"Instead of complaining that the rosebush is full of thorns, be happy that the thorn bush has roses" Anonymous

Many people have been asking me the same question over and over during the last several years- how did I develop my investing strategy and investing style, and what do I recommend to people who are just starting out? My answer to this question is always the same.

The key to success in the investing world, in my opinion, is simple. The first part is simply being consistently skeptical about everything you hear from the management, experts and the media in general. Remember, it is always in management's best interest to present all the facts in most positive light possible, so you have to focus on the negatives, as all the positives are usually conveniently highlighted in every press release and investor presentation.

I personally don't really care what management is saying 99% of the time, because the only thing you can learn from these speeches most of the time is only whether the management is completely incompetent, simply naïve or whether they more or less know what they doing. Other than that general determination, who really cares what they really say? They can't give you any real insights because of Regulation FD anyway. It's only the actual results that matter and numbers lie a lot less frequently than people.

Forget all the "experts" aka Jim Rogers, Schiff etc? Somehow they are predicting the next Depression and at the same time say buy commodities? Heh?

Very weird logic by Marketwatch in this article:
More oil is put into storage, waiting for prices to rise

Oil producers, refiners and investors have put a record amount of crude oil into storage at a key delivery point as they try to profit from an unusual form of "super contango" that indicates the market expects prices to rise sharply by summer.

Inventories in Cushing, Okla., the delivery point for futures traded on the New York Mercantile Exchange, have jumped more than 40% in the month ended Jan. 2 to the highest level in at least four years.

Somehow the author's conclusion does not make sense to me...The only reason the contango exists is the lack of demand in the spot market and that's most definitely not bullish.

Maximum storage capacity in Cushing is about 42.4 million barrels, but only about 80%, or roughly 34 million barrels, of that is operable storage space, says Linda Rafield, senior analyst at Platt. With 32.182 million barrels now sitting in Cushing, the market appears poised to test the limits of storage capacity there.

What happens to the excess oil when inventories fill up completely? In my opinion despite all the doom and gloomer's predictions we have way too much oil supply out there and it's not going away any time soon. Read this article from Bespoke

Nothing about oil looks bullish to me at the moment!

Source: Bespoke Investment Group

Stay safe skepticalcapitalist@gmail.com

Several videos from the most recent Money Show...

First one is about the change in my strategy

Vad's Changing Strategy

This one is about GEOY

Vad's Strat Lab Pick

Only thing I can say about today's trade deficit release is WOW. One can and should consider it a positive for the US economy and USD in the long run, but in the short run this indicates a complete meltdown of the global trade...If you have open long positions in any companies heavily dependent on trade- dryshippers etc etc- watch out!

WASHINGTON -- The U.S. trade deficit contracted by the most in 12 years during November as the recession sent oil prices into a record plunge and restrained demand for a wide range of foreign goods from crude and cars to coffee and computers.

Imports fell 12.0% to $183.25 billion from $208.23 billion, with Americans buying less amid the sinking economy

Any time someone mentions that China, India and Co are immune to the global slowdown based on the so called "decoupling" phenomenon promoted by the newly crowned "experts" (aka Schiff, Rogers etc) - you should simply forward them this chart from Big Picture...

There is NO SUCH THING as "decoupling"!

Incredible fall off in global trade...

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster."

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

Let's hope this is temporary...

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction

To cheer up a bit another great cartoon from Slate

P.S. The only good news is that S&P has retested the 815 level and bounced back hard. Combined with the option expiration we potentially have a mini rally coming our way...But for now- stay safe and don't buy the commodities hype quite yet...

skepticalcapitalist@gmail.com

"Everybody wants to eat at the government's table, but nobody wants to do the dishes"
Werner Finck

If you were one of the many of us who thought that government's "eminent domain" powers only applied to real property - I have some bad news to report- as it turns out, our government can now condemn your intangible property as well, including all of your rights as a shareholder, including "fair disclosure", "equitable" compensation etc! Heh? What are you talking about, one might ask?

Strangely enough you are unlikely to hear the public outcry on the matter quite yet, and instead every "talking head" out there is still focused on blaming the "evil bankers" for virtually every possible economic problem, using Bank of America's most recent bailout as an example. Unfortunately, just as it usually happens, media conveniently chose to ignore the key point of the entire BofA/MER fiasco! After learning about the deepening losses at Merrill in December- Bank of America tried to back out of the hastily arranged deal (fairly common practice and a normal capitalist way of doing business) but instead was forced to complete it by the Federal Government!

No one should take the blame of "Ken Lewis and Co" for running the share price of one of the best and strongest banks in the United States (Bank of America) into the ground by completing a series of "overpriced" acquisitions. But let's remember-despite all the "doom and gloom" and insolvency headlines in the media- Bank of America still made $4B in 2008 and only reported one quarterly loss during the last 17 years. Very few banks in the country have a similar record, earning power and deposit franchise to deal with "deeply recessionary" economy.

But by forcing the purchase of what now increasingly looks like a "virtually insolvent" institution, Merrill Lynch, to completion- Uncle Sam has introduced an entirely new concept to investing called "eminent domain" or "condemnation of private property for a public use". Unfortunately, if you were one of these "lucky" BofA owners (shareholders) over the last several weeks, it is now increasingly clear - government (in the form of Treasury Secretary Paulson and Co) doesn't really give a damn about your financial interest.

Report from Association of American Railroads

There is a reason I am paying so much attention to any news from the transportation sector. The data they report is the closest thing you can get to the real time health of the economy and it's not looking pretty. We all knew December was a terrible month but the first two weeks of January are not looking any better so far and things seem to be actually deteriorating from what I can see... Volumes are down roughly 16.8% year over year in January. And while some of the deterioration could be attributed to shift from rail to trucking because of lower diesel prices the adjustments are probably minor in the grand scheme of things.

To sum it up- it's not looking pretty...

January numbers

WASHINGTON, January 22, 2009 -- The economic slowdown continued to affect U.S. railroads as freight volume declined during the second week of 2009 in comparison with same week last year, the Association of American Railroads (AAR) reported today.

Carload freight totaled 267,063 cars, down 17.9 percent from 2008, with loadings down 13.2 percent in the West and 24.4 percent in the East. Intermodal volume of 199,117 trailers or containers was off 13.7 percent from last year, with container volume falling 10.2 percent and trailer volume dipping 27.0 percent. Total volume was estimated at 28.3 billion ton-miles, off 16.8 percent from 2008.

All nineteen carload commodity groups were off last week in comparison with last year."

"The safest way to double your money is to fold it over once and put it in your pocket"
G. Hubbard

How many times have you heard recently someone you know saying "I wish I sold the X stock a year ago" followed by something like "But I will most definitely sell it when it gets back to the price Y". I certainly have way too many times, and expect to hear it again, unfortunately quite likely from the same people. People are frustrated with themselves for selling too high and/or too low, furious about the illogical behavior of their stocks, and/or for not following their stated discipline.

Unfortunately the nasty "Mr. Market" keeps playing tricks with investors during times of extreme volatility- when it seems like stocks are almost ready to start going up - they go down, and then during the next day when people move into a net short position or liquidate all of their holdings- the DOW goes up by 200 points. In addition to that, proponents of the Elliott Wave and Dow Theories say "sell" because we are going to lower, most "valuation experts" say "buy" because everything is on sale etc...One can really lose his/her mind quickly if by listening to all of experts at the same time.

I have said many times in the past and will repeat again- no one can accurately predict where the market is heading tomorrow, so you will be much better off if you stop guessing. Instead- investors should focus on executing and improving their own defined strategy, diversifying/hedging portfolios to reduce risk, and quickly acknowledging making a wrong decision by selling losers off mercilessly.

It's not the first time I am try to bring everyone's attention to the fact that Global Trade is still collapsing much faster than anyone expected, and thus recent rebound in prices of the dry shipping stocks is likely to be a very temporary phenomenon. The most recent confirmation of continuing troubles came today from the former "momentum darling" DRYS... What can I say- cyclical downturn, overcapacity and excess leverage adds up to TROUBLE!

DryShips plunges as it warns may breach terms of its debt, announces large share sale

NEW YORK (AP) -- Shares of DryShips Inc. lost more than a quarter of their value Thursday after the Greek drybulk shipper announced that it was in violation of some of its debt terms.

The company also said it plans to sell most of its shares to preserve its liquidity.

If anyone is still drinking Cool Aid by believing the good times are coming back to the sector soon- look at this slide show from Guardian...

skepticalcapitalist@gmail.com

Markets seem to have reacted quite cheerily at first to the news of GDP falling only 3.8% this morning. Consensus was for the 5.5% decline so the headline of news being much better than expected popped the futures higher.

"Gross domestic product, a gauge of the nation's output, fell at a 3.8% annual rate in the fourth quarter, adjusted for inflation, from the previous quarter. The decline was the largest since 1982, though still well below the postwar record 10.4% quarterly drop seen in 1958"

I usually tend to shrug the GDP releases off completely as they are pretty much irrelevant from the stock market stand point, however, today's release made me feel quite a bit more bearish. Remember, the GDP release is only reflecting the data from several months ago, and we already knew the numbers were going to be ugly based on all the earnings warnings and retail sales data...

However, I think the "second half recovery hopes" has been just pushed a few months into the future. How is that so you might ask? Once again- very simple- let's take it step by step...

"While the fall was not as steep as expected -- most forecasts had GDP falling by 5% to 6% -- output was boosted somewhat by a rise in inventories of goods that were produced but not sold in the fourth quarter. Excluding the inventory adjustment, GDP fell at a 5.1% rate, which economists say more accurately reflects the nation's weakness"

While the 5.1% headline number itself is once again irrelevant, the inventory build news is different. Remember, GDP number represents the past and is thus irrelevant from my standpoint. Inventory buildup, however will have to be unwound in the future and is thus very disturbing. It is quite likely now that we haven't not seen the worst of the declines in the real economy last fall as many expected. I think the first quarter will be as bad if not worse than the fourth one...

Does it mean the markets will decline significantly from here? Not necessarily-but at least retest of the lows from November became much more likely occurrence. The fact that bellwethers like GE, FDX are heading down every day is not a good sign. Bonds still seem a better deal than stocks at this point... ( short treasuries ETF is an interesting play as well)

I have previously set my internal "worth case" target on the S&P 500 at around 720 based on the analysis of data from Doug Short, and while there is no reason to modify it at this point, extra caution at this point is a good thing...

Stay safe out there skepticalcapitalist@gmail.com

"The challenge of retirement is how to spend time without spending money"
Author Unknown

Several readers sent me e-mails asking to share some of the specific names in the preferred stocks arena. As I have already explained several times before- rationale behind my interest in this asset class is quite simple- (high yield, relative security and significant upside potential). It is important to remember that nothing is guaranteed and thus diversification is a key!. However, let's not forget that despite all the fear in the banking sector out there- preferred shareholders have seniority over the common stock holders and are invested alongside (pari passu) the government's TARP money.

So while complete nationalization of any specific bank would likely mean prefs being wiped out, by focusing attention on the "stronger" names, one should be able to reduce risk dramatically. Today I want to simply use preferreds of three largest "strong" banks as an example of how I approach valuing these and to show why I believe this market is quite inefficient and thus offers an opportunity for diligent investors.

All of the thoughts below are simply my thoughts on the matter, and shouldn't be perceived as recommendations of any sort..

First name- JPM- the strongest one out of all "domestics"; has a wide variety of various types of prefs- trust preferreds, cumulative ones, fixed and floaters etc. As you can see- yields vary from 9.16% on the JPM-I to only 6.29% on JPM-G. As an example of inefficiency in the market let's take three names: JPM-G, JPM-F and JPM-E. Basic terms and risk is identical for all three (cumulative).