 | | The Daily Reckoning | Tuesday, November 29, 2011 |
- The markets’ dazzling display of mixed signals...
- Last Airline Standing: Correctly calling the bankruptcy of AMR Corp...
- Plus, Bill Bonner on why debt doesn’t just “go away”, recalling a friend with a bulldozer, and more...
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|  | | | | Playing Hard to Get | | How Up and Down Markets Toy With Investor Emotions | | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
“I want it all, I want it all, I want it all, and I want it now.”
— Lyrics from a popular Queen song...and the prevailing political “wisdom” of our time.
Stocks up. Gold up. And oil back within a few cents of the $100 mark.
The world economy is, apparently, in full swing again. Until tomorrow, that is. Or next week. Who knows?
Investors have been suffering through a dazzling display of mixed signals lately. One minute they think the market’s got the hots for them...the next minute it’s throwing cold water in their face. It comes on strong...then plays coy. Shows some leg...then slaps a cheek. Last week investors got whacked. This week they’re all doe- eyed again. They think they’re in love.
Most folk don’t like all the games. “A simple ‘Yes’ or ‘No’ would do us just fine,” they say. “Think of all the time and money a straight-forward answer would save if the market would just pick a path and stick to it!”
Ah...but where’s the fun in that, Fellow Reckoner? Where are the lessons along the way...the travails of the journey...the hardships to look back on through the rose-colored glasses of retrospect...the glory days to romanticize at some distant date in a far off future?
More importantly, what would we have to write about all day if everyone already knew the headlines of tomorrow’s papers? Who’d bother asking any questions? Not us.
Fortunately, that’s not the way markets work. The relationship is far more complex than that. Last week, for instance, it looked as if the whole thing had gone sour. Stocks plunged during the shortened trading week. News came out that Germany couldn’t sell its debt. Not Greece or Italy or any of the other fiscal misfits. Germany! An auction of 10-year Bunds fell apart at the seams.
“If Germany can’t sell its debt,” cried investors in a panic, “what hope does the rest of Europe have? Portugal...Spain...the rest of the PIIGS...they’ll have to go bust! Then what!?”
[Editor’s Note: As a quick aside, Eric Fry recently discussed these ongoing problems in the Eurozone, specifically Germany’s failed bond auction, on Capital Account with Lauren Lyster. As always, his comments were incredibly insightful. Check it out here:
Well, what a difference a good tryptophan-induced food coma can make. Investors awoke from their long weekend slumber having seemingly forgotten last week’s little lover’s tiff. Romance is in the air again. German Chancellor Angela Merkel and French President Nicolas Sarkozy are playing footsies under the Euro table, promising to come to a solution that satisfies everyone’s deepest desires.
In the US, too, investors have been quick to forget past transgressions. And quick to forget their own situation. Shoppers, for instance, forgot they had no money and hit the retail stores last week with all the gusto of a drunk falling off a wagon. Black Friday sales were up. Wages, savings and disposable incomes were not. Neither were employment levels. How long can out-of-work consumers continue buying Chinese knickknacks with money they don’t have? Not long would be our first guess. And our second, too.
Of course, it’s hard for the average man to know where he stands today. He follows his heart and his emotions. And both tell him to look to his leaders. He has heard that his country is broke...but he sees his leaders spending...and spending more than ever. He has a suspicion that debt might be a problem...but he is told that deficits don’t matter. He knows the money has run out...but he remembers hearing something about a helicopter. So he sticks his head out the window and looks to the sky. Then, when no money falls from the heavens, he heads to the mall just the same.
“Capitalism is supposed to be a system of profit and loss,” writes Jeffrey Tucker, publisher at Laissez-Faire Books, in today’s Whiskey & Gunpowder, “but in recent years, central bankers and central planners seem to have forgotten the part about losses. They push and pull every lever on the control board to try to make losses for the big players go away, which can be a bit like trying to stop a receding tide.”
Governmental “Too Big To Fail” mollycoddling has rendered a generation virtually incapable of dealing with losses. In short, the average man on the street today lives in a world largely sheltered from the consequences of actions, both his and his government’s. (For now.) His leaders promise him creation without destruction, knowledge without lessons, wisdom without experience...all funded with EZ credit, made available until the day he dies. Amen.
How is this man prepared for a catastrophe, you ask? He isn’t.
How can he conceive of a day when effect again meets with cause? He can’t.
What will happen when the unthinkable becomes the inevitable? Don’t ask.
Occasionally, however, the nourishing process of creative destruction, of unfettered capitalism, is “allowed” to do its work. It can be painful in the short run, yes, but the eventual result is a stronger, more vibrant future...one deserved of those brave enough to resist the urge to meddle.
In today’s guest essay, Dan Amoss, editor of the wildly successful Strategic Short Report walks us through one such encouraging example. Please enjoy...
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| | The Daily Reckoning Presents | | American Airlines Retreats to Fight Another Day | | |  | | Dan Amoss |
Early this morning, American Airlines parent AMR Corp. (AMR) filed for Chapter 11 bankruptcy protection, listing total assets of $24.7 billion and debts of $29.5 billion.
Readers of my research service, Strategic Short Report, know that we’ve held a short position on AMR since mid-March. But that’s only part of the story here...
Many families of AMR employees will be impacted by this development, and it’s unfortunate that conditions forced this decision by the company. It’s a stressful day for loyal, hard working employees already suffering under a stagnant, inflationary economy.
The airline industry is deep into a painful but necessary restructuring process. Today’s bankruptcy is a big step toward a better future. We can all hope for a better, healthier airline industry on the other side of this restructuring, and hope that pilots, flight attendants and maintenance crews impacted by this bankruptcy find other opportunities with American or with other airlines.
Thankfully, AMR management and the board of directors did the right thing to avoid risking an even worse fate: liquidation. AMR is entering bankruptcy with several billion dollars in cash. Sustained high jet fuel prices, brought about by aggressive central bank money printing (and the prospect of even more printing) would have rapidly drained AMR’s remaining cash reserves.
The New York Stock Exchange has halted the stock several times today. Other than short sellers covering their positions, there are no natural buyers of AMR stock today.
Few will want to embark on the long, uncertain process of owning AMR stock through bankruptcy, with the thesis that it will retain any value in a “new AMR” on the other side of Chapter 11. Most likely, creditors will own the vast majority of the stock after bankruptcy, diluting the value of a current AMR share to practically nothing.
This is all part of the process. Successful bankruptcy reorganization is as American as “Mom and apple pie.” American history and culture is all about renewal and fresh starts. While painful for many parties, it’s often necessary to restore soundness to an organization.
Corporations, like people, go through different stages of life: birth, adolescence, maturity, and death. In capitalism, corporate death frees up the capital and resources to fuel the next wave of company births. Trying to stop this process with bailouts and zero interest rates only guarantees that we’ll squander ever more resources on situations in need of restructuring.
Pain is a part of life, and trying to avoid it entirely is not healthy. Of course, that may be of little comfort to those affected by AMR’s bankruptcy at this time. We keep them in our thoughts and prayers.
We’ve published eleven Strategic Short Report commentaries on AMR since the March issue (when we first identified the stock as an attractive short) reiterating our case. Our readers had the opportunity to play a profitable part in the important process of aiding stock market efficiency.
Short sellers add to market efficiency by adding selling pressure to overvalued stocks.
In the case of AMR stock, it was overvalued the whole way down, because in hindsight, it was worth nothing...despite Wall Street analysts’ humorous attempts to value AMR as though it were a “call option” on recovery in the airline industry. We simply identified that there was a high probability the stock was worth nothing before the rest of the market. Sometimes it’s rational to panic, and panic early, ahead of the crowd.
In other cases — high-P/E momentum stocks, for example — short sellers add selling pressure where there otherwise would be none. Short sellers help keep bubbles from getting completely out of control and wasting oodles of capital — often sustaining heavy losses while holding short positions that move against them.
Sometimes, disagreeing with market prices is painful, but it is important to remember the vital role that short sellers play in the capitalistic process.
Short sellers add to the efficiency of the economy by acting to raise the cost of capital for companies that, with overvalued stocks, can raise capital on easy terms — easier than more deserving competitors.
It was very unlikely AMR shareholders could have salvaged any value (in the form of future free cash flow or dividends), and in fact, it’s better for employees and the entire organization that shareholders and creditors will lose some or all of their claims on company assets.
So in case you’re concerned that you “profited from the bankruptcy” of a storied American company in 2011: rest assured, you did not. In a very small way, you accelerated a painful but necessary process. Further operation of AMR in its current form would have simply squandered scarce resources in the hopes that shareholders and creditors would have some degree of return on their investments.
We all learn from each trading and investing experience (myself included). Profit or lose, we can get better by building a working knowledge of which strategies work, and which do not. After enough experience selling short, you begin to identify the telltale signs of a good, potentially profitable idea.
If we are still in the midst of a 15-20 year bear market — as I suspect — adding short sales and a sensible amount of put options to your portfolio is prudent. Hopefully, our ideas have helped your portfolio weather the recurring 2011 financial hurricanes.
Here’s hoping a revitalized, slimmed-down American Airlines comes back stronger than ever.
Best regards,
Dan Amoss,
for The Daily Reckoning
Joel’s Note: Based on Dan’s March 18 entry price of $6.62 per share, and today’s price of 30 cents, readers of his Strategic Short Report had the chance to book a cool 95% profit on his AMR trade.
Long time followers of Dan’s work will recognize here a similar “anatomy of a bankruptcy” pattern to his brilliant 2008 Lehman Bros. call.
Just to recap...
In April of 2008, Dan recommended his readers buy Lehman put options. Less than two months later, he recommended taking half the position off the table...for 224% gains.
Then, one month later — to the day — Dan recommended closing out the remainder of the position for a gain of 462% in under three months.
Pretty explosive stuff.
“Ok then,” Fellow Reckoners might be thinking, “So what’s he got his eye on next?”
An ailing bank...struggling retailer...underwater insurer?
Hmm...think bigger...
Try a sovereign default.
Dan’s shocking, in depth research report — including specific guidance on how best to position yourself — is not due out until later this week. We’ll let you know the moment it goes online.
In the meantime, if you’re interested in reserving a spot on his exclusive mailing list,here’s how to get started.
| | | | | Less than 24 Hours Left to Claim Your... |
Special Daily Reckoning Holiday Gift Set: One Ounce of Gold, Ten Ounces of Silver
As a special thanks for being a long-suffering Dear Reader, the DR team wants to give you a special Holiday Gift set.
It contains an ounce of 99.99% pure gold and ten ounces of pure silver.
Go here to see what the catch is as soon as you can...
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| | | | | Bill Bonner | | The Staying Power of Debt | | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
We have the grim task of attending a funeral near Pittsburgh, today. Our reckoning will be short and sweet.
The markets were enlivened yesterday by thoughts of the holidays. ‘Santa’s coming,’ said investors as the Dow rose 291 points.
The bright lights and garlands have started coming out all over Christendom.
The immediate focus of cheery thoughts was in Europe, where investors never seem to give up hope and never seem to grow up. Plan A didn’t work. Neither did plans b-z. But some people...no matter how many times you tell them Santa doesn’t exist...they keep believing anyhow.
The euro-feds are talking about a new fix. From press reports we can’t tell if this is the one Angela Merkel just rejected or just pledged to give fast-track handling. Nor do we care. Because debt is debt. You can shuffle it around. You can kick the can down the road. You can pretend it doesn’t exist and promise to deal with it.
It doesn’t matter what you say...too much debt is too much debt. And someone will have to pay for it.
All of the crisis and hoopla of the last 4 years has been just an attempt to avoid facing up to reality. Christmas comes but once a year...but investors have looked under the tree every day...hoping Santa paid an un-announced visit.
And what a time it has been for speculators! When Santa is seen heading for Rome or Athens, stock markets all over the world take off. When no Santa-sighting is reported, they sell. Up 200 points in a day...down 200 the next. Whee!
Wondering where it will all come to rest, dear reader?
We will tell you.
When all is said and done, the debt will still be there. Larger than ever. Every major government is running a deficit. The US, for example, only collects a bit more than $2 trillion in taxes. But it spends about $3.5 trillion. You can do the math later, dear reader. We’ll tell you what it means now — the US is headed for bankruptcy. The paltry and pathetic efforts of the super-committee and Congress notwithstanding.
In Europe, the situation is more fun to watch. They speak in different tongues but they all say the same things:
“Give me a bailout.”
“Drop dead.”
The authorities may or may not cobble together a stabilization program. If they don’t, the ride will get even wilder. If they do, markets will rise...possibly through Christmas.
Either way, the debt will still have to be reckoned with. And that means less government spending in Europe and less household spending in America. It is unavoidable. The European government can’t borrow more. And neither can US households. In both cases, less spending will lead to a slumpy, crisis-prone, Japan-like economy. In Japan, stocks and real estate lost 75% to 85% of their value. You can expect the same thing in the US.
Those 200-point upsurges will be rare. Two hundred points to the downside will be more common.
But what do we know? We’ve been right about some things...and wrong about others. So far, stocks have not dropped like we think they ‘ought’ to. But heck...we remember saying the same thing about the tech bubble. It didn’t blow up nearly as soon as we thought it should. Neither did the housing bubble. We urged Dear Readers to sell their houses and head for the hills back in 2005...when the housing bubble had two more years to run.
So, maybe we’re early again. Or dead wrong.
We’ll see.
But until we find out, we would stick to the program if we were you: sell stocks on rallies. Buy gold on dips.
And more thoughts...
“No, that couldn’t be George. He was about our age. Maybe a little older.”
Your editor had not noticed time’s wing’d chariot. Or not noticed how fast it was traveling. He was talking to his cousin after Thanksgiving. He was trying to recall a friend with a bulldozer. His cousin had identified a man, now 70 years old.
“No, it couldn’t be him,” we repeated.
“What are you talking about Bill? He is almost our age. Just a few years older.”
“You mean, he’s still operating a bulldozer at 70?”
“Yeah, he seems to like it. He’ll probably keep going at it for another 20 years. All that family live to be in their 90s. Funny people. They don’t talk much, but they live long.
“And ol’ Buster...he hardly says anything. His first wife ran off. She must have gotten bored. Actually, she ran off twice. The first time, she ran off with the fellow who sold Buster his bulldozer. But that didn’t work out. So she came home. And Buster took her back.
“I don’t think I would have taken her back. If she ran off once, she was sure to do it again. But she was pretty. And I guess Buster liked her.
“You remember her; she was one of the Stansted girls. They had five girls. Every one of them was pretty. But they weren’t all good. Ellie wasn’t so good. So she ran off again. And this time Buster had enough. He got another wife. He’s been married to Virginia for the last 30 years...at least. They seem really happy. She doesn’t talk either. But they’re both about 70...”
Regards,
Bill Bonner
for The Daily Reckoning |
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