Traderbill’s Financial Markets Weblog

 …Apple disappointed last night and that will likely be blamed for the problems we encounter today, but like yesterday we have no further to look than the problems of the monoline insurers and the mountain of derivatives in weak (read highly leveraged hands). Apple is an innovative company with a string of one trick ponies. The first, the iPod was morphed ad nauseum and the second, the iPhone which started with the usual Apple fanfare is waning, while all they can bring to the table now is an ultra thin notebook at $1,500…only wealthy need apply…a year ago corporations would be buying them. These accomplishments should not be understated but for a tech company, and one that along with Google, Amazon, and Research in Motion (RIMM), delivered the lions share of the earnings last year, should it still be trading at 34x earnings (31x expected earnings) and is still up 82% over the past 12 months despite having fallen 22% just since 12/26/07. That is why a miss by Apple is significant. Apple opening -12%!

But Apple is merely symptomatic of the depth of the problems the markets are facing. All four of the aforementioned four horsemen have given up more than 25% (below the first Fib retracement) of their gains of the past five years (forget about since the 2000 crash). RIMM is the worst having given back

more than 38% (second Fib and major support), and will likely disappoint when they release earnings if Fred Hickey’s analysis is correct that they were shipping way more units than are being connected in the third quarter! Even the venerable Warren Buffett is not safe (beware of anyone telling you there are defensive stocks n a rout…a rout’s a rout), as Berkshire is also down at the 23.6% Fib of the past five years from it’s 12/14 high (still up 26% for 12 mos. but -4% since the high). Utilities, the best performer of last year (+8.3%  …11.6% with dividends reinvested) are down 11.9% since their 12/10 high. Yesterday, at the low set right after the opening,11634, the Dow was just 27 points above the 38.2% Fibonacci retracement of the rally of the past 5 years. Minor support at 11,600 and critical support at 10,800 (50% retrace) to 11,000…psychological only.

What, besides the problems cited yesterday has allowed this to happen? Since the late 1990’s the Fed has failed us…ignoring a stock market bubble and at the same time applying marginability to any Nasdaq listed stock…in other words the day after the IPO…at a time when stocks were routinely doubling on the first day of trading following the IPO pricing! Meanwhile the SEC too was asleep at the switch allowing all those scandals like Enron, Worldcom, Tyco and more…a total failure of responsibility. Then at the expense of the good companies Congress enacted Sarbanes-Oxley, a law to end all corporate fraud. Do you really feel safer?…are you happy that Elliott Spitzer lined the coffers of the great state of New York with fines for corporate wrongdoing while the shareholders got zip? When will they learn? Wonder why so few want to invest in stocks (outside their 401(k)’s of course), and why ETF’s are so popular?

But the cause of the current malaise (magnitude that is, not the underlying cause of over-leverage and poor credit policies…read: greed), falls right in the lap of the SEC. A friend went to USC with Chairman Christopher Cox…and was upset that TB referred to him as a failure…never said he wasn’t a nice guy or a good man…just not the leader we need there! He allowed naked shorts to run for years before putting on a Band-Aid…by the time they acted, to have required all shorts to be collateralized with borrowed stock would have been disruptive of markets but rather than phase it in they gave way too long a period to borrow the collateral and the street as well as hedge funds are playing it to the hilt.

But the worst was their Fourth of July extravaganza…the total elimination of the uptick rule. TB warned of this shortly after the 7/3 enactment when he noticed volatility rising. At the time, volatility was running along the 40 day moving averages so it was benign…but by July 24 it was rising rapidly…from 15 to 37.50 by 8/15 the stronger Nasdaq 100 allowed the VXN to rise from 18 to 34.70 but since has jumped to 40.77 as of yesterday)…if you recall the stock market collapsed during this period. Since then the market had two more significant rallies and one short, sharp one ending on 12/26 and over the entire period volatility never got below the 200 day moving average again.

So, you say? Just look at the volatility of the past 6 months since the July 16 highs…you don’t have to look at the daily ranges and point declines which have broadened in each selloff. The declines that began on Dec. 26 (TB’s birthday) were big thru yearend…especially on a seasonal basis, but what we have seen since Jan. 2 is truly remarkable. To TB it is due to the elimination of the uptick rule (or is it as the reader suggested a conspiracy of sovereign emerging market funds to drive prices lower so they can invest in our financial companies well below market), or is it deleveraging?

It appears to be the ability to short now and cover later…AND to ‘pile on’ by selling and shorting to drive weak stocks down even more. A hedge fund manager friend complained about the downtick rule since there are several managers at his fund and why should he be prohibited from shorting when another manager might be long…this is apparently the logic the SEC followed. Now we see the problems with this…once the momentum is down a stock…and the indices get hammered  …of course in itself this would be self-correcting but when hedge funds are forced to deleverage due to the evaporation of the yen carry trade as well as their derivative problems  …meaning seeing their hedges evaporate…you have a major problem and one that won’t cure itself. Why couldn’t we have just let the speculators use the options markets if they wanted to make bets…not the stock market which represents savings of long term investors? Perhaps TB’s wife is right: it’s a casino  …and it’s just gambling. Groan.

Now let’s discuss that emergency rate cut and its implications  …TB believes this is only the fourth in TB’s 36 year career (as of 2/1)…first was Volcker’s Saturday Night Special…a massive tightening; then Greenspan following the ‘87 crash and again in ‘98 following LTCM’s collapse. These are ’shock’ moves that are designed to send of message of severity of a problem or to instill confidence in the Fed. They do not of themselves solve anything. In fact, one could argue all it did yesterday was postpone the inevitable but at least it provided time to think…as for the fiscal stimulus it is woefully lacking of size or content.

Yesterday, Bank of America and other banks cut their prime rate following the Fed’s move to 6.5% (TB’s home equity at Prime less 76bp’s dropped to 5.74%). Moody’s placed their debt on review and despite their rising loan losses, credit card delinquencies, and non-earning assets the bank said this will improve their profit margins? Huh? Just what percentage of a banks portfolio (especially BofA who learned the hard way in the 80’s and 90’s about borrowing short and lending long), is in fixed rate loans?

Also their Q4 earnings declined from $5.26B a year ago to just $268 million, but at least their dividend which was raised by 14% following Q3 is not in jeopardy and the indicated yield is now 6.4%…contrast to Citi which would have been 8.85% had they not had to cut the dividend to 5.25%…while Wells has an indicated yield of 4.6% (but will have some home equity shocks to come…still dividend is likely safe).

But the big concern to TB is JPMorgan Chase due to their huge derivative exposure which TB feels will sink them as we begin to focus on counterparty risk which will dwarf the subprime debacle. By the way, JPM’s indicated dividend yield is just 3.72%!…hello? The stock is -18% (15 % with dividends reinvested) over the past 12 months, and 13.8% just since the 12/10 high…do your own research but TB wouldn’t touch it with a ten foot pole…unlike Citi which has been so beaten up, JPM a short?

So stop listening to what you hear about financial stocks being a buy…they are not…yet. Same goes for real estate and housing stocks…yesterday, Jim Cramer said he is considering starting to buy at foreclosure auctions…must be listening to too many of those dis-infomercials on CNBC. How can foreclosed real estate be a buy when you have all those 100% loans that are underwater backing most of the foreclosed real estate? TB’s boyhood friend in L.A. who is (was) one of the largest buyers of foreclosed property in L.A. would scoff at Cramer’s suggestion…TB will try to reach him for an update today and report on the situation there…imagine 250-500 pieces of R.E. on the block every day?…and only a fraction of those selling! WFC said they were holding on to their foreclosed real estate…for how long?…and what if the amount keeps rising which it surely will…those are non-performing assets, right?

Sallie Mae (SLM), the student loan lender just reported: their origination’s in 2007 topped $25 billion, $5 billion in Q4, BUT they had to increase their loss provision by $575 million ($750 million on a ‘core’ basis)…turning their ‘core’ profit into a loss of 36 cents a share…vs. consensus for a 55 cent gain…who pays these analysts so much to do such shoddy work? For 2007 they earned $560 million, core, vs. $1.3B in 2006…and look at the rate of decline…never a borrower or lender be…TR 12 mos: -57.5%.

It has just begun to get ugly so beware of what you are investing in, especially cash…SIV’s a no-no! Above all, treasure liquidity! Cash is indeed king again…after a long respite! Good luck to you all.

Sorry to be so negative but TB refuses to paint over the bad news to make you feel better now and sick later…all the best!