Monday, November 17, 2008

Death of Buy and Hold? & Comments on GM, F, DK, T, C, LOW AND TJX

GM and Ford currently have a combined market value of around 6 billion.  According to an article in Saturday's WSJ, GM and Ford have sunk 465 billion into their auto operations since 1998.  That investment now is practically worthless. When you put those figures side by side, it is difficult to make a case that they are viable companies worth saving.   Possibly, the government could let them borrow 50 billion and save them for a short period but there is certainly no guarantee that GM and Ford will survive even with that infusion.  Who wants to buy their bonds now even with some kind of  a bailout a virtual certainty with the Democrats in control next year?  You can get almost 30% now. 

Frank Rich quoted part of one of Sarah's  airhead responses to a Wolf Blitzer question asking her for 1 or 2 ideas that Republicans have to offer.  “Well, a lot of Republican governors have really good ideas for our nation,” she responded, without specifying anything except that “it’s all about free enterprise and respecting equality.” Well, yes, but surely there’s some actual new initiative worth mentioning, Blitzer followed up. “Gah!” replied the G.O.P.’s future. “Nothing specific right now!”Op-Ed Columnist - 

Avondale Partners kept its outperform rating on Delek but lowered its price target to 9, arguing in part that the current price assigned a close to zero value for the Tyler, Texas refinery. Research Reports -

I noticed that AT & T floated a large 1.5 billion five year note at 6.7%,424B5  
The good news is that T was able to sell the paper.  The bad news is that it had to pay about 4 1/4%  over 5 year treasury rates to get the deal done.  This is a rich spread for such a highly rated corporate issuer.  The current chaotic conditions in the corporate bond market may cause a delay in what I hope to be a call and  refinancing of the At & T underlying bond contained in two Trust Certificates that I own, JZE and JZJ.  Both went ex interest last week and paid their semi-annual interest payments to me today.  See discussion in prior posts for the reasons behind my hope for a call of the underlying bond which will result in a redemption of the TC: 

The October budget deficit reached 237.2 billion, which is a good start for the new fiscal year assuming you are rooting for the first trillion dollar deficit.  This will cause the treasury to issue at least another trillion in debt securities for the fiscal year starting in September 2008.MarketWatch  In fact, the treasury indicated in early November that it will borrow 550 billion in the final three months of 2008 and another 368 billion during the first quarter of 2009.  This just blows my mind.  You would think that this would cheapen the value of paper money which would  eventually cause a spike in gold.  Another possible impact is that the federal government's borrowing needs would crowd out corporate borrowers and drive up their cost of capital.  Lastly, while I am certainly no economist, this sounds to me like a replay of the 1970s that ended badly with a spike in inflation down the road.  

Target's 3rd quarter earnings fell 24% and the company reduced 2009 capital expenditures by about 1 billion.   MarketWatch  The stock closed Friday at a five year low and is down almost 6% in pre-market. Like many companies, Target  suspended its stock buyback program.  I wish these companies would just sock money away when the stock is rising, refusing to buy shares, and then use the money to support shares with buybacks during recessions.  Instead, they waste their money buying high and stop buying when the price falls to decade lows during tough times.

Although Lowes beat expectations with only a 24% decline in profits, it was downbeat about the next quarter, reducing its earnings estimate to 8 to 16 cents.  MarketWatch  Expectations for the 4th quarter were 18 cents.  Reuters

It did not look like a spending slowdown at T J Maxx in Brentwood Sunday afternoon.  I had to wait about 15 minutes in line and the store was packed.  TJX is a few pennies above its five year low of 20.36, having fallen from a 37  price in early August 2008.  It met expectations when it reported its 3rd quarter, with earnings at $.54 but reduced its full year to $2.11 to $2.15 from $2.26 to $2.31. Reuters  I generally shy away from retailers and underweight them even in the best of times.  But they will sparkle coming out of a recession.  When will that happen?  Who knows but TJX is on my stocks to monitor list and I will seriously consider adding it on further weakness.

Citigroup announced it was cutting 53,000 more jobs in the coming quarters, bringing its total job cuts to 20% of the pre-existing workforce. Yahoo! Finance

I have placed a temporary hold on stock purchases while I reassess what I am doing. The current period reminds me some of the market between 1967 to 1982.  If you had bought the index in 1967, near Dow 950, you would have been under water in 1982,  when the Dow average was around 820 early in the year.  Preceding the lost decade of the 1970s, there was a long term secular bull market, with a few interruptions similar to 1982 to 2000, that started in 1942 when the Dow was at 100 or so and lasting until about 1967 rising ten times in 25 years.  During the lost decade, there were wild swings up and down.  The Dow average fell to 616 in bear market of 1974 but then rose to 999 by January 1976.  For about 15 years, buy and hold would not have been a sensible posture to take.  The market had to be traded to stay ahead.  A buy and hold strategy would have started to work again in August 1982.  It could have been defended as a sensible strategy for individuals who were not players for the next 27 years.  Then, in 1999, it became a losing strategy.  An individual would have been better off in 1999 selling the entire stock position and investing in 3 month Treasury Bills, which I believe have returned more than stocks over the past decade as of today.  This does not mean buy and hold is an inappropriate strategy but it is simply not going to work in this kind of market.  It will return as a viable strategy.  When?  Who knows, maybe in another two to five years.  

I am not saying that history will repeat itself exactly.  However, implicit in this cycle are some common characteristics that are particularly human, greed and fear, euphoria  & despair-and a heavy dose of manic depression.  While each period is marked by the best of human progress, the end is marked by some of the worst characteristics.  Eventually, we will just screw it up to put in bluntly and will find different ways to do it. Maybe it is just impossible for mankind to maintain more than a quarter century of progress.   One similarity in the two periods is a war, financed with debt to avoid causing pain at home- Vietnam in the late 1960s and early 1970s and Iraq now.    There was excessive speculation in the late 1960s as was the case in the late 1990s.  It seems to me in retrospect that the current era is marked more by Wall Street creation of monsters that devour the economy, such as CDOs sliced and diced into multiple tranches (with subprime, ALT-A and higher quality mortgages all mixed into the stew and provisions about no modifications for the underlying mortgages no matter how crazy they may be)   and credit default swaps issue without regard to collateral.   Nonetheless, I am saying that buy and hold has been a  losing strategy since the wormed turned in 2000 and the mantra now is in and out, over and over again. As soon as we meander through the current debacle, buy and hold will return as a viable long term strategy.  So why am I bringing this up?  This belief will cause me to continue adjusting what I buy and when I sell probably for the next year or two at the minimum.   

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