Markets waiting on Big3 bailout news

President-elect Obama has been busy putting his team together. This includes not only his cabinet but other various advisors as well. One interesting choice was former Fed Chairman Paul Volcker to head a new advisory panel whose purpose it is to offer advice, information, and strategy for the finacial markets and how to jump start and maintain a healthy U.S. economy.

The world continues to watch and wait on the U.S. govenrment finalizing a package in the form of a bridge loan to the Big 3 automakers. What started with the Big 3 asking for $25 billion, then told to go back and come up with a plan (do you remember seeing AIGs plan? surely the other financial institutions who received part of the $700 billion had to show a plan . . .?). They did and came back and asked for $34 billion! It appears the House and Senate are prepared to offer the Big 3 $15 billion, payable on December 15th, to give them the ability to hang in there until Barack Obama takes over and then his team can decide where to go from there.

Ideas for investments???? Well, this is really looking for a jewel in the trash - what are the best companies in defensive or cyclical industries that have been beat down unfairly and when do you take a chance? I am not convinced we are at the bottom but I do believe we are very close. The markets still move up for a few days and then have a big down (people take short-term profits after a nice move upwards) as the markets settle in. It doesn't take much news, positive or negative, to get movement - though the movement seems to be overblown in either direction. I still like infrastructure plays, but others such as cyclical/defensive stocks are a good way to go as well. There is still a lot of quality companies out there than you can buy on sale! Companies I like are Dean Foods, Kellogg's and General Mills in the food producer category. As always, you need to do your research and determine whether these or any investment alternatives are right for you!

My most recent trade was buying Citicorp in the upper $3 range; it is currently at mid-$8 range. Sure wish I would have bought a truckload of it!!!

What Happens Now?

As someone who does small business consulting, financial planning and teaches finance courses I have been a little busy lately (it has been about 3 weeks since I have posted to this blog!).  So . . .  where do we stand on everything.

1. President-elect Obama has been busy working on choosing members of his cabinet in hopes of hitting the ground running on January 20th.  As an early sign of "keeping my promise to the American people", I do see his choices running the gamut of  liberal/conservative and both parties, many with experience in the Clinton administration.  Now, what shape the economy will be in by then is still up in the air; hopefully there will be something left for this team to manage!

2. Financial crisis continues.  The big three, GM, Ford and Chrysler, are still hoping for a $25 billion bailout (this on top of the $25 billion they want to upgrade the facilities to produce fuel efficient cars).  Yesterday was not a good day for the CEOs of the big three, flying in on private jets, refusing to work for a $1 salary (except for Nardelli, apparently he is "still good" with the $300 million package he got from Home Depot!), nor do they have a concrete plan they can share about turning things around (saying they have made a lot of cuts already), as they hold out the proverbial "tincup" asking for a handout.  Talk about not getting it!  Look, I have no issue with the private jet for important CEOs who need to be able to get to important meetings/conferences where traveling coach would just not work.  I do think this would have been one of those times to buy 3 first class tickets and fly commercial like the rest of the public as you try to show "you understand and care about the common man".  Who is their PR people - please, give me a break!!!  It is all about perception - and the perception of the big three CEOs are they are rich, arrogant, and don't get it!  There are a number in Congress who feel these companies should just reorganize in bankruptcy.   I am not in favor of the bailout without specifics and restriction (especially built around performance measures for pay for the executives), but I find it a little ironic that members of Congress (who don't have to pay social security taxes, have a pretty good "lifetime benefits package", etc.) are talking about cutting costs until it hurts and protecting the people's money.

3. The markets: the international markets are not that different from the U.S. markets, as governments are stepping in along with various money center banks and large world fund banks in an attempt to instill confidence in the system, but things still seen to rise and fall on the fortunes of the U.S. markets.  Yesterday (November 19th) the S&P500 hit 819.  This is significant for me, as in previous market highs which move to lows and then back to highs, etc., the difference between the market high and market low as measured by the S&P  is 50% (this means a drop of 50% from the high before the bottom is found).  In this last market cycle, 819 is that 50% down number.  For me, if this number can hang in her for a while (say a week or so), I think we could have a temporary bottom call to look at.  However, if it continues to fall, it is going to go way down (under 800 on the S&P and about 6500 on the Dow), in my opinion.

4. Ideas for investing (other than the mattress, that is) is very little is out there that I would venture into right now.  If you play options, tomorrow is options expiration so you can look at puts of certain stocks as well as some index plays (as I don't think anything is going to happen on the upside for a while), out a ways (maybe January at the earliest).  What to look at in individual stocks (this is only if you have a LONG TERM view) is very little as well.  I do believe there are still good quality companies that have been beat down too far, but they will come back only when some level of confidence is restored.  There are a bunch (latest count is over 100) "blue chip" stocks that are under $10.  While you can bottom feed it is important to understand the risk and what the story is behind the company.  I always say, if you can't talk about a company you are interested in, for two minutes, you don't know enough to own it!

Here are some stocks that are intriguing to me:

Citicorp (though I think this one is going to break up and pieces sold to other banks)

JP Morgan

Wells Fargo

Johnson & Johnson

Intel

Cisco

Wal-Mart (I think, if this market stays like this for a while, this could be the next Google, as far as price goes)

Merck

ExxonMobil

Blackboard

Apple

You need to have a strong stomach for this market and a long-term time horizon, or just find safe CDs, government money markets, and government paper.

Bailout passed by Senate

The $700, now $805 billion bailout passed the U.S. Senate last night. Now we have to wait and see what will happen with the House. Over the last few days there has been many articles written about what $700 or $805 billion would buy if it was spent on the people of the U.S. rather than the financial institutions that caused the mess. I agree something has to be done, as the credit freeze is affecting those with good credit, who would and are qualifiying for a loan (the types of loans the financial institutions should have made over the last few years), and the is no money to loan.

What this economy needs right now is no different than what a business needs, CASH FLOW. Consumers have nothing to spend and can't even borrow if they wanted to spend.

The markets are in their usually roller coaster ride they can do when uncertainty reigns supreme!

Some interesting items in the financial press, from yesterday (Wednesday, October 1st), is that General Electric is offering to offer shares of stock to sell in an effort to raise $12 billion to give it a chance for acquisitions - clearly it thinks there could be some valuable companies "on sale" when this all shakes out. GE stock is off more than 34%, more than the market (off about 21%). Interesting report has Warren Buffett interesting in buying into GE!

The markets still in turmoil . . .

Do we have a deal or don't we?!?!?! It appeared the financial bailout deal ($700 billion) was hammered out in extended sessions over the weekend, and it was now going before Congress for a vote. Unfortunately we are in a big election year (November 4th), and I believe we are seeing the political wranglings at this time. Whenever it looks like something is going to happen (markets rise a bit), we then have someone wanted to stall or change some detail of the plan.

Look, none of this is any good - we shouldn't be in this mess in the first place, but we are! We you spill a glass of milk in the kitchen, you don't spend time moaning about the glass slipped, your hand was wet, how to protect the kitchen floor from future spills, getting guarantees that the milk if it falls, we go sideways rather than landing on the floor! ------ NO, you clean up the milk first!

We are in a world of financial hurt both in the U.S. and the foreign markets (as they seem to watch us for what we are doing and then react the same). We need to do something! There will be more regulation coming out of this just like the 1930s, after the Great Depression and in the 1980s for the Saving & Loan crisis. We seem to put ourselves in this position every now and again (greed gets the best of us; or at least some of us who work in this industry) and some get hurt, but we always survive.

The markets need some stability, markets to not like uncertainty and financial institutions need to do something with the money (sitting on it makes no revenue), but those customers are either unsure of the future or if wanted to borrow are finding things really tight and they don't have access. We could end up in a depression if this doesn't get resolved soon. If no one is buying, then nothing is made, no one is working, etc. --- it is a vicious cycle.

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Annuities

Personally, I don't like them, but I know there are planners and others in the financial world who like them. I would never put a client in them if they asked me (s0me do it and then ask what I think???). Overall the concept is a good idea, but I am a firm believer people have no clue what they are buying.

They are signing a contract. A contract in which they have few rights and the insurance company has most of them. One of the reasons a person considers an annuity is that is sounds good, easy, and on the surface makes sense. They are looking for something "safe" and "guaranteed", with little to do after setting it up. Annuities are insurance contracts. There are two types "fixed" with a steady rate of return established at the front end, which accumulates or pays out periodically (depending on how it is set up). A "variable" annuity will have a rate of return that fluctuates, possible of making more than the "fixed" but also possibility of making less. Consumers looking for that "guarantee" will opt for the fixed annuity - bad choice! If I had to force someone into an annuity it would always be variable. Why? Simple, again these are insurance products. With a fixed annuity the annuity contract moneys are co-mingled with the Insurance company funds - in a sense they are in the same boat together. Okay, if the boat doesn't sink ----- every hear of AIG!!!!

Now, a variable annuity does not co-mingle the funds from the annuity with the insurance company, so in my opinion, can be a little safer.

Another reason that I do not care for them is the high fees (as much as 8.5% of your invested amount. Yes, the brokers will tell you "it is a declining fee", which means that if you invest and keep your money in for 5-7 years or so you may not have to pay anything on the way out, as each year the 8.5% you lose gets lower. My issue is if I invest $10,000, I want $10,000 working for me, not $9,150 like it would be with an annuity (after the sales charge).

Anyway, enough ranting for today . . . . . . someone just sit down and decide something!!!

Treasury to the rescue!

Well a couple of good days in the markets, both domestic and foreign.  Oil inches slightly higher, just under $100 a barrel.  Gold, silver and other precious metals are on the rise as people chase something tangible.  This based on some potential losses in money market mutual funds.  Long thought to be safe havens, most individual investors and many institutions own money market mutual funds.  These funds have a NAV (net asset value) of $1.00 per share, normally, and this NAV doesn't go up or down, as the majority of the interest paid to the fund from the securities held is distributed to the shareholders as a dividend.

Just like any other mutual fund however, you are at the mercy of the securities held by the fund.  If one holds government paper (t-bills, t-notes, etc.) there is not really an issue, but if one holds short-term commercial paper in other companies (particularly financials; and financials with weak balance sheets) and those companies have financial difficulties or file bankruptcy, then the mutual fund holding those securities will suffer a loss.  Today the U.S. Treasury Department said it will support money market mutual funds whose NAV has fallen below the $1.00 mark.  This announced by Treasury Secretary Henry Paulson (check you recently printed cash, he is the guy whose signature is on the bottom right front side of your currency!  He also announced an ASSET RELIEF PLAN, by taking bad mortgage loans off the books and getting some funds in the hands of those banks that will still be around after all this mess shakes out. "I am convinced that this bold approach will cost American families far less than the alternative--a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," said Paulson on Friday (September 19, 2008). (from Rueters)