I follow the recommendations or observations of very few people in this business. It’s not an arrogance thing, I just do so much of my own research that I have tuned out much of the noise that goes on. Last year I tried talking Ralph Bloch into reading my blog and using the database. Without explanation, he bluntly told me “I don’t read other people’s stuff.” Ralph didn’t need to explain - I didn’t need to ask for an explanation. Since then, I’ve thought about his statement and evaluated how much I factor what other people say or do into how I make portfolio decisions. Over time, I’ve learned why Ralph said what he did and I am saying the same thing lately.

I do my own thing and as I always say on here, I want you to do your own work too. If my comments encourage you to think about something new or in a new way, that’s good. But never ever substitute my thoughts or anyone else’s for your own. If you think I am stupid and it helps you solidify your conviction about a view opposite to mine, that is what HEDGEfolios is all about. If my work validates what you’ve already come up with on your own, that’s great too.

Great minds think alike…and so do stupid ones. And right now there are a few great minds I respect that are saying to get the hell out of this market. There are also some stupid ones that are saying the market looks great…come in…the water is fine. The diverse opinions are understandable given the volatility and strange market action that has been occuring. However, my work doesn’t show me that things are definitely getting a lot worse and I have to follow what I am doing, not what others are saying or doing. HEDGEfolios is committed to either an UP or a DOWN signal and being all the way out is not an option. Personally, I am still very negative on the market and the economy so I can understand why others are saying to get out of the way. But I look at each of the 3500+ stocks on an individual basis and once again this week, despite all the negative stuff, I gave more new UPs (162) than new DOWNs (101). Being 53% bullish is not overwhelmingly optimistic but I am comfortable with it. However, I am not you. YOU need to decide whether YOU are out or in. If you cannot handle the volatility, you need to discuss it with your financial advisor. Otherwise, just like Santa…you should be making a list and checking it twice so you are ready if this market is naughty or nice.

If this current improvement I am seeing goes away, you can bet I will be exiting as much as I can at my first opportunity. Technically, the downside (from a market perspective) looks very bad to me and if it doesn’t hold here, I expect that we will see a rapid retest in a matter of days of the 1400 to 1410 level. A failure there and I wouldn’t be surprised by a further 10% drop. Ominous stuff. But as I said at the start of this post, that’s my work - not yours. Right now, many people disagree with my view. If we fall to 1250, they’ll be disagreeing with me then too.

Goldman had earnings today - not losses. Don’t lose sight of that given the challenges in the financial markets. I keep telling myself that despite the realities of how many ways financial firms can play with their numbers.

On a more critical note, I am intrigued (and unimpressed) by Goldman’s share repurchases during the quarter. For people that are really good at trading - consider that they bought 11.6 million shares during the most recent quarter at an average price of $230.65 per share. HMMMM! GS is now priced at $201 or about 13% less than the average price they paid for their own stock. I trust they do better with other securities.  Goldman got criticized by Ben Stein and others for hedging and profiting from the mortgage mess.  Maybe they should hedge and profit from the decline in their stock after they do buybacks!?!   Now that would be a scandal, wouldn’t it?

So we know the buybacks were not good investments during the quarter.  How about longer term?  Over the past 12 months, Goldman repurchased 41.2 million shares at an average price of $217.29 per share.   That isn’t so hot.  But when you figure the need to manipulate EPS, it certainly helped out.  Good for them.  Investors love that kind of thing.  They also love hearing that the board increased the existing buyback plan by 60 million shares to now total 71.4 million shares for authorized repurchases.   It will be interesting to watch how much of the 71.4 million shares get used to prop up earnings going forward.

GS hit an all-time high on October 31, 2007 at $250.70.  Whenever I see share repurchases near all-time highs, I am not impressed.

Since August, the amount of Central Bank intervention has been increasingly extreme.  It almost seems like the Fed, ECB and Bank of London are conducting some kind of competition.  I call it One-Upbankship.  The ECB injected $500 billion for 2 weeks at a rate of 4.21%.  That’s about twice they had projected to do and more than I think they have ever done at one time.  It makes the Fed’s TAF program seem a bit small.  Last week, TAF was huge.  We’ll see how it went in a day or so, but judging from the Bank of England auction, I am just waiting to see what’s next.  Each program is bigger and more complex and since I don’t think the TAF will solve the liquidity problem, I expect that One-Upbankship will continue to play out.

Interesting analysis from my friends at Bespoke:  Check it out.

There are many reasons to invest abroad and many reasons to avoid it.  I’ll leave that analysis and decision up to you but looking at the fundamentals is a great place to start.

One of the key tenets of the bullish case for this market is the comment that “consumer spending is holding up.” I’ve heard that way too much lately. And I’ve not missed out on the hundreds of times that the permabulls downplay the concern by saying that the bears have written off the consumer for years and they have been wrong. Have they been wrong? Yes. But dismissing the argument based upon these past results is ignorant. I suspect that many permabulls cannot help but acknowledge the threats to continued consumer spending but somehow feel that they just don’t matter because the consumer keeps shopping. That poor logic will eventually be punished.

Let’s consider the prior bullish case for stocks which was based upon housing bubbles and cheap debt. Last year at this time, the permabulls laughed off the concerns about inflated housing prices and the dangerous mortgage situation. The same ignorant attitude applied back then when the response was that we had been wrong about the end to the housing boom for years. Were we wrong for years? Yes. Now? - not so much.

I feel the same way about this crazy idea that “consumer spending is going to hold up” because it did in the past. The consumer is in serious trouble from overspending and maxing out their credit cards this season is not part of a solution. Liquidity is a strange thing that is here one minute and can disappear the next. That happened with mortgages. That happened with LBO debt for Private Equity. That happened with commercial paper.  It can happen with consumers just as well.

This spring, I kept seeing the technicals eroding while prices were heading higher and it caused me to position for the downside. That was painful until mid-July but it paid off in the second half of this year. Last week’s market action had a lot of the opposite - prices were dropping while often times I did not see dramatic declines in the technicals. Not only were prices falling, but in many cases the weekly declines were about 10%. I never get into saying something went down “too much” as I am not the judge of what percentage is the right one. But it was certainly extreme.

When that happens, I work really hard to evaluate the merits of the price change based upon fundamentals. If they are still solid and the technicals held up, I tough out the price drop. It’s painful, but over time, I’ve found that it works out for many of the stocks. On the other hand, if I feel the price change was consistent with a weakening of the fundamentals and technicals, I bail.

The thing that concerned me the most last week were hundreds of stocks that had looked great a week earlier and now look terrible. The optimist in me (yes some part of me is not a bear!) says it’s just the start of a lot of cup-and-handle formations and the declines were the start of the handle. I’d like to believe that and I need to give it a little time before I feel confident one way or the other. However, the slope of the declines were extreme and I wonder whether the handles got broken off before they can start to form.

Don’t mess with the ratings agencies! I’ve hinted at that more than a few times here. On November 30 when Moody’s threatened to cut the ratings of about $105 billion in SIVs, I did a quiet nod and a bit of a fist pump. But in my mind, I was believing that the ratings agencies finally got a clue that they needed to fight back and say “Don’t fuck with us!” Because whether you like their cooperation, coordination or complicity in creating this mess in the first place, we have fiduciary rules that cannot be rescinded fast enough to avoid the bigger consequences of the ratings agencies downgrading the crap. So all you politicians - you better back off. Because as I have said here, if you force the ratings agencies to cut their grades on all the stuff sitting in money market mutual funds or pension funds or insurance companies or state and municipal funds, we are done here. And by done. I mean the banking system, financial markets and economy would crumble. So Moody’s and S&P and Fitch - please do what you need to do. In the end, Citi got downgraded for taking on the SIVs. One downgrade placed where it should be. The market can handle it. Citi can handle it. Will they find it more difficult to get funding? Yep - well kinda. Remember who the biggest banks borrow from. HMMMMM!?! They borrow heavily when they need it from the Central Bank. What a coincidence that the Fed announced TAF a few days before Citi took on the SIVs and in a few days, I suspect Citi will be bidding at the auction. In my opinion, the ratings agencies have a power that equals or exceeds the Central Bank and we need to realize that.

For the time being and until a new creation of the sophisticated financial people can exploit markets, Citi’s move to bring the SIVs onto its balance sheet probably marks the end of SIVs. Good riddance! I never like the Super SIV bailout (aka M-LEC) anyway. As for Citi’s capital, this decision has significant consequences for existing common shareholders. The Abu Dhabi deal was dilutive enough, but this SIV absorption seems to have set up for additional transactions that will hammer C in the short term whether that means another convertible preferred deal at loan shark rates or a cut to the dividend. I just don’t see how taking on the SIVs will not require something like that. Other than that, it’s just another example of the banks stocking the cookie jars.

The government bailout plans and intervention in financial markets are very troubling to me as a free market capitalist. As much as they keep saying they are trying to help improve the financial system, it really is nothing but a great effort to prevent the markets from “working themselves out”. They are achieving opposite of what they say they intend to do. Please, would all interventionist politicians stop using this phrase “the problems are working themselves out.” They have nullified the meaning of capitalism and nothing is working itself out on its own when they are involved. If things would be working themselves out, there wouldn’t be a plan to keep everyone in houses they cannot afford because the markets cannot afford them to sell the houses. There wouldn’t be plans to help banks avoid selling CDOs they cannot afford to sell and because they believe the market cannot afford to see them sold. The government will continue down this path and as much as I don’t like it, no one ever elected me or appointed me to an office that would allow me to influence these decisions. So I just do the whole freedom of expression thing here and not much else (pathetic huh?) But one of the few things I ask is to be blunt and honest - I know that is tough for them, especially during an election year(Isn’t every year an election year?). But it is extremely deceptive, misleading and dishonest to do all this government intervention in markets and then utter a phrase that says the problems in the markets are “working themselves out.”

Please look at the H.4.1 report which showed average Discount Window borrowings of $3.009 billion last week, a $2.7 billion increase since the 12/05/07 report. The ending balance on 12/12/07 was $4.5 billion, more than double the amount borrowed a week ago. With the disappointment about the recent FOMC rate decisions largely centering on the failure to lower the Discount Rate to the Fed Funds rate, it’s no wonder that the Central Banks came out with the TAF experiment. The way I look at it, this will at least temporarily close the Discount Window. If the $4.5 billion at the Discount Rate doesn’t shift over to the lower rates that will be bid at the TAF, I will be shocked. So now we’ll likely have 3 Central Bank rates: the Fed Funds rate at the lower end, the TAF rates at the mid level and the Discount Rate at the top. As a result and unless the TAF experiment fails miserably, I expect that the demand for borrowing at the Discount Window is over. It never really worked anyway, so the TAF is just a neat way to close it. Next week’s H.4.1 report will be very interesting to watch.