Yesterday, the S&P 500 Large Cap index rose 10.8% from the open to the close.

I looked to see how the HEDGEfolios Universe of 3,333 stocks performed.   Assuming my usual equal weighting and a long-only portfolio, the gain would have been 3.8%.

Given the allocation of UPs and DOWNs at HEDGEfolios and the equally-weighted portfolio, the actual performance here was approximately 2.3%.  Note that 67% UP signals times 3.8% is 2.5%, so it was pretty much what I would expect.

But back to the index reporting.  To say the least, it was extremely biased by the market-cap weighting of its components.

• An equal weighted S&P 500 Large Cap index would have had a gain of 7.2%.
• An equal weighted S&P 400 Mid Cap index would have had a gain of 5.9%.
• An equal weighted S&P 600 Small Cap index would have had a gain of 4.2%.

Unless your portfolio was perfectly weighted to the index, your results would likely vary widely.  Even if you had bought the SPY on the open and sold at the close, it would have given you a 7.4% gain.

Comparing your performance to the index is a good tool but the comparisons between your portfolio composition and the benchmark need to be considered.

We all have principles and beliefs..as investors and as humans.   These principles and beliefs guide our behaviors and under most conditions, we are very confident in them.  And yet, this confidence is often unearned.   It is real easy to have a belief and when the results of acting on that belief turn out to meet our expectations it tends to reinforce our views of what is right and wrong and what works or doesn’t work.  It isn’t always necessary for the results to be satifactory or what we want, they just need to fall within a range of expectations that we find reasonable.

However, it is only in times that our principles and beliefs don’t work that we find out whether we truly believe in them or not.

If you are a fundamental investor….  if that was your guiding principle in investing and has worked within a range of expectations for many years, the past two months have been especially difficult.  If you are a technician and rely primarily upon a set of indicators to guide your investment decision making, the past two weeks have been especially difficult.   The same can be said for thematic investing, or macroeconomic investing or buy-and-hold or just about any principle or belief that has worked well for you.    The past few weeks and months have been unlike anything most of us have ever seen.

I have gone very bullish over the past three weeks from 31% UP signals on October 6 to 33% DOWN signals this week.  Prior to today’s 11% move, that bullishness was not rewarded.  In fact, last week HEDGEfolios declined 4.7%, the worst weekly performance I think it has ever had during the 6 years I have been doing this.  As of last Friday’s close, only 37% of the 3338 stocks I cover had winning signals and of the 1500 or so UP signals I gave the previous two weeks, 85% were wrong with an average loss of 16%.

More than a few people have asked me what I saw to encourage me to go bullish.   And more importantly, why I was not changing the recent signals back to DOWNs since I was so horribly wrong.   The answer to those questions was the same:  my principles and beliefs about investing that have guided HEDGEfolios over the past 6 years.

Was I questioning those beliefs and principles over the past few weeks?   YES, and when I looked at the stocks again this week, I questioned them again.   And the answer was to have faith.  Sometimes that’s all you have when everything you think you believe in is not working.

If this troubling period is causing you to question your principles and beliefs and led you to sacrifice them or make decisions contrary to what you thought was right, you need to evaluate whether you really believed in them in the first place.

EMAIL NEWSLETTER #3 - OCTOBER 20, 2008 12:13 PM

I am sending this “newsletter ” due to a previous email I received from you stating that you wanted to hear what I had to say.  If that is not the case, please reply that you want me to remove your name and I will not send you anything in the future.  Once you receive a newsletter, I intend to continue sending you future newsletters until you tell me to stop.  YOU DO NOT NEED TO KEEP SENDING REQUESTS.

I ask that all recipients do not forward this to anyone or reproduce it in any way or publish it in any format or do anything with this other than read and think.

CONTENT:

You should read this first.  It’s better than anything I will follow it with.

http://dealbreaker.com/images/thumbs/Hayman%20Letter%20to%20Investors%20Oct%2014%20final%20version.pdf

Unconstitutional Watch……..The 5th Amendment to the US Constitution includes the “takings clause”/*.  */Here is the actual wording…*”*/*nor shall private property be taken for public use, without just compensation.*/”   As far as I know, Paulson did not invoke the rights of Eminent Domain when he forced the big bank CEOs to hand over equity stakes in their companies.  http://www.twincities.com/ci_10721272 I am not sure whether Bush, Paulson, Bernanke, Bair or any of that crew really care much about the Constitution, and I am sure they would find some snaky legal loophole but if you just look at this ambushing of the big bank CEOs and the ultimatum that Paulson supposedly gave them…. to a simple guy like me, it looks like a taking.

What about contract law and making agreements under duress?  I guess we just suspend that concept for the government.

What about corporate governance?  I didn’t hear whether these CEOs spoke with their respective boards of directors and received a vote before signing Paulson’s ultimatum.  Has anyone seen an 8-k filing or any other SEC filing detailing the sale of stock?

And speaking of deal terms, they were dictated by the government.  This is not like setting up an acronym lending facility and letting everyone know what the terms are going to be.  Other than the fact that I don’t think some of  Bernanke’s creative lending facilities were Constitutional, at least they presented terms and the other side of the transaction (banks) could choose to accept the terms or not participate.   That’s the way it should be.  But as for forced equity ownership, that is not the way it should be.  This idea that a CEO is forced to sign a deal sheet without negotiation and accept the terms in their entirety regardless of the difference between firms is both abusive on the part of the government and negligent on the part of the CEO.

Supposedly the CEOs of Wells Fargo, Morgan Stanley and Bank of America said they didn’t need the money and may have put up some resistance.  Okay.  Whatever.  They signed.  So from that you just can make up your own mind about why they signed.

Now, as for the rest of the CEOs…..big shot dealmakers.    Yep.  That’s their reputation.   Okay.  Whatever.  They signed the same piece of paper.   They did not negotiate.   So from that you can just make up your own mind about why they signed.

Do you remember last fall when we had the first big government intervention?   Bernanke dropped the discount rate and then the Big Four Banks at the time C, JPM, BAC and WB did their duty and ceremonially borrowed $500 million each to try and reduce the stigma of borrowing from the discount window.  They said they really didn’t need the money but were just doing it to help out the Fed.  Okay.  I got it.  In hindsight after the past year, we know they needed the money but it’s all about confidence!    Hey, Wachovia didn’t need the money so bad that it had to be forced into a screwed up shot gun wedding to Citi compliments of Reverend Sheila and then the annulment by the high priests allowed Wells Fargo to tie the knot.   Oh well.  I am CONFIDENT Wachovia never needed the money.   Then when Bernanke set up the PDCF to supposedly avoid another repeat of Bear Stearns, Goldman and Lehman did a repeat performance of borrowing even though they said they didn’t need the money and were just doing this to help out Ben and remove the stigma of borrowing from the Fed.   Here’s what I wrote back then.   http://www.hedgefolios.com/read/pdcf%20ceremonies Okay.  I got it.   In hindsight after the past 7 months, we know they needed the money but it’s all about confidence.   Hey, Lehman didn’t need the money so bad that it had to be left at the altar of another screwed up attempt at a shot gun wedding by the high priests and ended up going bankrupt.   So now when we hear that WFC, MS, and BAC didn’t really need the equity injections Ben and Hank forced upon them….it was once again said that they all did it to show solidarity and avoid the stigma for the guys that really did need it.   Feel better now?   Do you feel confident?  Do you feel confident in our government???? in their ability to create confidence???? in their ability to fix the credit crisis???   Do you feel confident that the bank CEOs didn’t really need the money?

And that whole thing about the government not dictating any control over the companies they just invested in….yeah right.  By the way, are these bankers still allowed to fly private jets, host fancy parties, go to resorts for executive retreats ala AIG?

The regulators have discussed their overriding theme of stabilizing the banking system and specifically, to make sure that businesses are able to keep functioning and not miss payrolls and not have to lay off workers, especially those small businesses they always like to pander to.   In essence, they want to prevent a massive recession.   That’s a noble cause.  But their plans are likely to accomplish the opposite.   Let’s say you are a depositor at Smalltown Bank and across the street from your branch is Bank of America.   You hear that Bank of America is one of the banks the government has chosen as a survivor.  Then you hear that the government is investing in BAC.   But they are not investing in Smalltown Bank….your bank.   HMMMMMM!?!   What to do?   Is Smalltown Bank going to survive?   So you go there and withdraw your money and deposit it across the street at BAC.   Just listen to Ken Lewis, he will smile and tell you about all the new deposits they are picking up.   Now think about the stability of the system.   There are many Smalltown Banks across this country.   And the reality is that those little banks do a tremendous amount of the local lending to small businesses that Bush, Bernanke, Paulson and Bair keep pretending they are helping.   Those little banks need the deposits to make those loans and to stay in business.  Most of them did not get involved in subprime or CDOs or CDS.   But they are getting whacked.  And when they fail because of the attempts to stabilize the big banks (aka the banking system according to Ben, Hank, George and Sheila) well then we will see how those Smalltown borrowers survive long enough to get a loan from the Bank of America across the street.

The SEC is hosting their Congressionally-mandated study of mark-to-market soon.   http://www.sec.gov/news/press/2008/2008-252.htm   Does anyone really think that they haven’t already made up their mind?   If you feel like spending your time doing your civic duty and expressing your opinion on this topic….have fun.   The process for doing that is at the bottom of the sec link.

I am really getting tired of Bernanke citing Section 13(3) of the Federal Reserve Act, known as the “exigent circumstances” clause, to do whatever the hell he wants to do.   Similarly, I am tired of having Paulson say he was authorized to do whatever he wants based upon Congress giving him the power of the purse at the end of July.   I still feel that was unconstitutional.   So citing that as authority is ridiculous.

In all the absurdity surrounding the Congressional debate over the Emergency Economic Stabilization Act aka the “$700 billion bailout” or rescue plan or whatever you want to call it, please try to remember any big discussion about the Treasury using most of the money to make direct investments into banks rather than buying up their distressed mortgage assets.   I call this the biggest “Bait and Switch” sales job of all time.   Second only to the Bazooka plan where he said he didn’t plan on taking over Fannie and Freddie and then did it about a month later.  SUCKERS!!!!!!   Just consider how many times Paulson made public statements about not investing directly in the days and weeks before and during the House and Senate debated like morons.  Then, that’s the first thing he does and uses up the majority of the initial funding.  SUCKERS!!!!!!

I hate the line that goes something like “You will look back on this 6 months or a year from now and wish you had been buying.”   I wrote this about 6 months ago. http://www.hedgefolios.com/read/wishful-thinking So when you hear the same morons say this bullshit now, please remember how many times they said it in the past and then calculate how much you lost if you listened to them.

Speaking of bullshit….Warren Buffett.    That NYT Op-Ed piece is dangerous stuff.   http://www.nytimes.com/2008/10/17/opinion/17buffett.html  Once again, he is not you, you are not him.   He does not know you and I doubt he has a securities license so telling someone to buy stocks is more than reckless.  Please go back and search my blog for “Warren Buffett” - you’ll see a constant theme about not blindly following the investing advice of anyone and that includes him or me. Here is one example http://www.hedgefolios.com/read/no-endorsements .  Do your own homework.

For the record, “buying American”  may be patriotic, but it may not be smart.  If American products are the best quality and price to fit your needs compared to foreign alternatives, I think that is a good idea.   Let’s say you “buy American” and the product sucks.   If it breaks, you are out the money.   Buying should be primarily an economic decision, not a patriotic one.  I also do not find “buying stocks” to be patriotic.   You should buy stocks or make other investments with the intent to make money - not to feel patriotic.   Note that if the stocks “break” and you lose money, I doubt your feelings of patriotism you got from buying like Buffett will compensate you for the hit to your finances.

Buffett loves to cite a few moments in history to support his case.   Many other commentators / gurus do the same thing.  They’ll say something like “this looks just like 1982 or 1987″ and then suggest that the market is therefore going to respond just like it did following those two dates.  First off, you need to have more than one or two data points in any statistical analysis to provide a meaningful projection.   Picking a few dates from history and saying that there is any relationship to today is dubious at best and at its worst, it is dangerously ignorant of statistical-based forecasting.  Secondly, while stock market behavior from whatever reference dates they cite is interesting, you really need to reflect upon all the forces upon stocks that existed then and compare them to today.   I doubt there is any moment in history that shares many similar macroeconomic factors or market fundamentals or market technicals or political factors etc. to any other moment in time that are years apart.

It is important to learn from the past, however I spend more time analyzing the market we have now and guessing how today’s factors will affect tomorrow.  my time machine to go back into the past broke recently!  http://www.hedgefolios.com/read/no-black-monday-memories-here I am here now and I am experiencing everything I can about the now.  I was not around in many of the dates that people like Buffett point to and I don’t care what anyone says, reading about the past is not as great as personally experiencing it when it happened.   I am experiencing the now.  That is what is relevant to me.

The Commercial Paper Funding Facility (CPFF) is beginning October 27.  Please read this from a year ago when I said the ABCP market was not fixed and Bernanke was “testifying” to Congress that it was stabilized.  http://www.hedgefolios.com/read/abcp-according-to-bernanke So now that he is opening up the Fed’s balance sheet to replace the CP market and no one really knows how many hundreds of billions or over a trillion of ABCP he expects to fund, who the hell is questioning why he was so clueless for the past year and why he has the answer now by using the Fed to lend, not to banks, but to individual companies.   Don’t quote me his authority under Section 13(3).

Gold price movements are very odd to me.   I have heard some explanations like the Central Banks are selling gold.   Okay…maybe so.   Something about selling in quantity and buying in pieces tells me this might be why gold is declining.   Personally, I don’t think it will continue and when this stabilizes and starts to head higher, I will probably buy some gold or silver.

Oil price movements are very odd to me.   I am really tired of hearing about demand destruction.   Oil has declined 50% in the past 3 months.   I am not going to discuss global recession and reduced forecasts….that is another story.  But instead, I am just going to look at my own personal demand.  Was it destroyed in any way by $140 oil or $4 gas?   Nope.   I am not driving any less now than I did then.   It’s just cheaper for me to do the same.  Are you using less energy?   Are you still driving the same distance to work?  Do you plan on driving the same distance to work in the future?  Just look at your own life.   Did your demand/consumption decline by 50% over the past few months?   You may want to suggest that $140 was never the “fair price” or that speculators were just artificially pumping up prices.   Maybe you thought $70 was the right price all along.   Regardless, demand destruction to this degree is a gross exaggeration.   Moral of the story is that I expect oil to stabilize at some point … as soon as now and probably between $60 and $70 before they head higher.

Many of the countries that hate the US love high oil prices and they have fragile economies built on oil that probably needs to trade closer to $100 for them to not lose the power they love.   So, my expectation is that they will eventually take action and restrict supply or worse yet, create a geopolitical problem that will increase oil prices.

If oil does not stabilize or head higher, I suspect we will wish it could.   ?????????   Cheap oil will mean a global economic collapse.   I keep wondering whether people prefer cheap gas and lower retirement account valuations or higher gas and higher retirement account valuations.  I am not saying that one has caused the other, I am just saying that people bitched too much about high gas prices and should have been spending their energies hedging their investments.

I am looking for a few things to happen before I feel like we have hit “the bottom” in the stock market.   It has to do with symptoms of hedge fund liquidation, mutual fund redemptions, credit market contraction, gold, oil, treasury spreads, currency levels, etc.  I am not looking for certain values in those areas.  I have no clue what they would be.  However, I am looking for stabilizations and shapes and patterns but mostly, I am looking for relationships between assets and market/economic factors to stop being so dislocated.   Right now, the financial system looks like an arm that has a dislocated shoulder, dislocated elbow, dislocated wrist and broken knuckles on every finger.   When I see those healing, I’ll be extremely long term bullish on stocks.   Right now I am just willing to be bullish for short terms.

LIBOR and the fascination with it as the main indicator of credit health is troubling.  Remember that we have just changed the ability for banks to borrow from their central banks at cheaper rates, and not necessarily from each other.   Therefore, relying on this to indicate an all clear is potentially misleading.   A reader I really respect questioned how much banks want LIBOR to come down when many loans are priced off LIBOR and therefore the margins on those loans are bumping up bank profitability.  That’s an interesting observation.   Here is a good read on that topic.  http://www.interfluidity.com/posts/1223780032.shtml .  Thanks Thomas.

Obama keeps talking about education, especially the importance of going to college.   Of course I find this to be a bunch of crap.   HUH?   How can I say that?   I love education.  My mother was a teacher.  I have been an adjunct college prof, but the idea that everyone should go to college is equivalent to everyone should own a house. http://www.hedgefolios.com/read/the-collegiate-culture  At some point we need to realize a key fact about going to college.  You need to finish high school first and you should have to complete it with good skills and results.  And when it comes to high school graduation rates, especially among poor families or minority families it is really really bad.  http://nces.ed.gov/pubs2007/2007059.pdf   Here’s the idiocy….  Obama wants to pay for the less fortunate to go to college.    Every American child has their education paid for from Kindergarten through grade 12 via taxes and about 30% fail to graduate nationwide.   Inner city schools like Detroit, Cleveland and Indianapolis have dropout rates closer to 75%.  http://www.wsws.org/articles/2008/apr2008/scho-a03_prn.shtml  Money does not guarantee success.  There are huge cultural reasons for students that fail to graduate.  Paying for their high school education is not the problem.  So the idea that we need to pay for their college education is idiotic.  Maybe we should figure out how to get them to graduate high school and learn those skills before we worry about whether they have a paid-for opportunity to go to college.

Note that I am not a fan of our VP.  Democrats love to hate Cheney, especially because of his association with Halliburton.  For the past 7 years, we have been treated to accusation after accusation that Cheney is pushing up oil prices so that he and his buddies at HAL and in the oil biz get rich.   Okay, so how come we haven’t heard that lately?   HMMMMMM?!?   Maybe because HAL is now trading only 10% higher than it was when Bush/Cheney came to power.   YEP!   Cheney would have been better buying a Certificate of Deposit 7.5 years ago.  Adjusted for splits, HAL was at $16.50 the day before the first Bush inauguration and was $18.26 on the last close.    Note that it is 65% lower than July 1st.  If he was so powerful and able to control world oil prices, you would think that the VEEP would at least be able to keep it going until he left office.  Like I said, I don’t care for the guy either but I am not able to believe that he or any other single person is to blame.  Neither do I give him 100% credit for lowering oil prices by 50% to try and manipulate the election.  If you believe in this political bullshit, please continue to do whatever you want with it, just do not waste your time sending me an email on this topic.

Guarantees are not all the same.   Let’s say that I put $100 into escrow to guarantee that if you fail to repay your $100 loan, the escrow agent can give that to the bank.  That’s a guarantee.   However, now the government is guaranteeing trillions of dollars in just about every financial instrument from money market mutual funds, to interbank lending to whatever they dream up next.   Those are not guarantees.  Especially not like my kind of guarantee.  When a government provides a guarantee it is a TAX.  For every dollar that defaults and uses the government guarantee, they are just taxing future earnings.   One more time…..our government is bankrupt.  Their guarantees are worthless over time.   They do not have the money in escrow like I did.  All they have is unlimited ability to promise resources that we do not have.   For each dollar that the government pays out under these guarantees, the long term value of the currency is reduced, inflation pressures accumulate and future generations will have to pay higher taxes to balance out the system.   The people in power think that their guarantees have value now.   They have negative value for the future.

As for the market, I sense we are experiencing an attempt at what I call the “denial rally.”   I believe it is our last one before we hit a deep dark reality.  As always, I hope I am wrong.  But what I see and feel now is a growing desire to believe that things have started to get better and that the government with all their plans have solved the problem.   I do not share that view for the long term.  In the short term, I expect that there will be a rally based on a denial of the realities facing our economy.   I think people are so worn out they are willing to be comforted like frogs in warm water that end up getting boiled.   This past week was harder for me to analyze than I had expected.   I had hoped to hang around the market neutral range near 50% UPs.   When I went through the charts, I became more bullish.  I am going with that for now.   As I said, I hope I am wrong but once I see a change in direction back to the negative, I expect to get out rapidly.   The next leg down will likely wipe out the denial and hope.  Please try to avoid making long term decisions right now, remain flexible and actively manage your money.

Good luck with your investing.   There will be no newsletter next week unless there are “exigent circumstances” and I have to invoke Section 13(3) of the *B*logger *U*sing *L*iterary *L*icense *S*uspending *H*is *I*ntentions *T*reaty.

Mike

EMAIL NEWSLETTER #2 - OCTOBER 14, 2008 12:02 AM

I am sending this “newsletter ” due to a previous email I received from you stating that you wanted to hear what I had to say.  If that is not the case, please reply that you want me to remove your name and I will not send you anything in the future.  Once you receive a newsletter, I intend to continue sending you future newsletters until you tell me to stop.  YOU DO NOT NEED TO KEEP SENDING REQUESTS.

I ask that all recipients do not forward this to anyone or reproduce it in any way or publish it in any format or do anything with this other than read and think.

CONTENT:

Some people have compared the US Treasury / Fed plan to “invest” directly in private businesses to the investments made by Sovereign Wealth Funds.  I laugh at that.  Those other countries are investing “wealth” …..as in what you get from your net capital earned from generating profits by selling stuff that other people want.  The US plan should be called a “Sovereign Poverty Fund”.  We are a bankrupt country.  We are a debtor nation….the biggest.  We have a massive budget deficit.  The “investments” being talked about by the US government are being paid for with “money” that is nothing more than a debt of future generations to be repaid by excessive taxation.  How anyone can believe that “recapitalizing’ banks by either lending to them, or by investing in them or by purchasing their troubled assets with money that does not really exist now or will likely exist in the future is confusing to me.

I heard all last week about global coordination and the G7 plan this weekend.  This is a race to keep up with the “Joneses”.  If the US does not follow what someone else does, they run the risk of having capital flow out of the US and into those other places.  This is a giant spiral.  If each time another country comes out with a new plan, the US feels like it has to look like it is doing something by copying off the other guy’s test paper, we are screwed.  I am not suggesting that foreign economists, Central Bankers or politicians are not worth listening to.  Frankly, I have suggested that the US economists, Central Bankers and politicians are not worth listening to so of course I am not being US-centric here.  What I am saying is that each country has unique situations and each of us adopting what the other guy is doing is not always helpful.   I believe in national sovereignty.  We cannot keep doing stuff just because we are afraid that not doing it will cause capital to flow to other places.  That is not solving the root problems.

New World Order conspiracy theorists must be loving this moment in history.

I am so tired of hearing about the Sweden plan.  There are lessons to be sure and probably some good ideas but that is it.  Comparing the Swedish economy back then to the global economy or US economy of today is not relevant.  And by the way, did Sweden turn into an economic powerhouse after their bailout and somehow I missed it all this time?

I find Gordon Brown of the UK and Putin of Russia blaming the US for their economic problems to be one of the biggest political finger pointings of all time.   Yes, our subprime problem is a huge cause of this mess.  But ignoring the stuff that went on in UK’s own mortgage disaster or Russia invading Georgia is easy to do.  After all, the US supposedly incited both of those situations anyway.  Yep, it’s all our fault according to them.  Just accept it and start dealing with the problem.

As for the interbank lending guarantees that the media and politicians keep hyping as a great solution……come on!!!!!   Now that we have all these big Central Bank lending facilities at unlimited levels, the cost of a bank getting credit from the Fed is much cheaper than a guaranteed loan from each other.  And more importantly, going back to the first two paragraphs…please ask yourself where the foreign central banks are getting all this liquidity.  From whom do you think they are borrowing so they can lend?   This is the biggest point I am making in this newsletter.   Please think it through and think what is backing up that money.   I have never seen a bigger and more blatant example of check kiting than this one.   I guess since it involves governments and central banks this deception should just be ignored.   Seriously, have you answered the question of where the money is coming from and whether it is really money in the first place?

Have you not heard repeatedly since last fall that the Fed is on top of the situation and they are going to do whatever it takes? Just pull up my old posts where I rip on that or look through the archives of Bloomberg or CNBC coverage whenever Bernanke said that over the past year and how the media hyped to try and justify rallies of “confidence.”   Why does this promise mean any more than all the other promises that failed to work?

Please remember the term “con man” is slang for “confidence men.”  I have yet to figure out why the snake oil salesmen keep repeating how critical they are to calming the markets and exuding confidence.   This coming from the guys that repeatedly said that subprime was a small and contained problem that would not affect the rest of the economy which, by the way, in their ever-confident assurances…the economy was fundamentally sound and oh just so you could feel confidence and calm in the banking system….that was fundamentally sound too and while we are at it….the markets????? yep - fundamentally sound.  Con men and women (Sheila) playing a con game.  Eat it up.

Has anyone noticed that the more plans we get the worse the markets get?  The bigger government plans we get and the bigger the market problems get?   Now, they are promising a plan tomorrow that will be bigger than anything they have ever done before.   Connect the dots.   Now, I want you to know that I don’t blame the government for most of the problems we are seeing.   I just don’t think they are helping things.  I blame markets and market participants for the problems and in the end, I expect markets and market participants to provide the solution.

I am enjoying seeing CNBC’s Liesman being used as a giant tool of the Fed and Treasury.   Does this guy have security clearance or can you just hide behind the freedom of the press?   But at some point, having these Breaking News flashes of Liesman saying that he knows that the government is coming out with more of a plan is just over the top.  He keeps promising stuff that will be coming tomorrow or in a few hours or whatever he is being told.   NICE!!!   Keep promising another bailout.

And speaking of that perpetual next bailout…..Bernanke and Paulson keep getting criticized, even by me for just responding to each new fire.   http://www.hedgefolios.com/read/fdfed But think about it, if they ever left the impression either on their own or by using their media tools, that they had no more bailout options coming in a few hours or tomorrow or next week……well, then we’d just be where we are going a little faster.

Much was made of the AIG spa junket shortly after they got $85 billion from you and me via Bush/Bernanke/Paulson.  Okay….so if we don’t like one government entity from having fun at a glitzy resort then why the hell do we allow the KC Fed to waste our money every year at Jackson Hole?    I don’t see much difference.

I came across this old post (November 2007) about the dangers of Money Market Mutual Funds.   Fun reading….http://www.hedgefolios.com/read/propping-up-money-market-mutual-funds

Last week, CNBC’s Kernen and Liesman were cheering the idea that money market mutual funds were seeing inflows.  Funny!!!!   How many times over the years did I hear how all that money being stuck in MMMFs was detracting from equity markets.  Something about “All that cash on the sidelines” bullshit.  Listening to these morons now, you might believe money going into MMMFs is good for stocks.  HMMMMMM???!!!??? Which one is it?  I have repeatedly said cash on the sidelines is irrelevant for stock prices and I have provided proof.  I am sticking with that regardless of what the markets do.

Margin calls are hitting hedge funds and even corporate execs.  As I have mentioned in the past, there is nothing more difficult in the brokerage world than clients losing money that have to deal with margin calls.   We keep hearing how rules that are causing stock markets to go down need to be either repealed (like short selling or mark-to-market for example.)  So I got to thinking.   Under that logic, margin calls are bad for stock prices.   Maybe the puppeteers should suspend those rules as well.  Hell, why not just tell people to keep buying on margin and the government will guarantee that if the markets fail anyway, they will cover investor margin calls to prop up the brokers some more.  This whole mess if freaking absurd.

This never stops.   If you guarantee one asset class, then you really need to evaluate the effect on other asset classes that do not have guarantees.  Right now the money is flowing out of unguaranteed assets and flowing into the guaranteed kind whether that means from one geography to another or from one asset class to another.   We saw this when they guaranteed MMMFs and then the banks lost deposits so they felt they had to come back and increase the FDIC guarantee.   Until this cascade of guarantees ends, the asset allocation volatility and repricing of assets will not stop.

I am not a fan of calling bottoms.   I am disappointed when people are allowed to keep calling bottoms and used by the media to manipulate the market towards bullishness when it is not warranted.  Those guys have cost a few bucks for investors without ever being accountable for the dangerous advice.  I have pulled no punches on the site and I will not pull them here.  Mark Mobius of Templeton is largely sensationalized as an investing icon / guru.  You might want to determine that for yourself by looking at the performance of the funds he manages.   As for calling bottoms, this guy is a piece of crap.  Please read this old post first http://www.hedgefolios.com/read/now-and-then   Note that on September 12, 2007 when he made the first statement I referenced, his Templeton Emerging Markets Fund was about $21 and the price at the second statement in April 2008 was also about $21.  It’s now at $12.  So today, Mobius was once again on tv talking bottoms.  Click here to watch the video. http://www.cnbc.com/id/15840232?video=887988588&play=1  While you are watching, you might question his air of superiority about  recognizing the subprime problem.   It seems to me he said subprime was overdone a year ago and fully priced in and the bottom was set….at least two times.   This guy  is emblematic of what is wrong with being famous for being famous in the financial world and getting your ass-kissed by pathetic “journalists”.   And it’s reality too.  Mobius is able to raise more money with his crappy commentary and his crappy performance over the past year.   Maybe I should be more like him!

Speaking of moronic prognostications….it’s almost time for all the bright chief investment strategists to use their crystal balls and tell us how high the S&P will be at the end of 2009.   Never mind how pathetic they were this year or most every previous year.  Here is a sample http://www.hedgefolios.com/read/abby-on-2008

The hedge fund redemptions have been painful for the markets.  Don’t forget about mutual fund withdrawals.  They are happening.

I have been intrigued by the movement in gold prices given what I have been hearing about the shortages of physical gold and the demand for gold as a safe haven.

As I mentioned on the blog last night, there are many great fundamental deals on stocks.   Note that there are always great fundamental deals.   And yet, it is often the case that stock prices decline anyway.  I am forced to take that chance each week.  And when a stock gets expensive, I am also forced to take the chance that it will not go higher.  I just don’t discriminate between one direction or the other.  Both are opportunities.  Both are challenges.

Much emphasis is being spent on how we “fix” the current credit crisis.  Unfortunately, finance is like physics.   Newton’s third law - “For every action, there is an equal and opposite reaction.”   We need to realize that the solutions to the current mess may be difficult but unwinding today’s solutions will have serious impacts on the economy.  There will be a reaction.   Just like the reaction we are dealing with today was a result of actions over the past few decades.   Future prosperity will be dampened by the repayment of these loans and the removal of all this “liquidity”.   Just think about how long it will take the banks to make enough profits to build enough of a surplus to repay the loans and interest and for investors to buy back the government’s stake.   At current interest rates, it’s going to take a long long time.  At higher interest rates, it’s going to take a long time.  The bigger their actions today, the bigger the consequences at a future date.  I know it feels like we need to save today so we have a tomorrow but I’d be more inclined to save tomorrow and take our punishment today.  I am in the minority in this and many other things.

I expect the excess US dollar demand during this crisis to have a massive unwinding effect when those dollars are not needed.

I propose Mike’s law of finance -  “For every inaction, there is a disproportionate reaction.”   Our failure to regulate is causing a very serious reaction.

If the government gets rid of mark-to-market, I am really looking forward to seeing what they do with the accounting for Maiden Lane.  Sounds like perfect timing to hide how terrible those assets really are.  And for that matter, if we can remove mark-to-market for everyone else,then we can just avoid accounting for the $700 billion.

Obama proposed a windfall profits tax over the past few months when oil was really high.  Here is what I wrote. http://www.hedgefolios.com/read/obamas-windfall-profits-proposal  In it I asked what he would do to pay for his $1000 giveaway / redistribution of wealth if oil prices dropped beneath the $80 per barrel threshold.  Oil was slightly lower than $80 yesterday and a little higher today.  So what does Obama do now?

If too many homes are the problem, why don’t we stop building new homes for a while?  Specifically, in the markets where prices are being hit the biggest, why not limit new building permits?   Too logical.  And too problematic.   First off, municipalities get a big tax boost from each new home.   And since city governments have a never ending desire to spend tax money….they don’t have the balls to stop building homes, especially when they haven’t redone their assessments after the housing price declines.   And on top of that, we have the economic domino effects.  If we don’t build houses, then all the people working in home construction will lose their jobs, then they’ll stop eating at restaurants and all those restaurant workers will lose their jobs, then the former restaurant workers will stop buying stuff at the shopping malls and then all those retail workers will lose their jobs, then the former retail workers will stop ……….you know how this goes.  So what we need to do is keep propping up all this excessive growth because if we don’t the economy will go to a deeper hell than it is already starting to visit.  I see that logic!

Please do some research and find out how many millions of Americans work for state and local governments and then throw in the federal employees.  I already know the answer and the per capita consequences.   When you cannot make things in factories, you end up getting a lot of people working to take care of the rest of us.  Do you think our country is better off now than it was decades ago?

We have too many people in this country and on the planet.  We grew too fast.  It has serious implications for the economy and the environment and health.   Read up on Malthus.

Speaking of collapsing industries….the GM and Chrysler merger talks are troubling.  Please look through my blog about my concerns over the US automotive industry and specifically my love for manufacturing jobs.  You might come across this post http://www.hedgefolios.com/read/is-gm-your-leader or you might find this one interesting…http://www.hedgefolios.com/read/1-1-1

Here’s what I think this whole mess is all about….retirement accounts.   Did you know that the Delphi pension was heaped onto GM?   Seems like no big deal right?   Except for the fact that GM will not likely be able to make good on its pension obligations and neither will Chrysler and neither will Ford.   They are not alone.  The pension funds of many companies and governments bought a bunch of the ABCP, SIV, CDO and all those other assets that no one really wants to touch.   Hey good thing the government is buying up all that crappy ABCP.   What a coincidence!   Hey good thing they approved a $700 billion plan to buy up the CDO and SIV stuff stuck on bank balance sheets.  What a coincidence! The pension funds probably had a bunch of Fannie and Freddie debt too.  Hey good thing Fannie and Freddie were bailed out by the government.  What a coincidence!  The pension funds are full of all kind of assets.  Stocks, real estate, hedge funds, etc.  Hey, good thing the government is trying to prop up stock markets.

Now Pelosi is offering up her next free lunch from the Democrats who really know how to spread tax money around.   And what a shocker….there supposedly is some relief coming for people to withdraw their money from 401-ks and I guess from other retirement accounts without penalty.   Hey, good timing on that too.

Withdrawing the promises of the future is much different than withdrawing the promises of the past.  It is one thing to tell this 41 year old that social security will not be there for me.   But it is something altogether different to tell a pensioner that the pension fund is full of crappy assets that cannot meet their obligations.

Our pension funds are a wreck.  Our 401-ks are a wreck.   The Pension Benefit Guaranty Corporation was insolvent when I ripped into their decision last February to increase their exposure to stocks and real estate and other alternative investments. http://www.hedgefolios.com/read/pension-benefit-guaranty-corporation How do you think they have fared since then?    Their year end is September 30 and the new annual report should be released within the next month.  Regardless of what the government does now to prop up retirement accounts it all comes back to the same scenario I started this email with.  The guarantees that will be required to give people protection for their retirement will rely upon money that really doesn’t exist and only represents the increased taxation of future generations.

Here’s an idea…..how about laundering the $700 billion bailout assets by issuing special purpose treasury bonds and using them to provide government “guaranteed” retirement accounts.  Think about it and don’t be surprised if you hear something like this in the future.

The people who love the VIX are going to look back at the spike above 75 as evidence of what?  Really, what a piece of crap indicator!   It used to be that over 30 was a buy signal.  That happened on September 15 when the S&P closed at 1192.70.  Good buying signal?   How about a VIX over 45?   On September 29, the S&P closed at 1106.42.   Is that a good buying signal?    What about a VIX over 55 or 65?   There is no history of the VIX over those numbers.   As for a VIX of 75, good luck with that.

Once the debt markets stabilize, I’ll be looking for M&A and buybacks to come back big time.

I used to use Wayne Angell, former Fed governor as a contrary indicator about his predictions for just about anything.  Personally, I don’t agree with his monetary policy very much (not that it matters.)   But the other night, when I heard him say that you cannot have inflation and deflation at the same time, I just laughed.  I think I have said this more than a few times.  I believe we had inflation in some assets (food and energy) and deflation in others (houses, cars, clothes) at the same time.   For the past few months we just shifted to almost all deflation as energy prices declined.   As we head into a recession, the last vestiges of inflation will disappear.

As for the market, I hadn’t expected a rally to begin until Wednesday of this week.  I thought I was getting in front of it with this week’s signals.  Personally, I would wish for a less dramatic move.  I don’t like V-”bottoms”.  Note that I don’t consider this to be the bottom.  But I am looking for a trade that will take us towards 1000-1025 before a retest of last week’s lows.  I fully expect that the next leg down will be more dramatic than the last one.   I hope the longs enjoy this for as long as it can last.  If I was wrong about being Mr. Sunshine this week, I will be very quick to reverse all those new UP signals.   This market has been brutal in both directions and I see nothing about this rally that appears sustainable.  As I have said in the past, I don’t get to design the shape of market moves but this “bottom” has not been earned by the bulls.

Good luck with your investing.

Mike

Last Sunday night I commented that I had never seen a market that presented itself in such a dramatic manner.   The results have given me a reference point to recognize something like that if it ever reappears in my lifetime.  Personally, I hope I never see it again.

While the S&P 500 declined 18%, HEDGEfolios managed a 5% gain due to the fact that I was positioned so heavily to the downside with only 31% UP signals.

This weekend has been a very difficult analytical process, but maybe not in the way you might expect.  I have spent hours and hours going over the technicals.  Usually, I only go through all the charts one time and then just repeat the stocks I expect to change signals.  This weekend, I have completed 2 passes on over 3300 stocks and am taking this break to write this post prior to going through them one more time before the open.

What am I looking for?  Considering that I have been so hedged to the downside there is only one thing for me to do.  I am spending all my time with two main ideas….what not to go bearish on and more importantly, what to go bullish on.  I tend to be proactive, and not reactive.  Have you ever perceived that I was panicked?

As you may know from reading my portfolio management articles, I don’t place much emphasis on being a contrarian for the sake of being a contrarian.  I have been bearish in times (like April to July 2007) when it was really painful to do so.  Click here and here and here for some samples.  When I am different than market sentiment, it has simply come from what I have seen that differs from others and not because I am just trying to follow those goofy sayings like “be greedy when others are fearful….be fearful when others are greedy.”   I never understood the timing of that.  Seems to me people were fearful two weeks ago and one week ago…. so being greedy at the start of last week didn’t turn out to be so wise.

When I looked at the charts over the past two days, there was much devastation and yet, I also saw much more positive than I did the previous week.  When I did the fundamentals, even using my more conservative approaches, I saw quite a few stocks trading at unbelievable prices.    For example, when a company has more cash than its market cap and has minimal debt, you really need to give it deep consideration.  I have been called “Mr. Sunshine” by some of my closest friends and as you know, it wasn’t because I am always so optimistic!  Right Charlie????  However, even someone like me can give credit where it is due or see a few positives on negative days.

HEDGEfolios will likely miss part of a massive turn - I have a habit of sacrificing returns for confidence in longer term direction.  I am taking things one stock at a time as I always do.  It’s really easy to stay negative or to finally bail out if you’ve missed all the warning signs over the past few months.  In this business, you get rewarded for being rationally proactive whether that means increasing your downside hedges over the past two months or going in the other direction as you see real reasons to go long.  I am not advocating that you do what I do unless that means you are working your ass off.  Do your homework.  In times like this, do more homework.  Then when you cannot take it anymore, please take a break.  Spend time with your family or go for a walk or just do something that makes you happy.  Then….do more homework.

I need to get back to mine.  There are only 9.5 hours left before the opening bell.  I am going to spend them on my new effort to move towards Getting Centered.  I don’t call crashes or rallies.  I leave that up to other people that seem to be doing far worse than HEDGEfolios but spend a lot of time appearing on television to say how smart they are.

I am taking this one stock at a time and while some are improving, they are not all improving enough to warrant signal changes.   For the ones that do look good to me, I am going ahead with the changes just as I have done when the market was euphoric and I was going negative.  I expect the difficult market to continue, but I have been leaning heavily in the negative direction for weeks and I don’t think it is wise to continue at the same pace.

Newsletter #2 to be emailed tomorrow.  It’s going out once and only once.  I’ll be sending it to anyone that has emailed me before the release.  If your request is late, I will put you on the list for the next one, if there is a next one.

I know I am setting up incorrect expectations that since I am doing the newsletter two weeks in a row that one will be coming out every week in the future.  Two in a row is random.

UPDATE:  IF YOU RECEIVED NEWSLETTER #1, YOU DO NOT NEED TO REQUEST ANY FUTURE NEWSLETTER.

EMAIL NEWSLETTER #1 - OCTOBER 6, 2008 2:28PMI am sending this “newsletter ” due to a previous email I received from you stating that you wanted to hear what I had to say.  If that is not the case, please reply that you want me to remove your name and I will not send you anything in the future.

I ask that all recipients do not forward this to anyone or reproduce it in any way or publish it in any format or do anything with this other than read and think.

CONTENT:

I’ll be keeping everything to short soundbites, maybe even random ramblings.   I don’t have the time to do as much research to support my positions.  If you don’t like something I said because it was unsupported….spend your own time doing the research to prove it or disprove it.

Some people have suggested that all I ever do is criticize other plans and don’t offer my solutions.  Usually it goes something like… “if you think you are so smart, then tell me, us, them or whomever what should be done …preferably step by step.”   You’ll notice in my writing that I just don’t tell people what to do.  I try to give viewpoints and facts so that readers can make their own decisions based upon more information than  what might otherwise be presented.   I have no idea who anyone is and  therefore, other than my children and anyone that has to deal with me as their coach, I do not tell other people what to do.  So if someone is looking to me for answers, they will usually just hear me tell them they need to find their own answers, whether that means stocks or anything else in life.

I’ve been asked repeatedly how I could stop blogging at such a dramatic time.  First off, no one pressured me to quit.  I stopped because the cost of continuing with the blog was far greater than what I get out of it.  It’s just that simple.  There are always reasons to believe that some future moment will be easier to make a change and yet, my experience has not found success with that theory.  In some of my life’s most troubling times, optimists around me tried to cheer me by saying, “Don’t worry Mike, it cannot get much worse.”  The reality was that things often did get worse and an earlier exit would have meant that I could have faced things sooner, taken my punishment and then focused on a more positive future.  It’s like that with stocks and portfolio management in general.  One of the biggest reasons for my performance with HEDGEfolios is the ability (most of the time) to exit stocks when they start getting bad instead of holding on until they just “cannot get much worse.”   I applied that same approach to the blog.

I don’t feel that this moment in market history is more important than before I started writing and everyone obviously survived without me.  Many people did very well ignoring what I said for the past three years and they will do well once I am long forgotten.

I am often amazed by some bloggers who do a great job (or a shitty job), but are so full of themselves and their supposed importance.  I never took myself that seriously.   Personally, I read very few blogs(check my blogroll) and while there is some good stuff to be found online, I have yet to identify how much of a positive impact the words of bloggers (myself included) have directly contributed to my performance.

One of my biggest themes over the years is to encourage everyone to think for themselves and do their own homework.  I guess reading a blog is homework and if it works for you…great.  It just doesn’t do much for me other than provide some entertainment value.  As for specific thoughts that help me avoid losing money or make money…not so much.  Therefore, I am not concerned that readers will fail or succeed any more or any less because I don’t write.  Some of you have shared thoughts that run contrary to my view and I respect what you have said.   Nonetheless, I still disagree.

Okay, enough discussion about blogging for now……….

If you’ve read any of my stuff, you shouldn’t need me to write a blog to express how I feel about the current bailout.  It’s pathetic and just like the past interventions, I do not expect it to solve the crisis we are facing.  What concerns me the most is the growing perception of many Americans that the government is responsible for fixing problems or that the stock market’s reaction last Monday or Friday is some kind of proof that the government needed “to do something.”

Watching financial entertainment lately I feel like I have C-SPAN on every channel.  Now I don’t know what’s worse - watching morons on CNBC or watching morons on C-SPAN.  I see no real difference other than a few letters.

I got a good laugh out of Dennis Kneale on CNBC last week saying how the devastation in the markets meant that we needed a bailout.  I guess Dennis has come off his happy talk over the past year about how people don’t lose if they don’t sell when stocks are down.  Don’t Worry…Be Happy!

Regarding those politicians - having them say they thought the bailout was bad but they had to vote for “doing something” was all I needed to hear to sum up how terrible the situation is.  We don’t “need to do something”….we need to do some right things.

Having a bunch of politicians work really hard over a few weeks by listening to Bernanke and Paulson is the financial equivalent of the blind leading the blind.   And my apologies to any blind person for using this analogy.   I hate to compare a blind person to Bernanke, Paulson or politicians.  Most blind people I have ever met were amazingly nice and gifted.

A year ago, I suggested on the blog that we needed to have a brainstorming session by other people than just the politicians and regulators to come up with some tough solutions to the mortgage/credit crisis.  Of course that was ignored and we wasted a year getting to where we are now.  Today, Barry Ritholtz made a plea for a brainstorming session…it’s a bit late, but never too late to start.  Maybe somebody will listen to Barry since he is such a popular blogger!  They didn’t listen to me and the chance that anyone would dare to include me in any brainstorming session is extremely small.

Despite comments that I never propose solutions, look back a year ago and you’ll see that I suggested we should unwind the CDO’s.  At the time, a few people told me it was just a naive and stupid idea that could never work.  Okay….I guess a better idea was to have the government nationalize the financial system inclusive of Fannie and Freddie and then come up with a $700 billion plan to buy troubled assets/mortgages a year later!  My point then and my point now is that securitization was a huge part of the problem and so was the difficulty of dealing with the individual assets.  Following Occam’s Razor, the simplest solution is often the right one.   My opinion is that no matter how difficult it is to do, we need to break these things down into their simplest components before we can value them.  Just holding them to maturity or waiting until investors are willing to take risks and buy these troubled complex assets back from the Treasury is not dealing with the root problem.

Starting late last week, the market suddenly set a new requirement of a Fed rate cut to juice the economy and stock market.  Supposedly, the post-bailout-signing selloff was a disappointment that there was no Fed rate cut.  I have no opinion whether that is right or wrong this time around.  Let me tell you one more time.   I don’t believe that rate cuts by the Federal Reserve are successful investing signals.  Furthermore, I don’t believe that government bailout packages like the fiscal stimulus last spring or all these interventions are good investing signals either.   Despite all the smarties telling me that every time they got a rally, they have been wrong.  I believe in markets and market participants.   I don’t care to follow conventional wisdom about Keynesian stuff.  If you want to go ahead.  It just does not work for me.  So if you ever wonder whether I am wanting to get in or out of the market or a sector or a stock because of something some government entity does, I am sad you could read my stuff and not automatically know the answer.

This morning, there is a call for a global rate cutting program to be coordinated by a bunch of central banks.   Once again, if you believe that rate cuts will save you, please consider the facts.  All of this talk about bailouts and cuts just reinforces an assumption that governments are the answer.   I don’t share that view.

I cannot begin to understand where the US Constitution ever gave the “authorities” the authority they have abused.  When is the ACLU or some constitutional lawyer going to sue to stop some of this nonsense?  Apparently never, because it might mess around with the “confidence game” that the “confidence men” who control our government have been playing around with.

Isn’t it odd how the politicians can say that Credit Default Swaps are a huge part of the credit crisis and yet, they are not suggesting getting rid of the things?  I know….I have been repeatedly told how wonderful these things are and what we really need to do is just regulate them and make the CDS market more transparent through some central clearinghouse and exchange.  I disagree.

Watching the 60 Minutes piece last night and seeing the smugness of ISDA chief Bob Pickel should tell everyone what a charade the CDS market is.

Somebody needs to do the work to analyze how much profits were created over the past 10 years by selling these fraudulent CDS contracts.  Just pick AIG.  How much of their profitability was based upon selling products that had no economic value?

Regulators love to point out the problem with CDS is that they are unregulated.  I agree that is a problem but using a lack of regulation as an excuse is a joke.  I think we have enough examples of regulated finance that went bad.  The main point for me is that the CDS market has delivered huge fees for the participants and huge personal compensation for the executives and other individuals who crafted and sold this crap.  Those people have a lot of political power and rather than holding them accountable for their role in this, I suspect that we will just see a lot of coverups.

Isn’t it odd how politicians can say that banks are just too big, but they make them bigger through forced mergers?  Isn’t it odd how politicians can say that financial instruments are just too complex but they don’t make an effort to get rid of the complexity?  Isn’t it odd how politicians can blame interconnectedness but work hard to keep control centralized by keeping everything connected?  Of course it is both odd by normal logic standards and not odd because this is what we come to expect from these guys.  I started calling the Federal Reserve the “hair of the dog Fed” over a year ago for trying to solve the problems caused by cheap debt by giving out cheaper debt.  It has only gotten worse and trickled down into the rest of the financial part of the government.

Last year, I suggested that there should be a “proof of innocence” before we start bailing out homeborrowers.  I feel the same today.  Ask yourself how many of these people who were supposedly taken advantage of by predatory lenders were getting their first mortgage.  Seriously, if somebody had experience with mortgages before, do you really believe that they could be so manipulated?

What are the default rates of mortgages initiated by predatory mortgage brokers compared to the default rates of mortgages extended by your nice home town bank that was regulated or by a Fannie / Freddie mortgage?   I know the politicians want to keep blaming this on unethical behavior other than their own, but I suspect that the default rates are not much different regardless who wrote the mortgage.  It’s easy to use bad actors as fall guys while we just ignore the root problems.

Since the beginning of the subprime mortgage crisis, we have been told that the main problem was an inability to make increased reset mortgage rates through personal incomes that were not sufficient.   As I have said before, I suspect that many people that have lost their home or are in danger of foreclosure are using cell phones, eating out at restaurants, watching satellite or cable tv, driving expensive cars, and spending money on other “priorities”.   We have a society that seems to believe that you deserve a bailout without having to make changes to other lifestyle choices.

I have heard politicians suggest that everyone should have the right to own a home.  I don’t believe that, but just assume that they are successful with that dream.  If everyone owned a house, what would happen to house prices? HMMMMMM

One theory going around being stated as absolute fact is that we cannot grow the economy without debt.   My friend Jack Stevison recently commented on that and I am going to call bullshit as well.   Our economy has dug an amazingly deep hole on this “debt equals growth concept.”  For how long have we heard that the US needs to save more and yet done everything possible to keep overconsuming through overleveraging.   Sorry, the gig is up.  Adding a whole bunch of debt whether that is $700 billion or a few trillion is not going to solve it.

And speaking of growth… my personal opinion is that growth is not always good.   Many companies grow too fast and the term is called “growing bankrupt”.   Our society and economy has done that.  There is something to be said for conservation and consolidation and getting things under control.  My grandfather was a farmer (one of the world’s most difficult jobs) and he was very successful regardless of starting his farm during the Great Depression.   While visiting him shortly before he died, I asked his secret …He said, “I spent less than I had.”  Simple right?  I call this “Grandpa’s rule”.   When I have looked at my past failures, I was usually violating some form of  “Grandpa’s rule.”   Our economy has violated that too.

On this and many issues, I am a fan of Malthus and the implications his theories have on our planet.

Have you spent much time evaluating the growth of restaurants and strip centers?   Where I live, we have so many new restaurants in the past 5 years that I wonder where everyone ate before.   As for the strip centers, I wonder where everyone shopped before.   The implications are huge.  We have millions of people just surviving with slightly above minimum-wage jobs and when the rest of us don’t eat out as much or buy stuff at the stores, these people will be out of a job very quickly.   And then the spiral of CMBS will begin.

At election time, you often hear the question “Are you better off now than you were 4 years ago?”   I suggest that you should ask that same question but just go back more than 4 years.  How about 8, or 20,  or 40 (depending on your age)?   Look at our budget deficit now compared to all those years ago.  How about our national debt?  How about our education system?   Is all that money and debt equal to growth / progress?  Is the quality of life really “better”?

My friend Todd mentioned that he wondered how all the commodity hedging that industrial businesses undertook over the last year will affect financial results now that commodity prices have declined.  Keep an eye out for that.

I find it funny hearing how many financial gurus and market smarties think FDIC Chairman Bair is so brilliant.   I don’t share that opinion.

I am hearing so many reports of people not being able to withdraw their money when they want to and having to take rain checks and come back later to avoid causing a more obvious run on the bank.

For the record, I was not a fan of the Wamu deal.  Having the government profit $1.9 billion by brokering a sale is sickening.  Having the FDIC pick the winners and losers is sickening in any of these deals.

I am enjoying this Wachovia / Citi / Wells Fargo mess.  It would be nice to expose how the administration has played favorites, called favors, pressured execs, cut special deals and in general took advantage of shareholders and bondholders to cover for their failure to regulate or maintain sufficient protection for depositors.  However, I don’t ever expect the truth to be told.

The “JPMorgan helped to bring down Lehman” accusations are great for conspiracy theorists.  I suspect that’s about as far as it will go.   Maybe the truth will be revealed when we find out about JFK’s assassination and UFOs.

You might remember my posts a year ago called “The Ghosts of Glass-Steagall” and “Haunted by Glass-Steagall” and know where I come out on this topic.  I cannot help but point out how ironic and absurd it is that the government now endorses and pressures investment banks / brokers to solve their problem by becoming a commercial bank (as per Morgan Stanley and Goldman) and/or by merging with one.   I believe we are in this problem largely because we got rid of Glass-Steagall and other protections from the last depression so trying to solve it by pushing this even further is just over the top.  Allowing brokers and investment banks to use regular bank deposits to fund their activities and provide liquidity is an amazingly bad concept.

Is anyone else really tired about hearing how Bernanke is such an expert on the Great Depression and Japan that he will prevent us from repeating those mistakes?  How many examples do you need to hear of things that we have not seen since the Great Depression to feel like we are in deja vu?

A few weeks ago, Forbes put out their issue showing their values of the NFL teams.  Billions.   If I was an owner, I’d be trying to sell at that price.   Those projections are based upon their share of  $100 tickets, $7 beers, $10 parking, $100  jerseys, etc. etc.   Good luck with those assumptions when our economy fumbles.  And for all you state and local politicians that wasted hundreds of millions on new stadiums so these owners could feel they are worth billions and so athletes could make millions playing games, please spend some time figuring out how you are going to help shelter the homeless and provide basic medical care to the sick or food to the hungry.

On the short ban….it didn’t work.   The evidence is there.  The stocks declined anyway.   But of course, once the short ban is removed and the stocks go down, the coincidence of that will embolden the anti-short crowd to suggest a causal correlation.

On mark-to-market….it will likely be removed.   Too many people in power are convinced that the rules caused the players to screw up.   You wouldn’t want to blame the players!!   Okay, so let’s say mark-to-market is taken away.   Good luck if you are a fundamental investor.  Imagine all the revisions to past financial statements that should have to be done.   Imagine what is going to happen with all those writedowns taken over the past year.  Imagine what is going to happen with analyst estimates.  And oh…..do you remember some of those banks that had profits because they benefited from mark-to-market (specifically statement 159 http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a2ppBYA0ELaU  I am looking forward to seeing how they try to keep the good parts of mark-to-market and get rid of the bad stuff.

I find this concept of suspending or removing accounting rules because they are making things too tough to be pathetic.  And the idea that we will institute them later when things are better is just a joke.  Remember that many of the rules were proposed years ago when times were “better.”   There are always years between a rule proposal and the phasing in of the rule.   So what the hell good are they when you create a rule in good times and when we finally are supposed to use the rule, it gets held off because times are bad?   When do we ever regain this lost credibility?

So when you hear our political “leaders” say that they will hold hearings and figure out how to fix the markets by instituting rules in the future, do you believe that?

As I wrote last night on the blog, I have never seen anything like the charts from last week.  It was pure devastation.  Good luck with your investing.

Mike

Regardless of volatility or whether the market went up or down over a given week, I usually do not notice anything out of the ordinary.   It’s always tough, so a particularly rough week does not confuse me or rise to the level of concern.

There have been less than 5 weeks in the past 6 years I have been doing HEDGEfolios that I saw something I have never seen before.   On those occasions, I made mention of them on the blog and said that I had no idea what they meant at the time, but I was watching them to see what happens so I’ll recognize it if the situation ever reappears.

This weekend looking at the charts and doing my fundamental work was one of the 5 weeks of confusion.  In fact, if I had to rank them, this was the worst.

Stocks that looked great for months, now look like crap.  Stocks that looked strong last week, now look like crap.   Stocks that had started to find support or head higher, now look like crap. In summary, the top fell out and the bottom fell out at the same time.  Strong stocks got weak, and weak stocks got weaker.

I am not a supporter of the capitulation theory that says you need to see a capitulation to find a bottom.   Commentators like Pisani have mentioned the “C” word almost every time they want to call a bottom and they have been wrong.   So since I don’t call bottoms or crashes or capitulations or things like that, I am not suggesting last week was a capitulation.   I am not suggesting that we are set up for a crash.  All I am saying is that I have never seen anything like it.

Of the 1443 UP signals I had going into last week, 669 of them declined by more than 10%.  It is rare for me to get hammered like that.  Of the 1910 DOWN signals I had going into last week, 1026 declined by more than 10%.  More than half the stocks I covered declined in excess of 10%.  If you are an optimist, you might want to call this a capitulation event.  I just call it devastating and since many of these stocks just started to fall last week, I have a tough time assuming that the slide began and ended that quickly.  What catalyst do you see for a positive reversal?  Another $700 billion government bailout?  Another Fed rate cut?  A bottom in housing?   Strong retail sales?  A great earnings season?

The S&P 500 declined about 9.4% last week.  Many people commented about how bad this was.  Usually when they say stuff like this I think they are exaggerating or maybe I even see the opposite.   This time though…IT WAS SO MUCH WORSE IN MY OPINION.

Newsletter #1 to be emailed tomorrow.  It’s going out once and only once.  I’ll be sending it to anyone that has emailed me before the release.  If your request is late, I will put you on the list for the next one, if there is a next one.

Good luck this week, I expect it to be unlike anything I have ever seen.

UPDATE 2:40 PM ET 10/06/08   I have emailed out the newsletter.  A few have been bounced back to me.  If you did not get the newsletter and you can provide me with another email for me to try, I’ll do that.  If you feel that I should have sent you the newsletter because you took the time to request it at an earlier time/date, then send me proof of your prior message.

HEDGEfolios year-to-date stock performance for 2008 (through 09/30/08 close) was up 28.86%.

Over the same time period, the S&P 500 index was down -20.55%.

At the end of September, the HEDGEfolios universe consisted of 3,354 stocks.

Commentary: HEDGEfolios was able to advance approximately 3% during a month that saw the S&P decline about 8%.  Throughout the month, HEDGEfolios had weekly moves that ranged from +1.9% to -0.9% and from September 22nd through the end of the month, it varied no more than 30bps.  Compare that low volatility to the massive swings in the indexes.  On August 11, 2008, HEDGEfolios was sitting at 80% UP signals.  For the past few months I have been advocating moving towards a very neutral position and ended the month at 43% UP signals.

Prior Years’ Performance:

• 2007, HEDGEfolios performance was +21.78% vs. + 3.55% for the S&P 500 index
• 2006, HEDGEfolios performance was +25.54% vs. +13.62% for the S&P 500 index
• 2005, HEDGEfolios performance was +19.99% vs. + 3.00% for the S&P 500 index
• 2004, HEDGEfolios performance was +31.19% vs. + 9.00% for the S&P 500 index

Disclaimer: Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to HEDGEfolios. These performance figures have not been audited or verified by an outside party and are NOT in compliance with the CFA’s AIMR Performance Presentation Standards. They don’t net out any transaction costs such as commissions or management fees and are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire HEDGEfolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.