Here’s a monthly chart of the last 20-odd years of the Volatility Index. Readings of 50+ are rare and obviously mark extreme panic. Assuming you have cash and know what you’re doing, it’s probably not a bad time to buy good companies. May I suggest these ten:

• Altria (MO): ~$19
• Boeing (BA): ~$55
• Coca-Cola (KO): ~$51
• GE (GE): ~$23
• Johnson & Johnson (JNJ): ~$67
• McDonald’s (MCD): ~$60
• 3M (MMM): ~$66
• PepsiCo (PEP): ~70
• Target (TGT): ~$47
• Wal-Mart (WMT): ~$58

UPDATE: Many thanks to the people who stole this chart and linked back to the post. A pox on you bastards who stole it and didn’t link back. :-)

Wachovia Slips Amid Speculation Citigroup, Wells Fargo May Bid

“Fears of mounting losses on Wachovia’s $122 billion in option adjustable-rate mortgages helped push the company’s shares down by 64 percent this year.”

The mid-July low is the line in the sand for so many of these financials: $7.80 in WB’s case. (You can’t chart after-hour trades on the $1,800-a-month Bloomberg (wrong, see UPDATE below — at least I don’t know how to in LaunchPad — forcing me to watch time & sales just like in the good old pre-realtime chart, tape-reading days.)

UPDATE: Livia, a kind reader in Hong Kong, wrote with instructions on how to chart after-hours action in Bloomberg’s LaunchPad. Go to the Properties tab of your chart, and then under the Settings tab select “All Sessions” under the Session dropdown (duh).

Here’s the all-sessions chart (5-minute) for WB:

JPMorgan Chase May Acquire Washington Mutual After FDIC Seizure

“As many as five banks had considered bids for WaMu without making an offer, balking in part because the lender faced as much as $19 billion in mortgage loan losses.”

A little wiser (maybe), a lot poorer (definitely).

(Unfortunately) Related:

Off the Charts: Washington Mutual’s Dividend Yield (November 14, 2007)
Tip the Chairman and Discover His 10 Favorite Financial Stocks (August 1, 2007)

Goldman Would Rather Not Dwell in their Necessity

“The Goldman Sachs Group, Inc. announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five year term.”

Not exactly a pound of flesh, but certainly a sweet deal for Buffett.

This kindness will I show.
Go with me to a notary, seal me there
Your single bond; and, in a merry sport,
If you repay me not on such a day,
In such a place, such sum or sums as are
Express’d in the condition, let the forfeit
Be nominated for an equal pound
Of your fair flesh, to be cut off and taken
In what part of your body pleaseth me.

but some animals are more equal than others:

“While China grapples with its latest tainted food crisis, the political elite are served the choicest, safest delicacies. They get hormone-free beef from the grasslands of Inner Mongolia, organic tea from the foothills of Tibet and rice watered by melted mountain snow. And it’s all supplied by a special government outfit that provides all-organic goods from farms working under the strictest guidelines.”

Pigs standing on their hind legs?

Paulson Shorts 4 of 5 Largest U.K. Finance Companies

“Paulson has short positions in HBOS Plc, Lloyds TSB Group Plc, Barclays Plc, and Royal Bank of Scotland Group Plc. The disclosures were required under rules pushed through by the U.K.’s Financial Services Authority last week.

‘Paulson & Co. empathizes with financial firms as to the difficult positions in which many find themselves … Our short positions are taken on a passive basis the success of which will be determined by the merits of the particular company.’”

John Paulson is a master of PR… the empathetic and passive billionaire hedge fund manager, lol. (I respect smart guys who have legitimately made a fortune off of the stupidity of others.)

From a 1987 interview with James Crumley:

“Sometimes I wish I was in the smaller paperback editions and more widely distributed in truck stops and supermarkets and 7-11s. I think that’s where my audience is … one of the things that has always encouraged me and made me feel good about the books that I write is that working-class people read them and are moved by them. My background is firmly rooted in the lower-middle classes, working classes, and I still remember what work was like, although I’m certainly glad I don’t have to do it anymore. I do have a great deal of respect for those people and when they like my books I’m particularly tickled.”

I’m a big fan of Crumley’s writing and recommend you read him if you haven’t already.

Oil Posts Biggest Gain as Traders Caught in End-Month Squeeze

“Crude oil climbed more than $25 a barrel, the biggest gain ever, as traders scrambled to unwind positions on the October contract’s last day of trading.”

This is one short squeeze not (directly) instigated by the Feds. That’s a 30-min. chart below: impressive, no? There are a lot of bald guys on the NYMEX floor… some of them just got a little balder.

Meanwhile, in the land of no shorting (”artificial strength”): U.S. Stocks Tumble on Concern Bailout Won’t Stop Recession

“The Standard & Poor’s 500 Index lost 3.8 percent, erasing almost half of its rally over the previous two days. Sovereign Bancorp Inc., Marshall & Ilsley Corp. and Washington Mutual Inc. sank more than 21 percent, sending the S&P 500 Banks Index to a record plunge … All 10 industry groups in the S&P 500 lost at least 1 percent … Homebuilders in S&P indexes fell 12 percent, their biggest drop on record.”

I thought it would be useful to post this excerpt from Mr. Buffett’s 2005 Letter to Shareholders in light of recent financial catastrophes (emphasis mine):

“We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re’s derivative operation. Our aggregate losses since we began this endeavor total $404 million.

Originally we had 23,218 contracts outstanding. By the start of 2005 we were down to 2,890. You might expect that our losses would have been stemmed by this point, but the blood has kept flowing. Reducing our inventory to 741 contracts last year cost us the $104 million mentioned above.

Remember that the rationale for establishing this unit in 1990 was Gen Re’s wish to meet the needs of insurance clients. Yet one of the contracts we liquidated in 2005 had a term of 100 years! It’s difficult to imagine what ‘need’ such a contract could fulfill except, perhaps, the need of a compensation conscious trader to have a long-dated contract on his books. Long contracts, or alternatively those with multiple variables, are the most difficult to mark to market (the standard procedure used in accounting for derivatives) and provide the most opportunity for ‘imagination’ when traders are estimating their value. Small wonder that traders promote them.

A business in which huge amounts of compensation flow from assumed numbers is obviously fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables and a far-off settlement date, their respective firms must subsequently value these contracts whenever they calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences – and I’m personally familiar with several that were huge – tend to be tilted in a direction favoring higher earnings at each firm. It’s a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable.

I dwell on our experience in derivatives each year for two reasons. One is personal and
unpleasant. The hard fact is that I have cost you a lot of money by not moving immediately to close down Gen Re’s trading operation. Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head on, however, I wasted several years while we attempted to sell the operation. That was a doomed endeavor because no realistic solution could have extricated us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured. Moreover, if severe
trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets.

So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the books. Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.

The second reason I regularly describe our problems in this area lies in the hope that our experiences may prove instructive for managers, auditors and regulators. In a sense, we are a canary in this business coal mine and should sing a song of warning as we expire. The number and value of derivative contracts outstanding in the world continues to mushroom and is now a multiple of what existed in 1998, the last time that financial chaos erupted.

Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully. Gen Re was a relatively minor operator in the derivatives field. It has had the good fortune to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less-than-efficient manner. Our accounting in the past was conventional and actually thought to be conservative. Additionally, we know of no bad behavior by anyone involved.

It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized, pressures. This is a scenario to which much attention should be given now rather than after the fact.”