One For You Daytraders

pacific capital bank investmentFor the most part, I usually choose to not actively participate in day trading, most due to the time commitment required as well as the stress levels it can cause. However, every now and then something comes along that is worth a look.

PCBC is a Bank that has been on the decline since the turn in the market and has been flirting with FDIC takeover for the past 6 months. Just a few months ago, the bank found a saving investor to hopefully salvage sinking ship. Gerald Ford, founder of Ford Financial Fund, opted to invest $500 million in capital into the bank, in return for a majority of stock. Although, temporarily, it seems as though the transaction will be enough to keep the bank going, it has also heavily diluted shareholders of the stock, which has sent the stock sailing down.

The interesting part is that now the bank will be offering a unique opportunity for shareholders of the stock. According to their filing (which has also bee confirmed by their investor relations department), any shareholder of the stock as of close of August 30th (which is the day before the Gerald Ford transaction is set to close) will be given rights to purchase up to 15.335 times the shares they currently own at an offering price of $.20 per share. You do not need to be a preferred stock holder, this is open to the public.

Due to this, we have seen enormous amounts of volatility in this stock (up 20% yesterday, down 45% today). As we approach this August 30th deadline I expect to continue to see extremely large amounts of volatility followed by what should be a rather steep decline in the stock, as the $.20 offering deadline passes. Obviously, the main risk in this investment is whether or not the bank stays afloat. As for me, I am familiar with the bank, and am comfortable with their operations and I am also comfortable with Mr. Ford's ability to see a good deal. If you want to see some fireworks the next few days, tune into PCBC.

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Big Banks Beefing Up & Emerging Markets

big bank profitsFirst of all, please excuse my lack of updates for the past while. Those that are active readers of this site know that this is merely a hobby of mine to update many of you of the changing in markets as well as my own two cents on the always changing economy... and hopefully to profit from it. The past several weeks have been extremely busy for me in other affairs and I have been pursuing a variety of different investment projects that has, unfortunately, eaten up a lot of time. It actually has a bit of irony in all of it, because the overall economy is behaving in a similar manner. In fact, I have not been the only one to be loaded with new projects and possible scenarios that was not available the past two years. The big question is, is it feasible and will it last.

No doubt, investment activity has picked up this year. There is money out there and it is getting itchy. Although many small businesses and middle America investors continue to see no light in this tunnel, know that there are several big businesses and banks who are seeing some of the best profits and deals they have ever seen. Unfortunately at this point, it is all about who you know and do you have the cash (isn't it always about that?). At any rate, phones are ringing more, people are at least trying to make things move, but there still remains a big elephant in the room. What is the economy's next move?!

Many "conservative" economists (myself included) strongly believe that we are directly headed for a "double dip" recession. It is very evident that the job market is not recovering nearly at the rate that was hoped by the Fed. Overall market growth continues to be sluggish, despite monumental bailouts and credits that have been given by government. Keep in mind that during all of this, interest rates remain at essentially 0%. So the big question, can Obama afford to continue to ruthlessly spend to continue this "mirage" of prosperity or will he finally come to the realization that a bit of pain needs to come before a true recovery can begin? It is his call and unfortunately either way calls for tough times ahead.

With that being said, it makes it hard to try and anticipate short term changes in markets. Although I have been busy recently pursuing new investment vehicles, I am making sure that everything I am pursuing is sustainable in an even stronger declining market. I have been offered many investment opportunities that forecasts massive jumps in activity the next five years and projects very rewarding returns, however, I continue to believe those forecasts to be far too optimistic.

One bright spot that seems to be benefiting from the collapse of large economies are the emerging markets. Sure, they will struggle with the rest of us and are somewhat tied to larger market performance, however, they have strongly outperformed most indexes this past year. ETFs like EZA, EWM, EWZ, and RSX have seen some extremely large returns and have rewarded investors who took the risk. The have traced back recently here, but as the Dow lingers near 10000, I would expect a short term "trampoline bottom," thus rewarding these ETFs even more. Time will tell, but I am in them.

Big banks are also strongly benefiting from recent government concessions. The foreclosure market has picked up tremendously, which is a direct correlations with the strength of their balance sheets. Earlier on, banks could not afford to take the hit on foreclosed assets, thus forcing them to modify loans or just not respond to delinquent borrowers. Now, they have replenished the vaults (at the Fed's and taxpayer's expense) and are much more aggressively taking back assets. As these assets hit the market, expect more declining prices in both residential and commercial real estate. It is definitely starting to get interesting. Happy Trading.

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Don't Rule Out Deflation

Many analysts have quickly written off the possibility of deflation due to the large amounts of government spending that has taken place. However, there are still many who know the adverse effect of market crashes, one of which is huge deflation risk. As for me, I continue to believe the beast still lies ahead for us and I'm not alone. Jeff Cox at CNBC writes about how deflationary worries are causing for a spike in the long term bonds. Here is what he said:

With investment advisors convinced the economy may be headed for a bout of deflation, they're turning to longer-term bonds for safety.

The uncertainty of the current environment creates acomplicated picture for investors, but many advisors continue to feel comfortable with the safety of bonds, particularly those from the US government and for a longer duration.

It's part of a mindset that believes inflation could well be the economy's long-term worry—going out two, three or four years from now—but in the near term prices could turn negative and bring about deflation.

"It's hard to see where the inflation is going to come from," says Brian Nick, investment strategist for Barclays Wealth in New York. "The longer-duration bonds look expensive but also look like stable, safe assets."

NYSE Traders
Oliver Quilla for

Nick recommends investors target 7- to 10-year durations in bonds and Treasury notes, though some strategists are even backing the 30-year long bond [US30YT=XX 4.0663 0.0783 (+1.96%) ].

Long-term bonds are a bad bet in an inflationary environment as their value erodes as costs go up.

But in deflation, they make attractive tools for investors who have the security of decent yields but also see increases in their face value and collect handsome coupon payments. Prices and yields move in opposite directions, with higher demand driving up prices and pushing down yields.

Government bonds had a remarkable July, with the yield on the benchmark 10-year note [US10YT=XX 2.9681 0.0631 (+2.17%) ] ending the month virtually unchanged even as the stock market roared higher by 7 percent. Stocks and bonds often move in opposite directions as risk dims the allure of safe-haven investments like government debt, so a stronger stock market would drive yields higher

Nick recommends a barbell strategy, with longer-dated US Treasurys on one end and triple-A rated sovereign notes from companies like Germany and Sweden on the other end. The middle would include investment-grade corporates, high-yield Treasurys, convertible bonds and defensive stocks.

Jeff Cox
Staff Writer

"Equities are going to be tough to pick individually in a declining market...You want to be in our opinion looking at higher-quality fixed-income," says Steve Baffico, senior managing director at Claymore Securities in Chicago. "That brings you to things like corporate bonds, asset-backed securities, even into the high-yield market, where there's a degree of undervaluation and some pretty high-quality product that's mispriced."

As with the question of whether the economy will enter a double-dip, the situation with deflation may be as much perception as reality.

Analysts say the economy may not actually meet the dictionary definition of a double-dip, though it will still feel like one. The same may be true for deflation, defined as a drop in prices often due to a decrease in money supply.

The Consumer Price Index has declined for three straight months but is up 1.1 percent for the 12-month period ended June 2010. And inflation slipped to 1.05 percent in June but trended above 2 percent for the preceding five months, according to the Bureau of Labor Statistics.

"A base case could be made for generally improving growth and moderate inflation. From an investment perspective, long-term assets such as long-term Treasury equities, corporate bonds and structured products are relatively attractively valued," says Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, N.J. "A diversified portfolio among these longer-term assets is going to offer some protection against deflation."

But with a $13 trillion debt looming and about $1.8 trillion on corporate balance sheets, the timetable for the deflationary environment is very much in question.

"This is a little bit trickier than going out to the long end of the curve, because we could see some sort of implosion in the Treasury market," says Abigail Doolittle, founder of Peak Theories Research in Albany, N.Y. "It's a matter of timing that very carefully."

Doolittle says investors can use longer-term bonds, including the 30-year, but not as hold-to-maturity vehicles. Trading bonds is common for institutional investors but is a little tougher road to navigate for less sophisticated retail investors, who are best off using an experienced advisor for help.

She is an even bigger advocate of cash, including foreign dollars such as Canadian and Australian denominations—countries that have raised rates and defended their currencies.

"Just because of the massive deficit, it's really going to put pressure on the dollar and Treasurys. When that happens you could see a spike higher in yield and a spike lower in prices," she says. "That's something the retail investor does not want to get caught in."

Indeed, today's deflation tremors might only be a precursor to tomorrow's inflation earthquake, as easy-money Federal Reserve policies and huge cash reserves make their mark.

"Investors need to be very cautious to try to protect themselves against systemic risk and dollar risk," says Doug Noland, manager of the Federated Prudent Bear Fund, which holds a balance of shorted stocks and benefits on the stock market falling. "It's time for investors to hunker down through this period without big losses. This is an incredibly uncertain environment."

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