Just what the heck does that mean…"back on offense?"

When I refer to "offense" and "defense" I mean which team currently controls the momentum of the market.

If the defensive team is on the field, then "supply" is in control.  If the offensive team is on the field, then "demand" is in control.  When the market is on defense, news can be interpreted as either "no news" or "bad news."  Meaning "surprises" (good and bad) usually bring lower prices.  Nearly everything can become a reason to sell.

When the offensive team is on the field, "demand" is in control of the football.  We don't know how long we'll have the ball.   It could be "3 and out" or it could be a sustained drive culminating in a touchdown.  We don't know the outcome.

But we know the plays to run when which side is in control.

See, a lot of folks (in my line of work) just run "offensive" plays, all the time.  Yes, ALL the time!

And when the things don't work out, they lament "well, right now the market is bad."
What kind of _____ answer is that?

I've got a fiduciary O-B-L-I-G-A-T-I-O-N to my clients to make sure we invest this money prudently. If we are on defense, the first play in my playbook is to STOP buying.   There is an entirely different set of plays I run whether we are on offense or defense.

You should know the market can go UP even when we are on defense. Or markets can just hang around doing nothing.  Defense means the risk of losing money is greater.

Here's an example: in this recent defensive period, the Dow Jones climbed to their highs for the year, but most individual stocks — and most sectors — pulled back and stalled.  You probably noticed in the 4th quarter that your accounts stayed flat, while the Dow moved up.  Most stocks and most sectors pulled back to the middle of their trading band.  So we didn't get hurt during this defensive period.

Ok, for this time around…defense was on the field and didn't give much yardage.  But we can spend more time talking about defense later.
For the present time, we are back on offense.

Which means the chance of making money is better now than in the recent period (when we were on defense).  Yes, the market can (and does, sometimes) go down while on offense.  But the odds of making money in the market improves when on offense.

Some areas will out-perform others.  My work keeps us in those areas.  But the tone on offense is a rising tide.  And a rising tide lifts all boats in the harbor…good and bad.

So a lot of lousy investments may go up when we are on offense.  When the football goes into defensive hands, the lousy investments will be exposed.  Warren Buffet said "It's only when the tide goes out that you learn who's been swimming naked."

We have the football.  Let's get to work.

Interest rates — short term interest rates turned negative on Thursday November 19th. Rates have been low and look like they could stay there awhile…but who knows? In this video, we discuss the purpose of a bank, and one possible reason rates may be so low.

Here is a quick video I put together to help explain the difference between equal-weight and cap-weight investment "baskets" like the S&P 500.

I had several calls this week from clients regarding money market funds and government insurance.  Essentially, the conversation would go something like this:

"Tom, I heard recently that the government will no longer be insuring money market funds.  Should we do something about this?   Should we be concerned?"

And I would reply "you DO know, that money market funds were never insured before last fall…right?"

"Really?"

It's true.  Most money market funds were not insured before the fourth quarter 2008.   Oh sure, there were "insured" money market options/choices around before 2008.  But their yields were so low, you needed a microscope to see them.  And in case you did not know, the actual technical name for money market funds…ALL money market funds…is "money market MUTUAL funds."  Which is why you get a prospectus when you open a money market account.

The objective of a money market mutual fund is to maintain its' $1.00 per share price, and return you a few bucks in interest/dividends.  Make sure all those assets they were invested in added up to $1.00 every night.  That's it.  Their marching orders: Keep that $1.00 price per share.  Or die.

And last fall, a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day.  More on this part in a moment.

Anyway…when the "financial crisis" spilled over into 2009, the Government continued to extend their "insurance" on money market funds.  That coverage will cease in October 2009 (very soon).

Part of the reason why interest rates on money market funds fell to zero was because:

• The Fed aggressively cut interest rates — and promises to keep them low, at least for the present time
• There is no incentive to pay a higher rate to attract deposits — all money market funds essentially became the same everywhere
• What's the price (yield) for safety?

Knowing that the "government backstop" of money market funds may not be renewed in October, I instructed TD Ameritrade (during the month of August) to move all money market assets from their traditional money market fund (which carried the government backstop) to an FDIC insured money market fund.  There is no cost or transaction charge involved in this move.  It was done strictly for peace of mind.

Why did the government have to insure money market funds in the first place?

The answer: Lehman Brothers

Don't misunderstand: Lehman Brothers themselves did not kill the safety of money market funds.  It was "allowing Lehman Brothers to go under" that dragged money market funds with them.  Like it or not, Bear Stearns and Lehman Brothers were two major players in the commercial paper market.

And commercial paper is what "drove the bus" called money market funds. 

You didn't really think money market funds were just T-bills, did you?
So…how was it that a money market fund at a bank or brokerage firm would be paying (for example) 1% and an outfit like ING could pay 3%?

Hmmm.   Exactly what WAS in that money market over there? It certainly wasn't all treasury bills.

But I digress.  Lehman Brothers was not only a market maker/facilitator for the commercial paper market.  They also borrowed heavily to fund their day-to-day operations with commercial paper.

OK, so remember a moment or so back when I wrote "a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day"?  Here is where things fell apart:

Lehman was a big player in the commercial paper market (as were all the big banks, along with GE Credit, Ford, GM and AIG, and others).  When you manage a money market fund, and your balance sheet is choking on stuff like short term financing notes (commercial paper) from companies that may not open for business the following Monday…well…what do you think you can sell those investments for?

A lot less than you paid for them.

Which is why suddenly, money markets assets stopped "adding up" to $1.00 per share.   It's like walking home with a lousy report card in your hand.

Bad.
Taking Bear Stearns and Lehman Brothers out of the commercial paper market is like taking the umpires off the field in a Little League game.  All that's left are little kids who don't know the rules.  Actually, it's not fair to compare those two companies with umpires.  But a Little League game without umpires looks like disorganized chaos.  And that's when Uncle Sammy pulled up to the field, and change the rules.

The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client).  He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.

I have to tell you, I really like this guy.  I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity).  Also, he is a good athlete — and umm, well, I like sports.  Over time, I've learned there are many common threads where our lives cross paths.

Wait a second…what does this have to do with point and figure analysis?

Everything.

I really believe I would have never met him if it weren't for point and figure analysis.  See, like many folks, he was referred to me — by another client.  If I didn't use the point and figure approach in managing the risk for my clients, I am not sure  he would be my client today!

Time out.

Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there.  The game plan, as directed by the home office, was "gather assets, place the assets with a money manager — or in mutual funds run by "professionals," then go find more assets."

When I was a financial adviser, there were many of those "episodes" where Toto pulled back the curtain and exposed the "Wizard" of the marketing department.  You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down.  I got tired of watching people's investment accounts getting blown up — through no fault of their own.

It's a wonder anyone made money.

There wasn't "one defining moment" in my 16 years as a broker that pushed me to change.  It was more like a "body of evidence."  And in 1997, I started looking at alternatives to "fundamental analysis."

Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.

Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.

Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?

Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.

You say you didn't own that stock back then?  Ummm…OK.

Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?

Hmmm.  Oh well, onward…

Know this: fundamental analysis does have a purpose.  But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.

What I was able to show my friend — in screenshots — is how the market has moved from a "negatively trending market" to a "positively trending market."

For the first time in about a year and a half!

That darn chart makes it crystal clear there are times you should be "in the market," and times when you should be "out of the market."

Fundamental analysis will never tell you when to get out.  Never.

My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.

With all they have going on, I'm happy they sidestepped a lot of potential damage.

And what about you…what's your story?  Is getting a game plan for your investments important today?

This is precisely why I use point and figure analysis… point and figure simply measures price.  And price IS the ultimate indicator — as it reflects changes in supply and demand.

In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.

Feel better my friend, you are on my mind.

There's an old saying: People want to do business with folks they know, like and trust.

A few years ago, I took a long look at my website and thought "if you cover up the name at the top of the screen, it's just like every other investment firm out there."

Yuck.

Now if you click over to Mullooly Asset Management, I think you'd agree — it looks nothing like any other adviser's site.

I wanted to put my own spin on the business.  After all, it's my name on the front door.  And people have told me repeatedly, "I like doing business with you because — unlike other money managers — I can talk directly to you, and we have gotten to know each other."  I can say many great friendships have unfolded over the past 23 years.

So…why Facebook…LinkedIn…Twitter?

OK, truth be told, I first went on Facebook because my kids were there, and a part of me wanted to periodically …ya know…check in on them!

But I found Facebook – and also LinkedIn were great ways for folks who maybe weren't in my immediate area to get to know me a little better.  They can read about me, they can see some of my articles I have written, they can check out my friends, who I am in touch with.

Now, in my line of work, results matter.

But I'll say it again, people like to do business with someone they know, like and trust.

And in case you have not noticed, investment advisers really should not have (meaning: they are not supposed to) have testimonials on their marketing material.  That's right!  Even simple stuff like, "I like working with Tom because he explains things clearly."

Not permitted.

So what's an adviser (or anyone interested in marketing) to do?  They need to find a way to get people to know, like and trust them.  Here's what they ought to check out:

Facebook
LinkedIn
Twitter

These are three great ways to be "in the conversation" and three great avenues for me to stay in touch with clients of mine in other parts of the country.  And three great ways for someone who is "not yet sure" about working with me to feel more comfortable.

Facebook = definitely more social.
LinkedIn = more business-oriented, I need to really develop this avenue more.
Twitter = how to get answers/information quickly

Find me on all of these applications and let's spend some time getting to know each other better.
When your friends are tired of the same old message from THEIR adviser, tell them to sign up on my website, or just check me out on Twitter, Facebook or LinkedIn.

It's a great first step.  And no pressure.

The reason these sites work is because these sites really don't want you promoting your business outright.  That's why it's called "social media" or "social marketing."

Now, what if I bump into someone who has never been to Facebook, LinkedIn or Twitter?

I tell them to Google: Mullooly Asset Management.  There are nearly 2000 different items Google serves up on Mullooly Asset Management.  That's page after page of results of content.

A few weeks ago, I was giving a presentation and two of the questions from the audience were:

1.  Most people I know already have an investment adviser.  What makes you different?

2.  How can I get more information about you and your business?

I tell them to google my firm.  Or, they could also Google "NJ Investment Adviser"

Or try Investment Advisor in NJ on Google.  Or perhaps they could Google 401k adviser (where I have two listings in the top 5).  Maybe they should Google "find an investment adviser in NJ."

There are TONS of way to look me up that way on Google.

But I think my personal favorite is this.  Go to Google and type in:

Best stockbroker in NJ

See what you get.

So, head over to LinkedIn, Facebook and find me.

Or if you are on Twitter, check out (send a tweet to) 401kExpert.

Why didn't we buy…this or that?

Getting calls from some folks who are asking questions like:

"Why didn't we buy GE at $7?"

"Why didn't we buy Citibank at practically zero?"

"Why didn't we…blah blah blah…"

Many of these same folks were screaming "Make it stop!  Make it STOP!" only a few months (and in some cases, just a few WEEKS) before.

Human behavior is a great source for comedy routines.

Look, many people in my line of work want to over-complicate this stuff.  They want to talk over your head and use jargon to confuse you, and perpetuate their existence.  I know, they send "fan mail" to me all time.

Basics.  Just basics.  Look at pictures.  I would like to acknowledge the use of these charts from Stockcharts.com.  You can check them out here.

Would you buy anything that had a pattern like this?

You know this company.  They "bring good things to light…"

The only time I would think about buying a pattern like this would be if it were incorporating writing (selling) covered calls against the stock.  Otherwise, yecchhh…

That's just way too much risk for me.  Do me a favor.  Read the next line carefully:

The definition of RISK, as a verb, is "to act in spite of the possibility of injury or loss."

I don't know about you, but that first chart looks like risk to me.  Take a look at the next chart.

The picture is heading in a completely different direction than the first picture.  Yes, it is heading up!

OK.  But you say…

"I don't buy stocks.  I only invest in mutual funds."

Or,

"I only have 12 different mutual funds to choose from in my 401k plan at work."

Charts are charts.  Doesn't matter if we are looking at a chart of a mutual fund, a stock, or the price of gasoline.

I look at the charts in your 401k plan on a continuous basis.  If none of the charts are going up, here is our plan: we stay on the sidelines.  Pretty simple.  No need to be a hero.  This is money you will have to LIVE on some day.  (You're not counting on social security, are you?)

Today's Lesson: Buy things that are going up.

That's an important lesson, and a lesson MOST people overlook, or forget.

So, good job.  Now take the rest of the day off.

Probably the toughest part of covered call writing is finding the right idea.

And ideas change all the time — as markets change, prices change and the option prices (premiums) also change.

Let's quickly review what "covered call writing" actually means.

Covered Call Writing (sometimes called "buy writes") involves the simultaneous purchase of stock AND sale of options.  Remember, any time you sell something, you are bringing money into your account.  So you are BUYING a stock (you are spending money) and also SELLING something at the same time (bringing money in).

If you were to buy 500 shares of XYZ at $50, you would SPEND $25,000.  If you were to buy 500 shares of XYZ and also sell 5 calls with a strike price of $55 (sold at a price of $9), you would only SPEND $20,500.  Put another way, your "net" cost would be $41 (buy the stock at $50, sell the calls for $9).

With me so far? 

Great.  Onward.

Now, whenever we examine any stock, there are three possible outcomes:

• Stock moves up
• Stock does nothing
• Stock goes down

In only one of those scenarios will you make money if you simply buy the stock.  Right?

Now what we have done in this example is this:

• We lowered our out-of-pocket cost to buy the stock from $50 to $41.
• We have protected our "downside."  Yes, the stock trades around $50.  But we are at break-even – even if the stock falls to $41. And the charts will clearly define where we should have a stop order to protect us.
• Yes, we have limited "upside" — the stock could be taken away from us at $55, but we were paid $9 for that chance. (By the way, if that happens, what is the gain?  Bought at $50, called away (sold) at $55 for a 10% gain, plus you were paid $9 as well.  Sweet.)

When looking for candidates for call writing, here are a few things I try to keep in mind:

Covered call writing works well when the market is confused.  Like now. We have short periods of time where the market runs straight up, and then reverses quickly.  In the big picture, we are still in a negative trend for most major indices, but getting closer and closer to testing resistance lines.  We still do not have confirmation this is a significant turning point, and no clear signals the market is turned a page.

So covered call writing is also an excellent way to get some money into the market, and still protect your downside exposure, or simply just bring in additional money into the account.  It's a great way to goose the yield on your money as well.

But the main thing to know is that you need individual stocks that are in uptrends.  A few weeks ago, there were only a small handful of stocks in uptrends.  Now there are more.  Here are some stocks that are in uptrends that may make good covered call writing candidates.  These are *NOT* recommendations. Call me and we can walk through what makes sense for your own individual situation.

Again, I am not recommending writing calls for everyone on the following:

IBM, Amazon, Reliance Steel, Imperial Oil, Scotts (Miracle Gro), Apple, EMC, Borg-Warner, AutoNation, Staples, and many more.

We need option papers on file.  And we need to have a thorough discussion so you understand clearly how this works.  I would not write about this if I did not feel comfortable at least discussing the topic with you.

It's worth a look, don't you think?

The Treasury Department said Friday that Sun Bancorp Inc. of Vineland, New Jersey, repaid $89.3 million, money it originally received on Jan. 9.  They gave back the TARP money.  Does that make it a good investment?

Sun Bancorp has sufficient funds to complete the redemption.

Additionally:

"When the Capital Purchase Program (which is part of the Troubled Assets Relief Program, or TARP) became available to well capitalized and healthy financial institutions like Sun, it was a positive partnership between the government and business to stimulate the economy through additional lending and community support," said Thomas X. Geisel, president and chief executive officer of Sun Bancorp.

Geisel continued: "The partnership then became politicized, the rules and regulations changed, and the dynamics of the partnership substantially shifted.  These changes significantly restricted the way we support our customers and communities, as well as the way we run our business."

Sun Bancorp was well capitalized by regulatory standards before accepting the CPP investment and will continue to be well capitalized under the same standards after the redemption.

Great.

I'm sure the Bank did not appreciate the Government getting into their business anyway.  Neither would too many businesses.

But here is where it gets interesting:

The Company also issued a Warrant to purchase 1,543,376 shares of its common stock to the Treasury Department at an exercise price of $8.68 per share.  According to the Company, they expect the Treasury Department to liquidate the Warrant following the full redemption of the Preferred Stock.

Part of the TARP deal was return of the money, plus interest, — plus warrants — to purchase shares in the bank.  1.5 million shares of the bank.  This represents nearly 7% of the entire shares issued.   They can exercise the warrants at $8.68, the stock closed Friday at $7.00.  This creates significant overhang in the stock.  I say that because a major stockholder (the US Government) will be looking the sell shares as the price moves up over $8.68.

So what does the chart look like?

Wow.  The story sounds great, but the chart looks terrible.   This is a stock that is stuck in a long term negative trend.  And that trend will not change until the stock can break through that red overhead resistance line.  That line is currently sitting at $11, a long way from $7.00.  And in between $7 and $11, there is a significant amount of stock that will be for sale starting as soon as the stock moves beyond $8.68.  This is a good example how we have to "marry" fundamental work with technical work.  The fundamental story sounds compelling.  The technical story looks ugly.

Good for Sun Bancorp, but I'd rather find somewhere else to put money to work.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.

Hey, I don't want to turn you into an "economics professor."  You would need your own beanie hat with a propeller to do that.  But let's cover the cocktail party "economics" conversation, so you can hold your own at a party.

There really is no "textbook" formula "how recessions end," but patterns tend to emerge.

First, understand why recessions start in the first place.  Banks stop lending.  Money supply shrinks.
Like it or not, the world runs on credit.  When credit dries up, business evaporates.
How do you get the machine moving again?  Lending.
And all the lenders have "gotten religion" recently, and are sticking to traditional lending yardsticks.

Often, two completely opposite ends of the market tend to move first when recessions end.  They give "clues" things are starting to loosen up: banks and commodities… especially precious metals like gold and silver.

See, the rising price of precious metals can sometimes signal that we're starting to see money back in circulation.  This would be a very strong indicator that the recession is coming to an end sooner than most people expect.   A rise in commodity prices tends to signal a pick up in economic activity.  And when you get enough economic activity, you get inflation.

A little inflation is a good thing.  Over the past year-plus, we have had no economic activity to speak of.

Now, there are plenty of people in the market today speculating that we will have massive inflation.  That's because the government has been printing money like crazy.  And when you stuff this much cash in one end of the pipeline, at the other end of the pipeline, you should expect runaway inflation. However (compared to other times), we have witnessed some massive price deflation in many areas of the economy: the price of your house, your stock portfolio and the job market.  So this massive "print job" the government has been doing (printing dollars) might actually just "offset" the price deflation we've seen.

Or not.
I suppose all of the pundits could be right!
When was the last time that happened?

See, the issue is not whether we MIGHT see runaway inflation or not.
The real question is: what are we going to do about it?

Over 23 years, I've learned the hard way.  Worrying about the future is really a waste of time.

We have to focus on what's happening right now.

As strange as it seems, we need to set aside what might — or might not — happen a year, two years or even three years from now.
So what is happening right now?

We have seen a massive bounce back in the financial sector.  Banks are far from being healthy, or even back on their feet.  But the selling was completely overdone.  So they are bouncing.  On the other hand, commodities: energy, natural resources (and the countries that are rich in natural resources) are really starting to move.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.
Here we go.

The other parts of the series:

The Economic Recovery of 2009, part I

The Economic Recovery of 2009, part II

The Economic Recovery of 2009, part III

How to get help with your 401k from Mullooly Asset Management.

This process will also help you with your 457 deferred compensation plan — or your 403(b) annuity at work.

First, if Mullooly Asset Management has never worked with an employee from your company before, we will need to get the list of investment choices available to you in your plan.  You can fax them to us at (732)223-9600, or you can send us the link to the website (if we don't need a password), or you could copy and paste the list into an e-mail or Word document.

We are not looking for your specific investments, or your most recent statement! What we need is an inventory — a list — of all the choices available to you within your plan.

We will need a day or two to review the choices available in your plan, take a look at the charts, and come up with a game plan.

We will then call you back — or set up by convenient time for us to speak — and review the best performing choices available to you in your plan at the present time.  This phone appointment should take no longer than 15 minutes.

Unlike financial planners or others in the investment advisory business (many use asset allocation pie charts), the recommendation you will be given will be based on what is working — right now — and are the best choices available in your plan today.  One of our core beliefs is "when the charts change, we change."

We will then alert you — usually by e-mail — when it is time to add, subtract, move money into, or out of — a particular investment in your 401(k) plan.

There are some years where we might make three or four changes.  There will be other years where we make significantly more changes.  The whole concept is to keep your money invested in the strongest asset classes at the current time.

Since Mullooly Asset Management is a fee only investment advisory firm, we have no product or investment to sell you.  We take a fiduciary obligation to manage your money strictly with your best interests in mind.  Unlike brokers (employees of brokerage firms) and some financial planners (who may work on a commission basis, or a "fee-plus commission" basis), a fee only investment advisor's only income comes from the fees generated by offering advice.

Therefore, it's in everyone's best interest (the Fee-Only advisor and the client) to avoid large risks and losses.

After we have had a chance to review the choices available in your plan, we encourage you to meet with us over the phone and be sitting in front of a computer with Internet access.

We use computer-sharing software.  This will allow you to see the charts of the choices in your 401(k) plan, as we describe the process to you.  This will also give you a visual demonstration of how we manage the risk for our clients.  We can usually accomplish everything on our agenda in less than 15 minutes over the phone with you.

We are not going to judge your prior investment performance.  We are primarily concerned with which investments are working today in the plan — and how to invest your money properly right now.  Since the future is unknown, it is a waste of time to predict what markets will do in the future.

At the conclusion of the call, if you are satisfied with what you've heard, we would be delighted to send you an investment advisory contract for you to review and sign.

The stock market has been posting gains the past few days.

After two very tough months to start 2009, what could go wrong?

Plenty, especially if you are focused on just the Dow Jones Industrial Average.

The Dow Jones has many financial-related companies, like Citibank, JP Morgan, Bank of America, American Express and quasi-financial stocks like General Electric and Caterpillar Tractor, which perform extensive lending and financing.

Remember, the financial stocks have led the charge the last two weeks, after Citibank's CEO circulated a memo to employees announcing the bank did well in January and February.  But two months do not make a full quarter, and the banks have posted significant losses in the previous quarter, as mentioned before.

In fact, JP Morgan CEO James Dimon mentioned on Friday, March 27, 2009 that March is shaping up to be a difficult month.  And financial stocks promptly swooned, bringing the rest of the market along with them.

What else could go wrong?

On Tuesday, March 31, we will finally hear the final revised 4th Quarter GDP numbers.  Remember, one month after each quarter, we get preliminary GDP numbers.  Then one month later, we get revised GDP numbers.

Then, at the end of the following month — which is also the end of the NEXT quarter — we receive the final revised GDP number.

The market took a beating on each of the previous two GDP announcements at the end of January and also February 2009.  If the number on Tuesday is revised downward, watch out.

We also will receive preliminary 1st quarter GDP numbers (1st quarter 2009) one month from now, at the end of April, 2009.  Fasten your seat belts.

Every time I see headlines about future budget deficits, I keep telling myself "that is a weather forecast!"  Most folks read the headline, perhaps scan the first paragraph, proceed to get bummed out and turn on the NCAA Tournament.

Just drill down into this a bit.  The forecast is for a $9 trillion deficit to amass between now and the next ten years.  Ten years!

Ten years ago, we were all worrying about Y2K.  Remember?

Buried in the next-to-last paragraph was this little golden nugget.  Read this whopper:  "Long-term deficit predictions have proven notoriously fickle — George W. Bush inherited flawed projections of a 10-year, $5.6 trillion surplus and instead produced record deficits — and if the economy outperforms CBO's expectations, the deficits could prove significantly smaller."

There is so much ink spilled every day in the financial media that is essentially nothing more than predictions, or a public relations spot for something else.  Unfortunately many of the PR and predictions become headlines.  Our decisions can be swayed by too many headlines that are merely predictions or opinions.  I've come to the conclusion everything written by the financial media has an agenda attached to it.  Or said another way, everything written by the financial media is intended to make you do precisely the wrong thing.

I cannot help but laugh when I see some "expert" interviewed about the stock market, and the excuses/reasons given why markets went up or down that day.  "The market is worried about inflation."  Later the same week "deflationary fears rattled the market."   Look, the market is not that smart — or that "forward-looking."

Don't get hung up on the Dow Jones.  The Dow Jones may not be a "relevant" yardstick for you to use.  After all, it's only 30 stocks…and you might not own ANY of them.  And avoid predictions and projections.  It's just a waste of time.

Have you seen the ads that Charles Schwab has been running on TV?
You probably have seen them.  They sound like real people, but they're actually cartoon/colorized images.

These may be the best ads for financial services ever created.  Here's why:

You're probably not aware of this, but in the financial services industry, firms and advisors are strictly prohibited from running testimonials of any sort. Think about it… how powerful would an ad be if some firm could get a few of their clients on TV and have them say: "You know, at so-and-so brokerage firm, they told all of us to get out of the stock market last summer!"

Too bad we can't do that.

I would love nothing better than to have one client after another — in print, audio or video — in their actual voices — splattered all over my website.

See, I can expend tons and tons of hot air (or spill a lot of ink) telling you how great I am.  But it becomes much more believable when you see an image of someone who looks like you, or someone who looks like someone you know, or who talks like you, or has the same problems as you, and is seeking a similar solution as you.

Which is why referrals are the strongest kind of recommendation/testimonial I can get.  You told your "story" in person to someone else, and told it in such a compelling way that it moved the other person to pick up the phone and say "I want that too!"   I sincerely appreciate the countless referrals I have received from you.  It tells me you appreciate the work I am doing for you, and also tells me you care enough to refer your friends and co-workers.  How terrific is that?

Testimonials are great — they are real people telling you real things that are important, or, at least matter to them.  Maybe their advisor or brokerage firm didn't get them out of the market, but perhaps they provide a valuable service, like — "he clearly explained everything to me like no one else had ever done before…" or even something like "he's the first advisor I've worked with who actually returns phone calls!"

Can you believe we are not even permitted to run testimonials saying "we were happy just to get a phone call back, that's never happened before!"?

By the way, if you happen to spot a financial advisor or brokerage firm with testimonials on their website, run!

This is why brokerage firms usually resort to running only "branding" advertisements.  Not that there's anything wrong with branding advertisements, in fact, they're usually very effective over time.  It's easier for them to say "we are bullish on America" (what precisely does that mean?), than to get their lawyers to approve an ad that says "well, my broker did not steal my money and basically did an okay job."

This is precisely why these ads from Charles Schwab are excellent.  They are not real people — they're illustrated images of real people.  Their voices are real, their situations are real — the woman on the street, the guy standing over the barbecue, the older couple.  People you and I could know very well.

More than that — Schwab really captures the essence of what's going on.  You know, that conversation going on in the back of your mind.  These stories they tell are dead-on, bull's-eye perfect.  I can tell you that every single one of these analogies they use in their commercials, I have also heard from new clients over the last few months.  Schwab has nailed it.

These are real people that really need help.

Of course, the next time you are with a friend or co-worker, listen.  Listen hard to what they are saying.  The main theme I have heard lately borders somewhere between worry and hopelessness, which is a terrible neighborhood.   The situation today is NOT hopeless, and worry never got anyone, anywhere.  Do THEM a favor, send them over to me.

One of top questions I've heard (over and over) lately has been:

What about buying Citibank down here?

As little as two weeks ago, the financial services giant was trading at one dollar (in fact it dipped briefly to 97 cents).

So?   How can we miss, right?

Well, I can think of few reasons why this may not be such a hot deal.   But before we get to that, did you ever read the first post I wrote about Citibank?  It was back in November 2007.

First, "word on the street" is the uptick rule may be reinstated.

If you were relentlessly selling short Citibank, the announcement of the return of the uptick rule ought to be enough to get you to cover your short (buy back the stock you sold short).   And while it's impossible to tell, it's my guess we saw a lot of short covering this week.

Next, the CEO of Citibank, Vikram Pandit, circulated an internal memo to employees that stated Citi actually made a profit in January and February.  That's good, right?

Maybe.

After all, the same company managed to lose $28 billion in the previous quarter.  Twenty-eight-billion-dollars!  How can a company manage (mis-manage?) to do that — in just a 3-month period?  Mark-to-market had much to do with the write-downs they took in the previous quarter.  And that rule is still in place, it has not been suspended.  So, the company may still lose money for the entire quarter.  Yikes.

What else? There are millions of new shares coming onto the market.  Citibank is converting many of their preferreds into common stock.  This dilutes the value of common shares already in the market.

Anything else? Well, yes, maybe the worst of all.  The company announced they are contemplating a reverse stock split.  A study completed in 2008 showed companies that did reverse splits found these reverse splits underperformed the market by 50% (on a risk-adjusted basis) during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.

Many companies consider pulling a reverse stock split to avoid getting delisted.  But many wind up taking that path eventually anyway.  Can you imagine Citibank getting delisted from the New York Stock Exchange?

I am not a big fan of Comedy Central or Jon Stewart, I've watched the show a few times.  But on Thursday March 13, 2009 Stewart interviewed Jim Cramer on his show.  And for the first time (at least that I can remember), someone actually tried to hold Cramer responsible for some of the advice he has given, and also for the fact that CNBC has "morphed" into an entertainment channel.  The thrust of the conversation was more toward exposing CNBC (and to some extent Cramer) as shills for Wall Street and no investigative work is done on that channel.

Bravo.  It is truly an excellent piece to watch and encourage you to do so now.

I expect Yahoo and Hulu will chop up this video shortly. So, don't delay, see this video as soon as possible.  It's nearly 20 minutes, so take some time and watch this, it will be worth it.  Here is the link: http://tv.yahoo.com/blog/stewart-vs-cramer-winner-take-all–183

Stewart said "CNBC could be this great financial tool…especially for people who believe there are two financial markets…the people who are told to invest in 401ks and just leave it there…invest for the long term…don't worry about it."  And the other market — that occurs in a back room.  Where giant piles of money are going in and out…" "But you go on TV and pretend (that market) isn't happening."

By the way, if you have not checked out Hulu (http://www.hulu.com) you really should.  Full-length TV shows (and even some movies) are shown online.  Free.  Since they have no business plan to make money, I don't expect them to be around very long.  But worth a look.

How mark to the market accounting helped kill Wall Street

Mark-to-market accounting is what's used in your brokerage account — your margin account at a Wall Street firm.  To understand mark to market accounting, let's look at what happens in a retail brokerage account that trades on margin:

Suppose you invest $80,000 in cash in a brokerage account.  You sign up for margin capability.  Before you place a trade in your account, you have the ability to buy up to $160,000 worth of securities with only $80,000.  You will pay margin interest on any outstanding balances, and your "margin maintenance" is recalculated every night – based on the gain or loss in value of the securities in the account.  This is how a margin account works.

Using the above illustration, you have 50% equity in the account, and have an outstanding margin (or debit) balance of $80,000.

Suppose the value of the assets in the account drop from $160,000 to $145,000.  You now have 45% equity in your account.  You still have buying power and seem to be in no imminent danger of a margin call.  Remember, you still owe $80,000.  If you were to close the account now, you would sell the assets for $145,000.  The margin debit balance of $80,000 would be paid (margin interest would also be included).  The securities dropped almost 10% in value (from $160,000 down to $145,000) but you lost nearly twice that percentage, because you leveraged the trade.  You would be left with the remainder… approximately $65,000.

But suppose the value of the assets in the account dropped from $160,000 to $100,000.  You now have 20% equity in your account.  Remember, you still owe $80,000.  At this stage, you have no more "buying power."   This means you cannot take money from the account, nor can you buy any additional investments.  In fact, at 20% equity you have a "margin call" and your broker would be contacting you requiring you to deposit more money (or other securities) to boost the equity in the account.

Margin works wonderfully when the assets in your account are rising in value.  But margin will wipe you out when the assets in your account are falling in value.

The assets in the account are repriced every single night in a margin account.  And the equity is calculated every day and the amount needed for "margin maintenance" is also calculated every day.  And when your account gets upside down, you have a margin call, and it needs to be rectified right away.

Margin accounts are calculated using mark to the market accounting.

Banks (and brokerage firms) that own mortgage backed securities have been required — since November 2007 — to use mark to market accounting on these securities.  Coincidentally, this was just around the time these mortgage securities started dropping precipitously in value.  2007 saw many mortgage firms get wiped out, and brokerage firms and banks holding these assets started realizing the volatility of these assets.

Remember banks and brokerage firms were required to employ mark to market accounting beginning in November 2007 for mortgage backed securities.  As real estate values collapsed, and foreclosures began to rise, banks and brokerage firms no longer wanted to hold the securities as investments on their books.  It is no wonder then, that six months later (March 2008) that one of the biggest holders of mortgage backed securities — Bear Stearns — was caught in a massive credit squeeze.  The assets that they regularly borrowed against were no longer "borrow-able."

Bear Stearns — which had traded at well over $100 per share months before, agreed to sell themselves to J.P. Morgan Chase for two dollars per share.  This figure was ultimately increased to $10 per share.

By mid– 2008, Merrill Lynch had decided to unload a $31 billion pool of mortgage backed securities that they owned, and essentially announced they would take the best offer.  These mortgage backed securities had been held on the books (it's estimated) at $.80 on the dollar.  This pool was sold for $.22 on the dollar in July, only after Merrill Lynch agreed to subsidize part of the losses that might be incurred by the buyer.

These are anecdotes and examples using vast over-simplification and are being used to illustrate how mark-to-market accounting works.
While not directly connected, mark to market accounting required that other banks and brokers investing in similar type investments market their own similar assets down to similar levels.  Thus, the entire mortgage backed market froze. Trades were no longer taking place, because every time a trade would take place, it would require the values of similar securities to be repriced everywhere.  These securities could no longer find a value and could not be borrowed against, hampering most lending capabilities at these firms.