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IT'S ALL FAKE!

February 11 2009

Since I have SCREAMED to anyone that knows me that - - " its ALL FAKE and has ALWAYS been FAKE "- - the "stock market"...

I guess WE ALL KNOW that, only NOW??????? that its been PROVEN on a bigger scale with firms like BEAR STEARNS, LEHMAN BROS that are/were NO different than Bernie Madoff except instead of scamming people for JUST 25 years (most of Bernie's were good!) they scammed them - - the poor investors - - for centuries between them vs. Bernie's 2 1/2 decades and provided lesser results and greater a DESTRUCTION OF WEALTH, I would "invest" with Bernie TODAY!!! vs. Citigroup or Buffett or Pimco... at least I would have a CHANCE to make good money BEFORE the "reality" sinks in ...

LOOK stocks DON'T go up over the "LONG-TERM"!!!!!! and NEVER WILL ... LOOK UP THE WORD "Entropy"

new/hot things are invented and (the companies go public to rasie more money to grow) "THEY" replace the losers with winners (the new good stocks) and "THEY" simply CHANGE the charts ("AS IF" the good/new stocks had been there all along!!!) to reflect how "well" the markets are working/producing returns AND "THEY" throw out the LOSERS - - its called "SURVIVORSHIP Bias".

Then "THEY", Wall street firms, TV - CNBC etc) tell you to relax "you don't lose till UNTIL you sell" when actually you dont lose by selling and keeping some of your money you WAIT until "the stock" disappears and you actually DO LOSE it ALL....

I think Warren Buffet (I KNOW this is Blasphemy!!!) is a "coin-toss" to die broke ... his RECENT exposure to derivates (he said his whole career NOT to use them!!! then he changes his mind and has NOW lost around 50% and is down >60% from his high h20 mark! by using them - - WHAT controls are keeping him from losing the rest? he has already managed to lose over 1/2 ... Boone Pickens it is rumored to be scrounging for beer $$$, Kerkorian hasnt faired TOO well lately either?) so I kinda HOPE Warren goes broke via his cheerleading that has HURT so many people since October of last year when AFTER he had been pretty silent when he was winning, surfaced when losing BIG, to screw over the people that shouldn't be in the market anyways because they had/have -0- saving to be gambling on the idiotic comments he made!!! they were using him as an example to dig out of the HUGE ditch they had dug themselves by having -0- saving so the money in the market is probally borrowed money anyways that we the people left that can still pay taxes (or our kids and their kids and theirs) will have to pay so GE and Citi and all these corrupt losers who lost the money get more and more......

I have BEEN calling that the "Dow" is worth about 3000 since 2003 and in reality I am/was right!!!!!!!!!! it is just not reflected via the shenanigans they play!!!!! now its "worth" what ? in REALLIFE ? get the books straight (all the bonues owed and the employee stocks options NOT accounted for and pension liabilites and and and) and maybe its worth less than -0- ??? who knows or will ever know the truth.

Below is a breakdown of just the "Dow" part of the scam "the stock market" I wish I had had time/knowledge to explain better in 2003:

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In this issue:
Stocks for the Long Run and Other Myths
Mister Softee is Only Worth 136 Dow Points
Nash-Kelvinator, Studebaker, and Other US Giants

What does it mean for Citigroup to be at $3? As it turns out, it distorts the information we think we are getting from the Dow Jones Industrial Index.

Mister Softee is Only Worth 136 Dow Points

Off and on over the years I have written about the distortions that the Dow Jones Industrials creates by using a price-based index rather than a market cap index. As an example, if Microsoft with a market cap of $153 billion went to a price of zero, all the Dow would lose would be 136 points, or less than 2%. If IBM with a market cap of $120 billion went to zero, the Dow would lose over 700 points! But it gets worse. David Kotok forwarded this note to me from our mutual friend Jim Bianco (www.biancoresearch.com), which Jim graciously allowed me to reproduce for your edification (prices quoted below are from a few days ago):

"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.

"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...

Citi (C) = $2.80

GM (GM) = $3.50

B of A (BAC) = $5.10

Alcoa (AA) = $8.35

"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.

"The financials in the DJIA are ...

Citi (C) = $2.80

B of A (BAC) = $5.10

Amex (AXP) = 15.60

JP Morgan (JPM) = $18.09

"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).

"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93

"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.

"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.

"So what is driving the index? The highest-priced stocks:

IBM (IBM) = $81.98

Exxon (XOM) = $76.29

Chevron (CHV) = $68.31

P&G (PG) = $57.34

McDonalds (MCD) = $57.07

J&J (JNJ) = $56.75

3M (MMM) = $53.92

Wal-Mart (WMT) = $50.56

"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.

"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.

"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."

You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.

Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.

Stocks for the Long Run and Other Myths

But there are other problems with using the Dow. Since 1871, real stock prices (after inflation) have grown at 2.48% while the economy grew at 3.45%. There is almost 1% of "slippage" between the growth of stocks and the economy. Bears could paint a bleaker picture by pointing out that much of the growth was from an increase in valuations. By that I mean, P/E ratios increased substantially. Investors were paying more for a dollar's worth of earnings. The market was valued at an average P/E of 12 (or 20 times dividends) for periods prior to the last bull market. The current valuation levels are still over 20, even after a nasty bear market. Almost 1% of the growth of the stock market over the past 130 years has been due to the recent bubble in prices.

Wait a minute, what about the studies which show the S&P 500 grew at almost 10% a year? Part of the answer is that these indexes include dividends, which averaged almost 5%. You also have inflation, which accounts for a great portion. And part of the answer is that the indexes do not reflect the actual results of the companies. If you measured the Dow or S&P by the companies that were in them in 1950, as an example, the growth would not have been as much. That is not to say the Dow should be fixed. They make the changes to reflect the broad economy, which is what the Dow and other indexes are supposed to do.

That is what makes index investing so attractive in bull markets, and why it is so hard for a mutual fund to beat an index. They keep adding fast-growing companies and getting rid of the dogs. As valuations increase, the funds become self-fulfilling prophecies. But they can have the opposite effect in a bear market, as we now experience.

Nash-Kelvinator, Studebaker, and Other US Giants

For instance, IBM and Coke were added to the Dow in 1932. Coke was dropped for National Steel three years later, and IBM was booted for United Aircraft in 1939. IBM was once again put in the Dow in 1979. Coke returned in 1987. National Steel has long since departed, as has Nash-Kelvinator, Studebaker (I learned to drive in a Studebaker), Woolworth's, and American Beet Sugar. Let's hear it for progress.

For those with no life, or the insatiably curious (I will leave it to you to decide in which category you and I are placed), you can go to http://www.djindexes.com/mdsidx/downloads/DJIA_Hist_Comp.pdf and see the entire history of the Dow.

(As an aside, if anyone knows of a study which shows what $1,000 invested on October 1, 1928 [when the Dow was expanded to 30 stocks] on a buy and hold would have grown to by today, I would be interested in seeing the study.)

Clearly, buying the component stocks of the Dow and holding them for long periods would not have produced the same returns as the managed index. In fact, the returns would have been rather dismal.

I would invite readers to think about the implications of this for one moment. While today we might smirk at Nash-Kelvinator or Studebaker or American Beet Sugar, or any of the scores of firms that have been added and dropped from the Dow over the last 125 years, at one time they were considered worthy of inclusion in the most prestigious roll call of companies.

Proponents of buy and hold use indexes to support their claims of its effectiveness. Indexes, however, are not instruments of a strict buy and hold philosophy. They clearly buy and trade. For every GE – which was added to the Dow in 1896 and then dropped in 1898 for US Rubber, and added again in 1899, dropped in 1901, and added yet again in 1907 – there are scores of other firms which were once a part of the mighty Dow and have now faded into oblivion. None of the other companies from 1900 are names which are familiar to me, except as historical curiosities.

Fifteen of the Dow companies have been added since 1990. There are only six stocks still in the Dow that were there in 1940. IBM was dropped in 1939 and was not added back in until 1979. Many of the stocks that have been dropped have gone to zero. If I remember correctly, some 60% of the stocks in the S&P 500 have been replaced in a little over 30 years. In fact, many of the large market cap companies now in the index did not exist 30 years ago.

So, when you buy stocks "for the long run" you are buying stocks selected by a committee (the Dow) or because their market caps increased to a size where they were included (market-cap-weighted indexes). In a very real sense, the S&P 500 is a self-selective growth-stock index.

As an aside, Dow Jones & Co. has no plans to change the companies in its industrial average after four fell below $10 a share, said John Prestbo, executive director of indexes at the Wall Street Journal parent.

"Do I think the Dow is in need of adjustment? No, not at this moment," Prestbo said. "Those stocks have been in the Dow for a while, most of them, and I think changing horses right now would be the very distortion that some people complain about." (Bloomberg)

Prestbo has a tough job. As Jim notes, can you imagine the political fallout if the dropped Citigroup or GM right now?

And please, no more deals that are not on the same terms that Warren Buffett or other private investors get. That was simply embarrassing for Paulson and team, or should have been.

In closing, let me quote two paragraphs from Bridgewater Associates that I think sum up the problem in a rather brilliant and clear way, and which I wholeheartedly agree with:

"The root problem is that debts that were incurred to finance assets at high price levels remain in place at their original amounts even though the assets that they financed are now worth far less. Debt that was incurred to finance extrapolated high incomes remains in place at its original amount even though incomes are now much lower. And, debts that were incurred to finance loans remain in place at their original values even though the loans that were made cannot be repaid. Until the debts are brought in line with the assets and the income, there is no moving forward no matter how much liquidity is provided or how eloquent the speech. And, until this happens, the self-reinforcing nature of the debt squeeze will only reduce incomes and asset values further.

"There is no easy way out of a debt restructuring. Someone will have to bear the cost of prior bad decisions. The people who should bear the cost are those who made the bad decisions to make the loans or those who financed the people who made the loans. They intended to profit and would have profited if they were right. But they were wrong, so they should lose. The government needs to allow the losers to lose and focus their actions on minimizing the knock-on effects of their failure on people who didn't do anything wrong (to minimize systemic risk). They should then take action to minimize the future exposure of the innocent to the future dumb decisions of the small minority, because no amount of regulation will ever eliminate dumb decisions, so you have to plan for them (through much lower bank leverage limits to cushion losses, bank size limits and non-bank entities playing bank-like roles to improve diversification, safety nets to prevent losers from poisoning the whole system, etc.)."

John Mauldin

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Since 1987 when I entered this business I was weary of the people I worked with, via they ALL seems like robots believing and listening to ANYTHING to make a commision dollar at any cost to the client... it broke-down to me one of two ways:


A. There were all as dumb as they appeared and there was no chance for the investors to keep any monies IF they were lucky enough to make during the easy cycles (1987 wasnt too pretty and none seemed to have much of a plan , but wait and "hope") where all stocks pretty much went up when the market changed and took it all back - - like the "Internet bubble" and now the "Debt bubble" that is a WHOLE lot more risky!!! yet the plan the same wait and hope...

or

B. They did understand that it was ALL a scam and they simply didnt care like the Mortgage brokers who shoved thru loans where the people had NO chance of paying back the money just to steal the commissions while ruining the dumb peoples life in the process ...

Neither case seems ok with me so I always did my own research and did with my own money the "trades" (I ate my own cooking) that I suggested... and had NOTHING, but contempt for CNBC and analysts and all the liars I worked with.

- G$

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IT'S ALL FAKE
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