Bailout vote, language of the bill and stock market response

An update to the whole "bailout/rescue of credit markets" issue. If I had mentioned somewhere on the internet that the bailout was socialism, I would like to take back that statement. The issue is more complex than I could initially simplify, and Ben Bernanke's and Paulson's panic seems somewhat justified. There is no point going into a depression, right?

By now, all of you know that the bailout vote to assuage the financial crisis failed in the US House of Representatives. What I am about to discuss is not so much about who voted in which way, or even the discussions leading up to the bill provisions or how the markets responded. You can read about voting records here and you must have heard that the "Dow" fell 777 points. Isn't that cute? The venerable Dow Jones Industrial Average decides to fall by a memorable number like 777 (more). If you love decimals, of course the index fell by .68 more, but let us not harp on a few billions (the worth in dollars when you convert the points).

Even so, thankfully the markets did not crash today. They were already down 300 odd points when they suddenly plunged down to 688 points and then fluctuated back and forth between -400 to -700 eventually ending the day at a good bottom. Now, coming back to the bill, the Paulson bailout plan for which McCain suspended his campaign, that one.....

what really concerned me is that the bill, is actually titled as is an amendment to an existing bill

H R 3997 RECORDED VOTE 29-Sep-2008 2:07 PM
QUESTION: On Concurring in Senate Amendment With An Amendment
BILL TITLE: To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes, and for other purposes

Oh, pleasssssssseee give me a break! Call the bill what it really is, A (purported) shot in the arm to the credit markets and a bailout of bad business decisions by exceedingly large number of financial institutions getting caught up in credit swaps. So unless the clerk of the US congress made some mistake in the bill title, this is probably the funniest title I have ever seen for a bull, oops I mean, bill. Sleep well, the market may crash tomorrow by 2600 points. Or not. I cannot predict things accurately nor can other economists.
if you want to read some funny English, check this out:

9/29/2008 9:27am:

Pursuant to the provisions of H. Res. 1517, the House moved to agree to the Senate amendment to the House amendment to the Senate amendment with an amendment.

9/29/2008 9:27am:

DEBATE - The House proceeded with three hours of debate on the motion to agree to the Senate amendment to the House amendment to the Senate amendment with an amendment to H.R. 3997.

Stock Market Crash and Your Money

It seems very imminent that there might be one of those large corrections, nay, a crash, pretty soon in the equities market. There have been several bank runs now, with the latest being WAMU. So how do you protect yourself from a crash or even better- benefit from it. Well, anytime there is a decent rally, sell into it and hold the cash and then buy more stable companies like consumer staples -Coke, Dr. Pepper group, JNJ, Grocery chains, Grain manufacturers etc.

you could also try reading books written by some people who have been around longer - like this book on Crash Profits: Make Money When Stocks Sink and Soar on Amazon.

ps: ignore the "Read More" button below. The post ends here

Air Miles Across English Channel in a Jet Pack

A Swiss adventurer Yves Rossy (pronounced Eve Ross-e) found a new way to add some air miles to his own FF program. Just kidding, Mr Rossy made a sort of pioneering flight by crossing the English Channel using jet packs after being released over French landmass at about a height of 8200 ft (~2500 m). You can read more about it on CNN. Nicknamed the human jet, the 49 year old former military pilot made this the first solo flight using a jet pack/jet propelled wing. A video of the final stages of the flight before he landed in Calais, England using a parachute is available on BBC. The BBC news report has a lot of details on its news page.

While I was talking about this (jet pack flight) to my friend, I mentioned that perhaps a more challenging feat would be to use hang glider and cross the channel. I also mentioned that since a hang glider is a little larger than a jet pack, the person could go up on a hot air balloon and then be dropped from a height. He started arguing that "one needs thermal currents to hang glide and that the probability of thermal currents over the english channel were very low". I ran a simple search on google of the query 'can you glide over the english channel". The results showed me that wayyyy back in 1989, a woman named Judy Leden had successfully glided across the channel, after she was hoisted along with her glider in a hot air balloon. I was very happy to see that something almost exactly recreated as I had imagined a few moments back. You can see the video below:


For losing the bet, my friend agreed to eat a whole garlic raw.

Driver License Compact DLC

This post is irrelevant to air miles, but in the interest of public information, I have decided to write about the Driver Licensing Compact (agreement) among the different states in US. The states of Georgia, Massachusetts, Michigan, Tennessee and Wisconsin are NOT members of the DLC (opens pdf). Note that District of Columbia actually signed the DLC. The states that signed the DLC share driving record info and also go by the "one license" rule. So if you move from one state another and want a new license from the new state, you have to surrender your old state license. Regarding this issue I heard something that, states of MA, GA etc can actually refuse to honor your license (Either as an ID or as a driving privilege document). I am not sure if that is just a rumor or if it is a valid but rarely ever enforced rule. Comments anyone?

Short Selling Ban

Update: An official from the SEC called me at 9:35 am and informed me on the clarifications that I had sought. Those answers are added below my questions in this post in BLUE COLOR. I will have to say that I am impressed with the fairly quick response (within 30-40 mins) by this government agency. I am happy that the response was quick, although I question the logic of the SEC's decision on banning shorting. What they should have done is merely get the uptick rule back in place, that's my personal opinion on this issue. Please read on.

Dear Chairman Cox

REFER: http://sec.gov/news/press/2008/2008-211.htm

I need some immediate clarification regarding SEC ruling 2008-211. In fact I *desperately* need the clarification before markets open today at 930 am. My question is this, the SEC has banned short selling of financial securities till Oct 2 as I notice in the ruling. Q1) Does this affect companies like General Electric (GE) (as an example) that have substantial financial sector involvement. Or does it involve only the purely financial companies?

>> Read funny note at the end on financials.

Q2) SUPER IMPORTANT: If I am short on any financial security as of yesterday (i.e not a newly initiated position but a previously held position), do I need to cover or can I continue holding that position short?


>>the SEC has not issued any guidelines on existing short positions. As long as are legally short, it is your decision alone to hold or cover.

In case I do not cover, will the SEC or the Treasury guarantee my margin position even if the stock price rockets up?

>> The SEC or the government will not guarantee any margin positions of individual investors.
What they did not add but I am saying is that, they might cover you if you are in the league of Bare Sternums or Fanny May or Fretty Mac (BSC, FNM, FRE). Names misspelled on purpose.

I am also concered if the Stock exchanges will halt trading if the rise is too fast in the indexes (they did this in RUSSIA yesterday).

>> No comments on this issue.

This email may not sound very professional, but I need the clarifications as soon as possible, at least before 930 am.

Thanks a lot.

A concerned investor

Investor in NYSE, NASDAQ, AMEX.


Phone

Currently residing in the state of _____________


FINANCIALS AS IN:
for the blog alone: purely financial companies as in the ones that just push paper form one place to another and do not add any real material value or create any goods. Companies that are just middle men, that get to hold your money for 3 business days or charge you wire transfer fees for moving your money immediately. Or companies that charge 21% interest for providing your loans more than 20 days (for purchases) or 23% interest for cash loans the moment you take them out.
END OF POST, please feel free to add comments

Stock Market Predictions

So what is really going to happen in the stock market? (not only in the US markets, but also world over?). I have an answer to that: I do not know. Neither does anybody else. Now that we have that out of the way, let us dissect available news and possible courses of action.

Click on image for full size chart
Many people are already in panic mode after seeing Lehman Brothers fail (and file for Ch. 11 protection to reorganize) and Merrill Lynch bought out by Bank of America. Additionally we have the large insurance American Insurance Group, Ticker: AIG in deep trouble as we speak. We also hear several other companies like MF Global comment that their exposure to LEH was minimal, in order to bolster confidence. But we all know how the mob mentality works right? Investors enmasse pulling their money out of the stock market, does little to help stock price. Pictorially, the story of LEH, as of now is this in the last few days:

Click on image for full size chart
Once they went below 14, it was pretty much a free fall. A lot of things in the stock market work based on perception, so if a collective group of people "perceive" something to becoming valuable in the future, they bid up the prices on those "it" stocks. When they think that stocks are going to go, a few big names start selling and then everyone (almost) scrambles for the exits. Take for instance, AIG. I had long felt that they would run into trouble, but I had not articulated that anywhere except in my paper virtual portfolio. Now, after it became well known to even somebody living in Solomon islands that AIG has big troubles, the three ratings agencies decide to downgrade AIG.

American International Group Inc., the world's largest insurer, was hit by a wave of downgrades by credit-rating agencies worried that the deteriorating housing market is further undermining the company's battered finances.

Read all about that here. Thank you Credit Agencies, you have been doing your job really well in the last few years! Do I hear the barn door being closed now, or wait, should I use the analogy that bad credit is bad credit, you can put lipstick on it but... No, no, no - I am not going to go that route or the other route. To be fair, I am not really bashing rating agencies Fitch , S&P etc, I am just making fun of their delayed reiterations of news that is already out in the open market.

So where does all this leave us. Well it goes back to the old wisdom of being diversified, keeping emergency cash as cash, and having a positive outlook on life, no matter what. I am not sure, if the musical Annie is part of that wisdom, but hey I thought it is cool. I am not giving any tips for stocks here, but some of my favorites are DUK, GE, UTX, ABB, SUN, BMY, ISIS. Several of them are risky, so do your due diligence.

Sorry for run-on sentences and any other grammatical errors.

Merrill-instead-of-Lehman-gobbled-Bank-of-America-dividend?

Now that it is well known that Merrill Lynch will be bought by Bank of America (contingent to a slew of conditions), the big question for BAC shareholders would be: 1) How much would this dilute current stockholder's positions? 2)Would this affect the dividend which Bank of America has been paying regularly and reaffirmed recently? What exactly will happen in the near future (1 week?) and....
UPDATE: Now there is definitely talk of BOFA's dividend cut. Check it out in this interview.
What would happen in the medium term (1 year?) and in the near long term (4-6 years?) - when it comes to the health of these financial institutions. This "crisis" which Wall Street still refuses to call as "panic" is mostly one of its own making. Printing money does not make finances strong, nor does undue leverage make any transaction sound and secure. But this has been pretty much the case with most of the mergers and acquisitions proposed and guided by several of these investment banking firms.
I am not expert on these topics, but it had been my grouse to see the easy availability of large money at low interest rates to big banking firms. Now that is it coming back to them, these firms are all crying and hoping for more bailouts. What is worse of course, is the plight of the middle class "investor" who will be hurt even more by the fall in stock price (or wipeout) due to large margin calls - if someone had been over risky to buy this on margin. I was long BAC sometime back, but sold out for a 2% profit on my capital because I just was not sure which way things would go. Of course my profit had already gotten wiped out by an improperly positioned LEH short, back when it was trading at 23-24. Hindsight is always 20/20.
Disclosure: I do not have any position in LEH or BAC or MER.

Stock Picking and Sectors Cramer

I read this article posted on street.com where Jim Cramer explains how to make the most of his Madmoney TV show. He explains about the fundamental reasons why he likes certain stocks which will produce long term gains or how he does not like certain sectors leading him to show a thumbs down for a particular stock from that sector.
He also talks about how private equity firms like companies with strong cash flow, low debt etc., which make said companies good takeover targets. Overall Cramer mentions that he cannot make you rich, but if you follow his guidance and do your homework, you can make yourself rich. To read the complete article visit his site.

Starwood points for no blackout date flights

Starwood introduced a new program called SPG Flights where one can redeem Starwood points for the cash value of any available airline ticket on required dates. While, it might seem a little pricier than the "so-called" free award ticket, it has the benefits of being free from blackout dates and capacity control restrictions. Additionally, it seems like you can redeem the points on several airlines.

I have not personally used this systerm yet, but I test drove the website and interface for multiple itineraries and compared with orbitz travel results side by side. I ran a weekend flight search from an obscure airport in Pennsylvania - State College (SCE) to San Francisco (SFO) on Sep 26 returning on Sep 29. Sidestep returned lowest cost flights in the range of $475.

Starwood returned lowest points flights at 40,000 points. Considering that 40,000 points converts to 50,000 miles with most airlines with Starwood redemptions, this deal is very close to the assumed value of Starwood points (1.25 c = 1 point).

In fact based on the prices on sidestep, we can see that Starwood seems to be pegging the value at 1.18 c/point. The biggest benefit in my opinion is that you can pick another airline apart from the one where you plan to add your miles and redeem free flights. So essentially you get a lot of flexibility in flight timing choices, hubs etc. Also according to the FAQ listed on the Starwood site, frequent flier miles can still be earned on the flights taken.

However, if you were to compare this to the United "choices" program you cannot do any partial redemptions. At least I was not able to figure out such an option. A complete chart of the points to money value as of early Sep 2008 was this:

Starwood's site mentions the following as the biggest benefits:

You still have the option to transfer Starpoints to an airline and receive miles with Starwood Preferred Guest transfer partners; however, SPG Flights allows you to skip the transfer step, expands your flight options to include more airlines, and eliminates blackout dates and other restrictions found with airline mile redemption programs.

Once again, I cast my vote in favor of the Starwood American Express credit card as the only rewards card worth the annual fee! So if you are looking for a single rewards credit card that you plan to pay off on a monthly basis, one that offers a good buyer's protection program and an excellent car rental insurance program and other hotel related benefits, then I can shamelessly say that the Starwood Amex wins hands down.