November 2008

Good quote:

Somewhere there should be a rule that those who did not anticipate the disaster should be prevented from vain attempts, with taxpayers’ money, to end a financial disaster. This would be particularly applicable to those who claimed that with their skills a disaster was impossible.

As the old saying goes: “Capitalism without failure is like Christianity without hell”. We used this decades ago and Warren Buffet used it last May.

– Bob Hoye

Once again, CNBC is running their Million Dollar Portfolio Challenge. Once again, I am entering, with the intention of doing very little.

The rules this year are a little different… only 5 portfolios per person, and you can’t buy more than 25% of a given portfolio in a single stock / ETF. Oh, and they’re getting advertising money from starting to offer 10% of your portfolio in a Forex account.

Trading opened on Monday, and end-of-day purchases are all that is allowed.

I’m setting up 5 portfolios for fun:

  • Shiny – Gold stocks
    • Unfortunately, many of my favorite “moon-shot” stocks didn’t have sufficient market cap to be included in the trading game.
  • Important – giant companies that should fare the best in a contracting market
  • Dividend – some natural gas and oil trusts with high yields (despite the fact that dividends aren’t included in trading returns)
  • BDC – Business development companies
  • ou812 – the most popular of the last bull market — AAPL, AMZN, EBAY, GOOG, and BIDU

Each portfolio has an arbitrary (and silly) name… only to identify them to me. Also, I’ve decided not to use the Forex account for now, but may hop in with some long-term trend following system at a later point (if I have the energy).

After one day of trading, my best performer is in the top 4.4% (16,000th place) — the Important portfolio with a 2% gain.

We’ll see if my strategic buy and hold portfolios continue to do so well after more than one day…

Recently I suggested buying of closed-end funds, especially those at a high discount and with high yields.

One of the risks of buying these securities is the fun way the rules and bylaws for the funds take effect. For example, PFL, PIMCO’s Floating Rate Income Fund recently had a press release:

PFL “announced today that the Funds have postponed the payment of the previously declared dividends on the Funds’ common shares…

In accordance with the … Fund’s By-laws, each Fund is not permitted to pay or declare common share dividends unless that Fund’s [assets] have a minimum asset coverage of 200%… Due to current market conditions, the values of the Funds’ portfolio securities have declined, which has caused the Funds’ asset coverage ratios to fall below the 200% Level.”

Oh crap, right? Continuing with the press release:

“…the Funds’ ability to earn sufficient income to pay the previously declared dividends or declare the December dividends was not impacted by this decline in the asset coverage ratios or market conditions.”

The funds have the cash to pay the dividends, but they’re not allowed to do so due to their own rules!

Side note: I agree with this approach, but not everyone does.

And according to an earlier press release, the managers of the fund evaluated selling some of their assets to get back over the 200% ratio…

“To do so would require the Funds to sell a significant number of securities for cash. The Funds do not believe that this is in their best interest at this time. Market conditions continue to be extraordinarily volatile and the Funds believe that market prices do not reflect the fundamental value of securities.”

That’s great if you agree with the managers (I personally do), but sucks if you don’t agree with them, or were counting on the dividend.

Such are the risks of buying funds like this. I think those risks are well compensated for by the high yields and the discounts to NAV… but your mileage may vary.

A lot of people are claiming the bottom is in, specifically because the stock market bottoms 6 months before the end of a recession. Since the recession is likely going to be over in 6 months (by whatever logic such prognosticators believe), now is the time to buy. I know I’ve heard this argument at least a dozen times.

John Hussman has a different opinion:

All of us know that the stock market bottoms 6 months before the end of a recession.

The problem is that this ?fact? isn’t really true. The actual facts are that substantial losses typically occur between the market’s peak and the point that a recession is universally recognized, and major gains reliably begin only about three months prior to the end of a recession, and continue into the recovery.

Read more here. Another good quote:

[Don’t think I believe] stocks have ?hit bottom? or that a new ?bull market? is at hand. That sort of thinking isn’t really helpful to investors, who should always be grounded in observable evidence (rather than trying to infer things like bottoms and turning points, which can only be identified in hindsight). Frankly, the idea of identifying those things in real time is wishful thinking.

… Staying with the present moment ? with what can be observed ? doesn’t mean one ignores the past or fails to consider the future.

… Presently, observable evidence suggests that stocks are no longer strenuously overvalued, as they have been for over a decade (with the consequence that stocks have lagged Treasury bills over that period). Observable evidence also suggests that the washout last month was spectacular enough (and the breadth reversal substantial enough) to allow for ? not ensure ? a sustained advance.

I find Hussman provides a tempered stance, and a good focus on the long-term investing landscape. While I don’t always agree with his analysis, I certainly find it thought provoking.


Wonder how big our national debt is? The Treasury will be happy to tell you on their website.

Negatives: The number is $10.496 trillion, and is up $800 billion in the last 2 months or so… and it doesn’t include the future obligations of the governments, Fannie and Freddie, PBGC and FDIC backstops, and it includes only the things that it currently considers debt.

On the other hand, over $4.2 trillion of the debt is owed to itself… a fact I often forget. That accounts for future purchasing power for Social Security and Medicare systems… which I have a feeling will be legislated away in some form in some future crisis.

I’ve thought of something that quite a few people may have overlooked. There is much gnashing of teeth amongst financial conservatives about the Federal Government (thinking about) bailing out GM and Ford.

The part no one seems to realize, is our government is already on the hook for their failures. Not via the lost votes, tax revenue, or general esteem of an American Institution failing… but rather via the bailed out banks.

Something like $1 trillion in CDS paper has been written against GM (CDS = insurance against bond default). It was sold by the likes of AIG, Bear Stearns, etc. It was bought by holders of GM bonds, also known as your pension, the bond funds in your 401k, and probably quite a few others.

So if GM were to fail, the sellers of insurance would have to pay up to make the bond holders whole… and what happens if AIG doesn’t have the money? Well, they’re effectively owned by the US government now, so it’s the taxpayer’s obligation to pay.

I’m starting to think that $50 billion thrown towards Detroit may be cheaper in the long term than settling on the CDS obligations of the partially socialized banks.

Of course, it would be nice to say that the government shouldn’t have bailed out AIG, but that decision has been long since made.

Propping up a zombie corporation like GM or Ford is going to be unhealthy for the economy as a whole… But then again, who really thinks that a $700 billion bailout is going to be healthy for the economy? In theory, we’re stopping a train wreck from getting worse, not preparing ourselves for long-term growth. We’ll keep sacrificing bit by bit to save next year, and pay for it in the next few decades.

Wonder how much it would cost to have a previously unnamed top-tier business school named after you?

I am very pleased to announce a remarkable gift of $300 million to the University of Chicago for the benefit of the Graduate School of Business by University Trustee and alumnus David G. Booth, MBA ’71, his wife Suzanne Booth, and their children, Erin and Chandler Booth. This is the largest donation in the University’s history and the largest gift ever in support of any business school. In recognition of the Booth family’s extraordinary generosity, the Board of Trustees has voted unanimously to name the school the University of Chicago Booth School of Business.

From Dealbreaker.