Stocks & Jocks taken off the air on WSCR…
November 28, 2008
Good morning! Where do I start? Since the last time I have written Jon and I have been removed from the radio show on WSCR, the market has declined to levels that would indicate that the upcoming recession will be longer and deeper than anyone imagined, we have a new government forming by the day, investors are nervous, and a lot of people have lost enough money to cause serious life-style revisions going forward. Nothing seems remotely positive on that list, other than everyone is “hoping” the new administration has more imagination and more feel for regular people than the last. They sure will need it.
What is going on here at PTI? For those in the Protected Index Program, we have been spared the great majority of the losses. In fact, even though the S&P at the end of October was down 29% on the year the PIP was down less than 2%. In November the S&P has dropped another 18% (even with last Friday’s 500 point rally), and the PIP has probably lost between 5-6%. I will say honestly that the market’s horrendous performance in November was not something most, including me, anticipated. On a relative scale we are doing terrific, but I did not start out this year, and work this hard, to be down on the year. We will try very hard to use what the market is giving us, in terms of opportunity, to finish the year strong.
What is going on with the market? Every stock seems to be trading with almost a bankruptcy discount attached to it, and clearly any communication by CEO’s, corporate Board’s, anyone in government, or most brokerage firms urging you to “hang in there,” is being viewed with skepticism by most (and I am being charitable). Every day, it seems, brings very serious liquidations of retail mutual fund accounts (obvious by the sell-offs on the close, as everyday investors scream “enough”). The prices of options, including the put options that are the mainstay of the PIP program, have risen dramatically as fear has clearly become the order of the day. For example, when the SPY’s were in the $150 range last year we were paying roughly $13-15 for the $150 puts. Now, with the market on Friday morning having the SPY’s at roughly $75, the $75 puts were in the $16-17 range. That is over twice as much on a percentage basis. It is hopefully temporary, but a whole different world is now facing the investor, maybe a world with some unique opportunities for those still willing and able to take advantage and stay calm.
What is the problem? Clearly the economy has entered a recession with a vengeance, and the thought of firms in many industries hitting a “wall” like GM in October (sales down almost 50% in one month) is on the mind of everyone. A dry bulk ship fetched $140,000 per day in lease 6 months ago, last week $7,000. I just returned from Indiana, where I was informed that the Mittal Steel Plant is considering closing with all 2,600 jobs lost. Talk about a disaster on a local scale for Hobart, Portage, etc. and all the new industry recently directed to that area. The government numbers (and we know they are optimistic) seem to be showing in excess of 200,000 jobs lost nationally per month, and bonuses appear to be very scarce. President-elect Obama this weekend released a jobs plan looking to jump start jobs that will start to become effective in early 2010, at the current rate that seems an awful long way off.
What has started with a sub-prime real estate problem has clearly escalated to a total lack of any type of adult risk control in virtually all of our major institutions and governmental regulatory agencies. It almost seems like a relatively small group of people inventing products most do not understand used dubious profits on those products to effectively “loot” through huge bonuses, and now are gone, leaving the rest to pick up the broken pieces. The rest of the population seems to be entering the recession (and we have survived recessions before) with unprecedented levels of debt on all levels, education, auto, credit card, and mortgage. I think most; including myself, think the American corporation is clearly broken. The American corporation started out as one of the most productive innovations in the history of the world, enabling the easy and efficient accumulation of capital in a manner that led to incredible productivity and job growth. Now it is totally unclear what adult is overseeing the affairs of the owners, not to mention any kind of altruistic oversight we may have hoped for. In Mr. Greenspan’s recent testimony to Congress the most memorable thing for me was when he said that he never anticipated that the leadership of major banks (executives, Board members, etc.) could not be trusted to act in the best interests of the institution in regards to any sort of risk control. Any fix seems a ways away, and it clearly would involve new people with new attitudes. The failed leadership of most of these institutions (banks, insurance companies, homebuilders, etc.) is still in power, with no inclination to leave or even take any share of any blame. The shareholder’s (owners) have almost no power to boot them out and try some new ideas. Not good.
Can we go under, or could 1932 be on the way again? Most of us would like to think not, but we could. The government is clearly out of control bailing out companies in a very ad hoc manner with money everyone knows they do not have. Would one of our rightfully maligned ratings agencies ever have to courage to put the U.S. government on ratings watch? Should they be there now? Last week we spent several days fighting about whether to loan the car companies $25B, and it appears that in order to get the help the companies will be forced to sell corporate jets, stiff union people on pensions and health care legitimately bargained for (forget whether the numbers are high or low), and drop wage rates for new people to levels last seen in the 70’s. On the other hand, this weekend, without any public or Congressional forum, we have committed to give Citigroup $20B on top of $25B already given, and a loan guarantee of $306B. So far I see nothing regarding jets for sale, stiffing white-collar employees on pension largess, new management, etc. Robert Rubin is still there (see this Sunday’s New York Times for more detail). I think some people still don’t get it, or maybe there really are Americans we talk about, and real Americans we care about. Still, I am going under the assumption America will somehow not go under.
Having painted such a bleak, but not necessarily terminal, picture, what do we as investors do? One thing is for sure. We maintain our traditional investment style of doing our risk control as we enter the position. I really do not believe that all the stocks that are being driven down by wholesale liquidations are going to go to zero. Most will find a way to survive, and eventually prosper. The incredible option volatility can mean huge opportunity for those able to sell covered calls, and maybe some are in the position to even sell some cash secured puts. For those in the PIP it should mean increased call prices for the foreseeable future, possibly translating into solid profits in both covered call writing and possibly repair type strategies. Next year may turn out to be the year investors positioned like those in the PIP, or with individual stocks, have all been waiting for. I will write more on specific strategies next week.
What about new clients? As everyone can probably speculate, we at PTI have had tremendous recent interest in our investment strategies. Unfortunately a lot of those who have not been in protected positions have seen their portfolios values decline substantially. It is imperative for anyone in that situation to clearly look, with our help, at his or her current situation as it now stands. There is opportunity being presented, and those still able should try to take advantage in a careful manner. Those not able need to find a way, again with our help, to stop the bleeding and establish what, if any, position may be appropriate going forward.
We at PTI are busy, but not too busy to talk to clients or prospective clients. Let us make absolutely sure that we are on the same page regarding your situation going forward, I always will make time to make sure of that.
Next week, or sooner, I want to talk about some specific strategies and maybe some specific stocks we like. It may be the time to get a little more aggressive in a sane manner. We also have to talk about some tax issues that may arise if the market ends the year near these levels. I will also keep everyone posted about the radio show, we are looking hard for a new spot and there is some interest. Let’s continue to be in the group that retains their focus while all those around us may be losing theirs.