Fallacy in investments, ongoing series.

1. Too many bulls (bears) therefore market cannot go up (down) anymore.

False. Earnings is the key to stock prices. The systems are wired that way because everyone in the business goes to the same school(s).



2. Using reasonable growth projection and realistic discount rate, you can get the long term (within 1-5 years) prices of stock. Use the formula Earnings/(cost of capital - growth) for this purpose.

True and False at the same time. The statement is true, assuming your earnings start at the right number. Can Goldman sachs replace $10 or so earnings from M&A and mortgage/CDO business and $2 or so from the hedge funds trading clients so the earnings at time zero is $22? I bet YOU know the answer.



3. Ambac can writedown up to $15B of losses according to CEO, which is what Times Square (Ackman) hedgefund (and this result is also reproducible by several entities, including T2 partners) was able to estimate as losses from CDO investments.

False. Equity book value is closer to $7B as of LAST year. Let's say there hasn't been that much outflow of cash yet, then the CEO is also PLANNING to writedown $8B of borrowing, which is not his money. Try tell your neighbor you are planning to pawn his car and see his reaction.



4. Getting tax deduction from (undeductible) prior losses is a reason to buy stocks, like homebuilders.

False. To get this deduction you first need to LOSE money. Have you tried on purpose doing that when you are gambling or investing? Ding Ding Ding.



5. There is reason to believe a lot of "bad news" have been factored in homebuilder stocks.

False. How bad? As in liquidating several hundred thousand homes at the "theoretical" 2-3x income of the "marginal" homebuyers? And then growing again with inflation? Don't forget though to add your "tax deduction". You're gonna need it BAD. [Evil grin].



6. Credit card company serious delinquency (read: Capital One), is at low 4%. It is a) not gonna increase further, and b) manageable.

False AND False. Nuff said on a). And for b), have you thought that for every $1 balance delinquent there is an accompanying $2 fees tagged to that and counted as "Asset" by accounting? Ah. Your body language tells me you are not feeling well. [Evil grin]



7. History is on MY side. Every downturn always led to recovery.

Hahahahahahah. Tell me where the downturn ends or what condition is sufficient to end the downturn. Then think whether the leader of this country/state/city/village has the ability or the courage to do so.

Also there has been experiment in Japan in the last 20 years to define that state and that experiment, suffice to say, is still ongoing.



8. Nevertheless I have proven in the past "mini" downturn, 87, 91-92, 00-02, that I can pick "stalwart" with steady earnings.

Like Ford and GM? Or Lucent, ATT, Oracle, Cisco? Was it Microsoft? Or was it Fannie Mae? Would it be Monsanto going forward, or would you rather have Chipotle rule the world? Or would you picture yourself getting a nice suntan in the carrib while waiting First Solar's earnings to be just under 100 of its price? I am sorry if your feelings are hurt. Point is, you generally cannot. I work for Fortune 500 with one goal in mind, to get paid at the expense of shareholder. To the extent I own shares of the companies I work for, they are awarded for free loot, and I am counting on the mindset above to help me turn that into money I can use to go to caribean myself at your expense.

Okay, if you insist to go East and fight the bolsheviks, the least I could do is give this inspiring parting gift:



9. Being rich is enough.

False. You also need to be able to HIDE your assets and income from that asset. Hint: Think a year or two ahead and save yourself. Also, being rich is never enough. Living a healthy life is much better.

I'll return to this series periodically.