No Random Walking!

Almost everything is down 10% or more today, reminding me of the Chinese A-share market. However it's not nearly as bad as I thought it would be.

[Also noted that, with today's drop, the US market is back to the level of late 2003! And the semiconductor index is not much higher than the post-dotcom low in early 2003!! In fact the semi sector has a total return of 0% in last ten years!]

[Also noted that US dollar future actually went up 1%. Why? No other places to park the money?]

The market may continue to drop for another day or two, but now is the time to load up some stocks: esp. those that are below the book, that are not affected by the credit market, that are US-listed foreign companies. 

The one sector that are tempting but should be avoided, however, is the iron ore deposit producers such as BHP and RIO. Even though they are down as much as 50% from the high (and over 10% today alone), they are more likely to drop more! There is a glut of iron ores in China now due to over-stocking last year and construction slowdown this year.

Long-Term Capital Management (LTCM) did it in late 1990s. Now the Wall Street is doing it again, in much more spectacular fashion. This time it is the CDOs (collateralized debt obligations) linked to the sub-prime backed mortgages. However both disasters are strikingly similar in the following aspects:

• Greed on part of the "investors" that used leverage heavily.
• Lack of regulation and supervision by the government.
• Inadequate math models built by those financial "engineers" that didn't account for extreme and non-gaussian market conditions

On top of them, the current crisis is made worse by the following factors:

• CDOs (and credit swaps) are difficult for ordinary investors to understand, not to mention to price properly.
• Even the rating agencies had hard time to rate those CDOs.
• CDOs are not liquid enough, i.e., they are not traded enough so that their prices are adjusted by the markets (as in stocks). [not sure what I am writing here!]

Lessons for us:

• Stay away from securitized products or derivatives including option trading. Stick with old-fashioned investing (stocks and bonds).
• Limit use of margin. In fact, I don't think it should have been allowed for retail investors in the first place!

http://finance.yahoo.com/banking-budgeting/article/105756/FDIC-Insurance-Protects,-Except-When

Krillinger, former CEO of Washington Mutual, admitted in June that repackaging loan for everything varying from home mortgages to credit-card debt had gone too far ...

I think you guys could have gone out and securitized your coats and pants and shirts and somebody might have bought it," Killinger joked.

Krillinger was replaced in early September. And WM is sold to JPMorgan Chase today. Its common shares, which were traded in 50s in '07,  are essentially worthless now.

Which major banks are still standing: Bank of America, JPMorgan Chase and Wells Fargo appears the winners at this point.

Fears still abound, after so many eye-popping corporate failures, for good reasons. There are still many unknowns:

• Are the credit unions safe?
• Are the remaining brokerage houses and investment banks safe?
• How about those highly leveraged hedge funds?
• Will the financial crisis spill into the real economy which has been resilient so far?
• Will dollar crashes?
• ...

There are big questions, which make the usual market-swaying factors such as inflation, middle-east tensions and the on-going economic slow-down in China seemingly minor headaches (which are not!).

Is it true that the closing price can somehow be controlled/manipulated by motivated party or parties, especially on the option expiration date?

http://economistsview.typepad.com/economistsview/2006/05/options_to_be_m.html

Also noted the other interesting topics on the same blog site ("Economist's View" by Mark Thoma at University of Oregon), such as this post, discussing how speculative bubbles were created in the oil and commodity markets.

The blogger also gives a list of related blog sites, one of which has discussed the no-show of a dollar crisis.

One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.

All chip makers except for Samsung are losing money. But Micron (MU) is in much better situation than most others who are really in distressed state. Its relatively stronger cash position may allow it to gobble up the "low-hanging fruits".

Manufacturers have long failed to match output with demand for the dynamic random access memory, or DRAM, chips used in personal computers. Prices can seesaw during the period of more than a year that it takes to build plants, which cost more than $3 billion. Shutdowns are so expensive that assembly lines run night and day, even when the chips sell below production costs.

For the rest of the story and a summary of the state of the chip industry, go to this bloomberg link.

In light of what happened in today's market where blood is all over the floor, it's hard not to notice the strength of the following plays: OVTI, MU, AMMD, BIG and IOC. In fact they have been super strong for the past week.

Are they as good as gold? More likely so than not.

Speaking of gold - the actual metal, its value (GLD) is actually going down with the stocks. So much for using it as a tool to hedge the market risk (and the greenback).

Another observation: ^VIX and $SPX are in sync today. A very bad sign for days/weeks ahead?

Pickens, the multi-billionaire, was born in an oil-man's family and graduated from Oklahoma A&M with a degree in geology in 1951, according to wikipedia.

Even though he started in oil - he started Mesa Petroleum, what made him super-successful is not his geological background but his business shrewdness, esp. in acquiring companies that are bigger than his own.

I am posting Wayne Andrews' update on InterOil following the successful testing at the Elk-4 well (see a couple of posts earlier). I focus not  on opinions- which are quite bullish - but for information that is included in the release. The same analyst's view prior to the (re-)completion of Elk-4 can be found here at Seeking Alpha. I would say he has been quite knowledgeable and consistent.  Maybe there is an honest analyst out there?

IOC Wraps Up Testing at Elk-4 with Sizable Flow Rate Boost, Moving to Antelope

By Analyst(s): Wayne Andrews, Pavel Molchanov

* In its latest drilling update, InterOil reported a completed flow rate of approximately 86 MMcf/d and 1,540 Bbls/d at its Elk-4 well. As anticipated, the acid stimulation of the well resulted in an increase in productivity, with the flow rate boosted by ~37% relative to the preliminary test earlier this month. In addition, the well continued to exhibit a strong condensate flow level of 18 Bbls/MMcf. The company is currently studying various options for monetizing the high condensate levels at the well, which would accelerate near-term cash flow and further enhance the value of the overall project; and we could see a more developed roadmap over the next two months.
* Having completed production testing at Elk-4, InterOil is moving forward with its delineation plans. While the third-party resource appraisal process is on course, with results anticipated within the next two months, the company is currently decommissioning the Elk-4 well site, followed by the mobilization of the rig to the next drilling site at Antelope-1. The prospect, located 2.5 miles (4 km) south of Elk-1 and structurally up-dip from Elk-4, is expected to spud during 4Q08 and will target a seismically indicated limestone reef at approximately 5,577 feet (1,700 m) depth. The company has targeted total depth of 8,202 feet (2,500 m).
* The completion of production testing at Elk-4, alongside the boost in deliverability shown via this recent test, has served to enhance our thesis that InterOil has discovered several billion dollars worth of hydrocarbons, while the enterprise value of the company remains under $1 billion. Looking ahead, this should pave the way for a number of upcoming catalysts for the company. First, and not necessarily in this particular order, we believe that this down-dip test of the reservoir should provide the engineers with enough data to refine (and increase) the resource estimate for the Elk/Antelope structure, which we believe should most likely support a full two train LNG development. Second, this production test should enable the PNG government to move ahead with the project agreement. Lastly, we would anticipate a strategic partner entering into a multi-phased transaction to acquire an interest in Elk/Antelope, the LNG plant, and an LNG offtake agreement - aligning its interests with InterOil across the range of the company's business segments. This transaction has the potential to create an implied "industry" valuation several-fold higher than the market's current valuation of InterOil shares. We reiterate our Strong Buy rating.