Friday, November 21, 2008
(Cont'd from above)...

Jim (cont'd):    This is the reason the selling hasn't stopped... It's the nature of the asset class... Equities are the only asset class where you can out and actually raise money... where you can go out and sell with ease...

I know this market had already fallen the most in a single year since 1932... I know you probably don't even look at other asset classes... you don't even look at them as classes... I mean, you've got your home and your stocks, maybe some bonds... But, if you're running a gigantic portfolio of assets, say, at a pension fund maybe, or a university endowment, or a hedge fund... one that includes commodities, real estate, commercial real estate, commercial and residential real estate backed bonds, locked up hedge funds, and stocks... the only one in that whole group with a real bid for millions of dollars... a real, realtime bid... the only one you can sell instantly to raise money is stocks. Equities...

This is the sad truth about the market right now... Stocks are being sold because they can be sold...

Understand... all this junk is awful too... all that stuff I mentioned... but, if you're running a huge portfolio of assets, the only stuff that can be jettisoned right now, and raise a lot of money instantly, to return to investors or pay pensioners... is stocks.

See, nothing else gives you money fast without causing you to take a huge hit...

How about that other junk that I mentioned that the huge portfolios have?... That the big managers... well, a lot of them have trillions together, with billions of bonds... But bonds are illiquid now. You might want to sell them at 70 cents on the dollar, but the only bid is for 30 cents on the dollar on the bad ones... So the burden falls entirely on stocks... which can be sold relatively close to where they are on your screen...

But let's get this straight...

Stocks are not being sold because they represent no value... okay. That's not why they're being sold. It's not because they're worthless. The selling has nothing to do with the stocks themselves often... and everything to do with stocks as an asset class.

The fundamentals are not in this picture, when these guys are selling these stocks. Stocks are being sold because you can sell them immediately to meet money and to meet your obligations. And, as long as they can be sold... as long as there are still buyers... as long as there's a bid, so to speak... at some level... it could be with the S&P 500, at 754 or 654... they will continue to be sold.

That's just the way it is, and the way it will be, until things stabilize... and who knows that'll take?... I always leave here, hoping that when it's up 500, that today will be the stabilization day. But, I've got to prepare otherwise...

Where does this take us?...

Kind of, nowhere we want to go...

Companies valued at 20, 30, 50 or 100 billion are not a half, or a quarter of that, or even less... especially the financials, and they can still go lower...

Companies valued at $2 billion to $3 billion will be reduced to companies that are worth $200 to $300 million. I kid you not. We've got that whole order of magnitude smaller. That's right. As mid-cap companies become small-cap companies, at least they'll be able to attract some of that $350 billion of private equity money that's piled up on the sidelines...

Believe me, these deals will happen, when the mid-caps become small-caps, because the market is totally poisonous. The desire to be taken private has never been greater, but the ability to finance such deals has never been worse.

Some of these stocks are already at levels where it's ridiculous that they're still public. But there's still too much uncertainty for someone to jump in now, and others still have much lower to go, because of the endless forced selling that I think will return, if not next week, then the week after.

What will happen to large-cap companies if the selling keeps up?...

If they've got decent dividends that have translated into accidentally-high yields, they'll get bought by institutions. But, this is a big but... A lot of these companies have corporate debt that is so much cheaper than the stocks that, for big institutions, it makes no sense to buy the equity... they've got to buy the bonds. And that includes the financials, which have all become totally toxic, thanks to the efforts, or should I say, non-efforts... of dissembling Hank Paulson's bait and switch TARP, and Tim Geithner New York Fed stewardship.

Now, everyone says that Geithner a genius, including president-elect Obama, who just chose him for Treasury Secretary today, like I said he would. Some people think he caused the rally. I think the rally was caused by S&P futures and the way the market went out on expiration. But that's okay. I'm open minded... I'm going to give Geithner a chance. I didn't care for him, because he was at the fulcrum of everything that's gone wrong... I think he's got a lot of explaining to do about why he's the right man. Would it have been so bad to give FDIC chairman, Sheila Bair, the job? She's openly, openly argued that the policies are wrong... Larry Somers, someone overtly critical of the obviously discredited policies... Oh well...

So when does this kind of forced selling end?... When does it stem itself?... When do we put in the real bottom?...

It's when we start seeing companies start to be taken private, because they're just too darn cheap. But, until then, stocks are going to be sold, because they can be sold... to finance all the other illiquid finance classes that people can't blow out of.

And stocks at these prices... which do represent good value on earnings, on book value, on cash on hand... are simply a gigantic commodity to be sold as a ay to meet obligations.

What's your Game Plan for dealing with this?...

Unless you think stocks will rally on news of bankruptcies and cram-downs, and collapses in commercial construction... collapses and bankruptcies of retailers and automakers and banks... then you should only buy in small increments on the way down, and you should continue to raise cash on any lift, like we had today, in order to pay for your big outlays that you might need over the next five years... like buying a home or paying for college.

Were we too late to sell this morning? Yeah. But now we're getting some lift... we might get some lift again next week... let's lighten up.

Why buy at all?...

Because, as I've just told you, stocks are being forced down, through no fault of their own, to bargain levels, to Filene's Basement levels... to Family Dollar levels...

You know the litany of what to buy...

Recession-resistant stocks... those soared... stocks trading at, or through, their cash... and the accidental high-yielders... boy, the oils were real accidental high-yielders... and they took off. And you have to know that the companies behind the stocks will still be alive and kicking when the dust settles.

Here's the bottom line...

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The Bottom Line!:     Stocks get more attractive to you and me as they go along... But not to the big institutions. You see, the selling is intense and motivated by the fact that pretty much all the giant portfolio managers have to sell something to return the money. And stocks just happen to be a commodity that they can sell immediately. So you've got to buy in small increments, using wide scales as we go lower, because of the endless... and I have to tell you... truly ridiculous sales that the institutions are doing, because they've got too much debt, and they've got to return the money.

[verbatim recap]

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