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No. of Recommendations: 16
you.

It's been several years (actually around 8) since I've posted at the Fool. The reasons involve certain contretempts with the Spanish ambassador's wife and a need to cleanse my chakras in the desert (and I got kicked out, but the business about women far above my station, idiotic eastern medical theories and obscure references to the messiah have that French thing that I can never spell correctly - je ne sais quoi or something liek that).

Anyway, I've managed to hold onto most of my money (I'm actually way up having discovered QID late in life) and am realizing that there are vast fortunes to be made in the next few months (though buying 300 shares of PFG on Monday was probably not the foundation of a family fortune rivaling the Kennedy's).

So, HowardRoark (and thanks for culling me from your Favorite Fools) where the heck are things going? It's pretty clear to me that vast numbers of 55 to 63-year-old baby boomers could be, one by one, capitulating and selling every security they own so as to provide the minimal return on investment they need to support a lifestyle that doesn't include mortgage payments on $32,000 (purchased circa 1973) split level single family homes in the suburbs - suburbs in which their youngest child graduated from high school in 2001.

It's also clear to me that many of these 55 to 63-year-old baby boomers could be listening to their "financial advisors" and staying the course - as the S&P 500 has reliably returned 15% per annum (+/- 10%) over the past 7 decades and there's no reason to think that it won't continue to return similar gains over the next 7 decades.

I think there's no chance that Technical Analysis will work at present because (and this is amusing) things are different today. What we require is sound judgment. And, when I think sound judgment, I think HowardRoark (and I'm not thinking Ann Rynd).

So, sorry to bring this up on Yom Kippur (being a reformed Jew myself - Baptist vis Catholic via Jesus via Abraham, I sympathize with a religion that says its sorry once a year) but I'm dying to know your thoughts.

Jeff

PS: Oh, and sorry about the Yanks. You probably won't have to wait until 2082.
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http://boards.fool.com/Message.asp?mid=26488152

(As usual) A great post--especially in the rear-view mirror. was a few weeks before his last in Fooldom....

Wish he were here, too, sa4800, and wonder whether he's buying stocks or canned goods or sitting on his hands today....
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No. of Recommendations: 62
Jeff! It's great to see you around, though if you think I've got the goods to litter wisdom on this vortex I'm afraid you may be suffering from some early senioritis. You're talking to the guy whose proudest intellectual accomplishment was guessing the final Wheel of Fortune puzzle the day of one of RJMason's Jeopardy wins. In case it was lost on anyone, soldat4800 doesn't look quite as self deprecatory slash bold as it did back in 1999. Ye who bailed on the Dow in 1995 missed out on maybe 13-years of 6% or so total returns, which is roughly what long term treasuries were offering back then.

Quite an amazing investment world, huh? I can't help but pine for the good old naive days at the turn of the millenium when all you had to worry about was when the market would stop trading your crappy value stocks at 3X earnings. Now you have to figure out if the cash plays you own have their deposits at the bank of Christmas Future, or if the 2X EBITDA retailer you're dissecting benefitted from a generation long tailwind of hyper-consumption rendering 15-years of millions of take and pay transactions a mere head fake. It was only a year ago when enough context still existed to separate those other idiots from us, errr, lesser idiots. I mean, buying Claire's or Outback or Ryan's at peak multiples, peak margins, and trough cap rates was nicely silly (let alone being the sucker providing the fixed rate leveraged loans) under the plain old reliable rules that came with the board game. Or junk spreads sub 200 or the Bearing Points of global infrastructure contracting trading as if 150% returns on tangible capital were a good bet into perpetuity or whatever. All in the handbook. But when Abercrombie & Markup trades for 5% implied operating margins versus around 20% for past 12 years, and the no-losses since 1970 Sandlers will best be remembered for handing the bread crumbs to Wachovia just before a black swan came a nipping, the rules seem altogether different.

And that's what the real fear in this market is really about, right? At least for those of us without the pedigree to have seen anything like this before? It's the lack of context, the feeling that some of the economic heuristics and assumptions have become unreliable. It's not simply because of the leverage and the derisking and the wild volatility and the government playing fast and loose with the rules of capitalism. Yes, the leverage and the borrow short-lend long model are behind much of the wrenching volatility. And in fact those features of our economy may quite likely be part and parcel to any underlying context-destroying problem. But whatever the cause, a lot of the uncertainty for the value hunters seems, at least to me, to be real. Real in that it is more value relevant to companies outside the immediate fray than a mere financial market freeze and related main street consequences (and inevitable recovery) that we're so often warned about. Real in that anyone with a working amygdala can't help but be concerned that the usual markers of reliable asset value -- long stretches of historical earnings experience, the reproduction value of existing assets, industry wide-incremental returns and relative competitive position -- seem to flicker at times.

Can large parts of a country go through extended periods of subnormal net national savings, poorly allocated investments, yet misleading macroeconomic indicators such as GDP and productivity that somehow fail to identify the extent of the excess consumption and malinvestment? Can credit, dollar hegemony, financial innovation, disintermediation and false comfort provided by governments that real investment risks can be transformed into safety (i.e. bank loans into bank cash via the FDIC and belief in regulatory prescience, mortgage loans into treasury loans via Fannie and Freddie, volatile creative destruction into smooth sailing via Fed Funds roulette) really conspire to create substantial long lasting dislocations in behavior in real markets? Might this cause previous consumption patterns (historical earnings) unsustainable or previous investment in infrastructure (reproduction value) catering to excessing discretionary consumption poorly allocated and thus devalued? In dollar terms? Then how do we value Starbucks??

I don't know, but I do know that these are the kinds of questions that investors who are normally more concerned with medical loss ratios and store build costs ask when things are really yucky (term of art, luckily my letters aren't outed on dealbreaker) out there. And it's this loss of context, the rules that all investors rely upon as the foundation for their frameworks whether they admit it or not, that makes it so hard to be greedy when the walls are caving in. Unfortunately, the world is just uncertain enough that you can fear something besides fear itself given a little poorly timed deep thought.

I have no wisdom. For quite a while, the world seemed really scary and the equity market seemed to be floating along like household wealth was an abstract concept related to the hadron collider. Hey, mortgage insurance may not be money good, but Nordstrom's should be fine! Now, you can make most equity bets with a lot of apparent scariness factored in (and even more fixed income bets). I mean, we're down to a stock market EV to GDP excluding the debt of financials of about 1X; what more can a girl ask for, right? In some cases, there seem to be bets emerging that might be a little more removed from the scariness but are likewise discounting lots of bad stuff. Even if we've consumed ourselves into gluttons of denim and cell-phones and organic kale, most of this crap we've built isn't going to be worthless, and some of it won't even be worth less. And given the volatility along with the general cheaper-ness, some of this stuff is or is going to trade at really weird prices relative to everything else, so you probably don't have to break your brain worrying about whether to bet on every race on the card. Bank loans are making daily moves normally reserved for biotech stocks. That can't be a bad sign. But you know it's not quite Kansas, either. Give me Worldcom fraud or CMGI evaporation or even portfolio insurance any day over this.
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No. of Recommendations: 7
No pedigree here taking me back to the 1929, 1973, 1987 or even the 2000 market debacles. But I see people combing through these for clues on how to rate and survive the Vanishing Of $8.3 Trillion in 2008. Are we there yet, how low will it go, how long will it last, maybe there really is no bottom this time around? Is there much to be learned from these today?

The frantic M&A activity and the unbounded admiration Wall Street had for the resilient hard-spending consumer supporting 70% of the economy for those too brief bubble wünder-years was disconcerting but it was so hard to know when it was all going to come to the jump without a parachute we have now. It went on Q after Q When to sell, when to buy puts on the QQQQ --no way to know until now--its very clear --October 2007 stupid.

When you are in it and not looking back on it and all markers have an Alice Through the Looking Glass directionless upside down absurdity, it seems impossible to know what anything is worth and when it might be worth any more than it is today. If a generation of investors is now being scarred for life it may be a good long time before anyone feels like paying much for anything regardless of the PE, the same store sales or the EV/FCF
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Are we there yet, how low will it go, how long will it last, maybe there really is no bottom this time around? Is there much to be learned from these today?

As with everyone else, I have more questions than answers. My view on this is as a highly-interconnected complex system (like an ecological system, or an evolutionary process, or something like that). I think it's an excellent model.

The view I came to about one week ago (ridiculously late) was that this was a system collapsing on itself because *all* the important feedback was positive*. Once asset values fall broadly, it is a self-amplifying loop that is not apparent when asset values move randomly or in small groups. CDS events occur, requiring counterparties to jump into action and raise cash. Debt/equity ratios rise, requiring shoring up the balance sheets. At the individual corporation level, nobody knows if the other guy can pay up on their CDS or loan or debenture or what have you, so they want to get theirs first. Everything points the same way: sell, sell, sell. As assets fall further in value, none of these factors diminish, in fact they strengthen. Then, extend to the global economy.

What's the countervailing force big enough to make a difference? I honestly don't know of one.

So I started going short in a variety of ways this week. So far so good on that program, just that I wish I had done it last week. I don't see this ending until everyone's on the floor riddled with bullets and can no longer press the "sell" button. Too pessimistic?

-Mike

* positive feedback doesn't mean "good" feedback, it means feedback in the same direction as the primary motion, i.e. accelerating it. Negative feedback systems have correcting forces to keep them in balance. But negative feedback systems are difficult to keep stable. They just need to slip momentarily into a positive feedback mode and it's all over folks. All the above is standard engineering stuff, BTW.
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What's the countervailing force big enough to make a difference? I honestly don't know of one.


The invisible hand, greed and easy money, eventually.
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Hey Dave, good to see you've still got that Delphi-vibe going ( see http://boards.fool.com/Message.asp?mid=14325879&sort=use... ).

If I understood your post (much in the way I "understood" Finnegan's Wake) you're saying things are screwed up, but some of the capital improvements, intellectual property and Trademarks we and our ancestors managed to wrest from the wilderness over the past 500 years (not to mention the real estate we stole from the Native Americans) will probably still have some value once the dust has settled and the new economic order (can you say President Schwartzenegger) has been established? And that probably much of this remaining valuable stuff will be distributed in some fashion (probably akin to the way the Russians allocated the Soviet Union's capital goods) easily correlateable to investment choices made today?

Perhaps I'm reading too much into your post, but that's pretty much how I feel. I sold all my QID today (it had doubled since August 25, bless its heart) and have capital to deploy. I am saddly reminded that the 1929 crash wiped out the dumb money while the smart money waited until 1931 to be taken to the cleaners.

I think we're in for a bounce. But I think 6000 is a real possibility for the DOW before the new order establishes itself.
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Mike,

You mention CDS here and that got me thinking about how long the markets might fall. Defaulted CDS are being settled in October, with the Lehman defaults being settled today:

http://www.ft.com/cms/s/0/73a3d4d8-8eff-11dd-946c-0000779fd1...

Could it be that AIG burnt through $60 bil of its $80 billion in the first round of settlements on Oct.6th? And did the Fed have to step in with another $30+ bil for AIG because of the settlement of the Lehman default today? Wamu apparently settles on Oct. 23rd, so a lot of this selling might be related to settling these CDS contracts in the wake of recent defaults. Until the CDS situation is resolved--that is, until these weapons of mass destruction stop exploding throughout the financial system--I suspect the market will continue to free fall. I mean really, who is selling babyb's at $3000 a share??? Some folks on the Brk Board are claiming to have picked up babyb's at a 25% discount to the a shares at the open.

PP
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Mike

I suspect the CDS are a major driving force behind a lot of this too

What happens if a party doesn't make good on their end?
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I suspect the CDS are a major driving force behind a lot of this too

What happens if a party doesn't make good on their end?


THEY are in default, which probably means that a bunch of their other debt is in at least technical default. And the CDSes against these events become collectable.
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In that case perhaps what the fed needs to freeze rather than short sellers is CDS settlements not allowing defaults situations to happen escalating the avalanche of credit problems this seems to be perpetuating

This is such an unregulated nontransparent market, that nothing good can come of letting try to go about its business in the current environment
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"I have no wisdom."

On the contrary, your greatest wisdom was having the temperament of sitting it out while...
"the world seemed really scary and the equity market seemed to be floating along like household wealth was an abstract concept related to the hadron collider."

Every quarter I was waiting for the next Roark investment idea to be gleaned from the 13 filings.

And you sat...and you sat...and you sat...and waited. (Well, HireRight got you momentarily excited)

Your fund is now positioned to benefit from the wreckage. You are a great steward of capital.

You understand innately one of Buffett's most important lessons, that of temperament and it's a lesson for us all - Well done.

Spin
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http://oldprof.typepad.com/a_dash_of_insight/2008/10/what-to...

"What to Watch

By following the "Dash Rule" a reader can evaluate the significance of any proposal. Anything that reduces counter-party risk is "the nuts", if we may borrow from the poker players. Examples would include the following:

* A guarantee of inter-bank transactions. Europe is doing it. The hints are that the US will do the same. This requires international cooperation, since no central bank can do it alone. The Fed cannot regulate foreign banks. It takes everyone, and it is complicated.
* Suspension of mark-to-market rules. At some point this will get reviewed and debated. The SEC study is now due on January 2nd. (This is the government operating as rapidly as possible.) Regardless of how one feels about the long-term merits, the market would celebrate a suspension. Why? We would not need to worry about whether a counter party would be around next week, based upon trades from some other distressed agency and the Paulson/Bernanke decision on whether the institution would live or die, and which investors would be protected. Until this process is ended, we have a problem.
* Capital injections. These will help on a case-by-case basis. Let us see whether it helps with overall liquidity.

Conclusion

We are watching other factors. We also have a list of best stocks and sectors in the event of a rebound.

But this is our single best idea, and we are sharing it. If the evidence suggests that the counter-party risk problem has been reduced, it is time for that first step toward more market exposure. The specific stock picking can follow later.


Thoughts on this view/thesis?
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