Why we still haven't hit the bottom?

There is a good article on gurufocus explaining the point of view why the market hasn't hit the bottom yet and the recent advances in stock market are a short lived phenomenon. It is quite interesting read and I agree with most of these reasons. Although I haven't said it earlier but stocks don't look cheap to me. Most of the valuation tools have hit the singularity. I am still trying to get my cash out or hedge my positions. It is a continual process, a slow and painful too. Considering that VIX is down a lot recently, now may be a good time to buy SPY puts or a levereged short etf.
Coming back to the valuation, here is the article

The arrival of spring

The cold hard winter is gone. Market participants are celebrating the arrival of spring by raising DOW over 10% in a week. As for me I remain pessimist about the state of the economy and the market should really just be a reflection of that in long term if not in short. Furthermore, there is too much sentiments on the wall street leading to irrational happenings. I don't understand it
For this reason I am continuing my efforts to take my money out of market. Considering the fact that I started investing in the greatest bull market, I have been able to go from 5% cash position to about 60% cash without realizing any net loss. This does not mean that my belief in value investing is shaken but the billion dollar question is when to re-enter the market?

Depression?

We may or may not be in depression but it sure feels like it :)

Low hanging fruit

Its been a long time since I have written on this blog. A lot has happened since I wrote the last time. These times have shaken the nerves of the most resolute investors. Losing 50% of your life savings in a matter of days is not easy to stomach. Most of the people I know have even stopped looking at their portfolios because its just too painful.

During this time, I shifted gear and traded actively. In this post I will not get in to details of how and what I have been trading but I will only say that I have been plucking some low hanging fruits. You see in past few months I lost a large part of my life savings because of stupidity of others so it was only fair that I got back at them and made up for my losses at their expense.

Talking about low hanging fruits, I must share with you the farewell letter of Andrew Lahde. Andrew was a hedge fund manager who dissolved his fund in September after betting against subprime and earning 1000% on his investment. His farewell letter is a very interesting read.
Andrew Lahde Farewell letter

I will quote the following word from his letter. These may be his words but the feelings are mine

"I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life."

Recession is here

The love and respect I have for my job has increased 10 fold. If this is not recession, I don't know what is.

Bye Bye Schnoover

Circuit city CEO Philip J Schnoover has finally resigned. Here is a guy who took a reasonably profitable company, a company that Jim Collins described as great in his book 'Good to great' and ran it to the ground. Under his stewardship share price plunged from 30$ to 1.7$.

While all this was happening the CEO had no idea why this was happening and what could be done to turn the company around. He tried desperately like a guy who is drowning and doesn't know how to swim. For example replacing the senior employees with high school kids to cut the cost is particularly a dark chapter in the history of Circuit city.

In a company if returns on assets is less than the cost of capital, it is not wise to buy more assets. Despite that CC kept on the opening more and more stores leading to bigger losses. One may argue that in retail the economy of scale matters a lot but you have to have some idea as to at what revenue target, you will break even. It seems that the more stores Circuit city opened, the more losses it reported.

The chances of Circuit city survival as an independent company are slim. Either it will be bought over by vulture investors(which seems more unlikely now since all the cash is squandered by the current management) or it will be bought by some other company that sees synergy with CC. The best scenario for the investors is that the new CEO will turn the company profitable or atleast break even hence making it more attractive to prospective buyers. This process will take long time. If you are patient and adventurous, you can either win 400% return in 1-2 years or lose it all.

We are all Keynesians now

To resolve the financial crisis government announced an 800B rescue package. Although it was announced on Sep 18, I believe that secretary Paulson arrived at this conclusion on the same weekend when BAC announced the purchase of Merrill Lynch. This makes sense because to commit 50B in such turbululent times, BAC CEO Ken Lewis must have known something that others didn't.

Now that the government has proposed the package on the floor, democrats dominated congress is having second thoughts. CNN reported that a lot of tax payers are against this deal and want the financial institutions to reap what they sow. This does sound just but the cost of the justice will be huge. Think of it this way - you have been let down by both political parties but still you can't just wish them away. Similarly these financial institutions are necessary.

Coming from socialist India where banks were nationalised, I can tell you it was a great achievement and in some circles a mark of status to be able to open a bank account. This will give you the idea how hard it would have been to take loans. Just think how easy it was to take loans for houses, cars and education. The problem started when it became too easy to take loans. Despite all its flaws wall street has done an efficient job of capital allocation. And if these financial institutions are no more, our financial situation will be a bit like political situation in Somalia.

In this crisis situation, government must act boldly and it has to act quickly. Today is the day that comes a few times in a century when we are compelled to say "We are all Keynesians now".