Ratings comedy.

We can't resist laughing at the ratings comedy we are blessed with every bear market cycle. Add this to the Madoff investors looking for a scapegoat. Common sense, like taking responsiblity and performing due diligence, is uncommon. Therein lies our opportunity.

S&P, Moodys, and Fitch will not do our thinking or due diligence for us. These ratings agencies will not be losing money if we excercise poor judgement. They have a profit motive in ignoring that "quant math" and "new paradigms" are serious red flags.

The SEC won't do our due diligence for us either. Nor will the vast majority of mutual fund and hedge fund managers, even the most legendary of whom are down between 40% and 60% this year.


From Bloomberg today.

By Elena Logutenkova

Dec. 19 (Bloomberg) -- Goldman Sachs Group Inc., UBS AG and Morgan Stanley are among a dozen financial firms whose ratings or outlooks were cut by Standard & Poor’s because of funding volatility and “significantly pressured” earnings potential.

S&P reduced ratings on 11 banks by as many as two levels, saying they faced more operational risk amid a worsening financial meltdown, according to a statement today. The agency said it “wouldn’t rule out” cutting the lenders’ ratings further if the global credit crisis and economic outlook worsen.

“The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,” S&P said.

Banks worldwide have reported more than $745 billion of writedowns and losses since the credit crisis began, according to data compiled by Bloomberg. S&P expects banks to face more uncertainty in funding markets and a higher level of stress than in a “typical business-cycle trough.”

“The macro outlook in the U.K. and U.S. banking sector has worsened materially,” said Sandy Chen, a London-based banking analyst at Panmure Gordon & Co. “They’re looking at the risk of what the combination of deleveraging and deflation could do to banks’ earnings.”

Banking shares closed little changed in European trading, while UBS, Switzerland’s largest lender, fell 3.7 percent in Zurich. The Bloomberg Europe Banks and Financial Services Index has declined 66 percent this year.

Goldman Cut

Goldman earlier this week reported its first quarterly loss since the company went public in 1999. While the loss isn’t considered indicative of the bank’s profit potential, “the timing and extent of earnings recovery are currently highly uncertain,” S&P said. It cut the New York-based firm’s rating by two grades to A from AA- and kept a “negative” outlook.

Morgan Stanley, which posted a net loss for the fourth quarter this week, had its long-term counterparty rating lowered to A from A+. “The cyclical downturn in Morgan Stanley’s core investment banking, trading, asset management, and wealth management businesses could well be far more pronounced and extended than we had previously assumed,” S&P said. Citigroup Inc. had its credit rating cut to A from AA-.

“Goldman Sachs and Morgan Stanley have adequate amounts of liquidity -- for now,” S&P told analysts in a conference call today. “We’ve learned that no amount of capital can prevent illiquidity for a bank.’

Losses

UBS’s writedowns and losses of $48.6 billion since the beginning of the credit crisis, the most of any European bank, reflect “larger risk concentrations and weaker risk management than we had previously perceived,” the rating company said. Next year the bank’s “performance will be relatively subdued.”

Credit Suisse Group AG, UBS’s largest Swiss competitor, earlier this month reported a 3 billion-franc ($2.7 billion) net loss for October and November. S&P reduced its long-term rating today to A from A+.

Deutsche Bank AG’s rating was lowered to A+ from AA- on expectations of “weak” trading results in the fourth quarter and a potential “significant” reduction in 2009 pretax profits compared with 2007 levels, S&P said.

Rating cuts come at a time when banks worldwide are increasingly relying on their central banks for funding after the interbank lending market nearly ground to a halt this year. Zurich-based UBS had to accept a $59.2 billion government aid package in October to help it split off risky assets and get extra cash.

‘Get Tougher’

The downgrades “will increase the price of interbank lending,” said Michael Trippitt, a London-based analyst at Oriel Securities Ltd. “This is confirmation that in the corporate and commercial world life is going to get tougher.”

Royal Bank of Scotland Group Plc, 58 percent owned by the U.K. government, had its rating cut to A from A+. The Edinburgh- based bank’s “market position, diversity, and our view of its strategy and management, has been somewhat impaired,” S&P said.

London-based Barclays Plc had its rating lowered to A+ from AA- in light of “significant exposure” to risky assets and expectations that markdowns in the commercial mortgage portfolio may increase as the economy deteriorates.

HSBC Holdings Plc was given a “negative” outlook, while its rating was kept at AA-. Europe’s biggest bank will likely “remain capital generative,” although impairments will probably stay “elevated” in the U.S. and increase in the U.K., the rating company said.

Counterparty

Bank of America Corp.’s long-term counterparty rating was cut to A+ from AA- and that of Wells Fargo & Co. to AA from AA+ in the light of expected “credit deterioration” in the U.S. banking industry.

JPMorgan Chase & Co. had its senior unsecured debt rating lowered to A+ from AA-, and the counterparty rating on JPMorgan Chase Bank N.A. was cut one level to AA-, as the rating company said “loan quality issues” will probably depress earnings next year.


GM has been effectively insolvent for a long time. From Market Watch today, our bolding for added comedic effect.

SAN FRANCISCO (MarketWatch) -- Standard & Poor's Ratings Services on Monday cut the unsecured debt of General Motors Corp.

GM 3.52, -0.97, -21.6%) to C from CC, saying that debt holders could see a "significant decrease" in value in the event of a bankruptcy. At the same time, Moody's Investors Service cut Ford Motor Co.'s rating to Caa3 from Caa1, explaining that the company may have to restructure its balance sheet to reach the same union concessions that GM and Chrysler are likely to achieve in the wake of the federal bailout loans. Shares of GM plunged almost 22% to close at $3.52 while Ford's stock dropped 12.2% to end at $2.59.

NOV covered calls action update.

This weekend December options expire.

Almost one month ago we purchased NOV shares for $24.75 and sold Dec $25 calls against this position for $3.50

The stock closed Thursday at $22.86

In case of a significant rally Friday, it is possible that it may close over $25 thus get called away. We'd rather use the shares to generate additional covered call profits.

We cannot know of course at this time what prices we'll realize for our transactions during Friday's session, so for illustration consider that the December calls we'd sold and now intend to buy back are showing the last ask price as $0.15 and the February $22.50 calls we intend to subsequently sell are last bid at $4.20

We wish to buy back our December calls, thus ending our obligation to sell shares should the stock close over $25 tomorrow.

We wish to take advantage of the current pricing for February calls, especially to avoid the price falling further if the market slides again Friday. The myth of markets rallying into options expiration is just that - a myth. This hasn't happened for some months now, nor by our counting does it happen any more often than coincidence would suggest, so we shall not count on it.

Upon closing the December calls position we will then have reduced our effective cost for the shares to roughly $21.40 ($24.75 for the shares - $3.50 for the calls sold + $0.15 for calls bought back).

We will then sell the February $22.50 calls against our shares thus reducing our cost further.

If the shares are called away, we will realize a 31% profit on our newly-adjusted cost base in under 3 months of owning the stock. In any market conditions, a 31% profit in 3 months is excellent ergo we'd be well-pleased.

If the stock falls significantly further and shares are not called away come February expiry, we'll take new action at that time while feeling lucky we took this action now.

In the event that markets rally quite significantly and NOV shares rocket far higher, we won't mind since we have other long holdings that will enjoy appreciation in a general market rally so for this position we gladly renew our hedging despite the limitation it places on our potential profit. Such is prudence.


It's nice to hear some companies are hiring during the downturn.


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We receive no remuneration or incentive directly or indirectly in any way, shape, or form for buying or selling the stocks we do, or mentioning them in this blog. If we hold existing positions we divulge the fact, otherwise we generally buy and sell as diarized here. This blog itself is merely a diarizing of our thoughts and trades and is in no way whatsoever to be considered investment advice of any kind. Always without fail consult a competent, experienced, and honest broker or investment advisor before making any investment or speculative decisions.

To be notified when this blog is updated :
Please e-mail christianguinness@hotmail.com with "Subscribe to blog" in the subject line or click here to do so automatically if your computer is configured accordingly. We have never shared our mailing list with anyone, nor will we, nor have we ever sent anything other than update notices for this blog to our mailing list. We only send update notifications when a trade idea is diarized, not if an update only contains general market commentary.

I.O.U.S.A.

Enjoy the condensed 30-minute version of I.O.U.S.A.




Who Will Bail Out Uncle Sam?

The United States of America is bankrupt. Don’t believe it? Consider this: Federal obligations now exceed the collective net worth of all Americans, according to the New York-based Peter G. Peterson Foundation. Washington politicians and bureaucrats have essentially mortgaged everything We the People own so they can keep spending our tax dollars like there’s no tomorrow.

The foundation’s grim calculations are based on Sept. 30 consolidated federal statements, which showed that Americans’ total household net worth, diminished by falling stock prices and home equity, is $56.5 trillion. But rising costs for unfunded social programs like Medicare, Medicaid and Social Security increased to $56.4 trillion – and that was before the more recent stock market crash, $700 billion bank bailout, and monster federal deficits chalked up in October and November.

“Given more recent developments, it’s clear that America now owes more than its citizens are worth,” said Foundation president David M. Walker, the former Comptroller-General of the United States who has been trying to warn Americans of the coming financial tsunami for years, to no avail. So, after Uncle Sam bails out bankers, Wall Street gamblers, carmakers and over-their-head homeowners, who’ll bail out Uncle Sam?

covered GCI +24% in 3 days, buying MGA, SU

Click for a larger, more legible version of this excellent and accurate cartoon.




Per our last update, GCI traded below $7 right off the open on Friday and so we booked a quick 24% profit on Friday after holding the position just 3 days. We're eager to short this stock again on any significant strength, believing it will go to zero or nearly so in the fullness of time.

This week we expect radical announcements from the U.S. Fed, which is meeting Tuesday, and announcements from other government agencies. Our guess is that these will be perceived as inflationary in nature.


We sold Mega Urnaium at a 9% loss in late June 2007, after failing to book a nearly 60% gain only a month after our intial purchase. It happens sometimes that great gains are missed, and it is crucial not to let those become great losses. As we wrote at the time of selling, "currently the stock is not proving resilient against continued selling so we step aside."

The stock is now 90% lower, last traded at $0.59 (in Canadian dollars, as the stock principally trades in Canada).

We wrote upon selling that we'd be happy to re-enter at a later time once the trend settled. We're speculating that trend won't take the stock lower than $.50 CAD although we stress the stock remains technically in a downtrend and near its annual lows which is on average a terrible time to buy any stock.


However, re-enter Mega we shall. We think it reasonably valued, some might argue undervalued, vs. its land and resource holdings. We buy Mega Uranium, MGA in Canada and note that it is cross-listed in the US as MGAFF. We prefer to buy Canadian in this case for greater liquidity and partly as a U.S. dollar hedge.

Click here to visit the Mega Uranium website.


We also purchase SU, Suncor Energy Inc., last at $20.25 USD. This is the Canadian tar sands giant, which also trades in Canada under the same ticker symbol and thus makes a U.S. dollar hedge for those who desire one.

If very conservative, we'd close out of this position (or not purchase it at all) if SU trades under $20 USD for more than an hour - the $20 being a level of support & resistance in this example. If less conservative, we'd use roughly a 5% stop meaning we'd sell out if the stock traded under $19 for more than an hour or if it closed below $19.

For now however we'll just "play it by ear" pending further update. We note that we do not believe Suncor is profitable with oil under roughly $55, however we doubt most "investors" realize this or believe oil will stay this low for long, and we feel that any general market rally or inflationary perceptions will lift the price of oil and of this stock in the near term.

Visit the Suncor Energy website by clicking here.



We receive no remuneration or incentive directly or indirectly in any way, shape, or form for buying or selling the stocks we do, or mentioning them in this blog. If we hold existing positions we divulge the fact, otherwise we generally buy and sell as diarized here. This blog itself is merely a diarizing of our thoughts and trades and is in no way whatsoever to be considered investment advice of any kind. Always without fail consult a competent, experienced, and honest broker or investment advisor before making any investment or speculative decisions.

To be notified when this blog is updated :
Please e-mail christianguinness@hotmail.com with "Subscribe to blog" in the subject line or click here to do so automatically if your computer is configured accordingly. We have never shared our mailing list with anyone, nor will we, nor have we ever sent anything other than update notices for this blog to our mailing list. We only send update notifications when a trade idea is diarized, not if an update only contains general market commentary.

covering GCI ?

We received email regarding the GCI short earlier this week and wish to address it here.

First allow us to say how gratifying it is to receive warm thanks and informed feedback for the blog. It is deeply appreciated. Further, we salute all persons who take the proper steps to research and thoroughly consider their market activity.

The issue raised regarding the GCI, Gannett Co. Inc, short (see previous blog entry) is that the company is expected to pay a dividend of $0.40 per share to shareholders of record at the close of business Friday December 12th.

Very likely it will happen, although these days who knows? We generally seek primarily the best entries and exits we can and secondarily to be hedged and reasonably diversified, while of minor concern are dividends thus we seldom seek or mention dividends as a material factor in our investing. As with tax implcations and commissions costs, we do what we do and leave such considerations to the individual and his or her advisors as we view these factors as little more than "white noise".

Of course in the case of shorting, the short seller is responsbile to pay out the dividend to the lender of the shares. In the case of GCI this is a relatively significant percentage - $0.40 being over 4% or our short entry price. However we did indeed luckily hit the stock at its recent high, and the stock is down 17% as of today's closing in merely 2 days. In that light we view the dividend as simply a relatively minor cost of getting short when we wished to get short.

To those shorts wishing to avoid paying the dividend we suggest covering now and enjoying the significant quick gain, perhaps re-shorting next week when the shares trade ex-dividend although it would be normal to see the shares then drop by roughly the dividend amount so we doubt there's much advantage to doing so.

We were originally going to write that we'd hold our shares longer term, however good news this evening is that the auto manufacturer bailout has been quashed in the U.S Senate and in ill-informed response markets are selling-off in Asia and U.S. futures are significantly lower.

In light of this, we shall buy to cover our shorts in GCI if it trades below $7 which would represent a 24% profit in just over 2 trading days.

To those who believe the Chrysler bailout was successful back when that company was saved by the taxpayers, and to the company's credit it later paid back the loans, we encourage you to consider how much better off Ford and GM would be today if Chrysler had been allowed to go under thus allowing their competitors to hire Chrysler's best minds and hands and to take over their market share.

We congratulate the U.S. Senate for this rare bit of sanity, even if this result was more likely accomplished via the ignorance of petty partisanship rather than a sudden comprehension of basic economic history and market forces.



We receive no remuneration or incentive directly or indirectly in any way, shape, or form for buying or selling the stocks we do, or mentioning them in this blog. If we hold existing positions we divulge the fact, otherwise we generally buy and sell as diarized here. This blog itself is merely a diarizing of our thoughts and trades and is in no way whatsoever to be considered investment advice of any kind. Always without fail consult a competent, experienced, and honest broker or investment advisor before making any investment or speculative decisions.

To be notified when this blog is updated :
Please e-mail christianguinness@hotmail.com with "Subscribe to blog" in the subject line or click here to do so automatically if your computer is configured accordingly. We have never shared our mailing list with anyone, nor will we, nor have we ever sent anything other than update notices for this blog to our mailing list. We only send update notifications when a trade idea is diarized, not if an update only contains general market commentary.

selling BTU and VZ covered calls, shorting GCI

Last update we wrote that we "expect the markets to rise for the rest of the week" however the rest of that week was dire indeed. Since then the markets have generally rallied however, so we weren't off by much.

Unfortunately our BTU position is a bit lower than our purchase and until now we didn't see a good opportunity to follow our stated plan to "lower our cost basis by selling covered calls against the equity position". However now we sell March 2009 $30 calls, last bid at $2.40, against our existing BTU shares.

If our shares are called away, we're assured of profiting over 30%. In the meantime we lower our effective entry price by 10% via the sale of these covered calls.


Verizon, VZ, we purchased in July and unlike the vast majority of stocks in the world these shares are almost back to the pricing the enjoyed this past summer when we bought them, closing today at $34.23 Currently we fear the markets may retrace the recent rally and we perceive resistance above this level for Verizon stock so we sell covered calls against this position too. Specifically we sell the April 2009 $40 calls, last bid at $1.53, against our existing Verizon shares.


Finally we add a new short position. While the markets may have found a bottom print media has not, as per yesterday's news :

"Dealing with $13 billion in debt and declining revenues, media and sports conglomerate Tribune Co. filed for bankruptcy protection yesterday (Monday). The company - which owns the Chicago Cubs and newspapers The Chicago Tribune, Los Angeles Times and Baltimore Sun - was famously taken private last year by real estate mogul Sam Zell, The Associated Press reported."

Thus we short print media company Gannett Co. Inc. , GCI which last traded at $9.16

Jobless losses will rise dramatically in coming months, but people will not be looking to newspapers for more work nor will increased advertising - for jobs or anything else - be found there, thus along with their decreasing revenue streams we expect to see more print media companies fail including, we believe, Gannett.








We receive no remuneration or incentive directly or indirectly in any way, shape, or form for buying or selling the stocks we do, or mentioning them in this blog. If we hold existing positions we divulge the fact, otherwise we generally buy and sell as diarized here. This blog itself is merely a diarizing of our thoughts and trades and is in no way whatsoever to be considered investment advice of any kind. Always without fail consult a competent, experienced, and honest broker or investment advisor before making any investment or speculative decisions.

To be notified when this blog is updated :
Please e-mail christianguinness@hotmail.com with "Subscribe to blog" in the subject line or click here to do so automatically if your computer is configured accordingly. We have never shared our mailing list with anyone, nor will we, nor have we ever sent anything other than update notices for this blog to our mailing list. We only send update notifications when a trade idea is diarized, not if an update only contains general market commentary.