Monday, September 22, 2008

Wall Street in Turmoil: What To Do

I'm going to resist the temptation to delve into politics and criticize the big mess on Wall Street. There's plenty to criticize but no one (in power anyway) cares what I think.

What is an individual investor to conclude from the situation? I see these things:

  1. The rating agencies who handed out AAA ratings like candy are not to be trusted. The paranoid among us note that they are paid by the issuers of securities and a good rating helps sell them. Giving a AAA rating to investment banks with 30:1 leverage ratios is clearly bogus, as a 4% drop in asset values wipes them out. Like most people, they simply thought that real estate prices would rise forever. Repeat after me: Trees don't grow to the skies. Anytime anyone asserts that a market will never fall, run for the exits.
    It is actually safer in invest in lower rated securities, assuming you have diversification as in a mutual fund. There you get a higher interest rate to compensate for the higher risk. AAA securities may or may not be safe, but you can be sure they will pay a low rate.
    Trust your own instincts as to what is safe and what is not.
  2. Now that we are into a bear market, it's time to check on asset allocation. One rule of thumb I like to use is to have a certain percentage of your assets in common stocks, declining as you get older and less able to recover from a loss. I like the rule of 110 minus your age for the percentage of your net worth in stocks. If you've been managing your asset allocation, the market drop may mean that you now have too little in stocks. In other words, it may be time to buy. How can you buy with all these screaming negative headlines? Well, that's a good sign for a buyer. When everyone is patting themselves on the back, that's the time to sell.
  3. What to buy? I've noticed that our old friend the tech stocks have taken a pretty good pounding, even though sales are holding up and they rarely depend on borrowed money. I'll be looking them over for bargains.


Thursday, September 11, 2008

Capital One gains by spurning mortgages

Interesting Dow Jones article yesterday interviewing the CFO of Capital One. They have deliberately spurned having mortgage debt on the books in favor of unsecured debt. They figure the unsecured debt is actually safer, as credit is extended on the basis of the borrower's ability to pay. Mortgages have been granted based on the security of the underlying asset, and when that falls in value, the holder is in trouble. Capital One has done relatively well in the credit crisis, and perhaps is a buy. Capital One Finance (COF) trades at about $46.

Wednesday, September 10, 2008

UAL Stock Takedown

Going down I think this story about UAL is fascinating. Apparently, an old story (2002) about United Airlines (ticker UAL) filing for bankruptcy got enough hits on a Florida newspaper's website to have it appear in their list of top stories of the day - generated automatically by the web server. Then because it appeared in this list, it was picked up by Google News as an important story of the day - again, this happened automatically by the Google news computer program. Then because it appeared in Google News, UAL was sold and sold short by automated trading programs - again, without human intervention.

The UAL stock price plunged, and then later when the truth came up, mostly recovered. So far, it appears that this snafu was just coincidence. For some reason, this old article got some hits, and the ball started rolling from there. But obviously, it could be used to manipulate stock prices - in a new way, and there aren't too many of those. It certainly shows up the flaws in using computers to process what ought to be done by humans.

UPDATE: Today's WSJ says that the whole thing was triggered by ONE HIT on the old article. It was during the middle of the night, when there was little traffic but it was enough to put the story in the top 10 of the hour and start the whole debacle rolling.