Debt Sold to Widows

I read an article a couple days ago about Incapital which underwrote millions of bond offerings for: GMAC, CIT, Lehman and many other companies. Incapital sells Internotes, Incapital says InterNotes, managed by a joint venture with Banc of America Securities, are sold through 600 broker-dealers, including Fidelity Investments and Edward Jones & Co. Incapital CEO, Tom Ricketts said, “We’ve always stuck to investment-grade and we’ve always put our faith that that was a good line in the sand,” Ricketts said. “To the extent that we have investors that may not get their money back, that doesn’t make me happy. CIT is in distress. We would never have put something up on our screens if we had a thought that they would ever end up in a situation like this.” Earlier in the year there was a great deal of criticism about how credit rating agencies handled subprime debt and CDOs. Lehman Brothers, CIT and AIG were investment grade issues until late 2009, consequently Incapital assumed they were providing retail customers safe liquid securities. however, the bigger issues is even thought criticism for the credit rating agencies is well deserved what alternative is there. The reason there are financial intermediaries is because of the large asymmetry of information and knowledge between retail investors and institutional players. On August 24, 2007 CIT was trading at $37.85 and $61.00 a month earlier. As we speak, there is no other viable alternative, but hopefully these companies can be more forward looking and more introspective about off balance sheet risk and innovative exposure stealth.

Sheeple

There truth is no one wants to be alone. Who wants to be the only money manager at a social not buying tech stocks in 2000. Who wants to be the only member of a California neighborhood without an investment property. In the short term the market is a voting machine, but in the long term the market is a weighing machine. In the investment community there is a great deal of group think, which is reaffirmed by rising prices. Fannie and Freddie were more than 90% institutional owned and lets not forget AIG also. There is even an emphasis on what institutional managers are buying so the home gamers can follow. Let me expand on a point I heard from Accrued Interest blog. Leverage was not the problem, the problem was bad investments. Being leveraged 25 to 1 and buying Google or Apple 5 years ago would have been brilliant. Being leveraged 25 to 1 and buying WAMU or Indymac would have been a disaster. Below is another video courtesy of American Public Media's Marketplace detailing the rise of toxic assets.

Toxic assets from Marketplace on Vimeo.

Training for a Marathon

Any competitive sport requires participants to consistently train and practice. For marathons the key is endurance because there are no TV timeouts, 2 minute warnings or out of bound whistles to stop play. Investing has been compared to a marathon, however there is one major difference, the race never ends. Because of this continuity investors can hang on to poor performers because nobody stops the race. You could have purchased GM in 1990 and lost the race due to their filing Chapter 11. My goal is not to discourage you but to emphasize practice and training. Investors must study the past, the present and human nature. These seem to have more bearing than valuations. One young reader encouraged me to explain aspects of the market using more media, therefore starting today I will have videos courtesy of Marketplace(one of my favorite radio shows)that explain market activities from CDOs to Dark pools. Also, remember in the marathon you are trying to beat time, if you focus on your peers speeding by you, you may run out of steam trying to catch up or even find yourself in the hospital. Focus on your pace and continue to train for a never ending race.

Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

In the Dollar Store

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.- Warren Buffet
Again with the Warren Buffet words of wisdom. Again Mr. Omaha is right, for some strange reason individuals think when a stock is at a dollar it is a sale and they are getting a bargain. While the upside is infinite and the downside is $1, that is a logical fallacy. You are foregoing the opportunity to make money by buying a dud that will not make money or even lose money. I believe the fascination is the ability to buy many shares example 1000 shares for $1 instead of 20 for $50 a share. These days it is hard to find the wonderful company trading for a low dollar price, maybe a low multiple, but that is also rare. The real money is made in private equity and venture capital. Buying into a little known company before it is followed by big Wall Street firms. My new goal is to file a 13G or 13D within 3 years.

Uncle Warren

I am no fan of Warren Buffet. Maybe it is pure jealousy or maybe because he simplicity shows the inferiority in my bad trades. However, I have begun to read the book "Snowball" about the life of Warren Buffet. This has lead me to begin reading books about sports handicapping. Ironically, I have heard some investors compare investing to horse racing. One rule is that the gambler does not have to win it back the same way you lost it. I have bought a stock at the opening, seen it fall quickly and attempted to make it back by buying or shorting another stock immediately. The reason I think Buffet's style agitates me is that I am impatient. Telling individuals that you can make them a guaranteed 18% in two years does not seem to get their attention. However, I can make you 18% in 30 days, stops them in their tracks. That is why Ponzi schemes are so successful. But while investing and gambling are different there is a great deal of overlap. Consequently to be successful in either you need discipline.

Making Money with Options

This is a simple strategy that does not necessarily involve stock picking. For my example I will the SPY( an ETF that tracks the S&P 500), this tracks 500 of the largest publicly traded companies. First I need a brokerage account that allows me to trade stocks and options. I recommend Option Express which has higher commissions than some brokers but is perfect for novice investors. Next, I buy 100 shares of SPY, lets say at $100. Next, I sell some call options at a strike price for 103.00. I will receive as of today $67. That is an automatic .67% gain. Some reader may say less than one percent I can get that from a bank CD. However, .68% in 30% days translates to 2.04% in 90 days. I do not know the future but SPY goes to $100 by the option expiration date. You made no money on the stock but still made $67. If the stock goes to $103 and is exercised, you made ($68+300) $368. Not bad for a month gain, this can be repeated until kingdom comes. The downside is if SPY goes to $130 you lose $2700 because you HAVE to sell the stock at $103. An option gives someone the option to buy or sell but anyone in there right mind will buy something at 103 if they can sell it for 130 the same hour. This is one way to use options, as my options knowledge expands so will my post regarding options.

How to Earn Money on a Credit Card

Thanks to Hustler Money Blog for the wonderful idea.

We all know that you can’t just get cash out of your credit card for free. There is a hefty credit card fee for doing any cash advance. However, you can order coins with up to $500 per president out of five, making a total of $2500 worth of coins, and get it deliver for free. Order this through the Charles Schwab 2% Cash back and deposit the coins back into your bank. Also, there is no limit to the Native American Agriculture coins, hence order as many as you like. Buying these coins is considered a purchase. Hence, it’s no different than buying a coffee latte from Starburcks.

Info from fatwallet:

1. Coins come in $250 boxes (ten rolls of $25). You can order two boxes of each design ($500) for the presidents; there is currently no apparent limit for the Sacajawea dollars. Shipping disappears once you complete the order.This is charged as a purchase, not a cash advance. The Mint will initially authorize the entire amount. The final charge is usually made the day after the coins ship. A few folks have noted receiving partial orders; the amount may not be charged until the order ships complete.The Mint appears to be back to matching order information. Keeping orders small (<$1000) seems to to be helpful in avoiding order matching, allowing one to order more than the item limits over time. To guarantee mismatched orders of the same item, the billing and shipping addresses, and credit card numbers must be different.

   All orders from the Mint of $300 or more will ship expedited (UPS Next Day Air or Priority Mail), signature required. Bellyaching about the signature requirement in the thread is verboten.

   Many have reported long (sometimes extreme) hold periods for orders. Coins also sometimes get back ordered (the website usually notes an expected ship date). Do not order with any expectation as to shipment and delivery dates. If you are planning on getting a large number of boxes, consider making separate orders of $500 or $1000. Orders appear to be filled on a rolling basis, one design at a time. Also, remember that there may be a hold for your order amount on your credit card for some time.

   Due to the vagueries of the Internet, shipping notices are sometimes received the day of or after delivery. The tracking number is the third in the block on the shipping notices. The first two lines have no obvious meaning.

   To check the status of your order over the phone, call 1-800-USA-MINT and select option 2. The system will ask you to input your order # and billing zip code. The order number is in both the subject line and body of the order receipt e-mail.

   If you do not know your bank or credit union’s policy on deposits of large amounts of coins, contact them before going. Most do not require that the coins be unrolled; however, you do need to remove them from their shipping box. Larger banks that handle commercial deposits have coin bags to place unrolled coins in. One poster reported adverse action from Chase after making coin deposits.

Adams, Jefferson, Madison, Washington, and Monroe available and you can buy 2 boxes each. Choose standard shipping during the order process and the shipping charge will revert to free.

Store Cash and Sleep Well

With the Federal Funds rate at 0%, investors are looking for short term vehicles to earn interest and provide liquidity. Interest rates have no where to go but up so certificates of deposit are a bad idea. Your money is locked in from 3 months to 4 years, without access to the money and as interest rates rise the purchasing power is decreased. Below are a few accounts the provide both reasonable returns and liquidity.

Earn 2% or More With These Money-Market Savings Accounts

Bank	APY (%)	Minimum Balance
ShoreBank Direct online savings account	2.15	$1
First Trade Union Bank savings account	2.06	2,500
Bank of Internet USA Advantage savings account	2.02	100
UFBDirect savings account	2.01	500
Discover Bank online savings account	2.00	500
Sources: Bankrate.com, Money-rates.com, bank web sites. All yields are non-promotional, but are subject to change at any time. Yields valid as of August 4, 2009.

Earn 4% or More With These Interest Checking Accounts

Bank	APY	Requirements
Community National Bank of Lakeway Area	4.51% on balances up to $25,000	* Minimum of 12 debit card purchases (excluding ATM usage) * 1 automatic payment or direct deposit transfer * Receive your monthly account statement electronically
First Arkansas Bank & Trust Online	4.44% on balances up to $50,000	*Minimum of 10 debit card purchases (excluding ATM usage) * 1 automatic payment, bill pay transfer, or direct deposit transfer * Receive your monthly account statement electronically * Sign in to your online banking account at least once
Royal Banks of Missouri	4.3% on balances up to $25,000	* Minimum of 10 debit card purchases (excluding ATM usage) * 1 automatic payment or direct deposit transfer * Receive your monthly account statement electronically
Liberty Bank	4.25% on balances up to $25,000	* Minimum of 15 debit card purchases (excluding ATM usage) * 1 automatic payment or direct deposit transfer, and 1 bill pay transfer * Receive your monthly account statement electronically
Connexus Credit Union	4.15% on balances up to $25,000	* Minimum of 15 signature-based check card purchases (excluding ATM usage) * 1 bill pay transfer and 1 direct deposit transfer * Receive your monthly account statement electronically
Ouachita Independent Bank	4.01% on balances up to $25,000	* Minimum of 12 debit card purchases (excluding ATM usage) * 1 automatic payment or direct deposit transfer * Receive your monthly account statement electronically
Source: www.checkingfinder.com, bank web sites. Yields as of August 4, 2009.

$50 Lending Club Bonus

Good news! Lending Club’s bonus is back up to $50 for new lenders until August 15th. New Investors Get $50 to Invest in Lending Club notes. With average net annualized returns of 9.61% it’s a great time to join Lending Club and they will give you $50 to get started. To get the bonus type in trug49 in the referral code box. I think Lending Club notes are an asset class that could give your portfolio additional return, however these notes are unsecured so there is a large amount of default risk. In a portfolio of $10000, the maximum allocation would be $1000. Anything less would not make a significant impact but again there is little recourse to make borrowers repay.

The House that Greenberg Built

Yesterday, 134 million shares of AIG were traded when the average volume is 13 million. While I can draw some conclusions on why this happens, the truth is I really do not know why Firm A put an order for 30 millions shares, maybe light track, good breakfast, school is about to start who knows. Many investors saw the better than expected results from Radian and might have speculated the AIG would correspond likewise. However, investors are only paying for ownership in 21 percent of those earnings. However, given that I cannot predict the future I will watch from the sidelines and jump on the bandwagon of the winning side.

Reader are Leaders

Usually when I say "Readers are Leaders" I say it in jest. But on a serious note, those who decide to watch television and listen to their friends to decide their financial future need to pick up some books. It is difficult but not impossible to be sensational in print as opposed to television and seminars. I am amazed when people tell me a fact based upon hearsay or secondary sources. Not every book is the truth or word of God, but I feel more confident in a book that someone took time to write than a 30 minute TV script or a speech that motivates the audience to spend thousands on books and audiotapes. My solution is that the public start to get informed and read. No one is going to throw jewels and pearls to the public for free and without work. The truth is you are going to have to work, read, have plenty of money or resources to get the gains that those Google Ads show.

Everybody wants Energy Efficient Vehicles

I hate to accentuate the negative again, but everyone is excited about car sales. Here are the facts:

July auto sales rose to 11.2 million when converted to an annual rate. That's the first month this year that sales rose above the depressed 10 million level. As recently as 2007, car and light truck sales topped 16 million vehicles, but a drop in consumer confidence sent sales plunging late last year. Ford Motor Co., which has steadily been gaining sales since GM and Chrysler took government aid and went through bankruptcy proceedings, reported a year-over-year sales increase, up 2.4 percent for the first year-over-year sales jump since November of 2007.

Here is another fact:

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion. Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

I mentioned earlier the government cannot continue to subsidize growth. Therefore, my strategy is to purchase a basket of international SOVEREIGN bonds. Most people will mention currency risk, geopolitical risk and a history of default risk, but the US is in debt, USD are in danger of devaluation and the US is relatively young compared to Italy, France, China and India. I mentioned I wanted to short Treasuries but I saw an error in my strategy. This is an asymmetrical position, there is not much to gain by going short unless you "juice" the investment. By that I mean leveraging the position to see a larger return.

HURN

Here is another symbol to watch closely. These are the facts from the companies SEC filings.

a) On July 31, 2009, the Company issued a press release announcing that it will restate its financial statements for the fiscal years 2006, 2007 and 2008 and the first quarter of 2009, to correct the Company’s accounting for certain acquisition-related payments received by the sellers in connection with the sale of certain acquired businesses that were subsequently redistributed among themselves and to other select Huron employees.
b) On July 31, 2009, the Company announced that Gary E. Holdren, Chairman of the Board and the Company’s Chief Executive Officer has resigned as Chairman of the Board and Chief Executive Officer effective immediately and will leave the Company as of August 31, 2009, that Gary L. Burge has stepped down as the Company’s Chief Financial Officer effective immediately, but will continue with the Company until the end of the year and that Wayne Lipski has stepped down as the Company’s Chief Accounting Officer effective immediately and will be leaving the Company. No severance expenses are expected to be incurred by the Company as a result of these management changes.

I will leave these facts to interpretation. I plan to go long or short tomorrow and will let my result known. As mentioned earlier I will use options as a hedge in case my assessment is misdirected.

From CIT to Sallie Mae

As Debtwire reports, several correlations desks made a killing over the recent CDS blow up: most notably Natixis and the omnipresent Goldman Sachs. According to Debtwire's Nicoletta Kotsianas:

"Correlation trading desks at a few firms, including Natixis and Goldman Sachs, have been buying up CIT protection on the cheap since January to hedge risk in the instruments they structure and trade...CIT stood out to some traders, both because of its exposure to the credit crunch and its ubiquitous placement in the bespokes, said two correlation traders. Just six months ago, jump to default exposure to the name averaged roughly €50MM for many correlation desks, estimated two of the trader sources... One correlation trader who runs a mid-sized bespoke book said that he bought $85MM in short dated protection at an average price of 12 pts up in January and throughout the spring. Five-year protection on the name was quoted at 34 on 9 July but ballooned to the high 50s by 20 July when it became clear the government would not bail out the asset-based lender. Much of that price movement originated from other correlation desks rushing to hedge their jump risk."

So whose CDS will Goldman's correlated tentacles blow up next? According to Debtwire, it is Sallie Mae's turn:

"Sallie Mae is the next name in correlation traders' crosshairs, said two correlation traders, an analyst at a boutique brokerage and a sellside desk analyst. Five-year protection on Sallie Mae trades at 20 pts upfront, reflecting relatively low risk of default in post-credit crunch terms. Though not as widely held in bespokes as CIT, nor as distressed, Sallie Mae caught attention in recent weeks as correlation desks braced for the company to be downgraded to junk, all the sources said. Standard & Poor's last week placed the ratings on credit watch following a vote by the House Of Representatives Education and Labor Committee to pass a bill that would eliminate the origination of federal student loans by private lenders after July 2010... Offers to sell protection from dealers grew scarce this week and several dealers have faded offers, in a sign that not all desks are covered for Sallie Mae jump risk, aid three traders. Some bids did get picked up this week but the market is now 18/20 upfront on the contracts as opposed to 691 bps on July 19, according to a broker and data from Markit." Again watching CDS spreads and purchases can show who firms think are weak.

This post is courtesy of Zero Hedge( shoutouts on the new site) and Debtwire.

Accentuate the Positive

In bull markets participants discount the negative and put a premium on positive news. In bear markets participants do the opposite. I have long positions and have profited greatly but I still doubt this rally. It is hard to know when you are being patient or stubborn as I cover my short positions. On Friday, my assessment was given a sound thrashing. The Commerce Department reported second quarter GDP fell by ONLY 1.0%. This news gave investors cheer as they pushed up stocks. However, the better than expected results was from the Federal Reserve holding down rates and the Obama administration spending. The spending is not indefinite, the government must pay back the debt and holding rates down for so long creates its own problems. Again this might be my stubbornness so take my assessment with a grain of salt.