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This week has been no different than the last two. We are still in circus mode over here on Wall Street. The government has stepped in tuxedo and all. The latest figures have put the government’s bailout amount at $700 billion. There are loose estimates that say this number can climb to a trillion dollars.

Do you realize how many zeros that is? Twelve. $1,000,000,000,000.

What a joke. I am NOT an economist and it’d be foolish for me to presume that I know what is going to happen in the long run. There are people much smarter than I who are chest-deep in Microsoft Excel calculating that. But here’s my speculation.

Where is this trillion dollars coming from? You can’t raise a trillion dollars from tax payers. Not possible. You can only borrow so much from abroad. So the result seems to me like an overtime on the Xerox printing presses. If we are just printing money, this gradually will decrease the power of the dollar over long-term. Not to be confused with short-term fluctuations, the long-term decrease indicates a substantial shift in the intrinsic value of the dollar. No more “oh it’ll bounce back - this is America.” Forget it.

The result of a weakening dollar is increased commodity prices. Energy, food, metals, and the like will rise. Meaning we still will be complaining about our ridiculous corn prices and fuel prices, and we won’t be able to leave the country and take advantage of the conversion. On the flipside, when we leave the country, we’ll be spending money faster than we even realize. Do you remember going to the U.K. a few years ago? A burger would cost you $12. That $12 burger is now available all over the world.

Since the onset of all this news, the dollar has seen a 10% drop against all major currencies. We’re already looking gloomy.

What I’m particularly curious of is how on Earth did the government come up with this thirteen digit figure? For years, the world’s smartest people have been trying to pinpoint a value on this credit crisis and have come up empty handed. But in a matter of a few weeks, the Fed has it all figured out? We are talking about crummy mortgages bundled up and resold, and then bundled up and resold again, and then bundled up and resold yet again in even different countries. The bottom line is that nobody really understands this thing - perhaps two or three people who certainly have sold out a long time ago and now have a private bungalow in the Cayman Islands. Did the Fed magically figure it out?

In my humble opinion, a bailout of this magnitude will result in several years of stagnant or zero growth by the US economy. With all that said, I do think that some action had to be taken swiftly. This may have rough long term consequences, but lack of action would have resulted in catastrophic short term movements. This bailout has indeed brought about some type of resolution to the profound risk of an entire systematic collapse. As I’ve said in other posts, this entire mess will pass. The Fed’s move has ensured that will happen. But we just shot ourselves in the foot to save our leg.

In light of the crisis going on in our financial markets,the CEOs of three companies came together and discussed the situation. Don’t take what’s written below as gospel - but I found it rather insightful - and determining what major companies are doing to combat the economy may be a way for you to spend more time enjoying yourself in the Investment Playground. McGraw Hill, Verizon, and Xerox CEOs answered questions from reporters at a press conference on the Business Roundtable’s competitiveness agenda this morning in a Washington hotel. Here’s what they had to say about the current crisis and the economy: 

Anne Mulcahy, CEO, Xerox

“I think [the crisis is] going to last a lot longer than perhaps we would have anticipated. The bump up might be a little bit further out.”

“It’s fundamentally not a credit problem for business right now. What you do have is a very nervous business environment in the U.S. that’s quite frankly a little hesitant in terms of decisions and clearly has caused a slowdown.”

More than half of Xerox’s business comes from outside the U.S. “When you have weakness in an economy or in an industry, a diverse structure becomes really important. That has been a great hedge against some of the local softness.” 

On the response to the crisis: “You can see that they’ve wisely acted in a situational way.” The outcomes for AIG, Fannie Mae and Freddie Mac were different from the crisis around Lehman Brothers and Merrill Lynch, she said. “It may not be perfect, but it was timely and I think it was situational as it should be.”

Ivan Seidenberg, CEO, Verizon

Up until the weekend crisis — which provoked layoffs on Wall Street — unemployment hadn’t risen as much as some people had expected. “We haven’t seen a big retrenchment because we haven’t seen big layoffs or big consolidation.” He now expects some further layoffs due to consolidation in financial services.

“We haven’t yet seen this financial crisis translate into fewer jobs, less companies starting up, less research and development, less marketing. We haven’t seen that yet. I’m sure every company is keeping their eyes on it.”

Harold McGraw, CEO, McGraw-Hill Cos.

He said the global implications of AIG failing were too high. “There needed to be a way to step up… Whether you agree with the specifics or not” he praised government officials for stepping up quickly with a “very creative” response by taking a loan in the firms.

The financial system is at the brink of breaking. We all have money invested in the markets - and it’s important to learn what the hell went wrong the last few weeks. Financial services are making 40% of all corporate profits in America, and this sector is getting hurt. Basically if you have any money in index funds or mutual funds, by definition we are sensitive to what happens in the financial sector. There’s a lot of hyped-up discussion as to what’s been happening - I swear most of these guys don’t understand it themselves. This is the basic summary:

Overly leveraged debt. Begininning in the 1980s, the market saw the Fed drop interest rates significantly, which led to a great bull market. This boom largely went for another 20 years or so, with some routine cyclical ups and downs. The market increased about 1200% in this 20 year time frame. A typical year of a mixed portfolio yielded 14% in returns (higher than the historical 11% since 1929). When the boom ran out with the economic collapse supported by our current administration - investment managers went looking for more ways to satisfy the unsatiable. Money was cheap, so they took on more debt. The economics are quite simple. If you are leveraged, your returns are magnified. However in a downturn, your losses are catastrophic. And this is fundamentally what happened. In the 1980s - the debt the financial sector held was 10% of the amount of non-financial debt. Now - 50%.

Confused? Consider it like this. If you save up $5000 and invest in the market. Let’s say you entered at the beginning of 2008 and this proved to be an awful idea, and you were down 10% within two months. Your NAV - net asset value - is now $4500. You piss and moan and sell everything just to save the humiliation from your coworkers. Now how about this scary scenario: you didn’t have the $5k to invest, but your bank offered you a great loan - 5%. And you take this newfound “cheap money” you have and invest it, because you’re just oh-so-sure you can get higher than 5% in the market. Then all of a sudden when you lose 10%, you now owe more than you have. The bank is breathing down your throat - and you have to raise money quick. So you go to a couple friends. They spot you the cash so you can invest it and do well enough where you can pay both your friends and the bank. But you allocated all of the money toward Bear Sterns and now you owe way more than you have.

 The nightmare continues like this - except its much scarier on Wall Street because you’re talking about billions of dollars in losses for EACH company. Banks have become debt machines that trade on their own accounts. Estimates of the total losses by the end of this are in the trillions of dollars (that’s twelve zeros - $1,000,000,000,000).

What’s the lesson here? Greed is a power so strong that it can cause an entire class or industry to make all the wrong choices at the same time. Be pleased with your earnings, and walk away when you can. Greed never got anyone anywhere but back where they started - zero.

About two weeks ago, I got caught up in speculation mode and bought into Citigroup at $19.95 per share. I saw an undervalued company that the market beat on - and scooped it up. Getting caught up in speculative trades is easier than you think. Even disciplined investors can easily be swayed by millions of investors with billions of dollars.

I sold Citigroup today for $23. I convinced my friends to do the same (successfully), who sold closer to $24. My total return in two weeks was about 12%. I am pleased with my decision to sell, and a little less so pleased with my decision to purchase. Here’s why.

Citigroup is one of the more solid companies in the world. They have historically held the highest market cap position in the financial sector for quite some time (until recently). With the market beating down the entire sector (rightfully so), I saw the stock’s value somewhere nearer to $28 per share or so. I’m modestly pleased with my stock purchase because it was a true value decision. Just buy and wait for the knee jerkers to leave the room. But I’m not thrilled with my decision because a value pick is only as good as the company is. And all we had to do was to keep reading and researching and Citigroup has a lot of fundamental management issues in the company. Firstly, they along with many other major banks in the sector are losing money fast. Although Citigroup posted $28 billion of revenue last quarter, they had a $10 billion loss in net income (due to subprime write-downs and the like). Secondly, they have a new inexperienced CEO in there (Vikram Pandit). Although he may very well turn the company around - the winds are against him. The company has an earnings release on the 18th of April, and you can expect some major volatility leading up to that. As Warren Buffet said “Better to buy a great company for a fair price than a fair company for a great price”. Which is essentially why I’m split on whether or not this was a good purchase.

As for as selling the stock - I avoid greed and gambling and uncertainty. Buying the stock on a major drop while counting on this volatile market paid off quickly for me. Get in, make your money and meet your goals (I had a sell price of $23 on the stock before I even purchased it), and then get out quick. Avoid the volatility. For the record, I think Citigroup is a buy until about $28. I’ll say it’ll hit this price within twelve months. I however won’t enjoy this long term play simply because it’s out of my risk profile. If you’re more of a gambler - then by all means scoop up some more shares on the next drop. But not because I told you to.

I don’t like trading - the risk is too high for not enough compensation. I’m not a gambler. This stock probably was the riskiest I’ll push myself. Now its time to turn my earnings into another stock pick.

We all make novice mistakes. So here’s your lesson on how to avoid mine.

Hewlett Packard (HPQ) is a stellar company. They target growth by utilizing their resources appropriately. They can provide print services through their Imaging and Printing division while at the same time offering their computer and IT support. Joint solutions provide revenue to all their divisions. They also derive a ton of revenue from overseas, providing protection from a US economic downturn.

So I decided to research HP as a stock purchase. On November 12th of 2007, the stock took a downturn due to general market malaise which caught my eye - it was down to $47.54 at the close. I was patient and disciplined, and no matter what the stock were to do, I wasn’t going to buy until I completed my research. I started looking at annual reports and shareholder presentations, and I got my hands on some sell-side analyst reports as well. The consensus price target was $56. I was quite confident of this price target - and which such solid management I said this would be a good short term buy. The problem is, by this point the stock was back up to about $52 per share.

Lesson learned: a growth story doesn’t work unless the company is selling at a reasonable price

Sure it’s still a great company, but I bought the stock at $51.95 which was fully valued. If you’re looking for a growth play, be weary of the market that we live in right now. What’s a better option is growth at a reasonable price. Had I followed this GARP rule, I would’ve said “Great company, but not a reasonable price”. And walked away. The stock has fallen 16% in two months since I purchased it, currently around $44. Was this a foolish purchase? No. It was just expensive. If you buy a fully valued stock, it will certainly tank with the market. If you buy an inexpensive gem, the market tanks and your stock comes out on top. I’m not going to sell and realize my loss because it’s still a solid stock to own - but the opportunity cost is that it now has become a long-term play that ties my money up for potentially years.

If you’re in my position, the best course of action is to buy more at such a good price. This is called dollar cost averaging. Meaning, your average price paid is lower than the $52 originally paid. HPQ is releasing earnings tonight after the market close. We’re poised for a gain if they do well, but I doubt it’ll be a 15% gain.

Bottom line - don’t buy anything that’s too expensive, even if it’s a great company.