The auto bailout

ESPN's Tuesday Morning Quarterback Gregg Easterbrook has some great discussions on the economy and bailouts spliced into his football column. My favorite part is at the end of the column regarding the government's negotiations with the auto companies.

Based on how poorly Washington has negotiated with General Motors and Chrysler, here's what it might sound like if Nancy Pelosi was buying a car:

DEALER: Yes sirree, I can let you have this cherry-red baby for $19,999.99! Plus undercoating and dealer prep.

PELOSI: I'll pay $50,000.

DEALER: For a limited time only, I can throw in remote-controlled eight-way power cupholders, for another $999.99.

PELOSI: I'll buy them at $75,000.

DEALER: Do you want the extended warranty?

PELOSI: No. But I'll pay another $25,000 for it.

DEALER: Aren't you worried something will go wrong?

PELOSI: If it does, I'll just send the bill to the taxpayer.

DEALER: So you are willing to pay $150,000 for a $20,000 car? I'll have to go ask my manager! (Disappears into back, pretends to talk to manager, returns.) Lady, you drive a hard bargain. He says that for $31 billion, we will give you absolutely nothing at all.

PELOSI: Sold.

Its funny and cynical and probably close to the truth. Earlier in his column, Gregg mentions it would have been better for the government to buy cars from GM and Chrysler, rather than just give them the money outright. Besides helping Detroit immensely, this is the kind of out of the box thinking that we desperately need.

How does this relate to investing? Well, over the past month, we've been looking at auto companies and their suppliers as potential short term investments; buy them low, hope for good news to drive stock up temporarily, and then sell. Obviously risky, but potentially very profitable. However I can't really see any of these stocks rising in a manner worth the risk, unless the bailout (or any major event) truly does something to improve the long-term fundamentals of the company. I could be wrong, but right now I will be looking elsewhere for short-term profits.

More shenanigans from credit card companies

I mentioned back in February that Experian was dropping access to your true FICO score. Liz Pulliam Weston has a great article on some of the deceptive practices of credit card issuers and why we should demand to have free access to our FICO credit scores, the scores used by most lenders and the ones that have the greatest affect on a person's ability to get a loan. I highly urge you to visit the links on the second page and send a message to your congressperson.

Why is fair credit practices vital for an end to this recession? We all know by now that the lack of credit flowing through the country is a huge problem. However these deceptive practices by credit card companies are hampering people from spending when the country needs it most. For example, a small business owner might not have needed to use credit a few years ago, but does during this recession to purchase new inventory. He has keep his balance low, paid on time, and used his credit responsibly. However, the credit card company sees him as an infrequent user of credit, reduces his credit limits (or closes the account altogether), and now the business owner can't make the purchases he desperately needs to get him through the recession. This is happening all over the country, and until we put a stop to this, the recovery will take longer than it needs to.

Don't try to figure this market out...

Watching and participating in the market over the last few weeks, one thing has become exceptionally clear; there is no clarity.

I've pulled three straight great trades (Lear +52.3%, Citigroup +57.25% and Bank of America +15.83%), I'm up roughly 13.5% on all buy & sell trades since I started trading in December, and my holdings of GE and Manitowoc Co. have been moving around their break even points, yet I still don't feel too confident in the market, nor do I have any real gameplan moving forward.

The best thing I've found to do so far is to follow the old adage "buy on the rumor, sell on the news". This has worked especially well on companies the government is subsidizing through loans and bailout, but you need to be careful because things can turn on a dime. A perfect example of this just happened with Bank of America. As I outlined in posts to the topic "Paul Woodcreek's Personal Portfolio" (http://11bagger.blogspot.com/2009/01/paul-woodcreeks-personal-portfolio.html), I chose to buy BAC because the government wasn't going to let it fail, the CEO hinted at big profits, and the price was low. I bought at $7.6482/share on 4/3 and rode it up to $11.58/share on 4/14. This is where things stood six days before they were to announce earnings. If nothing else, I figured it would slowly climb upwards until earnings were released... I was wrong. As of Friday (the last trading day before earnings were released), the stock saw a high of $11.23/share. I decided to hold through the weekend in hopes BAC would beat the estimates of $0.04/share. When I saw the earnings come in at $0.44/share, roughly 9x expectations, I figured this stock would skyrocket. Looking at pre-market numbers today, the stock was down about 8% and was at a point that my $1 trailing stop would have sold me out of the stock on open had I not changed it. So, I figured I'd widen my margin to $1.50 and see what the day held for me. BAC dropped like a rock... my trailing stop sold me out before 10:30AM!

When the dust settled, I still netted 15.83%, but I also left about $2.50/share of profits uncollected (DOH!). BAC ended up closing the day at $8.02/share, down 24.34%. This on a day where they blew away earnings estimates. I don't understand it, but I'm happy to take my profits and move on. I'd urge all of you to do the same... when profits are there to be taken, don't get greedy, just take them. This market is irrational and dangerous, even if you're right on top of things and try to use common sense.

Mark-to-Market accounting, bank stocks and you...

Here are a few links that explain mark-to-market accounting and what it could mean for investors...

http://www.newsweek.com/id/192562

http://www.bloomberg.com/apps/news?pid=20601039&sid=ajc25z7IOrTk&refer=home

http://online.wsj.com/article/SB123880085634588515.html

http://uk.reuters.com/article/bankingfinancial-SP/idUKBNG40992520090403


So, what does all this mean? Well, to most people, not much. However, if you're savvy and can keep a portion of your portfolio liquid and an eye on these stocks, you could potentially make some money with these changes. Most traders probably aren't that plugged in, so my plan is to continue to trade bank stocks under the assumptions that they are so beaten down there's a ton of upside potential, there's very little downside since the government has shown they aren't going to let the big banks fail, and since the banks hold all the money that drives our economy, they have to improve before the rest of the market does.

So when is the time to get in, and where do you place your bet? My plan is to play a mix of banks I'm expecting to turn a profit and those who may be returning TARP funds to the government. As you may have seen in the blog post on my personal portfolio, I've already been in and out of Citigroup (NYSE: C) in a small, but highly profitable trade, and now I'm into Bank of America (NYSE: BAC). If BAC can show a profit when they announce their Q1 results on April 2oth look for this one to skyrocket. Their CEO, Ken Lewis, said a month or more ago he was expecting a profit and the stock promptly took off.

http://www.usatoday.com/money/industries/banking/2009-03-12-bank-of-america_N.htm

What I'm looking for from BAC is a quick jump in price, then I'll set my following stop and see what happens. If it quickly spikes, then retreats a bit and the stock sells, I'm happy with the profit and will move on. If it goes on a long term climb, all the better. Either way, I'm looking to turn a profit then move on to something else. The nice thing about BAC is they'll be announcing their earnings a couple days later than JP Morgan (4/16) and Citigroup (4/17), so if things turn south in those announcements, there's still time to bail. Wells Fargo announces earnings on 4/22, so if you wanted to trade without any insulation, you may want to play Citigroup then Wells Fargo due to the spread between announcements being greater than three trading days.

Japanese companies with a durable competitive advantage

Warren Buffett emphasizes buying companies with a durable competitive advantage, while Peter Lynch talks about finding companies that aren't well known but are run well, and poised for growth. I am currently in Japan visiting my brother and I wanted to mention a few companies that I see fit those molds. I haven't had time to look up stock information, or see if they are publicly traded companies, but maybe there are a few gems in here.

First up are beverage companies in the Coca-Cola realm. In Japan, there are two main beverage companies, Asahi and Suntory, that have a monopoly on the beverage industry, be it soft drinks, beer, or fruit juice. Japan is litered with vending machines, and you are guaranteed to see a Suntory or Asahi product on every street, usually for 20-30 yen ($.20-$.30) more than you can buy them in a regular store.

Second are the convenience stores, in the vain of 7/11, which they actually have in Japan. The two other main stores are FamilyMart and AmPm. Most of these stores are open 24 hours and you can't go a few blocks without seeing one. There have always been people in these stores, regardless of the time I have entered one.

Finally, there is the grocery chain Daiei, similar to a Meijer or Kroger (for you Michiganders) or a smaller Wal-Mart that has a full grocery section. This seems to be the best place to do all in one shopping, although I have heard there are a few Costco stores in Japan, for those bulk shopping trips.

I don't know if anyone of these companies have stock that can be purchased, but for those looking at companies within Asia, those are a good place to start.