The Interest Rate Isn't the Problem.

Hey everyone,

I realize my posting schedule has been non-existant;however, it is not without reason, Intigril Capital Management has been working towards putting a lot more money into the market and I've been tied up. That and a little thing called EARNINGS SEASON.

However, I'm not going to talk about earnings today. I want to talk about the federal reserve's recent decision to cut interest rates. Now, there has been a lot of talk about this decision- isn't there always? - and two camps have been:

1) It was really important the the fed cut rates
2) Who cares about the rates, they aren't going to make a difference.

I agree with the second opinion, but it is for the reason that the first opinion is correct.

Confused?

Right now, despite the rate cuts, you are still seeing mortgage rates increase, regardless of whether they are credit card interest rates, 15 year mortgages, or 30 year mortgages. The problem isn't the supply of money. Its the demand for it. For years, via subprime lending, we greatly magnified demand for home loans and further amplified this demand by mass approving Home Equity Lines of Credit (HELOCs).

If a bank assumes that very few people default on their loans and at the same time increases the number of loans, then you can lower interest rates, because losses on a few defaults can still be covered by the few defaults. However, volumes for mortgages are down. Instantaneously, the interest rates go up, because their aren't enough people to spread around the losses to.

Therefore, a major component of the credit freeze is not the supply, it is the DEMAND.

Now, supply is really the best that it can be. With federal rates this low , banks do have a reasonable margin. So the reward for banks who chose to lend is still there. However, with lower demand AND a weak economy - the risks simply outweigh the reward.

So, was the rate cut important?

Yes, because it helps keep supply up.

But will it make a difference?

Not until the economy recovers and demand returns. Until then, the risk of lending will outweigh the rewards of lending.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

I am so sick of Japan./ Earnings seaon is here!

Dear Japan,

Please stop crashing every time the wind blows. Seriously, I'm sick of trying to figure out which obscure currency shift is causing your daily "THE END IS NIGH!" selling. Thank you for your attention to this matter.

Sincerely,

Mansij Hans, E.I.T.

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Hey everyone,

Thank you for indulging my letter to Japan. Anyway, earnings season is already in full swing, lets re-cap a few companies:

Jones Apparel and Liz Claiborne:

Down after weak earnings reports. You might remember that awhile back I specifically told you not to invest in "specific retailers". I told you so.

Ebay:

Down on poor outlook. Honestly, the word on the street is that ebay is really upsetting their US customers. They fired something like 10% of their employees and are using what would have been their future salaries to buy two businesses in Europe. Because the economy is SOOO much better in Europe. Morons.

Intel

Beat earnings estimates. I can't say I'm that suprised, they are really wiping the floor with AMD.

Alcoa

This was by far the dumbest reason for a stock price to drop. The stock price went down because profits were down 52%. Now, normally that's a good reason for the price of a company to drop. However, was it really that suprising that a company that sells metals had a bad quarter if you can see that all metal prices are plummeting?

On October 16th:

Google - The proble with Google is that people are becoming incredibly bearish on technology stocks. This is part a result of the fact that a lot of hedge funds are just dumping stocks to raise cash. The other reason is because technology is perceived to be the most negatively leveraged to an economic downturn. The basic idea is "Who is going to spend cash on $299 Ipods?"

So, Google is a falling knife. It is going to have somewhere in the range of a 10% drop or jump as soon as the earnings report comes out. If it goes down, I would buy it if you can hold onto it for a long time. If it goes up, I would wait until the wind blows again and the price drops for another random reason and then pick it up if you can hold onto it for a long time.

Prediction: 10% swing, one way or the other.

CapitalOne - I've made no secret of my belief that I think CapitalOne is undervalued. I think that unlike the other banks, they will not lose money and while their profits will go down from last year, their stock price will increase as a direct result of this earnings report.

Prediction: Up to at least 45 unless the market goes down 5 or 6% that day.

AMD - Like I mentioned before, this report is going to be a disaster. They still haven't answered Intel's Core Duo 2.

Prediction - 5% or greater drop. Perhaps a multi-year low.

Gap Inc. They just don't have the "cool" feel to them anymore. Take a hint from Liz Claiborne and Jones Apparel.

Prediction: They've been hammered about 33% in the last MONTH. The earnings report will likely be bad. Considering their P/E ratio is about 9 and a lot of their competitiors have a P/E ratio of 2 or 3, Gap has a good chance of dropping another 10%. Best case scenario is that it remains unchanged. I think this best case is highly unlikely.


That's it for today, let's see how I do. More tommorrow.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Dead Cats will Bounce.

Hey everyone,

8 days ago -or 6 trading days ago - I said the best trading strategy was to, "Sell the days that go up. Don't buy the days that go down"

Hopefully, you listened to me, because despite today's rally, the Dow is still down 1000 points from close on Friday, October 3rd to close yesterday, October 13th.

Now, the real question is what do we do from here. Buy, Sell or Hold?

The answer is all three.

If you were long in the financials (why you would do that to yourself, I have no idea) - take today's rally as a gift and sell. They may go up again with the government's big announcement today, but let's face it - good news in the financials is that a given company won't go under. Is this really where you think you you'll make any money in the next few months?

The above is also true for insurers. Insurers are screwed.

If you have a position in technology - stay there. Yesterday's rally really helped tech because they got disproportionetly hammered over the last several down days. If we see the stock market drop a little tommorrow, there are a few tech stocks that ICM is eyeing to pick up, but we won't pick them up unless they hit certain valuations. I think over the next few days you'll see some recovery in tech...but if the markets go down, that recovery will only be that tech doesn't go down as much as the rest of the market.

So what to buy? Aspirin.

But seriously, as far as I'm concerned, as of market close there is nothing that is screaming "BUY ME!!!". At 40/share, I think COF is a buy, not a screaming buy. They report earnings this thursday, and I expect the stock to be above 40 by the end of the week, but I'm not a 100% that it will be above 50 by the end of the week. I'd dump it at 50 (or even at 45) for the short term play. However, long term - by which I mean in 2 years or less, its going to be at 60 AT LEAST.

SHLD is a buy too, and considering it declined today because of the resignation of the CFO, it is very close to a screaming buy. However, I wouldn't say its a screaming buy until it is below 60. Buying it at 67 is still the right decision, but it's not fool proof. Also, anyone that thinks that the CEO and chairman Eddie Lampert isn't the de-facto CFO is a moron. Who cares about the damn CFO when Lampert is running the company?

Also, I'm in the middle of earnings season right now, so I expect that I'll have my usual earnings season predictions up tommorrow or the day after.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management


P.S. I'm just getting in details on the 250 billion capital injection that was being whispered around Wall Street and it looks like the federal goverment is forcing banks to give the government big equity stakes in exchange for cash. This is heavily dilutive and and I imagine that the banks are going to see their share prices cut. The only problem with this drop prediction is that with the extent of negativity in the market, you may still see prices go up short term for some of the banks because the risk of bankruptcy may been priced in.

Why I wish I was right.

Hey everyone,

So trading in Japan opened about an hour or two ago, and I can't tell you how worried I am. The Nikkei - Japan's major stock index - is down over 3% in that time. The dollar is up about 1.4% and mortgage rates today are less than that of the same day last week - but the market is still plummeting.

Right now, the European governments are scrambling to save their banks and the word on the street is that they may need an emergency rate cut to keep their banks alive. The problem is that a rate cut from Germany doesn't help the French banks or the English banks or the Spanish banks or the Portuguese banks. Unless all the individual countries band together and all cut their rates, Europe is going to be a disaster.

I know my prediction for the S&P bottom was dead wrong - it breached 1,200 and has continued to stay below that level - I am sorry.

Do I think its going to get worse? I think its very possible that we'll see the S&P breach 1000...and continue to go lower.

However, even if the S&P doesn't breach 1,000, I do not expect the US economy to be in the midst of a recovery for at least a year - and I think that's being generous.

What the trading strategy?

Sell the days that go up.

Do not buy the days that go down.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

This Week - A Perspective From A Hedge Fund Manager.

Hey everyone,

This week has been nothing short of awe-inspiring. On Monday, the largest point drop in the history of the Dow Jones Industrials.

I was actually in the Detroit airport when the market closed and the scene was unbelievable. There were more people huddled around the TVs showing CNN than were looking at the TVs with the flight information. I've been flying since I was 2 months old, and I've never seen anything like it. Same scene played out when I was in the Salt Lake City airport later that day. People were just in complete disbelief and trying to make sense of the collapse.

We had an emergency call to find a few buys, but really even with 20 point drops in companies like Apple, we still weren't convinced of a strong abrupt rise for the rest of the week.

We wanted to buy Goldman Sachs, but it "only" dropped 10 points, which wasn't down far enough for us to make a trade.

The nearly 500 rally in the Dow Jones on Tuesday was nerve racking. The problem was the market was going up for no identifiable reason. We saw loan rates go up that day and there was no real reason for people to be buying.

Of course, the subsequent days validated that assessment - with the S&P dropping 5%

We did manage to use Wednesday to lower the basis in one of our investments.

Thursday hit me very personally. My employer's stock, Monsanto, dropped nearly 20%, in a matter of minutes following a downgrade by Merrill Lynch. I own less than $100 worth of Monsanto stock at any given time, and not by choice - only because of my 401(k) match which I need to manually diversify every two weeks. However, many of my fellow employees own major stakes in Monsanto in their retirement portfolios - hundreds of thousands of dollars worth.

As I was working that day, I thought to myself with much empathy, I told you so.

Normally, ICM does one long conference call every Sunday.

This week, we talked to each other every day and were constantly firing emails back and forth to explore advanced strategies that we could quickly execute.

Today, Friday was an unusually twisting day. We were trying to execute an options spread on some fairly illiquid options positions while the bailout was being voted on a second time.

My computer had an internet stream from CSpan.com, real-time quotes from Yahoo! Finance, and our brokerage website up at the same time making sure that I wouldn't execute the order under unfavorable conditions.

At the end of week, after what we hope (perhaps in vain) is the most tumultuous week we will see, we were still beating the market by 19.5%.

Tune out the noise. Not the market.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

My Bailout Plan.

Hey everyone!

TEN BANK FAILURES!!!! WOOOHOOO!!! Or rather, WaMu! That's right, the bank who's nickname sounds like a hybrid goat created somewhere in the caves of Pakistan, has now been seized by the feds!

JPMorgan, the hahawegetnoriskthanksunclesam-purchaser of Bear Stearns, has bought up several thousand WaMu branches and billions in their assets.

(50 bucks says they buy Wyoming next)

Anyway, with the economy tanking, Congress has been scrambling to throw somewhere in the range of 700 Billion to buy out the bad CDOs....

...that is after it already:

1) Given JPMorgan a no-risk deal to buy Bear Stearns
2) Sent out $150 Billion in stimulus checks
3) Rescued Fannie Mae and Freddie Mac
4) Rescued AIG

Here's my question...does anybody actually know the percentage of foreclosures? I mean, really, do you?

Here lets do a multiple choice:

A) 10%
B) 20%
C) 30%
D) 40%


The answer is....NONE of the above. The answer is 2%-3%. The problem isn't the number of foreclosures!!! Most of the CDO's are paying near the correct amount of interest. The problem is that no one wants to buy them and so, because they were bought with borrowed money, the value of them needs to be written down, and the banks need more cash to remain what is called "A well-capitalized institution". If the banks had bought these with cash, they could hold onto these CDO's to maturity and just get a constant flow of interest and the principle repayments

So, we need to give $700 Billion dollars to these banks because they made one bad business decision?

NO WAY. NO HOW. NO BAILOUT.

So, how do we restore confidence to the banking system?

Increase FDIC insurance to $1 million/account. Hell, make it $100 million per account.

Insure every dollar in cash that every hard-working American has. This way, even if your bank goes under, you know you'll get your money.

This way people don't keep on causing runs on banks. The banks remain well capitalized institutions and the fear leaves the market. Now, with their deposits run-proofed, the banks have enough time for the CDOs to come to maturity and yield profits.

This will cost MUCH less than 700 Billion. You know, unless like half the united states had the entirety of its savings in WaMu.

(it doesn't)

-Mansij Hans, E.I.T.
Member, Intigril Capital Management.

Disclosure: The other members of Intigril Capital Management do not necessarily share my views on the above proposed bailout discussion.

Someone! Quick! That squirrel needs a bailout!

Hey everyone,

Anyone else think that the stock market has bipolar syndrome?

...and do you think that Paulson, when he was CEO of Goldman Sachs, ever thought that would end up being the Treasury Secretary during the biggest financial collapse in nearly a century?

Most of the business news media has been discussing whether bailouts are ethical or not and a lot of philosophical questions associated with what has happened over the last few days.

Considering I graduated with a double major in chemical engineering and biology, I'm not interested in discussing philosophy. I want to know what to expect come the opening of international trading on Sunday night (and the opening of the NYSE on Monday morning).

Immediate effects and recent events:

1. Oil
Spiked from its recent low of around $92 all the way back up to $105. Not suprising considering the dollar depreciated about 2% versus the euro.

2. Heavy rallies from the financials - and satellite companies?
However, there was another effect - other non-financial stocks which were heavily shorted also rebounded significantly. Sirius XM is a great example - outperforming the S&P by 15% this week.

3. The miracle company - CapitalOne

I've been extolling the positives of CapitalOne for quite a while now. Their stock - DESPITE NOT BEING ON THE SEC's NEW ILLEGAL SHORTING LIST - SKYROCKETED FROM 46 TO 56! By the way...for those of you who are paying attention - I recommended this stock when it was at 36.

4. I'm Eddie f***ing Lampert.

Eddie Lampert got his first job at Goldman Sachs when he was 15. He was a child genius who became one the best traders on Wall Street. He now owns Sears.

Now, his company's stock is under attack. TWENTY-FIVE PERCENT of outstanding shares were being sold short.

So what does he do?

He says, "I'm Eddie f***ing Lampert" and then...

...proceeds to buy back 4% of shares in THREE MONTHS (normally takes 1-2 YEARS).

The price of the stock goes from 70-ish to 100/share.

Some people shorting his company lose as much as 33%.

Why did he do that?

Because...he's Eddie f***ing Lampert.

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So, what does all of this actually mean?

1) Trust the book value. Companies that should not be trading below book values - such as Sears and CapitalOne - are now buys.

2) If you lost money on energy companies recently, I would use the momentary spike in oil prices - and the increased price of oil companies - to sell off the energy companies. Collapsing demand can only be buoyed by the weaker dollar for so long.

3) Covered calls are probably a winning strategy for companies whose only major concern is consumer slowdown. I would be more reluctant to do very specific retail -such as Guess and Ralph Lauren, but I think covered calls on APPL and BBY are probably solid strategies. Don't touch Circuit City or Gamestop. Circuit City is slowly dying and Gamestop is just too risky as their trade in service is starting to upset customers. I think covered calls on pharmaceuticals are a great idea too - especially GSK and SNY are great too. I don't expect the market to be up 30% in the next year or so and a covered call can often net you 30% with only small upward movements of the stock.

I think that's all I have for right now. Keep on reading!

-Mansij Hans, E.I.T.
Member, Intigril Capital Management