Well oil just keeps on falling. It closed today at $43.65, down almost 7% for the day and down a jaw-dropping 70% from its peak in July. Today's close marks a 4 year low. What happened to $200 oil that Goldman was predicting this summer? Merrill analysts today said that they are predicting oil at $25 next year. I remain a long term oil bull but am not making any plays until the market shows some signs of correction, beyond a week long bounce. When I say long term, I mean over the course of my working life. I am 22, so my investment horizon for oil plays is up to 35 years.

Moving on to the Big 3. Today they said they would be willing to accept strong government oversight in exchange for immediate aid (Chrysler and GM have said they need help soon, while Ford says they hope not to have to tap potential government credit lines, but would like to have them available just in case). They are looking for a total of $34B. I don't think they should get it, bankruptcy is a better option. My thinking is as follows: if the Big 3 enter Chapter 11 bankruptcy (something firms do regularly - think airlines), they will gain leverage in negotiations with both their creditors and the United Auto Workers (UAW). That is, they will be able to say to these parties "if you don't come to the bargaining table, we will go under and then we are all ******". They will be able to negotiate better terms on their outstanding debt, as well as cutting pay and benefits to UAW (which in my opinion are both excessive). Without entering bankruptcy, they will not have this advantage at the negotiating table and, while the UAW is granting some concessions, they are not nearly what they need to be for these firms to return to profitability.

The argument against bankruptcy is as follows: if the firms enter bankruptcy, customers will be unwilling to buy cars from these firms because they will be worried about the car companies' abilities to live up to their warranty obligations. This is where the government plays a role: they set up a fund to guarantee the warranties on these vehicles in the case of any of the Big 3 shutting down, much like the FDIC insures bank deposits.

I must confess, these opinions are not my own, I believe I read them on The Big Picture, but it may have been elsewhere. Regardless, now you've heard the much less publicized bankruptcy argument.

The market rallied again today. More choppy action, no surprises there. The question I am wanting answered is: when (if ever) is the precipitous fall in the price of oil going to stimulate the global economy?

So it seems I was right about a pull back this week. Man was yesterday harsh. After that I was not surprised at all by the rally we saw today. This range bound trading accompanied by high volatility is what I anticipate over the next 6 to 9 months. While we may set new lows over this period, I think it depends on how rough the recession gets over the coming quarters. I feel the market has priced in something pretty serious, but only time will tell whether the drop has been sufficiently large. As far as the recovery, I really can't see it happening until we get some good news (or no bad news for a while from financials). A string of earnings that surprise on the upside, or a series of better than expected economic data are the kind of catalysts I am looking for. Not sure exactly what is causing the unprecedented levels of volatility, but it seems to be here to stay as well.

Moving on, I saw an excellent video on YouTube last night. It is a speech Elizabeth Warren gave at Berkeley about the death of the American middle class. I found a lot of the information she presented somewhat surprising, but she has clearly done her homework, so I don't have any reason to doubt her. It is nearly an hour, but in my opinion time well spent (you can skip the first 6 minutes). There is also a story on Naked Capitalism quoting her talking about the lack of method surrounding application of TARP funds. She is the head of the TARP oversight committee and doesn't have good things to say about Paulson's methodologies.

Finally, another interesting piece on major university endowments selling private equity stakes at huge discounts. Apparently private equity has different accounting rules which has allowed them to not mark down the value of their holdings by as much as they should.

Interesting piece on Bloomberg about OPEC's failure to agree on production cuts, a situation the author likens to 1998, where oil fell to $10 per barrel. There is also some discussion of future oil prices, and there seems to be a large discrepancy between the analysts respective forecasts. Merrill Lynch sees oil trading at an average of $50 per barrel next year, while Barclays sees the price averaging at $100.50. In my opinion it is good to see divergent analyst estimates, rather than the usual clumping of estimates by analysts who want to play it safe. Nassem Nicholas Taleb has a good discussion of this in his book "The Black Swan", which should be read by all.

Okay so I made an early New Year's resolution to keep this thing updated. Let's see if we can make that happen.

There is an excellent video posted on The Big Picture of an interview with the Chairman of Blackstone Pete Peterson. It seems a little dated though, I must admit. Regardless, this is a sit down with a truly wise man He talks straight about the real problems America faces long term - ever mounting debt, social security and healthcare pledges etc. He also discusses what's wrong with the current American mindset and some possible causes. 15 minutes well spent.

Black Friday sales figures seem to be pretty good as well. Marketwatch reported that they are up 3% from last year (here), a figure which surprised me somewhat. Maybe consumers are feeling a little more confident now that Obama has been elected and oil continues to fall? I'm sure the sales were also enormous.

Also, another story I read that made me smile was that Trump Entertainment is to miss an interest payment. I have always hate a very strong hate for Mr. Trump and always felt that he was an incredibly self-important charlatan. Looks as if another Trump company is hitting the skids. I feel sorry for the employees if this firm folds, but I will not feel sorry for Mr. Trump.

It will be interesting to see what the coming week brings. A new month, maybe some cheer off the back of the Black Friday numbers? Hard to say though. Given the rally we saw last week I would have to put my money on a pullback to start it off.

I read Marketwatch.com habitually for news (with little or no meaningful analysis) about the American markets, and I always get a laugh from the conspiracy theorists who comment on the stories. If I had a dime for every time I've heard about the Plunge Protection Team, government manipulation of all types of economic figures, pending economic collapse, and well, you get the idea...

I was recently reading "The Intelligent Investor" and Mr. Graham pointed out that in inflationary environments, debt issuers benefit because they repay purchasers with devalued dollars. Which led me to think of a plot which would explode all over the Marketwatch discussion boards. It goes something like this: the unsustainable U.S. Federal debt is a well documented fact (see any youtube video of the Comptroller General of the United States for testimony to this). My conspiracy is simple: the U.S. Federal Government sees this mountain of debt they will never be able to pay off and note that trillions of it is held by foreigners. Therefore, they collaborate with the Federal Reserve to engineer inflation in order to reduce the present value of the outstanding debt to the detriment of the foreign debtholders (and I guess the average American).

I'm not saying that I endorse this theory, I'm just throwing my spin into the fray of BS currently flying around those Marketwatch discussion boards.

I recently read the cover story on seekingalpha.com (one of my favorite sites for more sophisticated analysis). In sum the story analyzes Jason Zweig's contention that Benjamin Graham (the author of value investing Bibles "The Intelligent Investor" and "Security Analysis") would not buy financial stocks. The article may be found here:

http://seekingalpha.com/article/87473-yes-financial-companies-can-
be-analyzed

The author, Tom Brown, argues (in my opinion, ineffectively) that Mr. Graham would invest in financials at the current levels. I posted a response to this article which I feel part of is worth sharing:

"I have a few points...

Second, I am currently reading "The Intelligent Investor" by Benjamin Graham with updated commentary by Jason Zweig and I have to say that thus far I have found Mr. Zweig to be very self-important (putting his contributions in capitals in the index of the book) and his contributions to be exhibiting an incomplete understanding of Mr. Graham's techniques and arguments (for a prime example, see his embarrassingly incomplete Michael Jordan analogy at the end of the third chapter).

I must admit that I have not had a lot of exposure to Mr. Zweig's work, and his resume is very impressive, so he must be worth his salt, but based on what I have seen I really do not feel that his analysis carries much weight.

Additionally I would tend to agree with the author of this article, to a limited extent. There are a very few financial institutions that I would be interested in investing in if I had a longer investment horizon (Goldman Sachs is the only one I would definitely invest in and sleep soundly holding), but also agree with Zweig. I feel that it really isn't possible to analyze how far the housing market is going to fall and how many credit-worthy people are going to be affected by this slump. As a result, it is very hard to tell how low various grades of investment securities will fall before they recover. With mark to market accounting, even if they will ultimately be written back up, a precipitous decline may force a financial institution to raise capital where it would not be necessary without such accounting practices. I was surprised by Amex saying that the current crisis was even affecting some of their "super-prime&quot... customers. To be perfectly honest, I don't feel that even sophisticated investors have the time nor the ability to value financial institutions. I feel that only the very best analysts can get a rough estimation of the true value of financial stocks, and oftentimes their compensation structure is such that we may not even get the true result of their analysis..."

I created this blog to keep track of my own ideas and understanding of the stock market. As a university graduate who has studied Finance and Economics I have a very good academic understanding of what is happening in the economy and how that SHOULD affect the stock market. However, there is clearly a disconnect between academia and the reality on the trading floor.

This blog is to really distill my ideas and opinions of goings on in the financial markets, with a focus on the American financial stocks. It will provide a record to verify/disprove the calls I will make and trades I will recommend.

Today is Tuesday July 22, 2008. Wachovia posted a loss of $8.86B or $4.20 a share, exceeding the loss anticipated by analysts by $3. The shares promptly dropped 11% at open, but have since rallied more than 40% on a statement that they do not plan to issue any more equity. I feel that traders are just playing the recent positive sentiment and are pumping this stock up unduly. I would wait to see what the market does for the rest of the week, but I don't like this stock one bit and would consider shorting them after this market reaction

Apple also beat, but lowered expectations. They are down 4%, trading around $160. I feel that they are managing expectations, kind of like another industry leader, Goldman Sachs likes to do. Both firms probably do this because the Street is so used to these two firms beating expectations by a large margin, that they need to manage expectations in order to still do this. Apple did the same thing last quarter, prompting a huge sell-off. I would wait until the end of the week to see what the market's reaction is to this news, then buy on the first show of strength thereafter.

Texas Instruments missed big time. I don't like them at all, but must admit I know little about their operations.

WaMu is also posting after the close. I was planning on being short into these earnings, but lost my nerve, although I predict a bigger loss than anticipated. In light of the market's reaction to the Wachovia loss, shorting financials right now is very risky.

My positions:
Long FREAC (Freddie Mac Jan $15 Calls) - Purchased at $.65
Long BZHHA (Beazer Homes Aug $5 Calls) - Purchased at $.35