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By Ian Wyatt, None |
GM | Nov 28, 2008 |
Your Daily Profit
November 28, 2008
*****Reader Mail
Dear Investor,
I hope everyone had a great Thanksgiving. Even with the pain in the stock market, we have plenty to be thankful for. I hope you were able to spend the day with good friends and family.
Now, let’s get to your questions and comments.
*****For starters, here’s a limerick from John K.:
There are many who thought themselves clever
By chopping up debt, an endeavor.
While consuming this beverage,
They forgot that such leverage
Had an equal downside to this lever.
Very nice. I’m just glad it didn’t start off with a trader from Nantucket.
*****Rasheme W. writes: I own shares of GM. I was wondering should I get rid of them or hold them and buy more at the current price? Do you think that the company will recover with the economy?
I can’t say I like the idea of buying GM (NYSE:GM). While I suspect the company will survive, it may have to go through Chapter 11 bankruptcy to do so. That means the stock won’t do squat while the company reorganizes.
Ultimately, the question is: what’s the upside? Could GM get to $10 a share in a couple years? Sure, it could. But given the companies problems, I think there are a lot more opportunities to grow your investment right away.
To me, the biggest risk in owning GM is opportunity risk. What profit opportunities will you miss while you wait for your investment in GM to bear fruit?
*****Emy A. asks: Do you recommend Verizon as a strong buy at this point? What would be a good entry price?
I’ve mentioned Verizon (NYSE:VZ) before in Daily Profit as an example of a stock that has great value at current levels around $30. The forward P/E is 11, the company generates a massive cash flow and pays a 6% dividend.
While it would be nice to get it closer to $26-$27, Verizon has already seen its panic sell-off. The weak hands have been shaken out. On the other hand, the economy is still weak and there could easily be more selling in the future.
I think Verizon at $30 is a fine idea. But patience may be rewarded with a lower entry. So you might consider scaling into Verizon.
*****From Maura R.: What about GGP and AIG? Also another question about AIG from Apostolos: Is it a good time to buy stock of AIG? And I want to buy only 3 stocks—AIG , CITI, and GS, what is your opinion?
I get a lot of questions about the most troubled companies. AIG, Citigroup, GM are constantly in the news, and not in a good way, either. I can only assume that investors see how far these companies have fallen and expect them to regain historic prices at some point.
The problem is, these companies have fallen so far for a reason. They’ve got serious problems. AIG, for instance, has had to borrow $125 billion from the government to stay afloat. $125 billion! Why on earth would any investor want to risk their money on AIG?
Now, I don’t mean to be disrespectful. AIG could turn out to be a huge winner over the next 5 years. But right now, I think investors should be more concerned about the return of their money than the return on their money.
The lessons from the sub-prime meltdown is all about risk. Investors and investment banks took on way too much risk. Investors would do well to remember that.
I’m reminded of Bill Miller’s fall from grace. Bill Miller was Legg Mason’s star fund manager. His value fund had beaten its benchmark for something like 20 years running. It was the longest streak in the industry. Then he went off the deep end, doubling down on Freddie Mac as it spiraled down. He lost a bundle of his investors’ money because he thought he knew the risk. He didn’t.
Now is not the time to assume anything about a company, troubled or otherwise.
I don’t mean to pick on AIG here. Citigroup is in the same boat. Goldman-Sachs (NYSE:GS) looks like the safest bet out of the group, but I’d wait to see what happens after its former CEO Henry Paulson leaves the Treasury. I have a feeling the stock might be vulnerable once the company loses its man on the inside.
Now, I’d like to introduce you to a few solid alternatives to risky stocks like AIG and Citigroup. I recently finished a Special Report called Buy America: Your 5 Stock Portfolio for the Next 4 Years. The report has the details on 5 stable companies that can make you money, but with much less risk. You can get it HERE.
*****More on Citigroup from William L.: How is it possible that a citigroup could still be hiding these problems after the wamu and lehman scandal were brought to light. Doesn’t anyone call out to the average guy and say stay away - where were the flags - the sirens - screaming out this is a dog stay away?
Well, there actually were warning signs from Citigroup. Last December, Citigroup put $49 billion off-balance sheet SIVs (structured investment vehicles) back on its balance sheet. That was the first sign that something was wrong at Citigroup.
Also, if you look a two-year chart of Citigroup, it’s clear that trouble started in October 2007.
But still, I get the point. There were very few, if any, warnings as to how deep Citigroup’s problems ran. In fact, that’s true for the entire financial sector. It wasn’t clear how far the sub-prime mess went until Lehman failed. (Remember, even in the case of Bear Stearns, the damage was thought to be company-specific.)
I’ve looked into Citigroup’s SIVs to find out what they are and why they were off-balance sheet. I have yet to find a satisfactory answer, but I’m eager to SIVs and Citigroup’s failure.
Investing is inherently risky. But the whole 401K retirement industry has made stocks appear less risky. I don’t mean to say there was a deliberate attempt to deceive. It’s just that so much attention is paid to the “stocks go up over time” mantra, that short-term risk is grossly understated.
I don’t think there’s a solution for this, except to be much more aware that there is always risk.
*****BW comments on short-selling: Shorting could be a good thing for investors who are day traders or who are very large and share (they do...I am near to it and know it to be true) information regarding targets that are "ripe". However millions are in the market through their Ira’s and 401 K’s and can be wiped out very quickly by the shorts with no method of using the same ammunition to fight back.
The issue of short-selling is one aspect of how retirement accounts understate market risk, and even make investors more vulnerable to downturns.
401Ks and IRA accounts are “long only”. You can’t short stocks and you can’t buy options (though I believe you can sell covered calls in IRAs). By they’re very structure, retirement accounts encourage investors to ignore risk and stay 100% exposed to the stock and bond markets.
There may be no solution for 401Ks, because you’re tied to a few pre-selected mutual funds. But with IIRA accounts, you can buy Exchange Traded Funds (ETFs). And included in the ETF world are short funds. These funds rise when their target sector falls. So with short ETFs, you can adhere to the “long only” rules for IRA accounts and still make money when stocks fall in price.
*****Jim M asks about “green” stocks: I am a small investor and have some cash. When will it be good to get started in setting up a portfolio of green stocks?
This could be a great opportunity to start building a green and alternative energy portfolio. Alternative energy stocks have been killed over the last year. And the recession and credit problems will expose some of the weaker players. I won’t be surprised to see some of these companies go under.
Do good research, look for companies with lots of cash. And I’d probably focus on solar, wind and natural gas.
*****Pearl wants to know about GE: Love to hear your thought about GE.
A lot of investors have been worried about GE, mainly because of GE Capital. As we’ve seen, exposure to consumer credit has been an earnings sinkhole.
But unlike all the banks who were up to their eyeballs in bad loans, GE is still turning a profit. Asset write-downs haven’t ended GEs profitability. That’s a good sign for the company going forward.
There’s also been a faction of investors who feel that the sweetheart deal GE gave Warren Buffett was a sign of desperation. Maybe it was, but Buffett isn’t going to buy a company that could go under.
*****Stan W. writes: Enjoyed today’s article about deflation and your explanation of it. Could you please continue writing about a what to expect in a deflationary environment. For example, your comment about money not circulating in a deflationary environment which would in turn lead to more expensive debt, was a comment that opened my eyes and gave me something to really think about. We have so much experience in dealing with an inflationary environment--i.e, buy hard assets, buy gold, avoid fixed income except for TIPS, etc. But when it comes to a deflationary environment, I’m not sure of what to expect. Also, what type of investments, if any, would do well in such an environment?
One of the problems with deflation is that one of the only assets that goes up in value is cash money. And that’s part of the reason deflation is so deadly. If cash is the best asset, why would anyone spend it? At least in a mildly inflationary environment, there’s an incentive to invest.
I’ll do some digging on deflation investing. But I suspect things like the short ETFs I mentioned earlier would be the best bet.
*****Krista H. asks about municipal bonds: We have just been advised by our financial adviser to look into tax-free municipal bonds. We (my husband and I – in our 40’s) have already lost $100k, diversified in stocks and bonds. Shouldn’t we just sit tight at this point and hope for a rebound or should we move funds b-4 we lose more?
Tax-free municipal bonds are a solid holding for any long-term portfolio. While it probably wouldn’t be wise to sell out of all your stocks right now, dumping some riskier holdings to put money in munis is probably a good idea.
*****Bill L. comments on credit: Lending institutions are not qualifying customers because of credit scores, for a 80/20 loan they must have a credit score of 740 or better, which means that most of the people applying cannot qualify, why would the keep the score so high, people want to refinance and purchase but cannot, what do you think?
I think banks are deliberately setting the bar high for two reasons. One, right now, they don’t want any but the highest quality loans on their books. And 2, the cost of insuring any but the highest quality loans has gone up considerably.
That’ll change as the threat of defaults falls and the current bad loans get worked through. Unfortunately, I can’t say when that will happen.
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