Citigroup Pleas for a Short Selling Ban

In an attempt to stem the tide, Citigroup is requesting that the Securities Exchange Commission (SEC) impose a ban on short selling. This request comes as the CEO of Citigroup, Vikram Pandit, tries to rationalize the nearly 84% decline in Citigroup stock since October 1, 2008. While Mr. Pandit isn't responsible for the mess that Citigroup is in, he is responsible for doing whatever he can to get the company out of its funk. Unfortunately, the idea of putting a ban on short selling is not going to solve anything.

In life we seldom get the chance to see comparable examples of the effect of an idea before actually implementing it. In the case of banning short sells there is one example that stands as a perfect case study. On September 30, 2008, Taiwan's Financial Supervisory Commission (FSC), the equivalent to our SEC, implemented a complete ban on all short selling. Along with this ban on short selling, the FSC has a rule that limits the amount of decline of any stock to 3.5%. After a stock falls 3.5% there will be no trading of that stock until the next day.

With these rules in place to limit the decline of stocks in Taiwan, you would think that Taiwan's main stock index, the TSEC Weighted Index, would have fared much better than the Dow Jones Industrial Average in the period from October 1 to the present. After all, The housing crisis originated in the U.S. The rating agencies that didn't properly rate the debt are in the U.S. The biggest financial institutions in the world that have failed are in the U.S. With all that has happened recently, it would stand to reason that the brunt of the decline in stocks would take place here in the U.S. rather than in Taiwan. Unfortunately, the reality shows that banning short selling has little impact on the market's declines.

From the period of October 1 to November 21 the TSEC index fell 27.64% while the Dow Industrials fell 25.71%. Was there any benefit of having the ban on short selling? There has been no material benefit to Taiwan's ban on short selling. A ban on short selling of Citigroup stock would have a similar effect. By banning short selling, Mr. Pandit blames the symptom, a falling stock price, rather than addressing the approximately $1 trillion in money losing "assets" that aren't on the company's balance sheet. Such an irrational response from a investment professional like Mr. Pandit puts into question the legitimacy of the leadership at Citigroup.

The investment community will zero in on Mr. Pandit's request to ban short selling as a cover for more serious matters at the bank that cannot be resolved through management or leadership. This will put further pressure on Citigroup's stock price and hasten a government inspired merger of equals (the combining of two unhealthy institutions) which will result in a scenario like the combination of CreditAnstalt and BodenCredit of Austria which sparked the worldwide banking crisis in May of 1931. Touc.

Sources:

• Westbrook, Jesse. “Citigroup Urging SEC to Bring Back Short-Selling Ban.” Bloomberg.com. November 20, 2008. viewed online November 22, 2008.
• Young, Doug. “Taiwan extends Short Selling Ban, Limits Stock Drops.” Reuters. October 12, 2008. viewed online November 22, 2008.
• Austria's Economic Development Between the Two Wars. Rothschild, Kurt Wilhelm. F. Muller LTD. 1947.
• Kassenaar, Lisa. "Citi's Wake-up Call." Bloomberg Markets Magazine. September 2008.
  
  
  
  
  

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Ceteris Paribus

The term that is the basis of all discussions in elementary economic modeling, especially when comparing two factors, is ceteris paribus. Ceteris paribus means "with other things the same" and represents the best guess as to what is likely to occur provided all thing remain unchanged. Let us take an overly simplistic view of the situation with Citigroup's government rescue plan and determine the potential outcome ceteris paribus.

According to the Wall Street Journal, in an article by David Enrich, the federal government has agreed to absorb $277 billion of $306 billion of losses that Citigroup has identified as "troubled" assets. Additionally, the Treasury is adding $20 billion on top of the $25 billion recently injected into Citigroup as part of the TARP plan. Remember, the $277 billion is separate from the $700 billion bailout package. Again, this current approach with Citi is counter to the early arguments that there needs to be a comprehensive solution, not an individual approach, to the bailouts after the fall of Fannie, Freddie, Lehman, Merrill and WaMu which spawned the TARP plan to begin with.


Now, let's look at only the off-balance sheet portion of Citigroup. The off-balance sheet portion is called an asset by Citi but isn't included on the books. The off-balance sheet items are valued at $1.23 trillion. I don't know why Citi wouldn't include these items on their balance sheet but if the U.S. government is any indication then the off-balance sheet is probably more like liabilities instead of assets.


If the government is going to front Citi $277 billion (a whopping 40% of the total TARP package for only one company) then that would leave $953 billion remaining on the off-balance sheet portfolio. If we split the $953 billion in half and conservatively assume this portion is "troubled" then we have a figure equal to $476.5 billion. Remember when Merrill Lynch auctioned off $30 billion of CDOs or "troubled" assets back in July 2008? Here's what Bloomberg.com said of that auction on July 29, 2008:

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

At the time, Merrill was only able to get $6.7 billion, a loss of 78% or $0.22 cents from every dollar originally invested. Therefore, my assumption of a 50% loss for Citi isn't so far fetched.

Ceteris paribus, this leaves Citi with at least $476.5 billion in losses to write down at some point in the future. This assumes that the economy remains in a slight recession, that earnings are the same, that the dividend for this company has been all but eliminated, that there are no further losses in the housing market. All things being equal, Citi is in for hard times. However, if we take 78% of the entire $953 billion then we get a total loss of $743 billion. A sum exceeding the amount of the entire TARP program even after a $277 billion direct injection to Citi from the government.

Clearly our government under Bush/Obama has severely underestimated the extent of how much damage has been done to our financial system. Along with the lack of knowledge that has been demonstrated, the only policy reaction is to have a blank check approach to dealing with the problem. This is what I meant when I said that chaos will ensue when and if Bank of America falls below $14.00.

As I write this at 12:15pm today, Fox Business News host Liz Clayman just said that she went to her Citigroup ATM twice this weekend and the machines said that no money was available to customers. Clayman later joked that if Citi is really in good shape after this bailout then they need to refill their ATMs. Wow!

Sources:

• Enrich, David. "U.S. Agrees To Rescue Struggling Citigroup." Wall Street Journal. November 24, 2008. viewed online November 24, 2008.
• Keoun, Bradley. "Merrill Sells $8.55 Billion of Stock, Unloads CDOs." Bloomberg.com. July 29, 2008. viewed online November 24, 2008.
  
  

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Meredith Whitney on Financials

In the following video from CNBC.com, Maria Bartiromo interviews Meredith Whitney. Mrs. Whitney gives you your money's worth regarding the current banking crisis that we're in. Although Mrs. Whitney could be way off the mark in terms of the dire nature of the banking system, it wouldn't hurt to review and re-review what she says and look at her track record from the past. Mrs. Whitney is right more often than she is wrong.

Below is my summary of Mrs. Whitney's remarks (with my comments in parentheses):

• Paulson is not a stable person to be handling such an important job (Paulson may have made some big mistakes that we won't find out about until he is gone)
• Banks reducing credit card limits will have the impact of shutting down the economy well into 2009.
• Banking stocks and market will decline further
• Whitney's estimates for banking stocks are 30%-50% below current estimates
• "Kitchen sink" will be thrown in when reporting fourth quarter banking losses (some over eager buy-and-hold folks are already guessing that the banks are over-estimating their losses and therefore might come out ahead on the rebound. Such a perspective is too hopeful.)
• Re-regionalize the banking system is necessary; there is too much concentration at the top of the banking food chain (Wow!!! This is an astonishing comment since the mergers of many banks have further consolidated the banking system. Sounds like things will get much worse based on this rational.)
• Any semi-conscious bank manager should be hoarding cash. (Nice. brutal. honest.)
• Better clarity can found with off-balance sheet data rather than on the balance sheet where it can be mixed in with other banking data. ( This makes me think of the recent Citigroup move to bring about $1 billion back on the balance sheet. Are they trying to hide something?)
• FASB ruling reduces lenders ability to reprice unsecured credit card loans (This explains why banks would have plans to pull $2 trillion [at least] in outstanding credit lines.)
• Citigroup hasn't seen the worst; will need more capital (Scary; but no surprise.)
• Whitney had to offer solutions since being negative can only go so far (Whitney realizes that if what she says it too accurate over an extend period of time then people will start to accuse her of being the reason for the decline in the banking system. What a tough business to be honest in.)
• If the big banks fail then the insurance fund for the banking industry would clearly go bust (Better move your money to a "big" bank, if it fails then the small banks will not be able to secure your funds.)
• More capital is needed for the banking system especially the big banks (Government's blank check policy ought to fix that.)
• More government money going into banking system means that the crisis isn't over.
• Banks will need to shrink in order to grow (too bad the banks are getting bigger each day. Maybe if we start seeing division being spun off then we can expect some improvement.)
• Expanded lending by the banks will signal the end of the banking crisis which will precede the rise in the markets/economy.
• The only way to reliquify the banks is through investment in the stock (translation: a falling stock price is a bank that is about to go out of business.)
• Wells Fargo is the only large bank stock that is high-priced relative to the where it could go (...and Wells Fargo is one of the last quality large banks out there.)

In the end, if Mrs. Whitney is right about the pain to come then we will have to watch out for the reverberations in the insurance industry as happened to Japan in the 1990's. If you have insurance stocks for some reason then watch out. Touc.

The Common Refrain, To Our Detriment

The problem with our markets and economy, as a "capitalistic" society, boils down to the fact that every mechanism set up to avoid failure and disruption (counter to a capitalistic system) has failed. Not only has failure remained in the system, the very features that have been instituted to save us have actually contributed to a slow and methodical breakdown of a system that is supposed to thrive on change. The following is a short list of ideas, institutions or laws previously thought to bring stability to our financial system:

• 
  
  Fannie Mae
• 
  
  Freddie Mac
• 
  
  Circuits breakers
• 
  
  Federal Deposit Insurance Commission
• 
  
  Government seizure of AIG
• 
  
  National Association of Securities Dealers
• 
  
  FINRA
• 
  
  Securities and Exchange Commission
• 
  
  Generally Accepted Accounting Principles
• 
  
  Uptick Rule
• 
  
  Ban on Short Selling
• 
  
  Sarbanes-Oxley (Sarbox)

After all, look at some of these concepts and see what their impact has been. Circuit breaks were instituted after the stock market crash of 1987 to prevent a similar one-day decline of 20%. Since then the only circuit breakers to ever kick in are those that happened during the largest rise in stock market history from 1990 to 2007. On the way down however there is not a peep of a circuit breaker being tripped. The most recent orderly declines have contributed to the largest singular decline in stock market history. Worse still, we don't even know if the carnage is over.

How about the Securities Exchange Commission and FINRA? Out of all the crimes that have been committed on Wall Street the only person to go to jail was Bernard Madoff and his associates. Come on!!! The guy turned himself in...and if it wasn't for the market decline who knows how long the scheme could have gone on. Do you want financial security? Don't rely on the SEC or FINRA to provide it.

As quiet as its kept, one law that keeps being violated but hasn't landed anyone in jail is Sarbanes-Oxley (Sarbox). What is Sarbox? Oh, that's the law that came out after the Enron and WorldCom accounting and executive frauds of the 1990's. One provision of Sarbox says that executives can't publicly say that their company is financially safe and sound when they knew otherwise. This was a tactic that Enron executives used to prop their price up while they were selling at the same time. I have heard too many executive from Fannie, Freddie, Lehman, Merrill, B of A, Citi and others do what is a clear violation of the letter and intent of the law. Any of those guys in jail yet? Naw, no one is likely to go to jail for outright lying because if the executive says something to prop the company stock between the quarterly reports but not specifically on the audited quarterly report itself then it's cool. The Sarbox legislation reads like a "how to guide" on ways to avoid getting caught. Either let Skilling and Ebbers go or back the intent of the law and put the most recent offenders in jail.

After the Enron and WorldCom debacle Sarbox was supposed to address the issue of off-balance sheet items. Among other things Sarbox says that it's purpose is:

"...to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities." (emphasis mine)

What about Fannie, Freddie, Citi, and Merrill using off balance sheet entities or GE using earnings management to cover their losses or produce profits? Is anyone going to stand tall and call these Enronesque tactics out?· Not likely, whoever has the guts to bringing these issues up would be accused of kicking an opponent while they're down. Unsportsman like conduct would be the charge.

Alright, so what's my beef with FDIC? It sounds like a wholesome institution. After all, it protects the deposits of everyday citizens like you and me, right? Thanks to James Grant's book Mr. Market Miscalculates, here is what National City Bank (today's Citigroup) had to say about the legislation bringing FDIC into being:

"The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases."

Now, don't get me wrong, I like keeping my money in an institution that passes on the cost of deposit insurance. However, it is the FDIC protection that allows the banking institutions to run amok when times are good and the public has to pay when times aren’t so exciting. Is there any coincidence that we had the S&L crisis (FSLIC backed) to begin with? Is it any wonder that the costs associated with the S&L crisis are still part of our government's off-budget items. At the same time we're still paying for the S&L debts, the Resolution Trust Corporation (RTC) is called a success. Prophetically, Citigroup is among the largest offenders of the very system that their forerunner was against and for the very same reasons. There is little wonder the FDIC is petitioning congress for an additional $500 billion backstop "just in case." The FDIC is moral hazard reincarnated. After all, a bank can put a FDIC sticker on their door and have instant credibility as a business and if it fails the FDIC swoops in to legitimize the sticker.

The government seizure of AIG is now a hornets nest. But it never had to be. If we didn't bail out AIG we wouldn't have to worry about bonuses being paid in the first place. The near $10 trillion of bailout money could have gone to better uses like bailing out the FDIC, something that people have expected to be there for over 60 years. Or buying up 90% of all mortgages in the nation...no, no... better still, insuring against any defaulted mortgages up to $10 trillion. By insuring against loss, no money has to go out at all until there is a real, honest to goodness foreclosure. And like every good insurance company, the government could selectively decide to pay up.

The outlandishness of getting rid of these organizations certainly gets folks riled up. How could a simple two-year decline in the stock market and economy call for the dissolution to such important entities? To which I say, show me the evidence that these rules and organizations have done their job. What good comes from letting a company like AIG stay around when so many well run insurance companies are waiting to take their place. Ah, but the common refrain is, "if we let AIG go then the alternative could be worse." Touc.

Sources:

• 
  
  Department of Justice. “Former Enron chairman and chief executive officer Kenneth L. Lay charged with conspiracy, fraud, false statements.” July, 8, 2002. accessed online March 22, 2009.
• 
  
  Colvin, Geoffrey and Benner, Kathy. “GE Under Siege.” Fortune Magazine. October 15, 2008. accessed online March 22, 2009.
• 
  
  Grant, James. Mr. Market Miscalculates. Axios Press. 2008. page 202.
• 
  
  DioGuardi, Joseph. “Enron Fraud Small Change Next to U.S. Accounting Gimmicks.” World Tribune.com. May 4, 2003. accessed online March 22, 2009.

Dow-Jones Let the Dogs Out...And Got Bit

After considerable pondering on the subject, I have come to the conclusion that the 89% decline in the Dow Industrials from 1929 to 1932 had little to do with the economic state of the nation. In fact, a simpler explanation lies behind the cause of the decline in the Dow which was thankfully never repeated since. A good portion of the blame should rest squarely on the shoulders of Dow-Jones, subsidiary of News Corp.

First, this is not an article to explain away the various levels of overvaluation in the market of 1929. It was clear then, as it is clear now, that the stock market was extremely overvalued. Also, the explanation that follows isn't the only reason for the decline of '29 to '32. We all know that various economic and political events pushed our economy and stock market to the known limits in the shortest period of time. In this article, I'm trying to point out or explain the reason for the extent of the decline in the stock market. I am hopeful that readers of this article will be open to a "different" perspective on this reasonably unique period which might broaden the minds of the reader rather than convince the reader to buy or sell their stocks.

As a person who tries to examine the Dow Jones Industrial Average from every angle, I have often wondered what the impact of the changes to the index would be if the changes to the index were never made. For example, where would the index be if AIG (AIG) wasn't added to the index on April 2004? How about if Bank of America (BAC) was never part of the index? Bank of America was added to the Dow on February 2008. What about if Microsoft (MSFT), Intel (INTC), and Home Depot (HD) weren't added to the index in November of 1999? Where would we be if Citigroup (C) and Hewlett-Packard (HPQ) weren't added to the index in March 1997?

These questions have significant bearing on why the index has fallen so much in the last year and a half. It is worth noting that the selection of these stocks were at or near the peak in the respective industry groups that these companies are members. As an example, when Bank of America was added to the index in 2008 it replaced Altria (MO) and/or Honeywell (HON). Both of these companies, when compared to BAC, fared much better in the time after being taken out of the index. In fact, Kraft (KFT), a successful spinoff of MO when it was taken out of the index, was added back into the index on September 22, 2008 replacing AIG. Unfortunately, once KFT was added to the index it promptly fell from its relatively high price of $34.97 to the current level of $22.55.

The decision to take AIG out of the index and put KFT into the index couldn't have happened at a worse time. After all, the Dow Jones Industrial Average is a price weighted index. This means that the higher the stock price, the greater the impact the stock would have on the overall movement of the index. Essentially, the people at Dow-Jones traded a low priced stock with little impact on the index for a high priced stock that was susceptible to falling during a crummy economy. Furthermore, by choosing KFT, Dow-Jones ensured that the index would fall further because high quality stocks like KFT are the last to go when the market hits the skids. And so, KFT promptly fell 33% after being added to the index. Being a relatively high priced stock in the index, KFT had a much more significant impact on the Dow Industrials than the 90% decline in AIG over the same period.

Effectively, what I am describing is a "buy high and sell low" strategy that Dow-Jones exhibited in recent years. Which got me wondering, how did they manage during the "Great" Crash of 1929? Well, the results were what I would consider to be astonishing. The untimely inclusion of companies like KFT, C, HPQ, INTC, MSFT, AIG, BAC and HD were nothing new. However, what was unique about the period of 1929 to 1932 was the number of changes to the index that took place in such a short period of time. A total of 18 companies were taken in and taken out of the Dow.

Never before and never since has the Dow had so many companies added and dropped as constituents of the index. The only other period that came close was the period from 1899 to 1901, when the index had 9 companies added and dropped from the index. As demonstrated earlier, the timing of the selections were not the most optimal. As one company was added at a relatively high price the outgoing company with a low price, which would have had little impact on the downside, was given the boot. This resulted in a vicious cycle which propelled the index much lower than was otherwise necessary.

I contrasted the period of 1929 to 1932 with other known bear markets like 1906 to 1924, when the Dow languished around the 100 level, and the period from 1966 to 1982, when the Dow traded at or below 1000. In each case, the number of changes to the index was marginal, at best. The 18 year period from 1906 to 1924 had only 13 changes or 1.38 changes per year. The 16 year period from 1966 to 1982 had only 4 changes or 0.25 changes per year. This is contrasted with the 1929 to 1932 period which had 6 changes per year.

If looked at from the perspective that Dow-Jones is always going to "buy high and sell low" then we can reasonable assume that much of the decline in the Dow from 1929 to 1932 was due primarily to the constant changes to the index. Frequent changes to the index causes "the market" to grope about for a bottom (no pun intended) that doesn't exist. It appears that Dow-Jones learned the lesson that "buy and hold" works better than trading in and out. However, the timing of their changes to the index has caused more pain to last much longer than if they just let sleeping dogs lie. Touc.

Keywords:

• delist
• delisting
• delisted
• replaced
• Travelers
• GM delisted
  
• Citigroup
• Cisco
  

Bank of America Redux

Bank of America (BAC) was reviewed by me on September 15, 2008. I only applied Dow's Theory to my analysis since there are so many unknown factors in the market. My conclusion on BAC was as follows:

Since Bank of America is now a bellwether stock for the banking industry, Dow's Theory is saying that either this banking crisis has hit bottom (for now) and might trade up from here (possibly in a range) or that anything below $18.44 is going to be chaotic.

Yesterday BAC fell below $18.44 by a wide margin to the level of $17. Prior to the decline below $18.44, BAC's price action seemed to do everything it could to avoid falling further. When and if it happens, a decline below the $14 level will be a period of utter chaos for the banking sector.

Bank of America is ranked #1 in the US in terms of assets. Right behind BAC is Citigroup (C) which is now selling for less than $10. Globally, BAC and C are ranked #1 and #2 respectively. That's Globally! Why is this important? No banks that are ranked #1 and #2 in the nation and the world should have their stock price cut in half in the last two months.

The stealth nature of the most recent banking sector declines will shock the financial system and require more talk of bailouts on top of the already proposed auto industry bailouts. In an economic environment like this, one needs to consider preservation of capital. The base of preservation of capital is the banking system. Right now the banking system is being challenged. Watch these two stocks for indications of where the banking system might be headed. Touc.

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Seeking Fair Profits in Investment Portfolios

Charles Dow, founder of the Wall Street Journal, once said:

"...secure stock at a time and at a price which will give fair profits on the investment."

The most essential piece in this concept is the idea of fairness in stock investing. For some, this idea might seem like a quaint notion however it exemplifies an essential quality that is necessary for all stock market participants. What exactly is "fair profits?" Dow covers this concept over and over again. Dow says:

"A 10-point decline under such conditions would be almost certain to bring in a bull market more than 5 points recovery and a full 10 points would not be unreasonable..."

Another example of how to determine what is fair is said in this way:

"A much more practicable theory is that founded on the law of action and reaction. It seems to be a fact that primary movement in the market will generally have a secondary movement in the opposite direction of at least three-eights of the primary movement. If a stock advances 10 points, it is very likely to have a relapse of 4 points or more. The law seems to hold good no matter how far the advance goes. A rise of 20 points will not infrequently bring a decline 8 points or more."

In the preceding examples, when a stock or index is rising or falling, we should be able to expect a decline or rise to retrace at least 38% to 50% and quite possibly 100% of the move. To be fair, we should be willing to accept that we'll never catch the exact bottom. Therefore, we should content ourselves with getting between 15% to 25% of any movement.

To better illustrate how this concept works, let us use the peak of the Dow Jones Industrials on October 2007 at 14,164.53 to the most recent low of 6440.08 on March 9, 2009. According to Dow's theory the market should go back to the 9375.37 for a 38% reaction (bear market rally) or 10,302.31 for a 50% reaction (bear market rally). Since we cannot say for certain that the decline is over at the 6440.08 level, the best we could do is to buy as the market is moving up, when Industrials and Transports go up together on strong volume.

What would I buy if I were investing based on the expectation of a rebound in the stock market? The best option for "trading" purposes is to buy the Diamonds (DIA) which are supposed to replicate the movement of the Dow Industrials. However, I prefer individual Dividend Achiever stocks which pay me while I wait. On March 10th, I bought Helmerich and Payne (HP) when both the Industrials and Transports reversed their direction. At $22.56 the price of HP was reasonably low. Not knowing where the top would be I sold my position in HP at $26.22 on March 26th for a gain of 16%.

After I sold HP, the stock went as high as $34.50. Basically I gave up the opportunity to receive a 53% gain. However, Dow's idea of "fair profits" means that I must be satisfied to receive the 16%. While I could have bought Citigroup (C) or Bank of America (BAC) I couldn't justify putting my money into stocks that weren't transparent and had discontinued their dividend increasing policy. After selling HP, I bought Meridian Biosciences (VIVO), a Dividend Achiever that had reached a 1 year low on the same day.

In the example that I've just given it is important to know that according to Dow, a gain of 5% was considered to be "fair profit." I guess if "guaranteed" money rates can easily be exceeded in a stock transaction then it might be worth the investment. Touc

Financial Panic Chronicles

On October 6, 1929, it was reported that BodenKreditAnstalt would be merged into CreditAnstalt in a deal valued at $17,000,000 or $211,000,000 in 2008 dollars. The merger of the number two bank into the number one bank was due to the low capital position of BodenKreditAnstalt after WWI and the excessively loose credit standards that essentially put the bank on the ropes.

At the time, the deal was pushed through by the Austrian government and had to be backed by F.M. Rothschild and several London banks. In an effort to boost confidence, the Austrian government guaranteed all bank deposits.

After the initial stock market decline from September 3, 1929 to November 13, 1929, the stock market rallied 48% to the peak on April 17, 1930. For many, the rise in the market seemed to provide some reassurance that the financial system had been restored. Unfortunately, because a bank's financial strength is closely tied to the value of the stock price, the subsequent worldwide financial meltdown from April 18, 1930 ensured that any, and all, bad loans from the BodenKreditAnstalt/CreditAnstalt merger would be next to impossible to resolve.

CreditAnstalt, ladened with the bad debts of BodenKreditAnstalt, soon suffered from it's own problem lending and falling stock price. CreditAnstalt, founded by S.M. von Rothschild and banker to the Hapsburg empire, was now in need of a lifeline. London banks, the Bank of England, Germany's Reichsbank, Bank for International Settlement and the Bank of Austria all threw money at CreditAnstalt starting in May of 1930 in a failed attempt to shore up the problem. The ultimate failure of CreditAnstalt in 1931 led to the worldwide banking crisis and bank holidays in the U.S. that same year.

According to the New York Times, the failure of CreditAnstalt, Austria's largest bank, lay squarely on the shoulders of the government effort to merge BodenKreditAnstalt. The newspaper aptly stated:

"The troubles of the CreditAnstalt are quite unanimously ascribed here to the unsound policy pursued in 1929, when the crippled BodenKreditAnstalt was attached to the larger concern."

"Vienna's Market Calm in Bank Crisis." New York Times. May 18, 1931. p. 31.

Similar tactics have been displayed with the government imposed mergers of Bear Stearns with J.P. Morgan, Bank of America with Merrill Lynch, and Wachovia with Wells Fargo. How do I know that these mergers were forced on the acquiring institutions by the government?

• On the Bob Brinker radio show in an interview, available until 5/15/2009 (Saturday, 3pm-4pm hour), with the fawning Patricia Crisafulli, author of House of Dimon, it was stated emphatically that Jamie Dimon, CEO of J.P. Morgan, said that "we were asked (by the government) to do this. Bear Stearns was never something we would have gone out to buy..."
  
• The Bank of America and Merrill Lynch deal has been recently exposed by BofA CEO Ken Lay Lewis as a sort of "strong-armed" tactic by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.
  
• I cannot say for sure that the deal between Wells and Wachovia was government forced. However, it is my observation that the Wells deal with Wachovia was simply a PR ploy to get the public to believe that Wells was healthier than Citigroup and therefore better positioned to take on new reponsibilities. This strategy was crafty and similar to forcing $225 billion on nine "select" banks as a way to mask who is really the weakest. Citi was already known by the public to be a zombie bank so Wells was the target of a spin campaign by regulators.

The passing off of one troubled institution to the next, in the hopes that the headache would go away, did not resolve the problems associated with the bad lending practices or malinvestment from prior periods. The fact that this approach to solving the problem has been repeated throughout the G8 nations and beyond leaves little room for error. The blowback from such policies could set off a financial storm of unimaginable length and depth. All it would take is one slip up, in a far flung region, that could set the dominoes in motion. Touc.

At a Glance

Today's big movers have interesting stories to tell. Harleysville National (HNBC) and National Penn (NPBC) both had large declines after their Jan. 31st breakouts. There has been no news posted about these companies and the speculation is that a merger or buyout is in the works.

Helmerich and Payne (HP) is being whip-sawed by the gyrations of the oil and gas sector. HP has been a favorite of mine simply because of it's ability to increase it's dividend for the last 28 years. This is no small feat for an oil services driller that survived the collapse in the sector in the 1980's. Check out HP's spin-off unit Cimarex (XEC) for more quality management in the oil sector.

Legg Mason increased it's earnings over 500% in the last quarter however, much of the gain was from the sale of a unit to Citigroup. Operating earnings were only $0.10 above last year's quarterly earnings...nothing to sneeze at but definitely a stark contrast to the newspaper headlines of HUGE EARNINGS POSTED.

Big Movers of the day:

• Harleysville National fell 12% after rising 24% on Jan. 31st.
• National Penn Bancshares down 4% after rising 12% on Jan. 31st.
• Helmerich and Payne fell 4% due to a drop in natural gas and oil prices.
• Legg Mason up 4.55% on earnings increased 5x.
• Martin Marietta Materials rose 7.4% in sympathy with Vulcan Materials.
• Vulcan Materials up 7.48% on increased earnings.
• Sonoco Products up 7.75% rise in 4 quarter earnings.

As the old adage goes "buy low and sell high," but how many of us actually do it? Somebody has to do it so why can't it be you. The following list shows companies that have fallen within 5% of their respective 52 week low. 52 week lows aren't necessarily the times to buy however, it is a great time to start doing your research on these companies. One of these must be at or below fair market valuation.

Stocks within 5% of their 52 week low:

• Telephone Data
• Tootsie Roll
• 3M
• Allstate Insurance
• Anhueser-Busch
• Atmos Energy
• Bard Inc.
• Comerica Inc.
• Commerce Group
• Conagra
• FNB Corp
• Frisch Restaurants
• General Electric
• Heinz Co.
• Hershey
• Johnson & Johnson
• Kimberly Clark
• Popular Inc.
• Sky Financial Group
• Unitil Corp
• W.M. Wrigley
  

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Market Cycles

In the right hand column I have added the cycles for three different markets. The cycles that I have added are for the stock market, real estate market and inflation. These three are necessary for anyone who is interested in investing, saving or spending their money in the "long-term." As far as I'm concerned the long-term is only as long as you're willing to wait for the next cycle top. If a person doesn't have the time to wait until the next cycle top then they should be in the most conservative "guaranteed money" vehicles that are available. I have a section on the lower right hand column that quotes the most current money market and certificate of deposit rates that can be obtained.

First is the stock market which has, in general, a full cycle of 33 years from peak to peak or trough to trough. In the most recent period, the stock market had a run from the bottom in 1974 to 2007 (33 years). The period when the Dow went from 100 to 1000 took 32 years. When the Dow went from 1000 in 1983 until 10,000 which was accomplished in 17-19 years or half the 33 year cycle range.

Another perspective on the stock market cycle could be viewed from the length of prior bull and bear markets. In the preceding bear market when the Dow stayed at or below 1000 from 1966 to 1982 lasted for 16 years. The bull market in the Dow from 100 in 1942 until the high of 1000 in 1966 lasted for 24 years. When the Dow was at 100 in 1906 and didn't cross over 100 permanently until 1925 lasted 18 years. Obviously there are many ways to view the stock market cycles. I have chosen to use 33 year cycles until better or more convincing information comes along.

Next, we have the real estate cycle. There is only one source that I rely upon for real estate and that is Roy Wenzlick. Mr. Wenzlick's insights and statistical analysis of St. Louis and national real estate is unparalleled. The way that I found Roy Wenzlick was while thumbing through the 1987 book, "The Wall Street Waltz," by Kenneth Fisher. In the last paragraph referencing Mr. Wenzlick's real estate cycle chart we have this quote from Mr. Fisher, "The next long cycle trough isn't until 1990, which means that real estate has some bad years still coming- perhaps until 1992." When you add 18 years to 1990 or 1992 you get the next real estate cycle bottom in 2008 to 2010. As we are already in 2008 the bottom might be in however I'll opt for 2009 or 2010 just to play it safe. How prescient is that? What's more fascinating is that Mr. Wenzlick passed away in 1989 but his research on real estate is still useful. Mr. Wenzlick called almost all real estate cycle peaks and troughs since the initiation of his Real Estate Analyst newsletter in 1932.

Finally, we have the inflation cycle which has an inverse relationship to the interest rate cycle. The inflation cycle is much longer than the prior two cycles and lasts 50 years from peak to peak or trough to trough. As some readers will remember, our last peak in inflation was around 1980. From 1980 we have seen inflation slowly fall from double digit figures to our current level of nearly zero. Presently we are on track towards 25 to 27 years of a reversal in inflation. The only thing left before we're on that path is to get past the next couple years of disinflation/deflation.

A good book to refresh yourself on where we have come from and where we are going to, in terms of inflation, is titled, "Is inflation Ending? Are You Ready?" This book, written by Forbes columnist A. Gary Schilling, was published in 1983 and predicted everything that has happened since. The chapter titled "Apocalypse Now? The Risk of a Financial Collapse" is interesting since the subsection headings have titles that are eerily relevant to today. Some sample titles are:

• Thrift institutions: Why Merging the Strong and the Weak May Be Throwing Good Money after Bad (WaMu, IndyMac and Citigroup)
• Municipalities: Will Defaults Throw the Market into Turmoil? (California, anyone?)
• Financial Markets: Speculative Excesses Could Cause a Panic (Bear, Lehman, Merrill)
• Money Market Funds: The threat of a Redemption Stampede (recent breaking of the buck)

If you could have read this book back in 1983 then you probably wouldn't be surprise by any of the headlines that we see today.

The cycle information that I have provided on the right hand column is intended to be for reference purposes. I expect that as time passes these cycle periods will be reviewed and changed according to the quality research and data that I come across. I feel that as investors we should put all of our investments in perspective especially relative to the "big picture." Investing, saving or hoarding any other way would be spitting into the wind. Touc.

Sources:

• Fisher, Kenneth. "Wall Street Waltz." Contemporary Books. 1987. page 132.
• Shilling, A. Gary and Sokoloff, Kiril. "Is Inflation Ending? Are You Ready?" McGraw-Hill. 1983. page 151.