– The Stock Market Companion –

15Minute Market Update

August 31, 2011

—— Stock Market Investing since the 1980’s ——

Published all Market Days
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-Executive Summary-

  • The markets again moved higher off their August lows.  See more below.
  • The Chicago Purchasing Managers Index (PMI) came in nicely higher than was expected AND July factory orders were stronger than expected.  On this news and the favorable fundamentals AND technicals of the company, we re-established our investment in Ford Motor Co. (F $11.12)
  • We talk at length about liability and profile two large companies who have achieved dramatically different results based on their ability / inability to see the importance of protecting themselves from unrestricted liability.  We then give examples of what this means for an individual and what individuals can do – in practical ways – to be wise about liability.
  • For those investors with a higher risk tolerance, Clearwire (CLWR $3.22) may move decisively HIGHER from here based on today’s news that the U.S. government is at least momentarily rejecting AT&T’s plan to purchase T-Mobile.  Swift investors need to move QUICKLY on this one – if at all.  At SMC, we re-established our 10% position in Clearwire at 5 minutes before the close of the markets – after a CNBC guest said the company may be an acquisition candidate.
  • An Oregon company BRINGS BACK manufacturing from China and plans to hire 30 more employees.  See below.
  • Please click here to send us your feedback.  Let us know how we are doing – We are here to serve you. Support@Stockmarketcompanion.com

– Stock Market Companion – Current Holdings –

Nr. Co. Ticker Action Entry Date Current Gain (Loss)
1 Bank of America BAC Holding 8/24/2011 -0.1%
2 MEMC WFR Holding 8/23/2011 +1.5%
3 Apple Inc. AAPL Holding 8/25/2011 +1.2%
4 Ford Motor Co. F Re-Purchased Today 8/31/2011 +/- 0%
5 Clearwire CLWR Re-Purchased Today 8/31/2011 +/- 0%



If the above “Current Holdings” table is empty it means that we are not holding ANY stocks at this time and that we are therefore 100% in cash.

– Markets “At a Glance” –

(Please scroll down to the end of the report to see your favorite benchmarks – Dollar, Oil, Gold … closing prices and daily direction.)

Market Price (Today’s Close) Unit of Measure Today’s Direction
SP-500 1,218.89 Index UP = +5.97 points
DOW-30 11,613.53 Index UP = +53.58 points
NASDAQ 2,579.46 Index Flat = +3.35 points

– Market Trends –

Trend

SP-500

DJ-30

NASDAQ
Short Term UP UP UP
Intermediate Down/Bounce Down/Bounce Down/Bounce
Long Term Lateral Lateral Lateral

*Summary of terms from Trader Vic II-Principles of Professional Speculation (pg. 140-141)
*_________* Represents a change in trend rating.

– Market Perspectives –

For your added perspective, we’ve included this chart of the broader market (Successful stock investors develop and start with a minds-eye view of the broader market and keep it clear) –

SMC SP-500 ETF Daily Chart

Please click on the chart to view it in a larger size.

 

– Today’s Highlights –

 

The reality is that the markets have HELD the recent August 8th lows, put in a higher low on August 22nd and have moved higher.

How much higher?  The answer is – The broader market, represented best by the S&P 500 has advanced +8.8% off the absolute closing lows of the market on August 8th.  That’s good.

Our Stock Market Companion analysis of previous pullbacks in the market over the last 10 years that we have reviewed during each of our Successful Investing webinars this month have shown that there is precedence for a pull-back to as much as -24-26% for a downtrend move in the market, while pointing out that the markets DID hold a “higher low” and looked improved.  So, why have the markets advanced off the lows and not pushed farther south?  The answer is – Current valuations of the stock of many corporations are simply very low, relative to current and expected near term earnings.  In other words, stocks are very inexpensive now relative to the earnings potential of corporations.

Why then have we not taken every spare dime and invested it in the market, if stocks are so cheap right now?  Answer – The stock market is one of the most LIQUID of markets available to the investing public.  As such, it is a reflection of the hopes and fears of the current economic environment – in combination with institutional investors who are looking for weakness to increase their holdings of stocks.  Because the market is so liquid, stocks that are cheap CAN GET CHEAPER, before they are purchased and pushed back higher.  Events and conditions can create irrational responses in the markets that can wreck the portfolios of those who think they are engaging the markets at absolute lows, only to find that they are not.


As of today, we are 60% invested in the market at Stock Market Companion, up from 10% or so as the market began to pullback and hit bottom.  We have moved QUICKLY to take advantage of short term opportunities as they have presented themselves in several stocks.   We have money yet in reserve to engage in opportunities as they present themselves.

As individual stock investors, one of our greatest challenges and opportunities is to view companies and their share prices with a keen understanding of what is taking place RIGHT NOW, while also viewing the company AND the market with an understanding of where it may be in 12 months or a year from now.  In other words, we are continually reflecting on this question, “What’s happening today and what are things going to look like a year from now?”.

A good example of this is to consider Bank of America as an enterprise and its beaten down share price.  Bank of America is a powerhouse and has enormous earnings potential.   This is why Mr. Warren Buffett purchased the shares this last week (making his announcement the day AFTER we got on board.) Unfortunately, Bank of America’s purchase of Countrywide Mortgage has basically caused Bank of America’s balance sheet and earnings expectations to be almost unpredictable.  It’s liabilities surrounding mortgages that were securitized and sold to investors, combined with lawsuits involving mortgage customers who may be able to prove fraudulent activity by Countrywide is almost limitless – particularly when the real estate market has not yet found its bottom.  State level attorney-generals, across the nation have been trying to complete a lawsuit and final penalties for “Robo-signing” of mortgages.  A recent proposal for an $8 billion penalty against Bank of America was considered too low!
What Mr. Buffett is doing is answering the “What’s happening today vs. what are things going to look like a year or more from now?” like this –  He is likely saying to himself and his staff, “Yes, near term Bank of America has big problems and some of them are almost immeasurable.  But if we make these broad assumptions of total liability for the current Countrywide problem and weight these liabilities against the strong operational cash flow at the bank, in the distant future they are going to come out of this and be stronger for it and our investment is going to have multiplied in value.”  Keep in mind this as well, $5 billion is a big investment by Mr. Buffett for sure, but it’s only approx. +10% of the cash that Berkshire Hathaway has on hand to make investments.

 

This is an important teaching moment for future business and financial leaders – Let’s take a moment and contrast this Bank of America problem with Countrywide with J.P. Morgan Chase and it’s purchase of Washington Mutual Corporation.

 


In 2009, J.P. Morgan Chase purchased Washington Mutual Corporation for approx. $1.1 billion (which was really a steal for J.P. Morgan Chase). The Federal Reserve Bank essentially brokered the deal and was more concerned with making sure that the entire financial system in the U.S. did not collapse than what the final price would be for J.P. Morgan Chase to purchase Washington Mutual Corporation (WAMU).   WAMU was one of the largest mortgage lenders in the U.S. and had entered the sub-prime mortgage industry and made a huge mess.  It was at the center of the securitization of sub-prime mortgages, which were sold as investment grade bonds to institutional investors worldwide.

 

Just a week or so ago now, we caught news that Deutsche Bank was suing the U.S. government’s Federal Deposit Insurance Corporation for $40 billion (which ultimately is funded by fees from banks, that are earned by fees that you and I pay for banking) – alleging fraud involved in the representation of bonds that were sold on the basis of securitized mortgages.  Deutsche Bank had tried FIRST to go after J.P. Morgan Chase for the money, BUT the U.S. Department of Justice determined that J.P. Morgan Chase had PROTECTED ITSELF from the liability of WAMU’s actions in its purchase agreement.  Friends, this is a great example of excellent business sense.  Not only did J.P. Morgan Chase pay pennies on the dollar for WAMU assets, they also insisted that they would NOT BE HELD LIABLE for Wamu’s actions in the mortgage mess that it had created.

 

Where is Bank of America’s comparable agreement when it purchased Countrywide?  We may be wrong, but it apparently doesn’t exist.  So far, it appears that Bank of America simply DID NOT protect itself well against the liabilities established by Countrywide’s actions in the market place.  J.P. Morgan Chase did.  This foresight has saved J.P. Morgan perhaps $40 billion dollars!

 

So, whenever you sell something – whether it is your house, or a car, or a boat, or a business, make sure that you put in writing that you are selling it “as is”, and do your best to make sure that you cover yourself from future liability by making a “full-disclosure” of what you know about what you are selling.  Disclose everything, keep it simple, put it in writing, and have you and the buyer sign and date it. You will sleep better for it.  That’s right, this may sound crazy – but whenever I have sold a house or car I have always listed EVERYTHING I could think of (Within reason.  For a car, maybe it is just a few sentences.) that was negative about the house or car.  I didn’t try to hide anything.  Without exception, the buyer has appreciated the transparency of the transaction. Depending on the size of the deal,  you may want to have a lawyer look it over.

 

If you are buying something like a house or business, make sure that the house has no liens against it and in the case of a business, make sure that you do not accept liability for any previous actions made by the company.  If that is not possible, then try to limit your liability to something measurable AND get insurance for it.  It’s better to walk away from what looks like a bargain if you cannot limit your liability.  Recently I met an old friend who purchases houses regularly on the courthouse steps in central Washington, fixes them up and then re-sells them for a profit..  When we met last year, he told me about a house deal that was so good, another person who is the “big-dealer” at the courthouse steps told my friend NOT TO BID on the house.  The house was valued at around $300K and was selling for $10K.  Fast forward to this year and when I met my friend again he soon told me how the story ended.  He did not bid on the house, the “big-dealer” bought it – and soon found out that there were liens against the house that weren’t completely clear.  The “big-dealer” who should have known to check everything out, is now responsible to pay back those liens.  I do not want to discourage anyone from making purchases of distressed properties at auction.  This has proven to be a very effective means of buying distressed property at a low price.  I am saying – “do your homework”.

 

There is another example of a company who has paid bitterly for their mistake in this regard, and we have written about this in the past.  Germany’s own Daimler Benz paid over $30 billion for Chrysler Corporation, and then proceeded over years to pour billions more into transforming the company.  Ultimately, I believe that there came a day when a business analyst at Daimler’s headquarters in Stuttgart woke up and realized that Daimler had no way of covering the pension liabilities for all of Chrysler’s workers and future retirees and that it would drag down Daimler very hard in the future.  I believe that this analyst or team of analysts finally was able to convince the Daimler board of directors to take action.   Daimler sold Chrysler to Cerberus Capital Management for $6 billion.  Daimler lost big on its investment in Chrysler, but it was at least free of all pension liabilities.  Cerberus Capital Management was probably going to break Chrysler up and make money on the deal, but they didn’t foresee the financial crisis.  The U.S. government then bailed out Cerberus during the recent season of bail-outs.

– Story-Stock Investing –

We re-invested in Ford Motor Co. (F $11.12) today and sent out this SMC Intra-Day Alert –

Dear Subscriber-Friend –

While we can, with a decent “backstop” for protection at $9.90 for a stop, we’ve re-established our investment in Ford Motor Co. (F $11.23) after this morning’s factory order information for July showed a bit more STRENGTH than was expected.  SMC purchased at $11.12/share and would purchase up to $11.50/share. 15% Holding.

For your protection and our own, we would like to remind everyone that this is not an investment recommendation for any particular individual.  We cannot possibly know the risk tolerance and investment suitability of such investments for any particular subscriber. Successful investors know their own objectives, purposes, and risks associated with any investment – whether in stocks, real estate or other investments.  Each investor is on their own.


We are simply reporting the SMC actions in the market place.


Your – Stock Market Companion

Here’s some good news about an Oregon company who has determined that it is cheaper to manufacture its disposable food containers in the USA than in China – due to tariffs and high shipping costs.   They are bringing BACK TO THE USA a portion of their manufacturing and they plan to hire 30 employees more and maybe there will be an IPO.  Click here for the link. This is a perfect example of what we have been talking about at Stock Market Companion.

 

In a world that is “flat” and where there is no allegiance to the structure from which the company has been created, a modest (just enough to balance the scale some) tariff system that can be imposed on companies who decide to outsource their manufacturing elsewhere and can be applied such that the proceeds from the tariff can be rewarded to companies who hire in the USA makes STRONG sense.  No way should the proceeds from this tariff land in the good ‘ol USA “general fund” like social security payments have (up until now).

– Benchmarks “At a Glance” –

US Dollar

1.4375 USD = 1 Euro

USD / EUR

Dollar = UP

Gold

$1,827.20

Ounce

Gold = UP

Oil

$88.54

Barrel (West Texas Crude)

Oil = Up some.

30 Yr. Fixed Mortgage

4.33%

Percent

Down

10 Yr. Bond Yield

2.23

Percent

Flat

1 Yr. CD

1.16

Percent

Flat

Data Source : Financial Visualizations Inc.

Please help us by sending your valuable feedback to – Support@stockmarketcompanion.com

Signing-Off for Today,

Your -Stock Market Companion

** Stock Market Companion Disclaimer **

The Stock Market Companion (SMC) Market Update and Watchlist are published documents to subscribers that show how we (SMC) are viewing the markets and what we are watching, investing in or selling today.  This information is for a wide readership and is not intended for any particular individual,  and under no circumstances should this Market Update or Watchlist be considered an investment recommendation or plan for any specific individual.  By accessing this material, you agree that the Stock Market Companion will not be held liable for any actions taken by a subscriber or other parties.  You understand that the Stock Market Companion holds positions in the above mentioned securities.  Based on market related or personal events these positions may change without notice.

Furthermore, the Stock Market Companion, Inc. is a content provider and publisher and not a registered broker-dealer or licensed investment professional.  Our intent is to publish very accurate market information for an audience of subscribers (1000+ subscribers).  By accessing the Stock Market Companion website and/or using the Stock Market Companion products and services such as this Market Update and accompanying Watchlist, you understand and agree that the material provided in the Stock Market Companion products and services is for informational and educational purposes only, and that no mention of a particular security in a Stock Market Companion product or service constitutes a recommendation to buy, sell, or hold that or any other security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.  To the extent any of the information contained in any Stock Market Companion product or service may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.  Before selling or buying any stock or other investment you should consult with a qualified broker or other financial professional to verify pricing information and to solicit advice as to the appropriateness of a given transaction or investment.

  • The markets were AGAIN divergent today, just as yesterday revealing further weakness in the technology sector while the broader market (S&P 500) and the DOW (DJ-30) held POSITIVE.
  • Research in Motion (Ticker: RIMM $27.75) reported earnings last night that were a major disappointment.  We go through the details below.  The company received 2 broker upgrades going into earnings.  The stock then lost -21.45% from yesterday’s close into today.  We go through our steps in handling our brief investment in the stock this last week – AND WHY, below.
  • Crude oil continued to descend today, reflecting a drop in value of the U.S. dollar – BUT also  concern of future demand as the global economy slows down.
  • The S&P 500 is finding support at its 200 day exponential moving average.  If the broader market doesn’t find strength here and begins to sink further, the next near point of support is the low it plumbed during the recent nuclear crisis in Japan.  If it fails that point, then the intermediate term trend will be DOWN.
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