Tuesday 2/26

I have been under the weather since last Friday.  I don't suppose it is any more serious than just getting old enough to not recover from lack of sleep rapidly.

I did not publish this yesterday because I let my hurt and anger show through on Warren Buffet's trades after reading of his meetings with the highest political leaders of this land since President Obama took office.  I know for you quants in NY, you don't see anything wrong with this kind of dealings, but it only means that free markets are an illusion and fair trading is an illusion.  The USA made laws against insider trading, but the Congress, Senate and the Presidents have made insider trading very secret and lucrative art form.

As an understatement, Monday, 2/25 was not a good day for stocks.  I don't suppose anyone reads Zeb's blog, but I had been warning on this blog to be careful - to be very careful as the internal strength of the S&P 500, DOW and Nasdaq were weakening.  VIX exploded to the upside, with going from complacency to "fear" in a single hour.  Wow!!!.  If you invested in VIX Calls using VXX you would have done very well indeed.  Ha... no retail investor I know of caught that move in VXX, and even if they did, it would be very unusual for them to do so over and over again.  So be warned...

Copper:  In the mid-term, there is a unspoken (but well known) relationship between copper and the US stock market.  Long term investors pay attention to copper because copper is used in almost every product produced during the recovery phase of an economy.  Human behavior studies indicate that copper broke sentiment to the downside.  For technical analysis the market broke the down out of the up-trend line from Jun-Aug last year.  (Note that is the same exact time when the stocks took off, and if you are willing to go into Stockcharts.com for free and chart Copper on top of S&P 500 you will observer Copper and S&P falling together through November.)  You can also get CME's (Chicago Mercantile Exchange) report for Copper fundamentals and technical analysis.

Seasonally, it is time for Copper to adjust.  Look for the S&P to follow Copper this time around (again).

Euro -- you already know the problem in Italy.  PM Mario did the full MONTY so to speak (coming in last) in the vote.  Seriously,  the fractured election is the worst possible scenario for Italy.  The 10 year Italian bond is pushing up near to 5% again up nearly 90 basis points in a month.  This is not good for Europe and it is not good for the US.  I had some conservative Republicans attack me verbally on suggesting the US must do what it can to maintain its largest trading partner, and I would say it to anyone who can at least attempt to understand what would happen to the US if the European Union falls.  In my newsletter I pointed out it is the US Banks and Insurance companies that hold the vast majority insurance part of Credit Default Swaps in Europe.  Therein lies madness for the taxpayers of every country, but most people in the USA have never been informed of the risk the taxpayer faces in Europe.  One of these days, Greece or Spain or Italy (or even perhaps Cyprus) will default. (There is an argument that says that Greece already defaulted with the bond investor haircut, but the powers that be would not define it as a default.  Therefore, no banks had to cover the CDS for Greece.)   The threat is the default will have a domino effect across the world with the US banks taking the brunt of covering.

Good Book:  Value Investing with the Masters -- Kirk Kazanjian  There is some really outstanding interviews in the book.
One of the great weaknesses we have as investors -- even very seasoned veterans -- is the lack of understanding how to value stocks.  If one can get their hands on an analysis of Berkshire Hathaway's investment in Heinz, it would provide a view into how world-class investors view a great business. (Yes, I'm going to point out later things are not what the seem, however.)

What is even more fascinating is this purchase is a study in how to leverage.  With just $8.8 billion in new equity, Lemann and Berkshire are buying a business with an enterprise value of $28B.  Now ask yourself: Why would Mr. Buffett be willing to spend so much (and include leverage no less) for a fully developed large and slow growing business like Heinz?  The approach to that kind of investment is called "capital efficiency".  In very simplistic terms a company is judged on how efficiently it produces cash. (one way is cash generated per unit of sales).  Do you understand this secret?  Write a comment and let us know why companies like Heinz, Coke, Hershey and so-on are good investments.  Then factor in the leverage (and that this business, Heinz, will be supported by guess who? Your new Secretary of State --  John Kerry -- remember him, where his wife owns most of Heinz? Good grief)...

I read an article by some talking head about how Intel was going to go the way of all dinosaurs.

Will Intel fall?   Did it miss the opportunity to enter the mobile market?  You should educate yourself about this.  AMD is the only major competitor of Intel (and it is no more than a pimple.)  There is an argument that Microsoft will be going out of business (highly unlikely - whereas no growth is highly likely).  Then MS translates to Intel going out of business as the consumer is driven into cloud computing (which everyone now uses the cloud in some way or another).  For the laymen, basically the "cloud" is the internet, and using the cloud means using services via Internet (for example Gmail in the cloud).  There is another whole level of complexity for operating systems and distributed data required by companies providing services in the cloud (for example Amazon's Elastic Compute Cloud EC2).    Arguably Microsoft's OS has not been able to handle something the size of Google, although I believe Microsoft would argue they have implemented everything Google has in MSN.  (That is not completely wrong view by MS, but it is very misleading.)

At the heart of almost all datacenters today is INTEL based servers.  They run Linux (in all its wonderful flavors), Windows (and all it grrrrr versions), Apple, and so-on.  Will Intel fall?  What do you think?

GOLD -- Hang onto your hats.  The war between commercials (central banks and producers) and funds is heating up.  Commercials bought a great deal more gold than funds sold last week.  The risks are high, and anyone who when short after the large drops are probably hurting big time at this point.  Look for all the talking heads to start saying "gold's" correction is over - we are now going to the moon.  I'm not convinced.  What is happening is the Western World is selling its physical gold to the Eastern World.  The wealth is being transferred.

General Electric:  Did anyone notice when the US government bailed out GE in 2008?  Do you remember the big hoop-la when the USA bailed out Government Motors?  and the bigger hoop-la when GM paid back part of the debt by using other money they borrowed from the Government to pay back part of the money?  I don't remember a lot of hoop-la about GE.  In 2008 GE owed creditors almost $700B which would make them the world's fourth largest debtor.  When funding dried up, the Government lent them money to keep them afloat (and then Obama made the GE CEO the head of job creation.... How did that work out for the US?)    Do you believe that GE will ever repay debts of that magnitude?  Now, let us revisit Mr. Buffet again.  (He really should have been schooling Bill Gates before Microsoft's anti-trust loss - as Gates never understood politics obviously.)  

Imagine for a moment a billionaire (Mr. Buffet)  fundraiser for Mr. Obama invests $3B (a nice number) in a multinational corporation run by an Obama appointee.  Then imagine (actually you don't have to imagine) the multinational firm (GE) rakes in billions in loan guarantees  tax credits, overseas employment payments and additional bailout funds ($140B).  Mr. Buffet (after having conversations with Mr. Obama) invests $3B in GE and cashes in a very handsome (and satisfactory) profit.  GE spends more on lobbying than any other corporation according to the public records.

GE/OBAMA/Climate -- GE profits handsomely on government support and even more so from Mr. Obama's policy on climate, energy, stem-cells, rail, transportation  health insurance and more.  Does this provide you any insight into why the CEO of GE was tight with President Obama?

BankofAmerica -- want some more of the same... Research Mr. Buffet's investments in BofA.  Even the red-necks where I live understood that Mr. Buffet was "betting" on a bank bailout by the government (old news I know).  "If I didn't think the government was going to act, I would not be doing anything this week," said Mr. Buffet.  (I'm not mad at Mr. Buffet.  I would love to be able to get insider info like this.)

And folks, that is how big-investors really work (all the BS they spout about value aside).  And can you ride Mr. Buffet's shirt tale without investing in one share of Berkshire Hathaway stock?  Probably not, as in the case of BofA, an investor would have had to sit to a very large negative position before the investment turned positive.  Do you think you could sit through that negative position?  You never know until you try it, but what usually happens is the retail investor finally throws in the towel at the bottom and liquidates, just as the investment turns around. (But here is the conundrum:  There are just as many instances when the investment does not turn around, and knowing when to hold on is an art that "old" investors have mastered -- which art is helped if you can call Mr. Geithner and Dr. Bernanke and ask what is happening this week.)

Well, sometimes it just pays to be a Democrat.  Wait, did I not hear that the democrats are all for the "little man"?  Someone (not me) should give an opinion how raising the minimum wage is going to affect all the small business and their employees in the land.

Helicopter Ben:  Remember Helicopter Ben who said he would drop money out of an airplane to stimulate the economy?  Well, Bennie and the inkjets gave all the money to the banks (as that is what they were set up to do.)  They had a really cool helicopter (with BIG Banks and Mr. Buffet underneath the drop).  The helicopter dumped the money, but the downdraft funneled the bills only where the Banks wanted it, and did not litter the streets of the USA.  Let me see, if they took the $85 Billion per month they are "printing" and gave it away, to be spent by the consumer, would that help?  Of course, you know the answer, right? INFLATION!!!! at the Argentinian  and Zimbabwe level.  We are getting "SCROOGLED" (which term I read somewhere). (It has to do with all the data mining from word clouds and personal advertisement that Google does in gmail.  And remember, I'm using the free blogger from Google; so reader beware.  I'm probably on the S**** list of the Home Land Security at this point.

That then, is my new "best" word -- SCROOGLED...  I Look to be SCROOGLED on 401K programs, IRA programs, tax-payers taking over state medical health care for employee unions, increase cost of gasoline even though Oil is down in price.

OK,  I repent.  I went into politics, but it "ticks" me off that I'm not in the in-crowd, and struggle very hard to make even 10% returns on my investments.