Investment Banking executives remind me of President George H.W. Bush (#41) when he uttered those regrettable words “Read my lips…NO NEW TAXES.” Except the current group is just making promises that they don’t need more capital. Of course, those comments go a long way to calm the crowd and suggest that the worst is behind us. They’ve been doing that since last fall but investors seem to have a very forgetful and forgivable nature. I am neither forgetful or forgiving when it comes to things like this.

• Merrill Lynch CEO John Thain March 16, 2008 - “We have carried out an enormous cleaning of our credit portfolio. We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.”
• Merrill Lynch CEO John Thain April 3, 2008 -”We have plenty of capital going forward and we don’t need to come back into the equity market.”
• Merrill Lynch CEO John Thain April 17, 2008 - Says he is “open” to raising capital through preferreds.

In the end, they raised billions. They had to after all. Never mind the promises. As they say….promises are meant to be broken. We all know that. Why get so upset?

Citi has had their share of “read my lips” promises too. In January, after the billions of capital injections received from the Sovereign Wealth Funds, Citi CFO Gary Crittenden and CEO Pandit suggested the bank wouldn’t need to raise more capital. Then on April 18, 2008, Crittenden said this about needing more capital infusions - “You can never say never.” Tonight, never is now as they announce another $3 billion of new equity that will dilute existing shareholders.

Everybody seems to love new capital….The media loves new capital…The Fed loves new capital…The market bulls love new capital. They love hearing that no new capital will be required. They also love hearing that new capital is required but it’s already on the way. Both stories work just fine. This either means that the kitchen sink worked and the worst is behind us so we won’t need new capital. Or…this means there is a strong appetite for investors to keep plowing more money into these blackholes and we will always have new capital to avoid big problems that might require another government bailout. In fact, go back to the post-Bear Stearns bailout articles and you’ll see that whether it was UBS or any other writedown, as long as it was followed with the promise of new capital…it was all good and the markets went higher. Imagine an exec of a financial institution being honest and saying they don’t have enough capital….Just ask Alan Schwartz what happens when you cannot lie about it any longer. Imagine an exec promising to cut dividends. Imagine an exec saying they have no clue how much they’ll need but just plan on them asking for a few billion every quarter until they don’t ask anymore. The truth hurts. Apparently, the lack of truth is much preferred in our current market.

I don’t dislike new capital. I dislike the appearance that these comments were made specifically to manage the stocks and the markets. Apparently, there are no consequences for making promises that will be broken as long as it helps the government and the bulls prop up the markets. It’s either intentional miscommunication or it’s an incompetent failure of execs to understand their balance sheet. Neither of those are encouraging to me.

A recent post “Too Small To NOT Fail” was picked up by SeekingAlpha and after reading through the feedback on that site, it really pointed out some of the underlying weaknesses and mistrust of financial blogging.

First off, I have a very thick skin and I do not get defensive. If you are familiar with Howard Roark, it’s somewhat like that. However, unlike Roark, I am going to respond to some of the criticisms in the hopes that people can focus on more positive efforts.

I am unabashed in my beliefs. Call it blunt. But as I have said in my disclaimers, I reserve the right to editorialize and give my opinion. I don’t expect everyone or anyone to like or dislike what I write. I am confident you will have the courage and intellectual capacity to decide whatever you want about my thoughts.

I challenge anyone new who reads one of my posts to do more than read one post. Read them all if you want. Go back to the beginning of HEDGEfolios and read forward. Or read the most current post and keep going backward. Long time readers obviously don’t need to do that, but I wouldn’t discourage it.

If you take the time, you should find a few things of interest.

Sometimes I do a lot of research before posting. Sometimes I just editorialize my thoughts. Despite what readers may think, I have no obligation to present facts and statistics for everything I write. I have never promised that and it would be unrealistic to do so. In fact, I have made it clear that I won’t disclose many of my analytical techniques for the signals in my database.

But on the issue of my blog posts, sometimes I reserve the right to just say what I am thinking without needing to give you evidence of the research I may have done. If you want evidence or if you have evidence contrary to my thoughts, do your own homework and come up with your own facts and statistics and make your own decisions based upon that. If my “unsubstantiated” comments spurred you to become more convinced in your own thesis, that is great. If you want to write your own blog and contest everything I say with your facts and stats, that would be fine with me.

If you choose to disregard what a writer or editorialist or satirist says because you think it lacks evidence, that is your right. But I encourage you to look back on it later if the evidence starts to appear. Regret is one of life’s greatest motivators.

For example, you might want to evaluate the totality of my work here. Go back to the beginning. Read some of my editorial comments about market risks that may have had varying degrees of “facts and statistics” to substantiate my views. Often times they are disregarded when I write them. I get criticisms about them for being too negative. Many times I am told I am an idiot and don’t know what I am talking about. I am used to that. It comes with the territory. Just be objective and figure out how many things I was wrong about that remained wrong a few weeks or months later.

One of the funny things is when I am asked how I knew something was going to happen, especially when the same post was criticized for being wrong or lacking evidence of my suppositions when I wrote it months earlier.

I do not bash. I certainly do not hype.

In fact, I rarely discuss individual stocks in my blog posts. I may reference a company or its stock, but that’s usually done to exemplify a bigger issue I want to address. For example, when I laid out my criticisms of share repurchase programs, I mentioned companies like MSFT, DELL, IBM and CFC. Click on the link in the previous sentence, scroll down to the posts following this one and read. Bashing? Not even close.

If it’s considered “bashing” to say anything negative about a company, our markets and capitalism and freedom of speech are in serious trouble. I try to be very even handed in my criticisms and let readers make their own decisions. If they listen to what I have to say and decide it is irrelevant to their portfolio or if they just decide to ignore it for whatever reason, that is their right. My hope is that people make decisions when considering both the negatives(risks) and positives(rewards).

Usually, I only discuss a stock after it is already in the news. In fact, one of the few times I can ever remember mentioning an individual stock in advance of news was Whirlpool (WHR) and even then, I did it as a means of discussing a portfolio management issue (the risks of one-of-a-kind pureplay public companies). Anyway, click on this link and then evaluate if you think I was bashing by stating what I thought was an obvious risk that was being ignored by the market. Then spend a few seconds to see what happened with WHR since then.

One of the reasons you do not see me on financial television is that I refuse to discuss individual stocks. For similar reasons, I don’t provide commentary on individual stocks on this blog. I don’t like it when people are talking their book, especially since they do not know the investing preferences and life circumstances of the reader or viewer.

There is a tremendous mistrust of stock bloggers. I understand that. Apparently, some readers of blogs think that there are nefarious reasons for writing a post and that each should be viewed with a skeptical bias. Go ahead. Be skeptical. But don’t let logic get lost in your untrusting bias. In the Too Small To NOT Fail post, I didn’t bash any specific company and yet, a reader wanted me to disclose my positions in NCC and WM. I have no idea why that would matter but here goes - no short or long position in either equity. No derivative / option position in either equity. No short or long position in any index or ETF including either equity. I am not a customer of either company. And on and on it goes. I don’t give disclosures of my positions because I don’t bash or hype any stock.

And yet, I suspect that if you feel the need to mistrust what I or any commentator says there is almost no way to satisfy you with position disclaimers since you probably think we are just lying about lying about them. This never ends and it is sad. It is not productive and it is not going to help you make money or avoid losing it.

In the end, the bashing of people accused of bashing is an absurd exercise. The reality is that my blog is not that popular. It is certainly not popular enough to influence trading in a stock or the markets in general. If I am positive or negative on a stock, who the hell cares? The only thing that should influence your opinion of a stock or markets is your own opinion, not mine.

I do not write anonymously. Yet, many people questioning my integrity or intelligence do so with anonymous comments. I always get a kick out of the hypocrisy of that one. And while we are at it, don’t you think it would be appropriate to force the disclosures of any person who defends a stock by leaving an anonymous post accusing someone of being a basher and demanding the blogger disclose his positions? Where do we draw the line?

Unabashedly, I tell you - focus on proactive ways to manage your money. If you don’t like my writing, don’t waste your time with me. If you feel that I am stupid, you questioning that will not make me smarter. If you feel the need to question my integrity, go ahead. However, none of those pursuits will be rewarding.

At the end of March, the editors of Seeking Alpha asked whether they could reprint my content on their site. They told me that it would increase the exposure to my writing via their syndicated deals with Yahoo Finance, Reuters, etc. Whatever! Note that they asked me….I did not ask them.

I don’t seek publicity for the blog and never intended to be known for writing on HEDGEfolios. I know this is different from many bloggers who crave attention for their work and may hope for a career in real journalism or get a mention on other blogs or media websites or magazines/newspapers or the apparent holy grail … a television appearance. All of that has happened for me and I never asked for any of it and I have turned down most of the requests from media or others who apparently like my work. Why? I don’t care about it and I don’t benefit from it. I guess if I wanted to make some beer and pizza money off Google ads, increasing website traffic would have been a huge priority. As it was, I wrote the blog to discuss topics I found interesting and to provide insight into how I think….about finance theory, markets, portfolio management and anything else that someone who might want to invest with me might use to evaluate their decisions. I didn’t write a word to increase website traffic. Maybe I should have. I’ve enjoyed writing without worrying about getting paid to do it. Mostly.

Have I enjoyed other websites taking my content without permission and doing whatever they want with it? Nope. I actually care about intellectual property and its importance to the foundations of capitalism. Do I like that other people might be making beer and pizza money by using my content? Nope. Especially considering that I have never charged for it, you might expect that I don’t appreciate other people with apparently no intellect making more off my stuff than I have by just cutting and pasting something in seconds that might have taken me hours to research and write.

So when Seeking Alpha actually asked my permission I appreciated that. Considering I believe Seeking Alpha provides a beneficial service for investors by aggregating and filtering content, I agreed with a few easy conditions - don’t edit my work to the point where my original words are not representative of my thoughts and I can opt out whenever I want. By the way, I also told them they may not want to waste their time with me since I intend to stop blogging within the next few months. They chose to move forward anyway.

For any of you that use Seeking Alpha, please know that they do not pay me for my content. My sole compensation is the increased traffic they can bring to HEDGEfolios. No offense to Seeking Alpha or its readers, but as I said before, I don’t care how much traffic they bring to my site. It does nothing for me. I don’t charge for subscriptions. I don’t sell ads. I don’t get a warm fuzzy feeling from having a few thousand extra readers. Nothing. I sought nothing from them so when I tell you I get nothing I care about, don’t think I am bitching. It is neutral. I know Barry and some other bloggers have their issues with compensation and aggregators like Seeking Alpha. That is their right and I respect whatever they want to do. It is just is not my concern so I gave my permission to Seeking Alpha because I thought it would not require extra work from me and on the off chance that someone might benefit from my thoughts.

Seeking Alpha decides which of my posts are worthy of appearing on their site and when they appear. Additionally, they edit my work and to the extent that they follow my simple rule of not bastardizing my words, I am comfortable with this process. I’ve had an issue once so far when they accidentally repeated the Too Small To NOT Fail post and it was resolved promptly and professionally. I appreciate that.

Unfortunately, the affiliation has required some extra efforts from me despite my naive expectations. If it gets worse, I will end it. Until then, HEDGEfolios content will appear on Seeking Alpha if they choose to put it there.

“Too Big To Fail.” We saw it with Countrywide Financial. We saw it with Bear Stearns. As the controversy expanded, there were more than a few smarties defending the need to save big financials because of the systemic danger their failure would inflict upon the world’s intertwined and complex financial structure. Chairman Bernanke suggested he really didn’t want to do what he did with Bear Stearns….only did it because of stuff associated with the “too big to fail” phenomenon….and doesn’t ever want to do it again. Personally, I doubt that Bear Stearns will be the only test of “too big to fail” before this mess is all over.

When I went through the charts this past weekend, I was struck by how many regional banks and S&L’s suddenly looked weak after some attempts at recent stabilization since mid-March. It caused me to think heavily about the other side of “too big to fail.” If the government is committed to only bailing out banks that would cause systemic national and international distress, then there is an inevitable concept coming that I call “Too Small To NOT Fail.” Okay, so National City got about $1 billion of pseudo Private Equity money from JP Morgan Corsair. Washington Mutual got $7 billion from TPG et al. There are rumors about other PE firms circling the S&L’s and regionals looking for opportunities. But the reality is there are thousands of these small financial firms and I suspect many of them are in big trouble. Their reserves for losses are insufficient. They need capital and some will get it. But there is not enough capital to cover it all and some of these banks will just not be appealing enough for new investors to put up the money.

In the early stages of the failures that will likely result, there won’t be a government bailout entity like we had with the S&L crisis. Instead, there will be a tough love stage where the banks will be allowed to fail. And then the politicos will start complaining why we could bail out the big guys on Wall Street at Bear Stearns (Too Big To Fail) and not the little guys on Main Street in small town America (Too Small To NOT Fail). Eventually, as the banks that could not obtain new capital topple, it will be tough to avoid small bank runs and then I expect that we will learn that even something small can lead to something big.

Last night, the Nightly Business Report - a show that I respect for actually being old-fashioned and reporting the facts rather than sensationalizing financial “news”, had Alice Rivlin giving an editorial piece:

“Commentary”-What’s Good About The Housing Crisis

Monday, April 21, 2008 SUSIE GHARIB: Tonight’s commentator says there’s a silver lining of sorts in the housing crisis. She’s Alice Rivlin, former vice chair of the Federal Reserve and senior fellow at Brookings.

ALICE RIVLIN, SENIOR FELLOW, BROOKINGS: If you think the bursting housing bubble is an unmitigated disaster, think again. A seller’s loss is a buyer’s gain. Many urban areas with strong housing markets have become unaffordable to ordinary working people. Workers in stores, offices, restaurants and construction endure exhausting commutes to far suburbs to find an affordable home. Teachers, police, firefighters, nurses and medical technicians live long distances from the communities they serve and the skyrocketing price of gas has made their commutes increasingly costly.

The housing slump, painful as it is for many current homeowners, will have two positive effects. First, it will slow the sprawl of cities into the far exurbs that adds to congestion, pollution and time on the road. Second, it will make living closer to work more affordable for millions of families. The market will accomplish most of the change without public intervention. But community land trusts also have a chance with state and Federal help to buy distressed properties at bargain prices. They can fix up homes, save neighborhoods from the blight of vacant and vandalized dwellings and rent or sell them to low and moderate income workers. This ill wind could blow many families into more convenient, affordable housing. I’m Alice Rivlin.

Silver linings are what you see right after you are blinded by someone blowing sunshine up your ass. The housing crisis is an “unmitigated disaster.” Regardless of the spin, it’s a disaster - not “positive” and not just a “slump.” Suggesting that this unmitigated disaster will reduce energy consumption and lower pollution was a nice touch by Alice but come on - it won’t provide any measurable effects on those accounts.

Alice is not the only one trying to suggest that we should be thankful for the housing crisis and how it is helping reduce housing costs for some segments of society. For some people that love wealth redistribution, the housing crisis seems to be a great new opportunity. Instead of redistributing wealth through taxing the rich and giving to the poor through social programs, we can just use the housing crisis. What a joke. I’ve heard this silver lining crap too much lately to think it’s just a bunch of random bullshit. Listen up for more talk like this. It seems to help pave the way for more socialist involvement and governments buying up mortgages and houses.

With few exceptions, I am not impressed with fundamental analysts and their estimates of revenues or earnings or their recommendations or the timing of their upgrades and downgrades or their price targets or whatever else they spend their time doing. I am impressed with how much money most of them get paid to do those things with whatever accuracy the market seems to tolerate. To be fair, I suspect the analysts have no use for me either so let’s call it even. I am comfortable with a head-to-head comparison between my performance on about 3500 stocks each week over the past few years and their performance on maybe 10-20 stocks they covered “in-depth” over the same time period.

That would take a lot of work so let’s just take the easy way out. Let’s be objective and consider some of the main catalysts for market action over just the past week.

• Was GE’s miss GE’s fault or the fault of analysts who had not lowered their estimates during the quarter?
• Was GOOG’s beat because of superior results at Google or because analysts had lowered their estimates too much?
• Was C’s miss on EPS okay because their revenues were about $400 million higher than analyst estimates or because analysts had expected $20 billion in writedowns and the company only marked them down by $12 billion?

I always get a little crazy when the market responds to earnings data. Seriously, if investors are fundamental only and believe in this mess, they deserve to get their asses handed to them. Just pick any stock that has more than a handful of analysts. Look at the dispersion of estimates and then consider the average that gets reported. Lately, there is such a huge difference between the high and low estimate that the average is a very statistically odd number. I really enjoy the occasions when a company meets the analyst estimates. So when a company misses or beats, what is it really missing or beating? Are we rewarding or punishing the company for its earnings performance or are we rewarding or punishing the company because the analysts sucked in either direction. Don’t even get me started on their idiotic price target announcements or the timing of their upgrades and downgrades. They can do all of this and be terribly wrong - unfortunately, investors still respond to it and that’s why it’s important.

For the record, I do believe analysts perform a useful function. Someone has to crunch all the numbers and it is a ridiculously difficult job that we should not really expect to have extreme accuracy. And as I have said, studying the investor reaction to these numbers is a significant portion of my work. But wouldn’t it be nice if the numbers would either be accurate and deserve the attention they get or at least, wouldn’t it be nice if investors would treat them accordingly when they are grossly inadequate?

What really concerns me though is the perception of a stock’s valuation metrics and for that matter, the perception of the market PE and anything else that allows commentators to proclaim how cheap things are. These crappy analyst estimates that have about as much accuracy as economists’ forecasts and yet, what they put out is half of the ratio that investors are conditioned to reply upon. Chief among this absurdity is the Forward PE ratio that is foisted upon us and even more dangerous is its derivative, the PEG ratio, which gives us a double dose of analyst estimate danger. I believe in the “P”, that’s entirely accurate at all times. But the Forward EPS? How many of those were accurate when you bought stocks 1 year ago? How realistic was the earnings growth rate?

Let’s look at C back then….

What was the opening price per share of Citi on April 2nd, 2007? $51.31

• What was the Forward PE if you bought into Citi on April 2nd, 2007? 11.4 - Sounds cheap! Doesn’t it?
• What was the Expected Earnings Growth Rate? 9.6% - Wow, a PEG ratio of about 1.2. Sounds doubly cheap!
• What was the Dividend Yield? 4.2% - Fantastic and besides, they’d never cut that dividend. Right? Wrong!

So one year later on April 1st 2008, the price was $22.61 and the trailing 12 month PE was 33.6. OOPS! That’s quite a bit off from the 11.4 projected last year. But don’t fear, today’s Forward PE based upon the analyst estimates is only about 8. Sounds cheap! Doesn’t it?

I am not suggesting that investors should ignore analysts. On the contrary, if you are going to invest based upon the fundamental expectations they provide, I want you to not ignore the reality of how right and wrong these estimates turn out to be. Analyze the analysts. If you pay attention to them, do more than just look at the average of the extremes. Figure out which analysts get close to actual results and which ones do it consistently each quarter. Then, calculate your fundamental variables based upon the good analysts and place more emphasis on these numbers when deciding what to buy or sell. It will take a lot more work, but good investing takes a lot of work.

There are good analysts and there are bad analysts. It’s up to you to analyze the analysts.

Maybe LIBOR doesn’t stand for the “London Interbank Offered Rate”. Maybe it’s really an acronym for the “Lying Interbank Offered Rate.” Click here if you haven’t heard about this. Obviously, the impact of a rising LIBOR on the credit markets will not be good if it turns out that there has been some serious fibbing going on. But for me, the bigger result will come when the markets realize that they have been comforted by Bernanke’s monetary policy innovations and their apparent success. Remember, those people in love with bailouts and programs like TAF were pointing to the reduction in LIBOR as evidence that Bernanke was a genius and these programs were working. HMMMMM!?! If the LIBOR improvements were really a result of lying, then what does that mean for the efficacy of Fed policy and more importantly, what does this say about the real health of credit markets or the equity markets that have rallied on the idea that the credit markets are improving?

Now and then, investing legends get quoted on their opinions of the markets. It’s impressive to some people I guess.

Today’s big line comes from Mark Mobius.

NOW: April 17, 2008 Mark Mobius on the state of the credit crisis - “I think we are near the end of it, because most of the bad news is already in the market.”

Does that cheer you up? Before you answer, consider this….

THEN: September 12, 2007 Mark Mobius on the state of the subprime crisis. - “The stock market has already discounted all of the subprime problem.” According to Mobius, the impact of US. subprime mortgage losses on global markets was “over” in September. Was it?

You can answer now. Do the reassuring comments from Mobius today cheer you up? Do they sound anything like the comments from September?

Mobius and any other market “guru” should not be regarded for their commentary. They should be evaluated based upon their actual portfolio management performance. That’s what they get paid to do.

I understand why financial journalists seek out their opinions on just about every market issue and even those topics for which they have no real expertise or historically strong track record. However, investors place way too much emphasis on their every word, especially when the investor really wants to hear a legend tell them everything is okay. Now and Then they are correct….Now and Then they are incorrect.

First - the “Away” part. Portfolio management is an all-consuming and ever-present process for me. I rarely take any time away during the trading day and if it happens, it’s usually not two days in a row. Other than skiing or beaching, there isn’t much that I prefer doing more than actively participating in the securities markets. However - “All work and no play makes Mike a very dull boy.” I need to get my life in better balance and I am “working” on that.

On vacation, you meet people and inevitably, as part of the small talk, you are asked what you do for a living. I hesitate to answer that question for several reasons. First, I am on vacation to be on vacation. Secondly, I do not give individual investment advice. The moment someone hears I am in this business, the requests for stock picks begin. Then I have to find a way to politely tell them I don’t give stock picks. It’s all a bit awkward and usually puts people off to the point where they go away. I am not much fun to have around. I really should come up with an alternate and dramatic and fun career to lie about in certain circumstances so that it’s a bit more enjoyable. I am “working” on that.

Last week, I was asked what I thought of the economy and the markets in general. Good questions, but really…. do you think my sunny disposition about the economy and our screwed up markets are going to make people happy while they are relaxing on a beach or at the bar? I know it’s not making me happy. So I have another choice - maybe I should just lie and tell them what they want to hear. Of course I cannot do that. I usually just say “it’s bad” and try to change the subject to the weather or sports or some other useless topic. I can talk about most things but oddly enough, unless I am here or in an appropriate environment, I don’t like to talk about what I do.

Being away from it all last week was much needed and it’s been tough to get back into my normal rhythm and routine. Other than the research I had to do to get the signals done this week, I haven’t been motivated to analyze what I missed. Consequently, I have very little to say.

When I hit the beach, I thought the market was ridiculously bullish. I kept thinking “Up Up and Away!?!” When I got back, despite the GE miss and poor trading action, I wasn’t seeing an end to the rally that was being mentioned by some commentators. In fact, this week’s signal changes were not dramatic at all. I only gave 111 new DOWN signals and while that was much more than the 19 new UPs, it’s really not remarkable. So I keep wondering “Up Up and Away!?!” That is yet to be determined.

I won’t be traveling much for a month so I won’t suffer from being out of touch and away. Sooner or later, I’ll feel like writing more often. Until then, I’ll be working on other pursuits.

Herb Greenberg has announced his departure from Marketwatch and Dow Jones and in some ways, the media in general so that he can start a research firm. Herb’s blog has been in my blogroll for quite a long time and as of May 1, it will be removed with his departure. I spend enough time poking at the cheerleaders and overall failures of financial journalism to make sure I spend a proportional amount highlighting the few that I respect - which by definition doesn’t take much. Herb is one of the best. He calls it like he sees it and he sees it well in my opinion.  Financial journalism has just dropped a notch.  The research business has just been elevated.