 2) since I built up a decent part of my portfolio in cash over the past few years, I am ready to buy some stocks at fire sale prices!
Right before the close today I picked up a little more FXI (China) when it was off more than 13% for the day and some more XLK (Technology) when it was down more than 7% for the day.
As far as a crash and true fire sale, I guess I will just have to wait a bit longer. Even if we don’t get a crash, I still think we are now moving into our next leg down in this bear market. The S&P 500 doesn’t have much support between today’s close of 1106 and its bear market low just under 800 in the fall of 2002. And if you look at a long-term chart of the S&P 500, I swear it looks to me like it is making a perfect long-term, double top formation; the first top was above 1500 in 2000, the cyclical bear market bottom was just under 800 in 2002, and the second top was above 1500 in 2007. All I can say is if this chart decides to complete drawing the secular market double top, then we better go ahead and adjust our psychology and be prepared to watch the U.S. market shave another 25-30% off of today’s close. Of the three major market indexes, I would say that the Nasdaq Composite will likely fair the best from here, but even it could go much lower.
So when you look at your online brokerage and 401(k) statements tonight, don’t get upset and think about “how much money I have lost” because that is in the past now. Instead, what you should be asking yourself tonight is how you will feel if you lose another 25% of what you have right now. I am not saying that this will happen, I am just saying that as of this afternoon the probability that it will happen has just been taken up a notch, or three.
Moral to the story: ALWAYS HAVE SOME CASH ON HAND. You should put aside part of your savings to cash during bull markets, and be willing to spend that cash in a bear market. After all, if you didn’t build up any cash during the past few frothy years on Wall Street, how are you going to buy stocks now when they are on sale?
We will know more about how much meaner this bear can get and when stocks will find their bottom later. Until then, Happy Investing!
Gregory
I just sold some KBE
OK, things are too much in limbo with the banking sector right now. I just sold 37.5% of my position in KBE, the banking index ETF. All shares were sold at a gain since I bought at a price lower than what it is trading at this afternoon. However, with bad banks like Citigroup having to take one even worse banks like Wachovia, I just don't see how the banks that are left are going to be able to outperform some other sectors that I am targeting for future growth such as XLK (technology) and FXI (China), both of which are at decent prices now if you are willing to hang on for a while. I will keep the rest of my KBE for the ride, but feel better having some cash back in my portfolio so that I can take advantage of buying into other key long-term growth sectors as the market goes down.
Gregory
Bye bye Wachovia. You will be missed!
Well, what a fun weekend we have had!
Do you remember my Market Update posting from September 17, 2008, And then there were none??? For those of you who still don’t think I have a grasp on what is going on, I ask you to reflect back on my prophetic quote from those comments on 9/17: “And my guess is that within three months a major U.S. commercial bank, such as Wachovia or Washington Mutual, is going to go bust.” Who duh thunk? This weekend, in the course of only three days, both banks failed! Washington Mutual died on Friday and Wachovia just passed away this morning.
Note that I said that “both” banks failed. I almost busted out laughing this morning when I caught the breaking news on CNBC that the FDIC had just announced that “Wachovia did not fail.” Does the FDIC (i.e. one of the bankrupt quasigovernment agencies of the bankrupt U.S. federal government) really think that anyone will believe such a ridiculous assertion? I guess they have to say such things to try and calm the markets and the many nervous Americans who are only one more bank failure away from running on all their banks.
And the other big news since I penned my September 17 posting is that as of last week all five U.S. investment banks are gone. Last week the final two IBs standing, or maybe I should say the final two IBs that were bent over in pain, decided that they would cease to exist as investment banks. Both Morgan Stanley and Goldman Sachs have given up on the IB business model as well. Both companies announced that they have decided to get the equivalent of a financial sex change; they will change their charters to become deposit-holding commercial banking institutions. All I can say is WOW!!! It must be really bad out there!
As I write this, it is 9:52am on Monday, September 29, 2008, possibly just days or even hours before something really big happens, the U.S. stock market has been heading straight down since it opened at 9:30am this morning. The Dow has already lost over 250 points and the Nasdaq looks set to breach the 2100 level. At least there is some good news: gold is up $1.00! But the best news of all is that I had the foresight to keep both my personal and business checking accounts with what used to be the fourth largest bank in America, good ‘ole Wachovia. Since I thought Wachovia would likely be one of the first banks to fail, I figured the FDIC would still have enough money left to guarantee my deposits.
Now that I am a Citibank depositor, I am not so sure where my money stands going forward.
Who will be the next bank to fall? I don’t know, but we will know more later. Until then, Happy Investing!
Gregory
America is far from over our the debt hangover....I'll toast to that!
Do you think the government is bailing us out of a mess? Think again. Actually, the Feds are attempting to borrow more money to try to solve our debt problem. Somehow it doesn’t add up; how can you solve the problem of too much debt by adding on more debt? I mean, if you are behind on your Visa credit card payments, can you solve your delinquency by opening a MasterCard and taking cash advances on the new card so that you can use that money to make the payments on your Visa card?
Want to see something scary? Check out the below chart of the U.S. debt bubble now compared to 1929 debt bubble which peaked at 270% of GDP. This chart only goes to 2005 when we reached total U.S. debt equal to 300% of GDP….now we are around 350%! Notice that after the previous debt bubble peaked in 1929 it took 20 years before the debt overload finally disappeared in 1950 (only after the U.S. economy suffered through 20 years of depression and stagnation).
So, do we have 20-30 years of misery ahead? I don't know, but I don't believe that one to two weeks of congressional hearings, committe meetings and Oval Office "we're in dire straits" speeches can prevent a bubble from popping. I do know that there are two simple rules to bubbles:
- Bubbles always inflate much higher than anyone ever imagined possible.
- Bubbles always burst and everything comes crashing down!
Here is the debt bubble chart: www.rense.com/general47/curr.htm
In short, I do not believe what is going on now in Washington is going to help America get over our debt hangover. There is more pain ahead for our economy and our markets (any rally will likely not last for longer than a few months). And for those of you who are wondering, I have not bought or sold a single stock or ETF this week, because I am not interested in trading on all this noise! I seek to invest in long-term winners, and this week has not changed my outlook other than the fact that it reiterates my belief that the U.S. markets and economy are not going to be the leaders for some time into the future, and that key international exposure is and will remain a significant part of my investment portfolio for many years to come.
We will know more about how this so-called "financial crisis" will evolve and how much the bailout won't really help us later. Until then, Happy Investing!
Gregory
And then there were none???
Market Update: 2008-09-17
Well, what a great time we are having! I just got back from a two and a half week business trip in China late Monday night, and I am just super excited about all the market action of late. As I have been saying all year now, I expected the markets to remain turbulent through this fall, and so far we are right on track.
The U.S. investment banking sector is amazing! We first lost Bear Stearns in March. The U.S. government was wrong to bail out Bear, because it set a moral trap that the market has now fallen into. Over the past three days we have lost two more investment banks including Lehman Brothers and Merrill Lynch. (See what a bunch of Ivy League MBAs are able to accomplish when they put their limitless knowledge and skills to use?)
As of this afternoon, we have two big guys left, Morgan Stanley and Goldman Sachs. And guess what, it looks like Morgan Stanley is right in line to be the next to go. Their stock is down 37% as of 12:00pm today, and the rates Morgan Stanley has to pay to service their CDS debt obligations jumped 1% today to almost 9%! Sounds like somebody is in deep water.
Goldman Sachs' stock is down around 25% as I write, which means they aren't doing so hot themselves. But of the two U.S. investment banks that are left, Goldman has the best chance to actually survive this mess.
There is no need to panic, except for the fact that the Treasury just came out with news that they are willing to back up the Federal Reserve. OK, so that could be scary, because the U.S. government is now admitting that we might not be able to handle what comes next. And my guess is that within three months a major U.S. commercial bank, such as Wachovia or Washington Mutual, is going to go bust. If that were to occur, then you can bet the farm that we will have a run on all U.S. banks. And the U.S. government, whether it be the FDIC, Federal Reserve or Treasury, will not be able to help because the U.S. is bankrupt.
It is such a shame, but what we are witnessing unfold before our very eyes is what has been expected by many economists and myself for years now. No country can be allowed to take on so much debt to the extent that the debt load far exceeds a country's ability to repay. Over the past 20-30 years, America as blown up a debt bubble that recently hit 350% of our annual GDP. In other words, the total debt in our economy (government, private and corporate debt combined) amounts to 3.5 years worth of U.S. GDP. By 1929, just before the U.S. financial system collapsed, we also had hit a record level of debt, but the total debt load then was under 300% of GDP. In other words, our debt level now far exceeds the unsustainable level that we reached in the 1920s. And we all know how the story ended then!
Now it is payback time. Our debt bubble is bursting, and that is why so many well-known Wall Street giants are failing. Our whole economy and the financial system it is built upon is at risk of default. I anticipate that we will pay for our mistakes with high interest rates and inflation in the short term, but eventually a prolonged period of Japanese-style economic stagnation and price deflation may set in (we are already seeing real estate prices deflate). Going forward, owning foreign stocks and hard commodities like gold may help to offset U.S. stock losses and risks, but nothing is 100% safe in this market.
What am I doing now? I am sitting back, enjoying the ride, and faithfully continuing to invest in sectors that have huge long-term potential as they are being driven down in the short term during this market selloff. If you are serious about investing for the long haul, then the next few months will present the opportunity of a lifetime to pick up quality positions at "blue-light special" prices!
Yesterday I finished selling out of my airline holdings that I recommended in this letter on June 23, 2008 (see posting "You have to pay $15 for your first checked bag...") when I bought United Airlines (UAUA) for $6.00 and Delta Airlines (DAL) for $5.00. I sold UAUA a month ago with an approximate 70% gain (it has since gone much higher) and I sold DAL yesterday at $10.00 for a 100% gain. Yesterday afternoon I took the proceeds from my DAL sale and bought XES, an oil and gas services ETF.
Now is the perfect time to start accumulating XES, as oil and gas services stocks are being beaten down as the price of oil retrenches. I am convinced that oil and gas services stocks will continue to rise in the future, even if they suffer over the next 12-18 months. I plan on buying more XES over the next few months as oil tries to find a bottom. NOTE: For this sector I previously recommended PXJ, but now I recommend XES as it has a lower expense ratio than PXJ with nearly identical market returns.
Both yesterday and today I bought more FXI, a Chinese ETF. The Shanghai Composite Index has fallen below 2000 this week (the high was 6092 in October 2007 the day after I warned of a top in Chinese shares in my newsletter). In my opinion, Chinese shares are now undervalued. While I was in China earlier this month, I heard several locals say how frustrated they were with the Chinese stock market. Such strong negativity is one of the key identifiers of a bear market bottom. China's stock market is down nearly 70% from its high and back to where is was at the beginning of this decade. Begin (or continue, in my case) to accumulate Chinese shares now and you absolutely cannot lose money if you are willing to hold on until the next bull market appears. I am really excited about the opportunity to buy Chinese shares so cheaply right now, and expect to make a ton on China in the next 5-10 years! Having said that, during the next few months we could continue to witness China's market fall further. This is why accumulating over time is a good strategy, as it will allow you to take advantage of lower prices later should they occur. But with the Shanghai Composite Index under 2000, I don't expect Chinese shares to stay this cheap for too long, so you must build your position during these rough times if you want to make money when the bull rages again.
Will Morgan Stanley and Wachovia be the next financial giants to fall? I don't know, but I do know that we will know more later. Until then, Happy Investing!!!
Gregory
Apparently Chinese Investors Don't Believe in the True Power of Eight!
Market Alert! 2008-08-08
Given that Chinese believe today is the luckiest day of the century, you would have expected stocks in China to rally today. So much for that, they fell to a new 52-week low, with the Shanghai Composite Index now sitting at 2600!
Why is today supposed to be so lucky? Well, putting the spectacular beginning of the first-ever China-hosted Olympic Games aside, today is lucky because of the power of the number eight. Eight is pronounced "ba" in Mandarin, which sounds similar to the word "fa" which symbolizes prosperity, development and getting rich! And today is the only day this century when the three eights will align on the calendar, that is the 8th day of the 8th month of the 8th year of the century! And to make sure the Olympics benefit from this auspiciousness, the Opening Ceremonies began promptly at 8:08:08pm tonight! So that makes six eights, 2008-08-08 08:08:08pm! And since six is also a lucky number that symbolizes that everything will go smoothly, why the heck would you not buy Chinese stocks today!
So, that is exactly what I am doing today. I am going to buy some more FXI (China ETF) to my portfolio, as I continue towards my goal of building up a position in FXI that will represent 10% of my total investment portfolio.
I also understand that, on average, country's that host the Summer Games benefit from substantial gains in their national stock markets the 6-month and 12-month periods after the Olympics. I hope the same holds true for China. We will know for sure a year from now. Until then, Happy Investing!
Gregory
Up, Up and Away?
Market Update: 2008-07-24
The past few weeks have been a blast in the markets, and we have witnessed most of my recent sector picks catapulting higher. Here is a quick summary of some recent performance:
1) Airline stocks. On June 23 I bought my first airline stocks, and mentioned that they were risky but beaten so far down that I couldn’t help not to buy a little. On that day I bought DAL (Delta) for $5.00 and UAUA (United) for $6.00. As of yesterday afternoon's close, DAL was up 72% to $8.60, while UAUA was only up 56% to $9.35. If the current correction in energy prices continues, I expect the airline stocks will continue to rapidly gain altitude. But for the long term airlines are not great investments, because airlines tend to go in and out of bankruptcy every few years and really just don't make much money when they are in the black! So, once I double my money in these two stocks, I will probably get out, or at least sell half of my shares to lock in some profit, and hold the remaining half in case they do return to their former glory levels.
2) Bank stocks. So far so good for the BKX index. It had its first successful test of 10-year support at 60. As of last Tuesday, July 15, the BKX looked like it was ready to break down, and fell as low as 46.52 that morning. But since then it has rocketed straight up, with the BKX hitting an intraday high of 71.53 during yesterday's trading. That is a staggering 54% gain in only one short week! So for now the banks are safely sitting above 60, but given the low they were able to hit last week, I anticipate that it will be a very bumpy ride for a while, and the BKX will continue to battle support around 60. In the short term, I see resistance at 75-80, and don't expect the BKX will rise above that before turning back down for another test of support.
3) Homebuilders. As I expected would be the case, ITB (the homebuilder ETF) had a wonderfully successful test of it January lows over the past few weeks and now the homebuilders are up 38% from their recent low. ITB's support is around 13, and it opened this morning above 16, which gives us a comfortable cushion above support. Once ITB gets into the $22-25 range, I plan to begin selling my position off, as I don't anticipate it will outperform the market after the said price level is met.
4) China. FXI, a Chinese ETF, also had a successful test of its March low of 40 (note: to avoid any price confusion with my previous postings about FXI, this ETF just had a 3 for 1 share split this morning). It recently fell back to 41, a level that when adjusted for recent gains in the RMB (China's currency) is about what 40 was worth back in March. As of this morning FXI is up to 47, a nice 15% bounce up from its support level. I do not anticipate new lows for China’s stock market. I am 90% confident that China's market has bottomed, and long term we will be up, WAY UP! Remember, long term is 5-10+ years. If you don't have any exposure to Chinese shares, I think that right now is the best chance you will ever have in your life to buy them this cheap. If you don't start accumulating Chinese shares now, I bet that 10 years from now you will look back and say, "What was I thinking back then? I was stupid for not listening to that guy on SinoCentury.com!"
I expect the market to remain turbulent through the rest of the summer and into the fall. Looking forward, I will continue to seek an opportunity to buy more oil and gas services shares, but we are there yet. The one other ETF I would be buying right now if I didn't already own too much is EWJ, the iShares Japan fund. It is dirt cheap and I expect Japanese shares to outperform U.S. shares over the next 5-10 years. I also think now is a time to start accumulating tech shares via XLK, a technology sector ETF.
We will know more later. Until then, Happy Investing!
Gregory
So far so good, but....
Well, a lot has happened since the last time I wrote (less than two weeks ago!).
Last week we witnessed the BKX banking index spiral out of control to the downside, which suspiciously looked like the index was breaking support and planning to leave the key level at 60 above it. The BKX as of last Tuesday fell to a 46 handle, and then everything changed on Wednesday. By last Friday, the BKX was back above its key support level of 60, and it remained above 60 today. We came around the 65 mark this morning but ending up giving some back later this afternoon.
So, what do I think this means for banks? I wish I could say we have had a successful test of support and that the worst is behind us, but I am not convinced of that just yet. I would not be surprised it we continue to bounce up and fall back down for a while, possibly even for months, as the banks try to find direction. Actually I wouldn't be surprised for the BKX to fall back under 50 and test last week's lows again.
Bottom line, if you don't have the enough fluids in you to sweat out this wild ride, you should probably go ahead and take your money off the banks for a while because I would rather you not make money if we go up from here than to complain to me how much money you are losing if we go down from here. As for myself, I will buy more if we drop way back down, because I am actually probably the only person you will ever meet who buys a stock (or fund) and hopes it will go down more (at least in the short run). I love to buy cheap, and cheaper, so that I can make more money when the rally does come. And I am a very patient man. When I buy something I plan to hold it for 2-10+ years, and don't sweat short term price volatility or drops.
Finally, ITB, the homebuilders ETF, looks great. The longer it refuses to break below 13 (which was the January low), the more convinced I am that homebuilders have made their bottom. For now I will keep watch. My position in ITB is complete now, and I don't anticipate I will be buying any more (unless it really goes on sale). Good news is that if the homebuildering stocks are finally done falling and have really found their bottom, then I would expect that the housing market will follow within the next 6-18 months. Stocks tend to predict the future, and they appear to be predicting a bottom in housing not too far out from now.
We will know more later. Until then, Happy Investing!
Gregory
Things can get worse, a lot worse.
OK, in response to Danny, I haven't a clue about Russia, so at this time I have no comment other than to say I would rather invest in China, something I know and know well, than to put money into a country that I have never even visited. Given all the false press on China, I won't even to pretend that the U.S. press on Russia is accurate. So, I just don't know.
And now on to what I do know a bit about: bear markets. And all I can say, as I did last Friday, is watch out below! As of today, we had the big down day in banks I was looking for to give us a clue as to whether or not the banks (i.e., the BKX) were going to break support. Today banks fell nearly 10%, and that is as a sector, which tells me that banks are on very, very thin ice at the moment. If you remember, the BKX had 10-year closing support at 60, and 10-year intraday support at 54. Well, today banks tanked and the BKX landed at 50. This is the level I have been watching to determine whether or not I should proclaim that the banking sector was really breaking long-term support. After today's action and news, I am about certain that banks have further to fall. The only thing going for banks right now is the fact that the so-called "experts" are doubting that banks can fall any further. But if you look at history, I would say that if banks continue to fall from here (i.e., breach 50 on the BKX), that they can easily fall to 40. After that, 25-30 is completely possible. If the BKX drops to 30, banks will be down 75% from their high. That would be a total, bear market wipe out (pretty much what the homebuilders have experienced already...and noticed that ITB is hanging on at the moment). So, given the problems in the banking sector, and the fact it looks like the BKX is more likely than not breaking down below long-term support, I am just sitting back and watching for now. If the BKX is going to drop to 25, that means it will have to lose 50% (50%!!!) of its current value. So we are talking Citigroup (C) at $8.00, Bank of America (BAC) at $11.00, and Wachovia (W
possibly OUT OF BUSINESS! If this does play out, then you need to have some money ready to buy when the BKX gets near 30. Because if that happens, you can expect to hear me screaming "BUY"! Until then, just sit back and watch a while. If you contribute more money in this environment (i.e., right after the BKX breaks long-term support), you must be prepared to take endure some portfolio degradation for a while. Having said all that, I am not selling any of my KBE. I am done buying for now, and will buy more later if we do get a total blow out. After all, 10 years from now I will be shocked if the KBE is not back to where I first started buying it, at around $42. But for now, the risk is to the downside. Breaking 10 years worth of support is nothing to play around with, so I am not buying any more until we get some direction on the banks or a really, really good deal.
Oh yeah, my comment on Wachovia above is for real. The BKX is down less than 60% from its all time high, but Wachovia is down over 80% from its all time high. In other words, the rest of the banks would have to drop another 50% from their current levels to catch up with Wachovia. Wachovia's stock price must be telling us something. Otherwise, why would it be down so much worse than the banking sector as a whole? As a matter of fact, today CNBC's Bob Pasani reported that two years ago Wachovia spent over $26 billion dollars to acquire Golden West, but as of this morning Wachovia was only worth $21 billion. Is that normal?
Could Wachovia be the next IndyMac? We will no more later. Until then, Happy Investing (and be glad that your bank deposits are FDIC-insured)!
Gregory