Thursday, September 18, 2008

No better place to be in a crisis

The current market situation reminds me of the last time the financial markets were in crisis: September 11th 2001. That morning I had driven into Liechtenstein from Austria, had a light lunch and then drove to Bachau in order to catch the train to Zürich (I've learned the hard way not to park in Kreis 1 if you can help it). At the time I was working for Merrill Lynch, and my office was a block away from the WTC.

I called my banker, explaining that it would be nearly 4:30 by the time I got to the Paradeplatz. "Haven't you heard?" he said, and you know the rest of the story. In those early moments of the attack no one knew what was next, and despite the horror and sadness of that day I must say that it felt good to be in Switzerland.

Anyway, on to the markets. Regular readers know that I work for a large swiss bank, and am thereby prohibited in investing in short term financial instruments except under very narrow conditions (as my father used to say, "Buy low, stay high"). Therefore the following commentary may or may not reflect my actual investments and should not be relied upon as investment advice.

First, don't panic. B-school investing 101 states that your number one goal should always be to preserve capital. If you don't have anything left in the game, you can't play. Working stiffs like me can always make more money to invest, but only as long as we're young and healthy. This is why I hold the majority of my taxable investments in energy, tobacco, and consumer products. The speculative stuff stays in my retirement accounts (technology and a few banks). With Kraft being added to the Dow tomorrow I stand to make a killing when the market opens in the morning. As Warren Buffet likes to say, "Stocks are on sale!"

I always cringe when people compare the stock market to a casino, but as a veteran gambler I know that the name of the game is risk management in both situations. Anyone can make money in the stock market, but you must know your risk exposure. (Conversely, few people make money gambling, so the objective is to enjoy yourself for as long as possible at the lowest vig. For me that means 100x odds on craps at the Casino Royale, next to the Venetian in Vegas.)

A few picks for tomorrow:

Goldman is trading below book value. In what universe does this make sense? I was waiting for Morgan to fall so that I could buy GS below 80, but it's still a buy at 110. Now that the feds are stepping in (again?) the opportunity is probably gone for a quick buck. It'd still make a good long term investment; I'm looking at the Jan. 150 calls for 8 bucks a contract, as the IV is still low at 77 (again, remember the volatility of recent days).

Morgan will succeed in getting a bailout, or least a decent buyout from Wachovia. I'd love to see Wachovia fail, as its CEO is chairman of Duke's board of trustees and one of the people to blame for the lacrosse debacle. John Mack went to Duke and used to fly up Coach K to management meetings when I worked in the NY office. These two are going to make a deal. I am long MS.

For something more conservative, GE is a buy. It's not a bank, despite the fact that GE Capital is losing their shirts.

I bought DR Horton many, many years ago when it was at 12. I took some off the table at 30, but if you're betting on interest rates to stay low the fundamentals of DHI are outstanding. I am long.

Speaking of interest rates, I love that T-bills are giving zero return. Ask someone who lived through negative interest rates how well this worked out in Japan. At least they had macro deflation!

I had a great economics professor at Duke who correlated the federal reserve's actions with the "jawboning" of the administration. If you think Bush wants McCain to win, then you must realize that easy money is going to keep on coming from Bernanke & Co.

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