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May 13, 2009

Fool Theory Gone Wild

There is an interesting phenomenon occuring in the capital markets right now.  Share prices are going higher on news that would normally have the opposite effect.

For example, the home builder, Lennar, announced on April 23, 2009 that it had successfully borrowed $400 million at 12.25% and the stock traded up 16%.  This is crazy for a company that burns almost $200 million quarterly and has lost $3.2 billion in the past 27 months. 

Ford Motor Company lost $14.6 billion in 2008, hasn't show a profit for YEARS, has a book value of NEGATIVE $7.18/share and somehow was still able to sell 300 million shares at $4.75/share (enough money to get them through a single QUARTER of losses).

Banks that have debt-equity ratios of 20 to 1 are currently considered to be well-capitalized.  A 5% decline in asset values would completely wipe out capital, but who wants to think about that?  

Unbridled optimism is one of the greatest attributes of investors in this country.  But there is a fine line between optimism and foolishness and we are most definitely walking it.


The Troubling Credit Card Default Rate

In Q1 2007, unemployment rates and credit card charge off rates were about the same at 4.4% and 4.6%, respectively.  By Q1 2009, credit card charge offs have risen to 10.5%, while unemployment rates have risen to 8.5%. 


The Shiftathon continues.