Its business as usual at big banks.

Today I read two news items about Citibank. First is that Citibank is paying off the TARP money to the US taxpayers. A smart move just in time to remove restriction on the executive Christmas bonus. Citibank is still the mess it was a year ago so what about the capital ratio of the Citibank especially after they have such a huge tax liability. Here comes the second news item in pictures. IRS has decided to give Citi a massive tax break so that Citi's capital ratio does not dwindle.

So lets put these two things together and try to see what just happened. Citibank is returning the money it borrowed from the US taxpayers so that it can award obscene bonuses to its executive but it still needs money so it gets a tax break from IRS which is effectively a bailout from the tax payers. So tax payers remain where they were but Citibank got rid of a liability and now they have no restriction on the compensation.


Another headline caught my attention. Citibank has blasted Abu Dhabi sovereign fund for not investing money in it as promised. So banks like Citibank and Goldman Sachs are willing to give much higher return on capital to sovereign funds and investors like Warren Buffet rather than accept the TARP money because the TARP money puts restriction on the compensation. Folks if this is not conflict of interest, I don't know what is. This behavior makes investing in these banks highly risky too.

In the end it seems that the only way to make money for an common person is to become a trader at one of these banks.

Why we still haven't hit the bottom?

There is a good article on gurufocus explaining the point of view why the market hasn't hit the bottom yet and the recent advances in stock market are a short lived phenomenon. It is quite interesting read and I agree with most of these reasons. Although I haven't said it earlier but stocks don't look cheap to me. Most of the valuation tools have hit the singularity. I am still trying to get my cash out or hedge my positions. It is a continual process, a slow and painful too. Considering that VIX is down a lot recently, now may be a good time to buy SPY puts or a levereged short etf.
Coming back to the valuation, here is the article

The arrival of spring

The cold hard winter is gone. Market participants are celebrating the arrival of spring by raising DOW over 10% in a week. As for me I remain pessimist about the state of the economy and the market should really just be a reflection of that in long term if not in short. Furthermore, there is too much sentiments on the wall street leading to irrational happenings. I don't understand it
For this reason I am continuing my efforts to take my money out of market. Considering the fact that I started investing in the greatest bull market, I have been able to go from 5% cash position to about 60% cash without realizing any net loss. This does not mean that my belief in value investing is shaken but the billion dollar question is when to re-enter the market?

Depression?

We may or may not be in depression but it sure feels like it :)

Low hanging fruit

Its been a long time since I have written on this blog. A lot has happened since I wrote the last time. These times have shaken the nerves of the most resolute investors. Losing 50% of your life savings in a matter of days is not easy to stomach. Most of the people I know have even stopped looking at their portfolios because its just too painful.

During this time, I shifted gear and traded actively. In this post I will not get in to details of how and what I have been trading but I will only say that I have been plucking some low hanging fruits. You see in past few months I lost a large part of my life savings because of stupidity of others so it was only fair that I got back at them and made up for my losses at their expense.

Talking about low hanging fruits, I must share with you the farewell letter of Andrew Lahde. Andrew was a hedge fund manager who dissolved his fund in September after betting against subprime and earning 1000% on his investment. His farewell letter is a very interesting read.
Andrew Lahde Farewell letter

I will quote the following word from his letter. These may be his words but the feelings are mine

"I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life."

Recession is here

The love and respect I have for my job has increased 10 fold. If this is not recession, I don't know what is.

Bye Bye Schnoover

Circuit city CEO Philip J Schnoover has finally resigned. Here is a guy who took a reasonably profitable company, a company that Jim Collins described as great in his book 'Good to great' and ran it to the ground. Under his stewardship share price plunged from 30$ to 1.7$.

While all this was happening the CEO had no idea why this was happening and what could be done to turn the company around. He tried desperately like a guy who is drowning and doesn't know how to swim. For example replacing the senior employees with high school kids to cut the cost is particularly a dark chapter in the history of Circuit city.

In a company if returns on assets is less than the cost of capital, it is not wise to buy more assets. Despite that CC kept on the opening more and more stores leading to bigger losses. One may argue that in retail the economy of scale matters a lot but you have to have some idea as to at what revenue target, you will break even. It seems that the more stores Circuit city opened, the more losses it reported.

The chances of Circuit city survival as an independent company are slim. Either it will be bought over by vulture investors(which seems more unlikely now since all the cash is squandered by the current management) or it will be bought by some other company that sees synergy with CC. The best scenario for the investors is that the new CEO will turn the company profitable or atleast break even hence making it more attractive to prospective buyers. This process will take long time. If you are patient and adventurous, you can either win 400% return in 1-2 years or lose it all.