The Financial Analysis Guy

This is a great read on this guy.  Jim Cramer made millions as a hedge fund manager and is no doubt very well connected on The Street.  My dollar to anyone’s dime, he makes even more money doing what he is doing right now.  The power of influence is contagious with this guy.  Whether or not he has a positive or negative influence on investing, who knows for certain.  But entertaining?  Very much so.

His shtick may get tiring at times and I will go weeks or months not watching the guy, but when I come back to him…very entertaining stuff.   I love the comparison to a televangelist.  He does have a cult-like following where people hang on his every word for investment advice. 

I do think his show highlights a problem with our society in general, though.  We are always looking for the quick fix; the timesaver; the get ahead idea; the way to beat our competition to the punch. This mentality, coupled with the seamingless massive liquidity that exists in publicly traded stocks, forces wild swings and knee-jerk reactions to any new news.

Since almost all of us are now using online trading accounts for our investments, taking investment action is literally 30 seconds away. This is bad for trading, let alone investing. It is the “gotta have it now” convenience of acting on this stuff that really is the root of the issue.

Argument: Positive
Doing your homework on stocks as investments is music to my ears. I am all about doing the analysis and when it comes to finances, you better do it at least twice.  If this message gets to investors (or even speculators for that matter) then his message is indeed positive.  When people start to learn why things happen in the markets the way they happen, then people will eventually become smarter and better investors.  It is just that simple.

Another place where he helps tremendously is keeping it interesting.  This stuff is not all that exciting.  Matter of fact, it can be like watching My Left Foot for the 67th time.  It can be outright boring.  At times, you will not see a return on your investment for years.  This is not good for our get it now society.   Holding the interest of people when they are learning is very difficult.

Finally, his approach to understanding sector influence on individual stocks is fantastic.  Knowing when things cycle in and out of favor depending on what is happening in the general economy is vital to long term success in investing.   Much of the financial analysis that I do is related to the sector and general market conditions.  After all, watch the general stock market tomorrow.  See which way it is going and see how that corresponds to the stocks you are watching.  The correlation coefficient on staggering in some industries.

Argument: Negative
The Cramer effect is a tough one to quantify. However, it is real just like any other influential person in our society.   He is the cause, like so many like him, for the massive increase in the VIX (Volatility Index) over time.  Remember, he is part of a 24-hour news and business station.  That is a lot of hours to fill up with commentary.  People use this as the new way to educate themselves and it is VERY easy for people to overreact to these folks looking for ratings.

When I ask some of the pros who lived through the S&L crisis of the late 80’s and early 90’s if this downturn is worse than then, they all say the same thing:  MUCH WORSE!!!  They say the amount of fear and uncertainty in the market (led by the news shows and media in general that is now and in your face 24/7) is immensely more influential.  It is leading the problem to a much worse scenario just based on the amount of fear it is producing.  It is a reality we have to bare with 24 hour media and attention grabbing techniques for eyeballs.

Finally, his constant “BUY, BUY, BUY” or “SELL, SELL, SELL” leads the weary to do one thing all the time - act on our investments constantly.  The brilliant Warren Buffett abhors this type of investing.  The need to constantly be acting on our investments is our way of making sure we “stay ahead of the curve” - which is insane.  It is also a way for us to “stay relevant” - also insane!  Do the homework and be patient.  You always have to make sure your thesis makes sense, but buy and hold works.  Holding forever does not work on everything, but holding for the long-term almost always does on good investments.

Wrapping it up…
I love watching him for entertainment value - anything beyond that is simply buyer beware. He keeps it interesting and his books are not bad so long as you understand the context. This is going to sound weird, but he offers me almost no value for trading purposes.  He is usually reporting on stuff that already happened or is behind the curve.  For investment value, he offers me very little as well, but does help with some of the education. He has some good ideas and his work on sector analysis is priceless in my book.  Everyone, please, do your own homework and learn, learn, learn.  As you start doing your own financial analysis, you will see order where there is nothing but chaos.  The fog will eventually get lifted and you will benefit from your own education.

Try to calculate the Return on Investment (or Internal Rate of Return) of doing this…good luck.  Today, I spent several hours doing household chores.  My wife went back to Detroit for a business trip and left me a little honey-do list.  So today, like the good robot husband I am sometimes, I did my thing and went through that list.  I spent every agonizing, errr enlightening, moment on checking off every task and achieved the whole thing - save some last minute cleaning she wanted done right before she comes home on Tuesday.

One thing that wasn’t on her list but was on mine, was replace every dinosaur light bulb we have in the house with those new fandangled bulbs that look like a bowl of spaghetti. Since I am all about saving money and doing my own financial analysis to justify my actions, I had to look at this based on my return on my investment (or Internal Rate of Return).  It took the idea of saving money bigtime for me to actually do the right thing - what kind of person am I???

I thought this process would have taken me about 20 minutes, but after spending roughly 2 full hours on this little project, I was felling pretty good about myself.  I replaced nearly 40 light bulbs and did a variety of equivalent 60 watts, 75 watts and 100 watts.

What is cool about this is the learning process.  What I learned was the following:

• the old 60 watt version uses only 14 watts in the new version
• the old 75 watt version uses only 18 watts in the new version
• the old 100 watt version uses only 23 watts in the new version

These new light bulbs use 1/5 of the electricity as the old version.  HUGE savings when it comes to paying my those really nice folks at the utility company.  The package says I can save, under normal uses, the following:

• the 14 watt version saves $46/year
• the 18 watt version saves $56/year
• the 23 watt version saves $77/year

Since I replaced nearly 40 light bulbs today, I know the savings could very well be huge.  If the average savings per yer is $50 per bulb (on average since most of them were the small kind) and I replaced 40 of them (I need my calculator), but I think that is roughly $2,000 per year in energy savings.  I am not that optimistic and I know that it simply can’t be true, but lets say I was off by 50% and it only saves me a cool grand each year.

Time to crack out one of my best friends (Microsoft Excel) and do a little investment return.  The total investment in light bulbs was $33.  My time is free since I was working around the house and my wife gets a special discount - for barter of course…  ;)  The internal rate of return on this investment is silly to discuss.  It is off the charts, so let’s not even discuss it. 

What is truly neat to look at is how these 10 C-notes are going to multiply over time, invested VERY mildly at 8% return.   To see what this means to me in 30 years time - saving the $1000 every year; invested at 8% annual return - simply use the following formula in excel   “=FV(.08,-1000,30)”. 

(BTW, I am writing this with The Matrix on in the background…killer flick)

This silly little bulb replacement exercise just netted me an additional $113,283.21 for our retirement.  If my adjustment down to $1000 per year is wrong and I actually save the $2000 per year, my take at the end of all of this (just replace the 1000 with 2000 in Excel) is an unbelievable $226,556.  I am besides myself right now.  Somebody needs to come on over my pad and punch me in the face a bunch of times for not doing this sooner.  If not in the face, then at least a couple swift kicks in the beans.  What the heck was I thinking? 

Oh yeah, one more thing, I of course put all my dinosaur bulbs on craigslist to try to offset my $33 initial investment.  For some reason, spending the initial scratch still gets to me.  Those light bulbs seem perfectly fine, but in the in long run, those things were eating me out of house and home.  Taking food off my table sort of speak.  And the Financial Analysis Guy can never have that!

One more thing, the Financial Analysis Gal has this amazingly beautiful floor lamp in the corner of our living room.  It is artwork - I will give it that.  She loves it and we can’t craigslist it quite yet, but the time is coming.  Why?  That halogen lamp uses 300 watts (that’s 21 FREAKING times more energy than my little spaghetti style friend).   That lamp is now officially put on notice!!!

This past week on Fast Money, one of the favorite shows of the Financial Analysis Guy, Jeff Mackey conducted a three part series on the trading trend of Good Enough.  It’s a trend that assumes the consumer is beginning to finalize realize the fact that the “cheap” alternative is usually just as good as the more expensive version.  It is good enough.

If this is true, companies like Walmart and Costco are going to succeed in this new world paradigm.  Sales will grow tremendously over time and this less expensive alternative will win out in the masses.  I, of course, am extremely interested in this concept as any good financial analyst might be.  What does it mean to my investments?  How can I capitalize on this sea-change, if it really is one.

Jeff took on several aspects of consumerism in this three part series.  As I watched this, I realized it is not just doing my analysis for investment purposes that is so important.  The other part of this equation is the Financial Analysis Guy as consumer. 

In our quest to climb over each other in this wonderful rat race we are all in, we are constantly reminded that there is always something a little better that we could have had with a little more money, or a little more time, or a little more effort. 

Why are we so obsessed with having the very best?  I think one reason is the long-time American pastime of “keeping up with the Jones’”.  This simply the notion that there is a need of people to compare how they are doing in life with their neighbors; their family; their friends; colleagues; etc.

I am always trying to convince my wife and others around me of the concept of Good Enough.  Yes, I get accused of “settling” and being a slacker because I am not necessarily striving for perfection.  What does that say about you, Chuck?  Seriously, what kind of person are you to settle?  Don’t you want more?

Of course I do.  But at what cost to get more?  During my undergrad and, even my graduate work, I realized that B’s were good enough.  It was not that I would not take an A if I could get it, but the amount of work required, extra work, to get that A was overwhelming.  Therefore, I was the guy not always swinging for the fences.  I was happy swinging and making contact with the ball and getting singles, doubles, and triples.  I knew that my quality of life and my quality of education was not tied to my grade, but more the learning experience.

The other side of this argument is growing as a person.  How can you grow as a person - personally, professionally, spiritually, physically - if you are settling for good enough?  This is a good question, but a huge leap in my opinion.  Like everything else I do, I don’t think that this concept can be applied to everything in our lives - nor do I want it.  Is my love for wife good enough?  Never.  How about my health?  Nope…not that either.  But it does apply to just about every material thing I possess.  It does apply to my work and my ability to cope with other people in everyday life.  And it certainly applies to my time.

In future posts, I will address several aspects of our lives - material, spiritual, etc, in this series “Good Enough”.  I believe this is a topic worth exploring and I want others to comment.   I just might be all wet here, but I want to explore it.

On Wednesday, Home Builders Research President Dennis Smith gave his annual presentation on the “state of the Las Vegas housing market” to hundreds of Las Vegas real estate professionals.  I was not able to attend this year, but I did speak with several folks that were able to attend. 

Our leading housing prognosticator here in town made some good comments and some not so good.  Again, many look to this guy to give them guidance as to how to “feel” about the coming months.  Dennis pointed out that new-home sales in Las Vegas are down 49 percent for the first two months of the year, existing-home sales are off 37 percent and home building permits have plunged 70 percent

He said, “Obviously we’ve got tight credit and qualifying requirements.  Those are factors, too. I could go on and on. I think we’re close to the bottom, but it’s going to be an extended bottom.”

Any recovery won’t be in the shape of a “V” but a flat-bottom “U,” Smith told about 700 builders, developers, mortgage brokers and real estate agents at the Las Vegas Convention Center.

He predicted that median new-home prices will finish the year at $274,000, about $1,000 more than February’s median, though it will dip further between now and then. He thinks 2009 will show a 2.2 percent increase to $280,000 and 2010 will be about the same, with prices conservatively climbing to $286,000.

“We had many years of 1.5 percent to 2 percent increases and that’s what we’re going back to,” Smith said.  Resale prices, which are down 5.2 percent so far this year, will rise again by about 1.3 percent in 2009 to $240,000, he predicted.

This information is fine, but if you are working in this market, you simply want to hear something different.  We have all been wallowing in this purgatory for quite some time now and we want to believe something different.  I take a different viewpoint than from what Dennis and others who are way too negative at the moment. 

NO ONE and I do mean absolutely nobody predicted in 2003 that we would get to 38,000 new housing units in 2005 and 2006.  Nobody could foresee such a run-up and bubble like what we saw in those years.  Why would we simply blindly buy into this near doomsday scenario for new home-builders. 

Look, there are TONS of new jobs coming in the coming year or so.  Interest rates will end up falling SHARPLY very soon due to the Uncle Ben and Fed’s action on the Fed Target Rate.  There are still 6000 folks moving in every month. 

Please folks, try to stay positive and look at the physicals.  It is very easy to see where we are today and predict that more of the same is coming.  It is very difficult to take the position of change.  Therefore, many in the business take this position like Dennis has taken. 

The following information came from that presentation and was published in the local newspaper as well.  This is just for historical perspective, but please see where the bubble occurred and where we are today.  If you were put this on a chart, you will see where we have to go to make up for the false demand in those high-tide years. 

The local rag here in Las Vegas called The Las Vegas Review Journalis an “OK” paper.  They are definitely right leaning and do a pretty good job on reporting the news - regardless of their political viewpoints.

Every year, like most local papers, they do an online poll for “The Best Of” in that metropolitan.  The LVRJ does a descent job of this but sometimes they miss the mark completely.  If you are local like me, you have your own hotspots you like to frequent.   I strongly encourage anyone coming to visit Vegas or who has just moved here to read this Review Journal article.

They even do a Razzie-type thing of the Best of the Worst.  This is actually really cool.  In this town, the press is part of the show and when you see someones face over and over again for the same things, you know that this list was needed.  Our good friend Oscar Goodman, Las Vegas’ Mayor, made the list once again, but I don’t fault him for it.  He is so freaking good for this city it is amazing.  I love what he has done and what he brings.

Now, on the list itself, they have some celebrity type folks that give their favorite places.  This is OK, but take their information with a grain of salt.  They are just one person’s opinion and some of these folks are transient in nature due to their jobs. 

I was really bummed not to see my two favorite pubs in Vegas.  One is a chain and you have all heard of it - Gordon Biersch.  I have been to almost every GB in the nation and this one takes the cake.  This one is not like any of the others.  If you are a local, or a visitor, go see Kala and Billy “The A-Team” on Wednesday or Thursday nights.  They are the absolute BEST in town.  They have the most amazing Southwestern Egg Rolls.  Enjoy a Heff with lemon or skip it and go straight for their flagship beer, Marzen.  Can’t go wrong with any of em.

The other is a genuine British Pub that made the list some time ago - The Crown and Anchor.  This place is rough around the edges - just like a British Pub ought to be.  They have all the soccer (or football everywhere else) matches and have genuine English food.  They make some of the best Yorkshire Pudding around.  Enjoy your favorite beer (Guinness, Bass or Boddington’s for me), take in a football match, and maybe even try some of the famous Snake Bite.  Great stuff.  And yes, if you are Brit coming to town, you will feel right at home.  Almost every British native in town ends up here at some point during the week.

On all of the other stuff on their list, you can’t go wrong with it.  There is always something to do in Vegas.  From world-class clubbing on The Strip, to outdoor activities, to top-notch shows for every genre - this place never sleeps and you can get pretty much anything you want here, literally.

This past weekend there was a huge house foreclosure auction here in Las Vegas.  There were roughly 300 bank owned homes on the block and the turnout was impressive.  It was standing room only when you first got there.  Wall to wall people trying to get a read on where the market is sitting right now.

As I suspected, the Las Vegas real estate market is still in VERY strong demand.  The pricing across the board started at about $50/SQFT (with some outliers of course).  The bidding was fierce early on and people seemed like they really knew what they were doing.  In some of the past auctions, there were tons of lookers and not much experts.  It seems with foreclosures coming mainstream, a lot of people are jumping on the bandwagon.

Where most of the homes ended up is in the $100/SQFT range.  Again, some exceptions to this rule, but this was the norm.  This number is very important.  Since one of the businesses I help manage is a new homebuilder, I know what replacement costs are for building a new home.  This number is the proverbial “Mendoza” line of homes in Vegas.

Here is the breakdown for a new production home

• Vertical costs (lumber; concrete; labor; framing; etc) is roughly $50/SQFT
• Land Development costs (the lot; undergrounds; utilities, etc) is roughly $30/SQFT
• Marketing, Sales, General Expenses, carry costs, etc are roughly $20/SQFT

I know this is very simplistic and not always true, but this is generally correct.  When you get below replacement costs of that magical $100/SQFT, then there is quite a bit of rehab work to complete or you are looking at one seriously motivated seller.  In either case, this is a completely different business.

Why am I telling you all of this?  I am a huge fan of the Las Vegas real estate market, but we have been getting murdered out here over the last 18 months.  Some people simply believe pricing will continue to fall.  This is not possible in this type of market because of the physicals.  Vegas has 6,000 people moving here every month and that has not dropped during this downturn.  We have $50 billion being spent on The Strip in new hotels. There are 500,000 new jobs coming in the next 20 years.  I can go on and on. 

If we were in back in my hometown of Detroit, then I would agree that you can go way below replacement costs because of the supply demand dynamic.  (BTW, houses there are actually trading for half of replacement costs in a lot of cases.)  But here in Vegas, all the physicals point to not dropping below this fabled number.  That is good news for those of us in this market - new homes or not.  This means there is a bottom in place and we should be seeing the light at the end of the tunnel. 

I am a simpleton.  I know I am, so no sense trying to debate or hide this fact.  I was asked the other day what I would consider a good rate of return on my investment.  Well, it’s all relative as the smartest guy in the room (Warren Buffett) would say. 

My Dad would say, “so long as I don’t lose money, it’s good.”  This is probably what Mr. Buffett would say as well - if it came down to it.

A good rate of return on “safe” money would be the return on Treasuries, but who knows nowadays.  A good return on investment or IRR for a risky land deal (which I am often in as a part of my business) is 25%.  A killer Internal Rate of Return (IRR) is 40% - which ironically is doubling your investment in just 2 years. 

Everything else is “close nuff” - as the genius Lonnie Skruggs once said.  For those who don’t know who Lonnie is…he is the Godfather of mobile home investing.  I used to be in the mobile home business, but really, his lessons can be used in anything anywhere and he is a genius…no other way to put it.

1. Doubling your money in 3 years gives an internal rate of return of 25%. 
2. Doubling your money in 2 years gives an internal rate of return of 40%.
3. Both are darn good and nothing to sneeze at…
4. Use leverage (debt), and that only magnifies your return of your investment

Also, both are VERY difficult to obtain.  Regardless of what anyone tells you, it is the vast minority who obtain these returns year over year.  Some might do it one year at time - which is not that difficult, but most will not achieve this in the long-term.

The rule here is that a return on investment or internal rate of return (using time value of money) is relevant to what you require as an investor to the amount of risk taken.  For me, I want the highest return possible in the shortest period of time.  What makes the smart investor smart is they want this, but ALSO want the lowest risk possible for that return.  It’s the balancing act that differentiates folks.  Everyone wants huge returns, but what risk are you willing to take to get it.  Oftentimes, it is NEVER worth the risk of long-term capital loss to achieve a few extra percentage points.  In the recent past, many professionals forgot this rule (not guideline, but a rule)…

Do your homework and listen to your gut when making your investment.  This will always yield the highest possible return in the long run.

Living in Las Vegas and being part of the Vegas real estate market has been quite an experience.  I came here in 2005, right at the freaking top of the market.  We bought a house the right way, though.  We bought a house that needed tons of work and are just fine with our mortgage.

However, I work for a group that has a company that is a local homebuilder.  Much of the company’s income over the last decade came from closing new houses in the vibrant Vegas real estate market. 

If anyone wanted to see what the bottom of a real estate market looks like, they should have been with me on Saturday.  We are doing what a lot of homebuilder’s are doing and are “mothballing” a community.  Essentially, putting it on hold until the market comes back.  Why are we doing this? 

Well, we purchased the land and improved the lots and our basis is WAY too high where house prices are right now.  The math doesn’t work anymore.  It will someday, hence, we are pressing the pause button on one of our communities here in the Vegas real estate market.  Like so many other homebuilding companies.

So, there we were on Saturday selling model home furniture for pennies on the dollar to whoever was lucky enough to see our bandit signs or see our wonderful Craigslist ad.  Our top of the line furniture and home furnishings were being thrifted away since we are losing the models to the bank and everything has to go in order to press the pause button on the community. 

One after another, folks were coming in and buying our stuff super cheap.  They then would ask the question what is going on with the community.  Could the Vegas real estate market be that bad?  Could you really be doing this?  The people loved the houses and several folks asked how they could buy one.  If only it were real…

The Vegas real estate market, like pretty much all other local markets, is in shambles.  My wife who is a professional organizer by trade and resells on eBay and Craigslist (check out all her posts on the Vegas Craigslist - general; furniture; and books) helped out that day.  She came home, fell to the floor and started crying.  I assured her it would be OK and that what we were doing was absolutely essential to staying alive to see the other side of this horrible mess.

There she was, the love of my life, now experiencing first hand what I have been dealing with for over two years now as a Vegas real estate participant.  I am a land investor and financial analyst for our company and simply don’t know where all this will end. 

In any event, if you want to know what it is like to see the bottom of the real estate market, go visit a new home community in your area.  If they are still open and selling houses, they are the few.  If they are like us, they are doing things that will make most of us cry.  They are doing things that never crossed the mind just a few years earlier.  My how times change…

This is a wonderful post by our good friends over at GenXFinance.  I highly recommend reading it.

JPMorgan Chase Buys Bear Stearns for $2 per Share and the Fed Cuts the Discount Rate

Jeremy hits on a few topics in this post and it is all good information.

1. The idea of JPMorgan buying Bear Stearns absolutely crushes some Wall Street historians.  These companies are bitter rivals, regardless of what they say, just like all the other investment banks on the Street.  Then put into place the fact they are buying them for $2 per share!  You’ve gotta be kidding me.  In Jeremy’s post, it states they were at $150 per share just last year.  Welcome to the world of recession folks.  Absolutely amazing.
2. The FED cutting the discount window rate to 3.25% from 3.50% is just so typical from our good friend Uncle Ben Bernanke.  The economy is shot and bleeding on the side of the road and he is trying to figure out where to go on vacation next year.  Again, way late and now it is merely a slap in the face.  He needs to go to 1% on the Federal Funds Rate and 1.5% on the Discount Window rate.  COME ON already.  We are on the eve of financial armageddon and he and our “good friend” President Bush are still claiming the economy is strong.  Where is the leadership???
3. The S&P 500 is down 12% this year, but if you are heavily invested in good, growth companies with excellent earnings potential and not a ton of earnings history (like I am), you are down 40%.  Seriously, I have a large position in Crocs (symbol: CROX) and smaller positions in Google (symbol: GOOG), Goldman Sachs (symbol: GS) and Apple Computer (symbol: AAPL).  I am ready to go all Zed and the Spider to anyone at the FED who does not help this market since it is headed down further.  Seriously…

Jeremy has timely stuff and great material.  I love to read him and several others out there.  Don’t forget to check out my blogroll to see who else I read on regular basis.

Since I hang out in Vegas where my job and family are, I tend to wake up to the opening bell on CNBC around 6:30am PST.  When I woke up this morning, I was giddy with the idea of Ben Bernanke and the Fed coming to the proverbial “rescue” of the credit markets.  I was beside myself actually.

Financial Analysis Guy is a long-term investor…no kidding
I am a very long term guy, very Warren Buffett-like, when it comes to investing.  I am a land investor in Vegas and I know that if my investment doubles in 3 years, I earn roughly 25% IRR (Internal Rate of Return) - not bad.  If it doubles in 2 years, I am a very happy 36% IRR.  Which is about as good as you can get with a large sum of cash invested in a passive investment - regardless of what the infomercials or phone-jockey’s that call you at 7:00 am at home will tell you.

Now, since the Oracle of Omaha has increased his book value in Berkshire Hathaway by 23% compounded annually over his management life, I know this is the mark that everyone is shooting for.  Most “professionals” in the business will say they earn way beyond this, but they are lying or at the very least misrepresenting.  Some years they earn way beyond this, but some years they are down 30%.  So, over time, their compounded annual return will probably be something like 10%.

Since I am a long term guy, I know that my portfolio being down 25% year to date is not that big of deal - kind of like The ‘Stones (Detroit Pistons if you are new to this blog) being down be 25 points at halftime.  Chauncey and the guys would like to be ahead by 25, but realize it is only halftime and A LOT can happen before the game is over.  Just like my investing, come talk to me this time next year to see who is smiling.  So long as Benjamin Bernanke (Uncle Ben as many like to call him) continues to loosen credit (jargon for lowering the Federal Reserve Funds Target Rate), I know that equities will rise over time.  This is a fact, not a theory. 

Fed and Uncle Ben
The other tool Bernanke and the Fed Committee can use is injecting funds into the credit market by buying “stuff” from the major banks.  They call this injecting liquidity through the purchase of debt instruments…YUCK!  What the heck does that mean?!?

Well, the credit crisis is here because the Wall Street guys and gals (not the Financial Analysis Guy) can not get enough funds (cash flow) in the house after they have lent it out.  They need to sell their debt on the secondary markets after they create it through the lending, in order to free up funds to keep the lending machine (mortgage creation and other commercial paper) cranking.  As of recent memory, they bundled these individual mortgages into CDO’s (Collateralized Debt Obligations) maybe to the tune of 10,000 or so and sell them to investment houses (Private Equity; Hedge Funds; Pension Funds; Endowments; etc.) - pieces at a time.  As long as the underlying obligations don’t default in mass quantities, these are great investments to supplement their investment portfolios…whoops, again, a whole other topic…

If no one is buying these CDO’s, then lenders can not lend more money.  If lenders don’t lend money, then business shuts down and people start selling whatever they can sell (regardless of how good the investment is)  just to raise cash.  This is the equivelent of everyone heading for the exits at the same time in a crowded theater - mass panic!  Since no one is lending and everyone is selling - hence, the fabled CREDIT CRUNCH. 

The FED to the Rescue
The Federal Reserve Bank has decided to buy these collateralized debt obligations to the tune of $200 Billion (yes, with a “B”) over the next 30 days.  This is a HUGE thing to the markets.  Now, there is liquidity being injected.  Now, the other buyers have a feeling that there is hope.  Where there is hope, there is better times ahead.

The Federal Reserve is basically saying to everyone, we got your back.  Just like The Wolf in Pulp Fiction - they are coming “DI-rectly” - classic movie.  If the Fed is buying, so should everyone else.  If that happens, you will begin to feel like the world isn’t actually coming to an end (25% decline in just 2 months!!!).  If the world is not coming to an end, then even The Lemmings of Wall Street (another Graham/Buffett thing) will decide to come back to equities. 

I love waking up to seeing the market up 4,850,938,408,230,480 points…or something like that…makes me giddy since I have a lot of equities in my portfolio.