Market Meltdown

The market started out on a positive note today with much better than expected earnings from General Motors (GM). GM earned $2.48 a share ex-items vs. $2.03 a share ex-items in the 2nd quarter of last year. GM had revenues of $46.8B vs $53.9B last year. The decrease in revenues vs. the same period last year was expected due to the majority sale of GMAC to Cerebus last year. In fact analysts on average were expecting sales of $44.45B this quarter. GM opened up 6% this morning before falling along with most of the market this afternoon.

News did move the market lower today. American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure. Investment banks cut off credit lines, leaving American Home without money for $300 million of mortgages it had already promised. American Home anticipates that $450 million to $500 million of loans probably won't get funded, and the lender may have to sell off its assets. American Home caters to borrowers whose credit scores fall just short of standards for top-rated mortgages. The announcement provides fresh evidence that defaults may be spreading from subprime borrowers with the worst credit scores to homeowners with more reliable payment records. The biggest U.S. mortgage lender, Countrywide Financial Corp., said last week late payments rose among some of its most creditworthy clients.

According to Bloomberg late Tuesday afternoon Bear Stearns, manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to overwhelm the fund with redemption requests. The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds. The fund's stumble is a setback for New York-based Bear Stearns and illustrates how the crisis in the subprime mortgage market has spread. The fund had less than 0.5 percent of its assets in securities linked to loans to subprime borrowers. The two funds that collapsed invested almost fully in subprime bonds. Losses have spread to banks, insurers and hedge funds in France and Australia, including one run by Macquarie Bank Ltd.

The news that mortgage troubles are spreading beyond the subprime market may prove devastating to the market in the short run. At this writing the Dow Industrial Futures are down 112 points. I would imagine that the financials will be hit particularly hard.

The long term investor may want to ride out the storm and at some point open or add to positions in the financials that will survive this rough point. I am holding Citigroup, JP Morgan Chase, and AIG in my portfolio. I am very exposed (many will think overexposed) to the financials. Short term this will be rough. Long term I am convinced that these companies will turn out to be good investments.

Better Days Ahead?

Today my "losing streak" was finally broken. A positive day for many in the market. You can count on that the market will fluctuate. While some may be "gifted" enough to know which way the market is going short term, most investors and traders do not know day to day how the market will go. It is a certainty that on many days news will drive the direction of the market. I am intrigued almost daily by the headlines that attribute the markets rise and fall to some obscure event.

More evidence that the behavior of some "experts" can be no riskier than that of the individual investor going it alone. According to a report from Marketwatch, Sowood Capital Management LP, a hedge fund firm that had more than $3 billion in assets, told investors on Monday that its Alpha funds lost more than half their value this month amid turmoil in credit markets. You can read the story for yourself my clicking on Marketwatch above.

It is interesting to note that the Sowood meltdown is attributed to a widening of spreads in the corporate loan market as opposed to the subprime mortgage market. Could this portray more of the same ahead?

While today was promising with the market up on heavy volume, I still stand by my strategy of investing of the long run.

Lessons From the Fall

After the market close on July 20, my gut was to sell all of my holdings. I decided to remain disciplined and hang in there. Earlier in the week I sold my speculative holdings for a very modest profit. Good thing too, I would have taken a bath in those stocks last week.

On Monday, July 23, the market was up on light volume. Could it be that was the last gasp of the bull market? Whether this was the beginning of a bear market or the start of the much anticipated 10%+ correction remains to be seen. As stated in the July 27 entry, I have been down 10 consecutive days, a personal record of the dubious kind.

At this point what is an investor to do? As an investor, one should strive to prevent losses. I could sell all at this point for a profit (albeit a much smaller profit than a month ago). Even with the horrible month of July, I am still up over 19% for the past 12 months and over 3% Year-To-Date.

I am staying in. I am not on margin (I would not recommend anyone using margin at this time of great uncertainty) so I am not in real danger of being wiped out. I am holding only 8 stocks. All 8 are in the Dow Industrials and all pay dividends. Two of my holdings (PFE & C) have yields of over 4.6% at current valuations. My strategy is to stay with my holdings at this time. I will likely add to all of my positions at "sale" prices at some point in the near future.

The Onslaught Continues

Down for the 10th day in a row. That is the longest losing streak that I have ever had. I perceive that we may be getting close to the bottom in this shake out pending no major negative news. Only one of my holdings, JP Morgan Chase (JPM) closed up today. While that is bad news, it may be good news as well. JPM hit a 52 week low yesterday. It may be that this stock has found its bottom for the short term anyway. Another holding, Pfizer (PFE), has dropped to the point it has a 4.88% dividend yield. While there has not been positive news from PFE for sometime, it is a company that has ample cash for buybacks, increased dividends, or acquisitions. I would think that PFE is close to finding a bottom.

Exxon Mobil

Although Exxon Mobil (XOM) released earnings today that disappointed the street, the bottom line of $10.76 Billion ranks as the 4th largest corporate profit ever. The company spent $2 billion on dividends in the second quarter and $7 billion to acquire and retire 99 million of its shares. In fact although profit was down from last year, the new per share was actually up at $1.83 vs. $1.72 a year ago do to a reduced share count as a result of the company's aggressive buyback. Even with the rough day today, I am still up over 30% on XOM. XOM is a stock for the long run.

8 Down Days in a Row

I have been down 8 consecutive days in a row. That is my longest down streak since the end of February-Early March of this year. After that down streak, my portfolio started an almost vertical climb. Perhaps that will happen again. As I have referred to in previous entries, I am heavily invested in financials. In fact they make up over 37% of my current holdings. That could bode ill for my portfolio performance over the next few months. In addition to the subprime fiasco, it now appears that banks are having a difficult time selling loans used to finance leveraged buyouts (LBO). Citigroup (C) may be stuck on several deals including the LBO of Chrysler by Cerebus. C is also involved in the deal to take Allison Transmissions private. Allison Transmissions is being sold by General Motors (GM). Allison Transmissions has one of the highest profit margins of any unit of GM.

The financials may be in for a rough several months at the least.

My Clock Works Great Because It Sure Got Cleaned Today!

Wow! What a ride we had today. I was down over 2% in my portfolio. Not much positive that I can say except that the market typically overreacts in both directions. It may be that all of this action will shake out some folks and the market will continue to move up. It may be that yesterday's big upward movement on lower than average volume was a top and its downhill from here. I am sure that you could pay dearly for advice from "gurus" who will tell you that I am right in one or the other of my presumptions. Over the weekend I seriously considered selling all my positions and riding out the volatility for a time. After much thought I decided to hang in there. If the market keeps going down, there will be good times to add on to positions.

Focus Stock American International Group (AIG)
If you have seen my holdings on Covestor.com, you may well consider that I am too heavy in the financials. I own American International Group (AIG), JP Morgan Chase (JPM), and Citigroup (C). They were all down big today on heavy volume. I am hanging in there. I think that these financials are not as exposed to the subprime mess as they may be considered. AIG and C have very large footprints outside the US. I think AIG in particular is a great stock to own. It currently is trading at just over 10x projected earnings for 2007. AIG historically trades at around 22X earnings. 2007 earnings are projected at 6.70 per share. 2008 Earnings Per Share (EPS) is estimated at 7.30. Should the company go up to 18X earnings (still below its historical average), it could more than double to over $130 per share. Additionally the company has stated that under normal conditions it will increase its dividend payout 20% per year. Now that is only ,20 per quarter currently, but at an annual 20% increase the stock could have a payout of $2.00 per year, an increase of 150%.

I consider AIG to be a stock for the long run.

Down On An Up Day

A tough day for my investing strategy. The Dow was up almost 100 points and I was down. Only 7 of the Dow 30 Industrials were down today and I own 4 of them, CAT, AA, JPM, & AIG.

CAT continues to be hit because of disappointing earnings for the 2nd quarter. CAT kept its guidance for the year showing confidence that the 3rd & 4th Quarter results will be better.

AA continues to fall because of the lack of a deal with Alcan and that there apparently are no suitors interested in buying the company. AA did close off its lows today. Could it be that the stock has found a bottom? More than likely it is because of the great broader market today.

JPM & AIG were hit because they are in the financials. In addition AIG is likely held down because of the ongoing conflict with former CEO Maurice Greenberg. JPM released good earnings last week. AIG has a large footprint overseas. I think that these two stocks will be among the financials that will weather the subprime storm. It may be that over the next few months an excellent buying opportunity will present itself here.

Investing For the Long Run

I have been an investor for about 8 years. I have tried everything from interpreting stock charts to subscribing to newsletters. About a year ago I read The Intelligent Investor by Benjamin Graham and Stocks for the Long Run by Jeremy Siegel. Those books along with the shareholder letters of Warren Buffett have had a tremendous impact on my investing. I am neither a value investor or a growth investor. I am simply an investor. I'll briefly describe my current portfolio to you with my reasons for owning these stocks.

Alcoa (AA) I first purchased AA in July of 2006. As of today I am up 38.94% on the stock. This is after a couple of days of AA being beat up because BHP publicly stating it was not interested in a take over of AA. I suspect that the stock my go lower yet over the next month or so. AA is the largest aluminum company in the world. The company is well managed and should continue to increase its profitability as aluminum prices continue to increase over the next few years.