The Shadow Stock Trader
Friday, September 19, 2008
By Horacio Marquez
Email – #19
** The Restoration of Confidence in a Cracked Market
Last week we added HealthShares Enabling Technologies (AMEX: HHV) and with this week’s volatility it was down some 10% at times. But as of this morning, it actually opened 20% higher than our entry price. Clearly some are big-time short the fund and/or shorts in the components, many of which may have been banned are contributing to the volatility. But in this convoluted market our strategy centers in value, fundamentals and the knowledge that in these crises, you have to buy when the blood has hit the street, right against your very instincts.
The Warren Buffett quote from last week is worth repeating:
“The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
And Warren was faithful to his advice, by buying Constellation Energy this week, even before the governments of the US and UK and Central banks around the world moved in unison to terminate a torpedo of the global financial system by speculators abusing naked shorting.
I have gone through a crisis just like this every two or three years in countries around the world for the last decades. And they are all the same. It looks like the bottom is falling out, like the US will sink simultaneously into both the Atlantic and the Pacific…and it will never come back.
The reality is that financial systems have failed a lot in different countries in the last thirty years. For example Sweden’s financial system collapsed in 1991 had the government guaranteeing almost all the banks and recapitalizing. They issued bonds, which were bought by other European countries. That was it.
Similarly, Chile, Mexico, South Korea and others saved their banks and recovered very fast. Japan saved their banks, but had them retain the bad loans and look where they are today: still lagging badly. So the US Treasury’s plans to buy the distressed debt, which is so illiquid and for which market prices are well below fundamentals addresses the heart of the problem.
Once implemented, banks will know that they can trust each other and thus do business again amongst themselves. Their capital, having sold off the loans at a logical model value, rather than a short-sell-depressed market value will increase strongly, as they de-lever and actually take gains in their mark to market. Most importantly, we will not be scared about their quarterly losses from this “toxic waste” in their bellies. Thus their recapitalization from their already profitable operations will increase.
Profits will also increase due to the consolidation we are going through. With a number of key institutions disappearing, margins are going to increase as competition is much lower. The strong survivors are getting stronger, as the weak perished.
With Fannie and Freddie, Bear Stearns, Lehman, Countrywide and Indymac gone, the main enablers of the real estate bubble, encouraged by the legislation that pushed Fannie and Freddie to expand lending in subprime mortgages have been punished. And the plan puts a stop at all these over-levered institutions having to forcefully run out of the same door at the same time, destroying every asset class in the process. An orderly, more lengthy liquidation will capture much more value over time.
And the government actions in AIG, already gave them a 15 billion gain in a couple of days.
We had reached an analytical tipping point, where the entire global financial system was breaking down: money market funds breaking the buck or liquidating (they are now guaranteed by the government), banks lending 4% above Fed funds to each other, equities in panic.
This Incredibly serious global run had to be defeated with overwhelming pre-emptive force. And the global authorities reacted appropriately and in time addressing the root causes. With respect to the prohibition on shorting even Byron Wien, head of one of the most powerful and successful hedge funds did not oppose this.
Confidence was restored. The value of your 401Ks was preserved, massive job losses and global economic dislocation was averted.
Ken Heebner, the manager of the very successful CGM focus Fund opined that:
- Financials and retailers will be part of the leadership going forward. His focus fund was at over 30% in financials this morning
- The US government has been brilliant in their fast response
- That we may have bottomed in housing in many markets – some deflation in California and Florida is going to be a persistent problem, though.
In this extreme value environment, expect us to keep going, undeterred, to take advantage of the moment to get in at these incredibly low prices.
Stay strong, since the crisis peaked this week. We will be enjoying the acceleration of the economy and strong gains in the markets much sooner than pessimists and short sellers dare to admit. This is just the first step.
Enjoy and Profit,
Horacio Marquez
Stock
Current Price
Comments
HealthShares Enabling Technologies (HHV)
$32.20
Buy
Market Vectors Agribusiness (MOO)
$45.35
Buy
Energy Select Sector SPDR (XLE)
$71.25
Buy
Market Vectors Steel ETF (SLX)
$67.68
Buy
iShares MSCI Emerging Markets Index (EEM)
$38.47
Buy
Vanguard Financials ETF (VFH)
$43.07
Buy
iShares MSCI Australia Index (EWA)
$22.29
Buy
Market Watch
NASDAQ
1462.11
0.00
SP 500
778.12
0.00
DJIA
7395.70
+178.73
As Of 5:33AM 3/18/2009
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