A Rare Post

If you follow this blog at all, you will note that I have made few postings the past few months. Perhaps the greatest reason for my inactivity is that I am getting "my clock cleaned" almost daily in the markets. In August I began thinking that I was overweight in financials. I stuck to my guns and am paying the price. I still believe in the stocks I own for the long term. However over the short term their may still be a tremendous amount of pain associated with owning American International Group, Citigroup, JP Morgan Chase, and a non-financial, General Motors.

Alcoa Reports

Alcoa reported earnings on October 9 after the market close of .63 per share. As Alcoa stated that the business environment was tougher in the 3rd Quarter due to among other factors the weak dollar, higher energy, costs, the Jamaica facility being closed due to a hurricane, and higher costs for raw materials. The weakness was offset by continued strong demand for China.

Alcoa is in the midst of trying to stream line its business to concentrate on the production of aluminum. Over the next year Alcoa will likely sell several of its business lines including its Reynolds consumer product division and its automobile related business. While there will be large charges related to the sell of these divisions, Alcoa should also receive a fair price for them when sold. Alcoa received over $1 Billion from the sale of its 7% stake in the Aluminum Company of China during the 3rd Quarter.

Alcoa also announced it would increase its buyback of shares from the planned 10% to 25%. This amounts to around 217 million shares.

In selling non-core lines and using some of the proceeds for the stock buy back, Alcoa is positioning itself to either purchase a related aluminum business. When there was speculation of a potential buy out of Alcoa this past spring and summer, there was much discussion that Alcoa would have to either sell or spin-off its non core lines. By already disposing of the non core lines Alcoa could be making itself an even juicier target for a future buyout.

Got Cash?

Many investors keep cash as part of their portfolio. In times of falling prices, it is good to have some cash on hand in order to buy stocks while they are on sale. One question I had was what to do with cash. While I am overall very pleased with my online broker, they like most other brokerages pay only a pittance of interest for cash in your account. Most regular savings account interest rates are low. If I invest in a CD, the cash may be tied up for at least 90 days. I save monthly, but invest in the market quarterly in order to save on commissions. I wanted to find a place to park cash where I could 1) get a decent rate of return and 2) be able to get to the cash fairly quickly.

I discovered TreasuryDirect.Gov (click here). As the name suggests, at TreasuryDirect you buy treasuries directly from the government. The account is fairly simple to set up with some paper work that must be signed by your bank. Once the account is set up you are able to buy T-Bills, T-Notes, Savings Bonds, etc. directly from the government. In using TreasuryDirect, you pay no commission so all the interest earned is yours to keep. I personally buy 4 Week T-Bills so that my cash is tied up for only 28 days. The yield this week was 4.75% on a 4 week T-Bill. Not bad for these uncertain times.

Is This the Time to Buy The Big Banks

Back on August 10th this blog asked the question, "Have the Big Banks Bottomed?" (Click here for the blog entry) Tonight I wonder is it time to buy the big banks today. The four largest American banks revealed today that they had borrowed $500M each from the Fed Discount Window (Click here for story). This was more of a sign that the system works as opposed to true needs. Bank of America revealed a $2B investment in CountryWide Financial today (Click here for story). It seems that BoA really paid 80 cents on the dollar for CountryWide. The big banks have weathered the storm and may be ready to seek bargains in those sound businesses that have been hit along with those businesses that may fail. These are times that Warren Buffett looks forward to.

I am an amateur investor. All investors should do their own due diligence before committing funds to any equity. This may be the time to get in on the big banks. I am long on Citigroup ($48.43) and JP Morgan Chase ($46.00)at the time of this writing.

Let's Be Fair to Cramer

While my style as a long term investor is very different from that of Jim Cramer, he deserves his due for how he educates the individual investor through his show Mad Money on CNBC and his website TheStreet.com.

Cramer is very passionate about what he does. Witness the "Cramer Meltdown" (click here) on CNBC's Street Signs with Erin Burnette. What you see is a man who cares about the markets and people. Notice his comments that we are spending billions to build homes in Iraq while 100's of thousands of Americans face foreclosure on their homes due to the policies of the past.

Jim Cramer made the cover of the August 20 edition of Barron's. The article questions Cramer's stock picking abilities (click here for the article). I have watched Mad Money on average at least a couple of times a week since the show debuted back in March 2005. To be fair to Cramer, he begins every show with the usual written legal jargon about how investors should use caution in making investments based on recommendations from the show. Cramer goes beyond the legal jargon though and verbally warns watchers not to buy his recommendations in the After Hours market while watching the show. Cramer tells viewers and callers that they need to do their own homework before investing. He waits until his Friday show to make his most speculative recommendations in order that investors have the weekend to do their homework and not rush out and buy the stock. Jim Cramer is also honest about his mistakes. I remember distinctly his reaction and remorse the day after he recommended Dick's Sporting Goods, only to later see the stock plunge.

I have to say that only one time have I ever purchased a stock because Cramer recommended it. I quickly sold the stock for a small profit. I enjoy the excitement of the market. I love to learn about different companies and their prospects. In my area, I really have no one to talk to who shares my passion for stocks. Watching Cramer fills that void for me. I watch Mad Money not for stock picks, but for education, for ideas and for entertainment. Let's face it, Cramer is very entertaining. I believe the entertainment factor is by design. Cramer entertains so he can inform and educate.

I wonder if the Barron's article was the first step in the coming marriage of Dow Jones and Rupert Murdoch to deliver a blow to CNBC as Murdoch's FoxNews plans to introduce its own business network on cable later this year.

As a long term investor I would hope to be more like Warren Buffett than Jim Cramer. That is not to sell Cramer short. I have learned much from him and have spent many hours enjoying Mad Money. Investors should do their own due diligence whether copying Warren Buffett or following recommendations from Jim Cramer, CNBC, the talking heads on FoxNews Saturday Morning Business Block or any other source. The Intelligent Long Term Investor will do just that.

Financials Up Yesterday

After being down over 300 points at one time yesterday, the Dow Industrials bounced back to finish down just over 15 points. The financials led the way today as traders feel that the Fed will lower interest rates soon. Some speculate that it has already secretly done so. While the reader may think that it was prescient that yesterday's entry referred to Citigroup and JP Morgan as long term buys, it was merely coincidence that those stocks finished up strongly today. Although I do believe that both are solid long term investments, no one can make better than an educated guess as to the short term direction of the market. Another financial related stock in the portfolio, AIG finished up today as well.

Light at the End of the Tunnel?

Citigroup (C) $45.61 (.05) P/E 10.72 Yield 4.62% Dividend Pay Date 8/24/07

JP Morgan Chase (JPM) $43.00 (.30) P/E 9.65 Yield 3.47% Dividend Pay Date 7/31/07

There may be light at the end of the tunnel at two of the big banks. At the end of the 2nd quarter, Eddie Lampert's hedge fund, ESL Investments, raised its stake in Citigroup to 24.8 million shares from the 15.2 million held as of March 31, according to a Securities and Exchange Commission filing released on August 14. Exactly when the purchases were made is not known. C has declined substantially so far in the 3^rd Quarter as the subprime mortgage fiasco unfolds before investors. Although Sanford Bernstein has been estimated that Citigroup may lose $3Billion in the 3^rd Quarter as a result of the subprime mess, Citigroup is poised to come through the recent market turmoil in better shape that many banks. Lampert is widely known for the quality of his investments. Analysts from Sanford Bernstein and Sandler O’Neill rate the stock as Outperform with price targets of $65 & $62 respectively. Citigroup has a current yield of 4.62%, equivalent to a bond.

While JP Morgan Chase is struggling in the current market to complete many of its current deals, the bank is also poised to do well in the long term. JP Morgan has positioned itself to take advantage of the current weak environment due to the bank’s strong capital and liquidity positions. JP Morgan , like Citigroup, pays out a decent dividend to reward investors for their patience. Currently JPM has a dividend yield of 3.47%.

Has the market bottomed out? It is too soon to tell. It may be best to wait before committing funds to either of these stocks. Yet in the long term, Citigroup and JP Morgan should provide investors with a good investment. As always the reader is reminded that I am an amateur investor. Each investor should do his own due diligence before committing funds to any equity. There is potential for substantial loss of capital by investing in equities. I am long in both Citigroup and JP Morgan Chase at the time of this writing.