Mullooly Asset Management

Detroit Go Bankrupt?

Thomas Mullooly — Thu, 20 Nov 2008 02:47:16 +0000

I don't know which side of the argument you fall on…bailout the automakers, or let them fail. But a very compelling, and well-written editorial was submitted to the New York Times by Mitt Romney. The question has been asked the last few days, "if the airlines can slink in and out of bankruptcy…why not the automakers?" In fact, the NYC subway system originally ran as independent lines, until the magic word forced them all together into one wonderful rat hole: money.

One point getting glossed over in all of these discussions is this: there are no showrooms for airlines. That is, you don't decide "you know…today I'm turning in this old clunker of a 747 and get me a new 767. They are offering zero-percent financing!"

Cars are sold by, and bought by individuals. Automobiles are personal statements, to some folks.

Rides on a subway, and flying on a plane (quickly becoming the same thing) are not the same.

There are compelling arguments on both sides. However, I would like to offer my own solution:

Money…with strings. No bailout.

But the US can guarantee the automakers loans. But with the following conditions:

A taste of their own medicine. Zero-percent financing. But for only TWELVE months. If the loan repayment schedule is not adhered to, a prohibitive "lets-put-you-out-of-business" rate applies (because it will be the end of the road).
Senior Management works for one dollar. But they can get five times their old salary in employee (incentive) stock options…free.
Current management must sign resignation letters dated 12 months from the date of the guarantee. This is it, boys.
An understanding from all parties (management, unions and Congress): there will be no more money after today from Uncle Sam.
As a condition of the loan guarantee, Uncle Sam takes a preferred stock ownership in each company, much like they are doing with the banks. However, after twelve months, the shares are sold (or granted)…to the employees, through their retirement plan (and/or) employee stock purchase plan. Everyone…right down to the janitors…has a stake in the success of the company.

Or not.

Honestly, how much debt can you pile on top of a broken system? Is more crushing debt the answer? A better solution than all of these strings would be to see the automakers issue and sell shares of stock at these rock-bottom prices. Look, any time a company wants to raise money through a stock sale, they have to hit the road and "pitch" the merit of investing in them (management) — and their company. Which means they need a business plan (which they may not have — or may not have completely pitched well enough for folks to understand). They have to make a presentation that is credible and believable to get people with money to "buy" into the story.

Would management buy their own stock right now? We will be able to gauge precisely how well management believes in their future by asking them to open their own wallets as the industry is down on it's knees. Will anyone ask?

Opponents will argue "but a stock sale at these prices dilutes the ownership of current shareholders!" Technically, that IS true. But so what? You need a microscope to these stock prices right now. They are trading right NOW at prices that indicate they will file bankruptcy any day. Consider this: anyone owning the auto stocks at these levels is either:

blindly loyal to the company (they would definitely buy more),
living under a rock, or
speculating.

Long term investors would be much friendlier (and supportive) of management as well. After all, it is THEIR MONEY at stake.

The US Auto Industry does NOT need a bailout. Everyone runs into a cash crunch now and then. The automakers need to sell (and tell) a better story. They need to take responsibility. And they need to get investors behind them. This means putting together a credible game plan. NOW.

Why did my stock go down?

Thomas Mullooly — Sun, 16 Nov 2008 00:54:49 +0000

Don't worry about "why" your investment is falling.

Focus on "what" instead. What is happening now.

Don’t worry about “WHY”…everyone is doing that. Gyrating stock prices are getting swung around by deceptive news headlines, faulty stories — all designed to play on your emotions.

Do we really NEED to know “why?”
If a chart is breaking down, giving sell signals, breaking the all-important support line, giving a relative strength sell signal, etc. Does it really MATTER why?

No. You should sell.

Everyone is searching for clues, answers, reasons WHY the market is falling or where/when the market will hit bottom.
How many times this week will you hear "The market is down today because _____ ."

Just remember, in most cases, they are guessing!

Financial stocks starting breaking down, giving massive sell signals in April-May 2007, nearly a full YEAR before Bear Stearns agreed to sell to JP Morgan for $2.00. By the way, Bear Stearns broke support at $140/share (that’s $138 above the price they agreed to sell at).

And the point?
The point is that no one knew in the spring 2007 WHY stocks were collapsing – or how spectacular the meltdown would be. They just were falling apart, period. All the charts told us is that there were clearly far more sellers than buyers, and that supply was in control. That was all we needed to see.

When there is too much supply (of anything), prices are heading lower. You don't need the "why."
So…focus on “what”…like what IS happening now?

People seem to be preoccupied with “what will get the market moving again?” and “when will the bottom be reached?" SImply, when buyers outnumber sellers, prices WILL go up. That's economics 101.

But unfortunately that doesn't sell newspapers.
By the way…we may have ALREADY put a bottom in place – a month ago!

Mutual Fund taxable distributions

Thomas Mullooly — Sat, 15 Nov 2008 23:08:20 +0000

Your mutual fund has a surprise waiting for you. It is not a nice surprise.

Banks and the Bailout

Thomas Mullooly — Sat, 01 Nov 2008 18:30:08 +0000

One of the side stories coming out of the bank bailout has been this: some banks are actually using the money — to buy other banks!

My first reaction when seeing this headline, was "why can't these banks do what we ask them to do?"

I did read a story recently where some banks that received government bailout money are "still" planning on handing out giant-sized year-end bonuses to executives. What's up with that? I hope there is more to that story, because I think that's the wrong message to be sending — getting taxpayer-funded bailout money, and then turning around paying fat bonuses.

But the original story — banks using bailout money to buy other banks — actually has a happy ending. Some of the banks that are being bought would have collapsed, and that would then fall under the jurisdiction of the FDIC. And that is an organization that is stretched to the max. When JP Morgan took over Washington Mutual, it did not cost taxpayers anything.

And some troubled banks are being swallowed up at gigantic discounts. Problem loans are being dealt with, and mortgages are being "re-worked." All the while, these banks are being bought at severely discounted prices — and without direct intervention from a government agency.

Futures vs. Stocks

Thomas Mullooly — Sat, 25 Oct 2008 20:07:26 +0000

It's a little embarrassing to hear media folks on TV and radio asking questions Friday morning like: "Do you think the stock market will open today?"

Wow.

First, it shows how clueless many people in the financial media really are about markets. But questions like that also help promote the fear factor.

Just reckless.

Many people outside the market simply don't know that the futures markets trade practically 24/7. That's OK. But media people involved in the market OUGHT to know that. When Asia or the European markets are down, you can also track the futures on the Dow Jones or S&P 500. For most of us, these "futures reports" you might hear in the morning are merely indications of what the market will do when it opens at 9:30 in New York.

On this past Friday morning, I awoke to learn the futures markets were trading "limit down." This means the futures markets had traded down to their daily trading limit and no more futures trading was permitted.

It did NOT imply the stock market would have trouble opening.

In fact, there have been many days (lately) where the futures indicated a dramatic move up or down at 7 am, but when the market opened at 9:30, everything had changed.

Tell you what — I miss the days back in the 1980's, when you knew in the morning if the market would be up today or down today. Not anymore.

I have lost count of the number of days this year where the market was heading UP but finished DOWN later. Or vice-versa. I've also lost count of the number of times the market changed direction multiple times in the same day.