A Miracle: Bush Parting the Bankrupt Sea

August 31, 2007

If the today’s economic story can be related to bible story, it would have to be the iTunes Subscribeone where Moses parted the Red Sea. Back then, Pharaohs soldiers were chasing the Jews towards a dead end represented by the Red Sea. Then, after much hoping and praying, a miracle occurred. The Sea was parted and the Jews passed safely. Then, the soldiers were swallowed up and drowned as the sea closed around them.

Bush is now helping individuals who were moving towards a dead end by aiding financial companies that are closing in on the Bankrupt Sea. In this circumstance, the soldiers that will drown this time are Investors and Hedge Funds that went short on the homebuilders, banks and markets.Bush Parts the Sea

The flood that will kill them will be in the form of a short-covering rally initiated by several key economic results as well as the realization that there will be a governmental bailout if necessary.

According to news sources:

The President on Friday is to talk about several initiatives and reforms to help homeowners with risky mortgages keep their homes, a senior administration official said Thursday. Bush also is to discuss efforts to prevent these kinds of problems from arising in the future.

Bush also planned to:

—Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages.

—Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.

—Call for rigorously enforcing predatory lending laws and strengthening lending practices.

Companies such as Countrywide (CFC), Bank of America (BAC), Toll Brothers (TOL), Beazer Homes (BZH), Bear Stearns (BSC), Lehman (LEH), Goldman Sachs (GSC) and the entire financial sector will surely get a huge lift from this move and short-covering. What stocks will get hurt today? Ummmmm, nothing that we can think of. This is a good move by our government for the most troubled borrowers(unless Bush does something really odd during his speech later today or Bernanke usurps President Moses Bush with comments that are at less than positive and supportive)

President Bush to speak at 11am and Fed Chief Bernanke to speak at 10am today

Horowitz & Company clients hold positions in some of the stocks mentioned in this article

Placations for a Financial Crisis – The Planner’s Playbook

August 30, 2007

There has been a series of financial planners on CNBC and other media outlets that have been discussing the recent market turmoil’s effect on clients. Specifically, there has been interest in whether or not clients have been calling and freaking out. This morning on CNBC, Alice Finn a financial planner from Ballentine, Finn & Company was interviewed. PlacationsShe commented (as has been the case with most planners), “Clients have not called, they are not as concerned and the phone has not been ringing. Clients are investing for the long haul and they are well diversified and have not called since they are comfortable…”.

She went on to discuss the difficulties of trying to time the market. Essentially, Ms. Finn contends that no one can time the market, as you will have to be right twice in order to succeed; when to get out and when to get back in. That seems to be a fair assessment.

Furthermore, she went on to talk about diversification and investing for the long haul and all of the other catch phrases that planners use. I too am fond of many of these. But, I contend that the reason clients have not been ringing the phone is twofold:

1) Summer Vacations
2) Statements have not gone out for August yet

These “phrases” are an excellent means to pacify clients during short corrections that bounce back quickly. If you read between the lines though, these are nothing more than standard comments by advisors that can be interpreted as; we are not doing anything to protect your account.

I am sorry to say that hollow phrases are not going to help if the market really declines. The truth is that diversification is fine through quick and shallow corrections, but when we see a protracted slide, there is nothing better than cash. Unfortunately, advisors who continue to believe that a “sit on the hands” mentality (albeit with crossed fingers) will allow for clients to weather major storms are plain ignorant. This is not to say that this is any time to panic. Nor is it a forecast that we are in for a major downturn. Rather, it is a lesson that we should all look forward to what is ahead in order to make appropriate investment decisions.

In this market condition, action is required to ensure that portfolios are allocation away from the areas that may be in for additional downside risk. Yet, time and time again we have seen comments from experts that look to provide comfort over action. Here are some of my favorite axioms that have been bantered around during market turmoil that are meant to mollify clients:

The Financial Planner’s “Placations for a Financial Crisis” :

    1) Buy on the DIP
    2) Diversification is key
    3) We are in it for the long haul
    4) Do not listen to the noise
    5) There is plenty of liquidly in the markets
    6) Great time to dollar cost average
    7) The situation is contained
    8 ) They’re not losses until you sell
    9) Market Timing does not work
    10) The 25 Year history of the S&P 500 shows….
    11) Now is the time to buy, not sell
    12) Only 5 days over the past 20 provided 80% of returns
    13) This is healthy for the markets
    14) Do not let emotions control your decisions
    15) The S&P 500 has never had a negative 20 year return

Be smart, do what you know to be right from all of the information that is available and resist the urge to just sit and hope for the best. Re-evaluate your allocation, reassess the risk and act.

Good News for Hedge Fund Rats

August 28, 2007

Geron (GERN) a biotech company involved in Stem Cell research announced that they have seen success as human stem cells proved regenerative in the damaged hearts of rats.Sub Prime Rat

The Menlo Park, Calif., biopharmaceutical company said the study’s data demonstrated that heart muscle cells derived from human embryonic stem cells improved heart function in rats when those cells were transplanted after heart attack. This comes at a great time as there has been an incredible amount of heartache that has been felt by many of the over leveraged hedge fund rats managers, it is about time that someone is looking for a cure. The fact is that is is awful that they have to suffer simply because of their uncontrollable greed. It is an illness and surely not intentional.

These stem cells will be put to good use as there has been an apparent outbreak of manager heartache as they have had to explain to their clients that they may not be able to provide withdrawal privileges as they underestimated the effect of 100%+ leverage. Maybe someone should have explained to these geniuses managers that if they play with fire they may get burned. While they are unemployed back in school, maybe they should also think about the millions of people they effected this time around.

It is our sincere hope that the sub-species of Primus Rat-eous (originating from the Banking Sector) will also benefit from this biotech breakthrough. The sad fact is that these particular little fellas have been recently found scrounging for food and shelter as they have been kicked out of their usual haunts. There are indications that there will be more sightings and a significant increase in the number of cases of heartache with these particular rats. FEAR THEM! They are very dangerous and will do anything to get to your money….

Press: Interview on thestreet.com

August 28, 2007

I spent some time today talking with my friend Aaron Task from thestreet.com. Aaron is a very bright guy and has a keen understanding of the markets. Lately, he has been thinking about the volatile market action and is looking to find evidence that will show if we are in the beginning, middle or end of the market correction cycle.

Housing Hurts, But Deals Aren’t Dead
8/27/2007 5:53 PM EDT
Weak sales data and Countrywide downgrade put a crimp in the recent advance; Andrew Horowitz lends insight. Plus, the politics of the mortgage crisis. (Interview with Andrew starts around 12:45)

Aaron TaskThe Real Story With Aaron Task was Selected as a “Best New Podcast of 2006 — Staff Favorite” by iTunes.TheStreet.com’s Editor-at-Large goes behind the headlines to find out who and what is really moving the market each day.

Stocks Mentioned: SFLY, AAPL, NOK, TOL, CFC, BAC, HD, ZEUS, ZUMZ

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Bank of America – Last Man Standing

August 27, 2007

TDI CoverThere is a fine line between brilliance and stupidity. In the world of finance and investing, that line can sometimes be measured by risk and reward. If the decision made by an investor turns out to be profitable, then we look at the outcome as a result of either luck or well-planned execution. The risk was simply the potential for a loss or gain. Of course this is OVERsimplified, but you get the point.

Bank of America (BAC) is walking that very line right now with the infusion of $2 billion into the troubled Countrywide Financial (CFC). The latest acquisition by the company is not the first one that CEO Ken Lewis has stuck his neck out on. In fact, he seems to be making a habit of cleaning up corporate messes.

Bank of America Aquisitions

The takeover of US Trust was the result of ongoing losses by Schwab (SCH). It became painfully obvious to shareholders after it became obvious after several quarters of miscommunication and the drag on corporate earnings. Originally the “Crown Glory” of then CEO, David Pottruck, it was seen as a departure from Schwab’s core business as he looked to expand into high-net-worth clientèle segment. The inability of Pottruck to assimilate the US Trust division into Schwab’s business ultimately lead to the decision to release both Pottruck and US Trust. Bank of America’s Lewis looked at this as a great opportunity to pick up US Trust at a bargain price. So far this seems to have been a great move by Lewis.

Now, according to The Wall Street Journal, Bank of America paid $2 billion for preferred shares of Countrywide that yields 7.25% dividends and are convertible into a 16% stake in the lender. This deal booked a nice profit (paper for now) of about $400 million.

What’s more, since Lewis was positioned as CEO, Bank of America’s annual revenue has more than doubled to more than $74 billion. Its assets have more than doubled to $1.46 trillion. And profits have more than tripled, to $21.1 billion last year.

The timing of the Countrywide deal is going to become Lewis’s greatest triumph if Countrywide emerges from this crisis and eventually is able to clean up any significant outstanding financial issues. This is clearly a time that will benefit the “last man standing” in the beleaguered mortgage industry. The companies that are able to weather this storm will surely become the new leaders within the financial industry. As is said; what does not kill them, will surely make them stronger.

No matter how the Countrywide story unfolds, this was a brilliant move by Lewis to strengthen the industry by allowing for additional liquidity and at the some time helping to boost investor sentiment. Either way, Bank of America will surely be one of the last ones standing. The wild card will be if they do it with, or without, Countrywide by their side. Even though Countrywide CEO Mozilo currently denies any merger talks, he will surely warm up to the idea if the sub-prime mess worsens and his company continues to suffer.

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Horowitz & Company clients have Long positions in the securities mentioned as of the date of this post.

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