Buy Like Buffett

As expected troubled automaker Chrysler has filed for Chapter 11 bankruptcy protection. This was a necessary move in order to get suppliers and unions to renegotiate contracts for the broke car maker. Chrysler Financial will no longer offer auto loans as of today while the firm seeks to restructure. The UAW will receive up to a 40% ownership stake for allowing Chrysler to change its contract terms. The question is now, Can Chrysler become relevant again in the US automotive market?

Finance

General Motors (GM) will soon stop producing Pontiac automobiles. The troubled US automaker will close down its Pontiac brand by next year. GM is also planning to discontinue its Saturn brand by the end of this year as well. While not an easy decision GM is making the tough decisions that are necessary to become a competitive automaker. General Motors will be down to 4 main brand in 2010 consisting of GMC, Chevy, Buick and Cadillac. This still may be one brand too many as GMC may have to discontinue Buick if the company’s sales are below expectations in future years. Even still it looks like the company is on the right track to becoming relevant in the US auto market again.

Finance GM

I have read a few articles late tonight that state that government stress tests show that Bank of America and Citigroup will need to raise billions more in capital. These 2 banks have already received almost 100 billion in funds through the government’s TARP program. These findings illustrate a larger problem facing US banks. IF B of A and Citi need more funds then why doesn’t PNC, Wells Fargo, US Bancorp or Suntrust need more capital? The problem in the banking system is that there is a perpetual cycle. Increases in unemployment lead to greater mortgage delinquencies which result in a decrease in housing prices. This leads to larger asset write downs which require banks to raise more capital. Until unemployment stops rising it will be impossible to predict how much capital banks need to survive this economic downturn. It is clear now that in September of 2008 that the US banking system was insolvent and without the major capital injections from the Treasury; the system would have collapsed.

Finance Bank of America, Citigroup, PNC, US Bancorp

Tomorrow the US government will release the results of its stress tests performed on 19 major US financial institutions. The stress tests judge the financial strength of banks by rating the individual loan quality and toxic assets. The difficulty in valuing troubled assets is that a subjective value has to be placed upon them because no one is sure how much further these assets will decline in value. Mortgage backed securities and derivatives could decline significantly if unemployment continues to rise and housing prices continue to plummet. These tests should help to gauge the cash and liquidity needs for individual institutions.

Finance

Bank of America (BAC) announced a profit of 4.2 billion dollars for the 1st quarter which surpassed analysts expectations. Analysts expectations were for a profit in the millions but not the billions. This is the latest bank to report earnings that exceeded Wall Street’s low expectations. Wells Fargo, Citigroup, JPMorgan Chase and Goldman Sachs all had earnings that surprised Wall Street. These inflated earnings have not been based on increased revenue but on acquisitions, change in mark to market accounting rules and lower interest rates. The problem for banks is that loan losses continue to rise and credit markets continue to weaken. I still don’t believe that the bottom is in for all financial firms as charge offs and credit losses will continue to rise. Banks also will not have government aid in future quarters to help prop up earnings. It appears that banks will need to raise more capital to deal with loan losses in coming quarters. The easiest way for banks to raise capital is by selling additional shares. The negative to this is that this will dilute existing shareholders’ equity.

Finance BAC, JPMorgan Chase, Wells Fargo

Tech Ticker Article

These results seem to confirm the “the worst has passed” consensus that has developed in recent weeks. This view has both fueled the market’s six-week rally and, simultaneously, been “confirmed” by higher stock prices in the eyes of many. (This gets to the essence of George Soros’ theory of reflexivity, but Soros is among several former naysayers who also believe the worst has passed.)

But Paul Krugman throws cold water on the “green shoots and glimmers” everyone’s all excited about. He makes four key points:

• Things are still getting worse. “The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered.”
• Some of the good news isn’t persuasive.  Goldman’s “excluding December” quarter.  Wells Fargo’s best quarter ever.
• There may be other shoes yet to drop. “Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now.”  This is the critical one.  House prices are still plunging.  With the possible exception of China, the rest of the world economy is headed into the tank.
• Even when it’s over, it won’t be over. Unemployment likely to keep rising right through 2010. “’V-shaped’ recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand.”  And that’s not our problem.  We’ve got the reverse: Too much pent-up debt.  It will take years to work of the bad debts.

Read Krugman’s whole piece here >

As we noted earlier this week, there’s a strong case to be made that the same thinking applies to the stock market.  See “Enjoying The Suckers’ Rally?“

Investing

The largest mall owner in Maryland and the second largest mall owner in the US has finally declared bankruptcy. General Growth Properties(GGP) has fought off bankruptcy for months but could no longer hold off its creditors. General Growth has amassed over 27 billion in debt from acquisitions and other financing loans. The acquisition of Rouse Company doomed the once promising company. Much of GGP’s growth was fueled by debt financing at low interest rates. When the credit markets froze up last year GGP found themselves unable to obtain capital at a time when it was sorely needed. The company failed in its attempts to renegotiate its agreements with its creditors. General Growth has a number of favorable properties that competitors will glady acquire at reasonable prices.

Finance General Growth Properties

GE has risen all of the way past $12 over the past five weeks. The stock was at the $5 level just a month ago and has been on a tear. The higher that financial stocks continue to rise, the more that I think that we are overdue for a major pullback.

Finance

From MarketWatch article by Robert Powell

Full article can be found here.

1. Longevity Risk

This is, in many ways, the biggest risk and the most difficult to figure out. We know that life expectancy in the U.S. is now 78 years and that on average women outlive men. But that doesn’t tell us a thing about how long you might live. It just means that half the population will live beyond 78 and the other half will die before age 78, and, more likely than not, many of those living beyond age 78 will be women.

“Long lifetimes are difficult to predict for individuals,” according to the SOA’s report, “Managing Post-Retirement Risks: A Guide to Retirement Planning.”

“It’s easier to predict the percentage of a population with a long life than to predict this for an individual,” the report said.

Given that, what’s the best way to manage that risk? Social Security, traditional pensions and payout annuities all promise to pay an individual a specified amount of income for life, according to the SOA. But some newer products can help protect retirees against outliving their assets as well. Those include a reverse mortgage; “longevity insurance,” which is an annuity that does not start paying benefits until an advanced age such as 85; and perhaps “managed payout” plans.

2. Inflation Risk

For anyone planning for or already living in retirement, inflation is an ongoing and constant concern. But even though we know that inflation has averaged 3% since 1913, it’s also true that it’s gone up nearly 9% in some decades and it’s fallen nearly 2% in another decade. What’s more, we know that the cost of living for retirees is very different than it is for workers. In short, there are no guarantees when it comes to predicting the cost of living in the future. So what can be done to manage that risk?

“Many investors try to own some assets whose value may grow in times of inflation,” the SOA said.

“However, this sometimes will trade inflation risk for investment risk.” Those risk management tools include: common stocks, inflation-indexed Treasury bonds or TIPS, inflation-indexed annuities, and commodities and natural resources.

3. Interest Rate Risk

Retirees and would-be retirees hate times like these, when interest rates on both short and long-term instruments are low. Retirees tend to have less income they can spend, and they may be forced to re-invest their money at lower rates. And pre-retirees who might be investing in fixed income have to save more to build larger nest eggs. When it comes to predicting interest rates, the SOA said government spending, inflation and business conditions tend to be the drivers.

But as with many of the risks associated with retirement, it’s difficult to predict the future direction of interest rates. So what can be done to manage this risk? The SOA recommends immediate annuities, long-term bonds, mortgages or dividend-paying stocks.

4. Stock Market Risk

It might be an understatement, but the SOA notes that “stock market losses can seriously reduce one’s retirement savings.” That, and then some. Suffice to say, as with the other risks, it’s impossible to predict what will happen to stocks.

But it is possible to manage this risk, the SOA says, by diversifying widely among investment classes and individual securities, and being prepared to absorb possible losses. “Because such losses may take many years to recover, older employees and retirees should be especially careful to limit their stock market exposure,” the SOA says.

In addition, the SOA says hedge funds may offer some protection, but they can be complex and have high expense charges. Another tool of choice: Financial products that invest in stocks, but guarantee against the loss of principal.

5. Business Risk

Lots of bad stuff can happen to retirement funds. Employers who offer defined-benefit plans can declare bankruptcy. Insurers who sell annuities can become insolvent. The list goes on. You can gauge whether your employer is safe by its credit rating or whether your insurance is safe by it claims-paying ability rating. But you still need to manage this risk. The Pension Benefit Guaranty Corp. insures — up to certain limits — defined-benefit pension plans of employers that go belly up. And owners of annuities are covered by state insurance company guaranty funds up to specified limits should the insurer become insolvent.

Finance

Added more shares of ProShares UltraShort Financials ETF (SKF) @ $76.00. This sector has been on fire and I continue to believe that it is due for a pullback. I will be paying close attention to bank earnings when they are reported next week.

Added more shares of ProShares UltraShort Real Estate ETF (SRS) @ $38.50.

Finance SKF, SRS