Archive for February, 2008

2/29/08…take a flying leap

February 29, 2008 at 6:36 am · Filed under economy, financial, markets ·Tagged , , , , ,

TB’s Quote of the Day: “The individual serves the industrial system not by supplying it with savings and the resulting capital; he serves it by consuming its products. ” John Kenneth Galbraith. Gives an entire new meaning to give until it hurts…didn’t know I was a patriot! TB
…not a flying leap, just a leap of faith…after all it is leap year! That is pretty much the feeling that emerged in our conference call yesterday. Then, TB was sent a story from across the pond by one of his avid Brit readers who provides a lot of ’seed’ for TB to explore for articles. This one is rather compelling and will thus be the main topic of discussion today, along with a counterpoint article sent by a local reader and friend.  
Today’s topics:
1. Commodities and the dollar
2. Conference call summary
3. Dealing with inflation in a stagnant economy
1. Bucking Commodities. TB has been concerned with both the dollar and commodities lately, and even more concerned with the stock market mavens who can’t see how either can adversely affect the market…after all they say: you can buy stocks that are commodities driven or whose revenues come from abroad, in fact 20% of the S&P 500 revenues are non-dollar denominated. They have thoroughly scrambled that basket of apples and oranges. A quick look at the overnight markets below should alarm you…if not you believe that the stock market is immune to everything else happening in the world today. 
How can we sit here day after day and watch the dollar fall to record lows since we had a universal currency in Europe and precious metals and energy prices climb to record highs and pretend it doesn’t matter and if we simply buy commodities stocks (coal production is the hot one now), or those who benefit from higher agriculture prices (farm equipment makers), or oil companies (without regard to whether they are producing, processing or fully integrated, domestic or global)? How can we sit idly by as a flawed and sorely lacking energy policy that does nothing to encourage energy conservation and produces ethanol from corn which, while consuming more energy than it produces, is driving the price of it to the sky and taking along with it wheat and soybean alternatives? Those higher prices have filtered thru to chicken and milk and next it will be to cattle prices as they have a longer lead time…but now do to a record massive millions of pounds beef recall, we even managed to accelerate that! TB has been doing the shopping lately and is appalled at the price of a bag of groceries now…and that is with all those Safeway savings (by the way they are laying off about 500 managerial workers). Imagine a person who went to the store a year ago, went to sleep and went again today to buy the same things…up about 20%…in one year! Have we gone mad?
Several years ago, Jim Rogers (the new friendly but unkindly Mr. Rogers), who made his mark and his fortune managing Soros Funds in the early days, began screaming that we should be buying commodities…but commodities went nowhere and he was scoffed at when he repeatedly made the comment on the Saturday talk shows. Even TB thought he had lost it…but last year it all turned around and his patience was rewarded (he even went so far as to say his young old daughter is learning Chinese…because he feels she will need it). Now we are in a commodities explosion…not a bubble yet by any means (recall the price increases in real estate before we got to the bubble point…lasted for years and sadly the correction will last similarly), and everyone is now piling in…yesterday while TB’s conference call was on Cal PERS one of the largest pension funds in the country, increased their exposure to commodities. The sad thing here for the average investor…or even professional money manager…and that includes TB…is we know little of anything about commodities trading and portfolio management. When an expert in on field delves into another there can be problems as we saw with Warren Buffett’s foray into ForEx in an expensive bet against the dollar…he knew nothing…and said so.
A Brit friend sent an article from the Times Online (London), yesterday and it is truly shocking as it was about a global fund managers conference in Tokyo and had comments from a panel discussion. Here are is the entire article as TB thinks it is important for you to read:
“Jim Rogers – who co-founded the now closed Quantum Fund with George
Soros – told 750 global fund managers in Tokyo today that, America is
“completely out of control”, there will be a 20-year bull market in
commodities and that prices will be in turmoil.
And he also warned that it “made sense” if global competition for
resources ended in armed conflict.
Mr Rogers told delegates to the CLSA investment forum that the prices
of all agricultural products would “explode” in coming years and that
the price of gold, which hit an all-time high of $964 an ounce
yesterday, will continue its surge to as much as $3,500 an ounce.
Gold would continue to rise, the analyst Christopher Wood told fund
managers, “because it is the exact opposite of a structured finance
product”.
In a blistering attack on US monetary policy and the “helicopter cash
drop” responses of the Federal Reserve, Mr Rogers described the
American dollar as a “terribly flawed currency”.
He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up
the money-printing machines and run them until we run out of trees”
had exposed America’s weakest point to her rivals and enemies.
The dollar may have declined recently, he added, “but you ain’t seen
nothing yet”.
Talking to a room almost exclusively populated with Japan-focused
equity investors, Mr Rogers recommended an immediate language course
in Mandarin and a switch into commodities — the second-biggest market
in the world behind foreign exchange.
Mr Rogers said that historic drains on wheat, corn and other soft
commodity inventories have created market dynamics that could lead to
severe food shortages.
The outlook over the next two decades would see prices of everything
from cotton and sugar to lead and nickel “going through the roof”.
Heavily playing down the prospects of a big recovery in Japan, Mr
Rogers said that the country’s demographics — as the fastest-ageing
country in the world — would cause it greater problems and an
ever-diminishing quality of life for ordinary Japanese.
But he also said that other countries — including Britain, Italy,
China and the US — should take note of what their own demographics
would look like without the effect of immigration.
“Japan will be the perfect laboratory for the world to watch how a
demographic crisis plays out,” he said.”
TB hopes you took the time to read it as it calls your attention to major problems facing us and unfortunately we have no leaders capable of dealing with them…especially the slate of Presidential hopefuls. Think any of them would make Jim Rogers, Treasury Secretary, or Energy, or Agriculture?
So if you believe that your stock portfolio can insulate you in this environment you are mistaken.
TB has been thinking about Sam Zell’s comment that he likes commercial real estate here…yesterday he considered it ‘talking from position’ and trying to dupe someone else in the way that he did Blackstone last year, but after reading the above article TB thinks Zell has a point. Recall in the early 1990’s when the yen was in the low 80’s? The stupid Japanese were buying up everything from the Empire State Building to Rockefeller Center…what fools as our real estate market was in a slump…well guess what: by July 1998 the yen was at 145 again still below the 150 set in 1990 but close enough to call it a round trip. Their economy was in the tank and their hot real estate market was now a shambles along with ours. But no matter what the properties they purchased were worth 78% more in currency terms and look how the price appreciation since has offset the rise in their currency again to 104! Now before you run out and start buying strip malls note that both Zell and the Japanese are talking about big commercial properties whereas the strip malls and shopping centers will suffer from slowing consumption and apartment houses from an inability to raise rents and vacancies due to evictions.
2. Conference Call: there were only 8 callers but TB would gladly take quality over quantity as we had people from SF, London, New York, Boston, Miami, and L.A. TB started with a brief summary of the mononline/ARS situation which gradually morphed into concerns over the overall economy from all participants. The biggest concern, and these were institutional investors was fear…fear of the unknown. Where are the skeletons? How does one invest in a company…especially a financial company when you don’t know what their exposure is? A financial advisor with decades of experience in institutional sales and marketing for a major fund manager expressed what TB has heard from retail brokers: that their clients are scared and calling constantly. We discussed three corporate issues (one was actually a CD) with rates of 8-10% and he said he wouldn’t dare put one in a client’s account not knowing if they would make headlines tomorrow. TB brought up the Islamic bourse discussed yesterday and one informed caller said it was highly unlikely that this would ever amount to anything since not only the Saudi’s and their affiliates but Mexico and others would never accede to the wishes of Venezuela and Iran…a very good point but it seems likely that more oil will be traded in Euros or a basket further weakening the dollar and thus driving US energy costs even higher (see Rogers comment above). Now here is what TB is most proud of: not only did we have a great exchange of ideas but the call originally scheduled for 30 minutes ran almost an hour and of the eight the shortest time anyone was on the call was 40 minutes! TB hopes you will join us next time…in about 4 weeks or whenever some event triggers the call. IF you join us,  please understand that we are all seeking information, not telling you how it is, as we don’t have the answer…therefore there are no stupid questions or stupid answers…you will see no bashing like on CNBC…not on TB’s call. Everyone is respectful of others but will not defer to their opinions. 
3. Dealing with inflation: ever since he was a teenager TB was always curious how people in banana republics dealt with inflation…sometimes 1,000%, or more. The textbook story is a woman dropping off her husband at work where he is paid in advance so she can spend it before it is worth less. If you think this is funny, consider in Mexico where 20% of the pay for the average worker goes for tortillas, their staple! Thank you ethanol for that one. But the most memorable to TB was a 60 Minutes story on Brazil about 10 years ago. A man was filling the tank of his Mercedes…as we watched the pump churn he commented that filling his tank cost as much as his car did five or so years ago. Although extreme, that is what rising fuel costs denominated in dollars can do to us, especially when we are the largest debtor nation in a world flooded with dollars. We had better pray that the lack of foreign participation in the last two auctions of 2 and 5 year treasury notes does not expand (hopefully it is due to their low levels and they will still want to buy our longer paper although the bulk of issuance is 2 and 5 years which are being bought by fearful investors…how else does one explain buying bonds out to 5 years that yield less than the inflation rate. TB reiterates the word he coined: stagcession! Not stagflation but a declining economy where inflation remains elevated albeit at modest historical levels but that is because it is cost push inflation, not demand centered. The problem here is that with personal and government debt at historically high levels, how long can we maintain our standard of living through credit? Certainly you better not count on your pay increases…not as unemployment rises and it will rise. Even in a strong market, people were working 10 hours or more and not taking vacations to protect their jobs…what about now when so many skilled people from the financial sector are losing their jobs? As for the falling dollar increasing exports that would be fine if we made anything here but other than agriculture we don’t make much, and the inputs largely come from abroad. Note that our exports have been rising nicely (mainly ag), but have been overwhelmed by import growth due to energy as well as food we now import. That is what TB meant yesterday about all the agricultural land that has been destroyed to build homes that are now in foreclosure. 
 TB was thinking about what happens if one moves abroad and it is no help if the source of your income is dollar based such as your retirement or social security unless you move to Mexico or another emerging market which few of us are willing, or able to do.  
If you think this is negative, check in six months from now and remind yourself that you cannot solve a problem until you recognize it. God bless the United States of America…and its next President!
TB hates to be so negative but unless and until our leaders do something different things will get worse.

Enjoy a well-deserved weekend…and don’t kick your dog! 

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 29, 2008

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2/28/08…I can’t hold her Captain!

February 28, 2008 at 6:54 am · Filed under economy, financial, markets ·Tagged , , , ,

TB’s Quote of the Day: “Entreprenurial profit…is the expression of the alue of what the entrepreneur contributes to production in exactly the same sense thatwages are the value expression of what the worker ‘produces.’ It is not a profit of exploitation any more than are wages.” – Joseph Schumpeter again. this does not apply to CEO’s or Wall Street. TB
Conference Call: Today, Thursday at 8am PST (11am EST; 10am MinnesotaST; too early for Hawaii and too late for Japan and Australia.) Details with tomorrow’s commentary. Call is free except any long distance charges to Kansas. Dial-in number is 785-686-2400, participant code: 321856. TB will be there five minutes early so call in before 8 if you can so we can start on time with few interruptions. Topic will be credit markets and auction rate securities. A good day for the call as weblog has now had 3,100 hits…thank you! TB
Today’s topics:
1. Inflation and the dollar
2. More fallout from housing
1. Inflation and the dollar…poor Ben Bernanke must feel a lot like Scotty. To heck with inflation (and thus the dollar) as focus shifts almost entirely on the economy…which is only secondary as it is the credit markets. Apparently, the markets took him at his word and decided to accommodate him as the S&P 500 closed down for the first time in four sessions and the Dow came back from negative territory to makes four straight up days of 400 points and while a mere 9 point gaine advanced the margin above the 40 day moving average to 192 points. Meanwhile the combination of inflation rising, while the core remains mired around acceptable targets for the Fed, and the continued deterioration in the housing market (although you wouldn’t know that by the seventh attempt to rally housing stocks), is taking its toll on the dollar. The Index is at an alltime low and the Euro closed well above $1.50 for the first time in its 9 year lifetime. Still over the past 12 months the Dow is up just 3.47% (5.86% with dividends reinvested…although if you had gotten fair value you would have earned nearly 6%), and -4.3% year to date, while the S&P 500  
is -1.9% (-0.03%), and 6% ytd. The beloved NDQ 100 is up 3.3% (2.67%) over the past 12 months and -13.7% year to date. There is trouble in paradise.
Over the weekend TB heard that Iran has now started an Islamic commodities bourse. Initially, it will only trade in oil but can be expanded to other commodities. So? Why go there. Because you can trade oil in any currency you like (doubtful there will be much interest in dollars there). Were it not for the Saudi’s we would not be trading oil in dollars…it would be a basket at least or if Venezuela’s Hugo Chavez had his way a basket ex-dollars. IF this trend catches on, you have not begun to see the weakness in the trade deficit, balance of payments, or the demise of the dollar. TB is not saying this will happen but we are no longer the most popular nation on the planet, especially since we just inflicted great pain on the banks of Europe and even a small town in Norway thanks to Wall Street’s financial engineering. Already the dollar is showing signs of strain and with a global commodities boom, bubble?  …we cannot avoid rising food and energy prices: over the past 12 months energy at the producer price level is +23.7% and food up 8.2%…over the past three months they are up at an annualized rate of 44.7% and 12% respectively, while the dollar index is down 4.2%, 13.5% annualized. Over the past six months the Euro is +11.1%…annualize that! Second most popular is the Yen +8.3%. Clearly, the preferred currency is not the dollar, or Sterling which has fallen from favor and TB attributes this to the failed actions of the BOE over Northern Rock. Since hitting $2.1162 on Nov. 8, it is down 6.2% vs. the dollar. TB will leave it to readers to look at Sterling/Yen or the Sterling/Euro cross.
Yet we continue to be told that inflation is good for stocks, as are the completed and pending rate cuts (probably another 50 basis points at the March meeting), and even with a gradually deteriorating dollar. Well, it isn’t gradually deteriorating and won’t as long as the currency markets expect more rate cuts. This is also bad for the Yen carry trade as the cost of borrowing is increasing although thankfully it isn’t a Euro carry trade. Remember credit markets are being constricted too.
2. Housing. TB’s friend in L.A. is back buying properties again…he said he has $100,000 instant equity. TB pointed out that means he could sell it tomorrow and net $100,000…haven’t heard back on that. Also we have Sam Zell saying commercial real estate has value which is either his observation or talking from position which is much lighter since he unloaded much of it to Blackstone (BX) a year or so ago. Perhaps this is an overture for a buyback at a discount…a deep one? Both TB’s friend and Zell seem to feel the rate cuts will lower mortgage rates but the data doesn’t support it. According to the latest MBA Survey released yesterday, the 30 year fixed mortgage rate has risen from 5.49% just before the back to back 50 basis point rate cuts by the Fed to 6.27% in last weeks survey…a year ago it was 6.16%. All classes are higher than before the rate cuts. From a year ago, the 15 year fixed is -10bp’s; 7 year balloon -77 bp’s; 5 yr balloon -57bp’s while a one year ARM is down just 10 basis points. This of course ignores the higher credit standards required to obtain a loan or refinance. According to the MBA Survey purchase applications are -10.7% from a year ago. Re-fi apps plunged 30.4% last week (remember these are not loans merely apps and due to credit multiple applications are being filed), but they are up 26% from a year ago!
Next we look at home sales. In January, Existing Home Sales fell 0.4% due to a 6.5% drop in condo sales which have been in decline since peaking in July and are down five of the last six months, while single family home sales peaked in Sept. 2005 and have been down all but 3 months since, with the last up month 11 months ago. Inventories are up 5.5% from the average for 2007 while the Months Supply has risen to 10.3 from 8.4 months (peaked at 10.5 months in Oct. dipped and is rising again). Anything above 9 months is a warning sign…and we have rapidly increasing delinquencies and foreclosures…don’t listen to those who tell you they are still low…Dennis Neale on CNBC said the other day that Countrywide (CFC) is undervalued since foreclosures are just 1% of the total portfolio. Looking thru the rear view mirror Dennis and it is only they percent of capital that matters for a financial institution. Breaking down the unsold inventories doesn’t help either: single family homes 10.1 months, condos 11.8 months! New Home Sales are bad too despite huge incentives by builders…TB predicts a major builder will file bankruptcy in the next six months, or be acquired on the cheap. Those sales were down 2.8% in January and are down 20% from the average in 2007…and spread pretty evenly across the geographical sectors (note that new home sales are not based on closings but on contract sales and those are not adjusted for cancellations which have been running 50% or more). Inventories are 2.2% above the average in 2007, while the supply is 9.9 months which is .5 months above the peak in the 1991 recession! The median sales price is -3.7% from a year ago due to the incentives helping to stabilize…while existing home median is -15.1%…and remember this includes tracts where the developer is now offering those incentives and are thus unsaleable…only way out is foreclosure.
State and local finances are deteriorating rapidly all over the country due to declining income, sales and property tax revenues and more to come as home appraisals are lowered. TB reported on Solano County where the assessor said he expects tax bills to fall by 20% next year! In California that is a double whammy because of Prop. 13 which only allows existing homes to be raised 1% per year above the purchase price…that spells deficits ahead. Vallejo, which is in Solano County will decide to declare bankruptcy today and thus be the first in California since Orange County in 1994 but the economy will not bail them out this time. The problem in Vallejo is rapid growth followed by a plunge in property values. TB could give instances all over the country of this and now Flint, MI, which has been in bankruptcy for years and in decline since GM pulled out (Roger and Me), and TB was told by a firefighter friend there that there were homes torched every night since they couldn’t be sold. Now Flint is joining Cleveland and other cities that are razing foreclosed homes to stabilize the market and lower crime. As stated: these are extremes but not atypical!     
What are the banks doing?…what they do best, exploit the situation. Remember just a year ago when TB told of a commercial from a loan company offering 102% financing? He thought it was a fly-by-night but nope…it was Wells Fargo Mortgage, the largest subprime lender (and seller although they stupidly held on to the home equity portion for what reason TB cannot even fathom). Wells is now out of subprime, but guess what? Already, TB has heard commercials for them as well as BofA with a new wrinkle…they are now writing reverse mortgages. If we missed you last time, we’ll get you now! Can you believe the audacity of this? Yet it makes sense as those are the safest loans over the long term and deeply discounted. There is black marble sculpture (more of a blob actually) in SF outside the BofA building, formerly headquarters, dubbed the Bankers Heart…how true…how true.
Hope to ’see’ you on the conference call…just remember TB is an observer not a seer.

All the best, 

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 28, 2008

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2/27/08…as GM goes

February 27, 2008 at 7:13 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

TB’s Quote of the Day: “Capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest,” – Joseph Schumpeter. This is one of his quotes you will not hear from Sir Lawrence of Kudlow. TB
Conference Call: Since it has been about a month since the last one and we have a catalyst: monoline insurers and auction rate securities, there will be a call Thursday at 8am PST (11am EST; 10am MinnesotaST; too early for Hawaii and too late for Japan and Australia.) Details with tomorrow’s commentary. Call is free except any long distance charges to Kansas. TB 
…so goes the economy. That was then, now it is: As IBM (I Believe in Me?) goes, so goes the markets and who cares about what is really happening with the economy. THAT, if you believe CNBC was why the entire market rallied. Does that make sense? Does TB’s explanation that we are coming to the most important date so far this year on Friday…fiscal mid-year for Goldman, Lehman, Morgan Stanley, and Bear Stearns and who were forcing the issue of a bailout of the monoline insurers…make more sense?
Today’s topics:
1. IBM – duh!
2. Stock market action - unprecedented irrational exuberance
3. Monotonous Monolines – anything but!
1. IBM. This company hasn’t been a powerhouse for years yet yesterday it rallied 4% just because they said they are going to do a $15 billion stock buyback…because management thinks the stock is too cheap! Who give a damn what management thinks? Management’s interests are not yours. their idea of long-term is when the CEO retires. They even interjected a term that has been dead for years: mainframe. Kids, think of that as a great big desktop computer…really big…TB knows, we have been trying to make them smaller, lighter and even thinner (but more expensive), for years…decades even. But CEO Steve Mills, Sr. VP, not even the CEO came out with this (not one of the Mills Brothers who you have also never heard of), but hey, it’s a start. Now of this $15B they plan to buyback $12B in 2008 and no more shares than approved by the board (bored?) over the next 12 months. Hello? They still have a billion or so to do from that LAST buyback…are you getting the picture? Now the good news for the shareholders: it will add 5 cents a share on the buyback! Wunderbarf! Are we nuts? That is an additional 0.00044% return…that is less than the rounding done on unemployment CPI and PPI. Their dividend is 1.4%…isn’t that special, S&P 500 is 2.15%…and that is, or was before the runup about a 10% buyback. They could have increased the dividend or declared a special dividend of $10.85 a share for the same amount of money but see how short-sighted you are…always thinking of yourself…think of management! This company that has been around since 1916 fell on its face due to a Harvard dropout named Bill Gates and is a shadow of its blue tie and white shirt required days. What is management really saying when they do a buyback? That they can’t find anything better to invest in (than themselves).
You really wanna know how cheap IBM is? TB ran a regression on Bloomberg over the past 5 year and $110 is STILL 1 standard deviation above the mean! At the Oct 11 high it was 2.5 SD’s above the mean which is $100…want value? Buy it at $90 which is 1 SD below and coincidentally the 200 day moving average! How would you have done if you bought it on 7/13/99 at $139 a share? -30% if you reinvested dividends or -6.2% annualized as if last nights close. By the way this isn’t atypical of major industrial stocks. IF you had bought however on 7/31/96 and reinvested dividends you would have earned 13.6% but from Sept 1989 to April 1995 your return would have been zero, and to date you would have earned about 9.6% with dividends reinvested. Timing is everything. Will make it easy if you want to disagree…Beta is .91 so it is defensive and est. P/E is 13.9x which is fine and PEG is 1.3x since LT growth is 10.7%…don’t make the same mistake as in 2000 when they told you defensive stocks earning 10% plus were the place to put your money…they weren’t and won’t be!
2. Stock market action. The Dow rose by 115 points…35 of those came from IBM, 8+ from HPQ, WMT, CAT, AIG and PG…that’s about 75. But the real story is that the market was down 42 until the IBM announcement…and well it should have been…it then marched up 222 points to +165 before giving back about a third of the gains. A look at volume which was barely average tells you that it was the same pattern we have seen every day…no big spike on the news and solid but not a huge spike in IBM volume…in fact it wasn’t even in the top six on the NYSE (EMC’s was double IBM and it was sixth!). On the S&P 500 IBM was the biggest gainer but only added .68 to the 9.49 gain on the session while Google subtracted a like amount…these were the biggest winners and losers? Huh? Nasdaq was less then impressive, especially the 100 which was up just 0.3% thanks to GOOG taking away 3.8 index points and Foster Wheeler (FWLT and a Cramer pick) -2.1, giving the 100 a net gain of 5.85 points.
To understand yesterday you have to start at Thursday. Remember? Leading Economic Indicators in Jan. posted their fourth straight decline which is definitely recession territory (OK not to everyone), Coincident Indicators were up a weak 0.1% while Laggers dropped to unchanged. That should have tanked a rational market…and it did by 142 points. Yet on Friday the Dow rallied 97 or two-thirds of the loss. On Monday, we got Existing Home Sales for Jan -0.4% or -23.4% annualized (they were down 12.8% in 2007 and 8% in 2006 so you see the trend, right?). Worse the Average Sales Price is down 3.7% annualized and the Median -4.6%…indicating that the low end homes aren’t selling and is appropriate given rising foreclosures. THAT should have tanked the market….it didn’t…the Dow rallied 189 points closing almost at the high…and why? Because of a bailout for AMBAC which the street thinks will be extended to ‘all monofilament lines’ (translucent not transparent)…see point 3 for that fiasco.  Then Tuesday we ignored a sharp spike in Producers Prices of 1% vs. consensus of +0.3% and a 0.4% jump in the Core rate when 0.2% was expected, and worse a decline from 87.3% in Consumer Confidence (per Conference Board, not UMICH), in Jan. to 75.0% in Feb…way below consensus of 82%! The Present situation declined to 100.8 from 114.3 a huge one month drop to the lowest level since late 2004 and Expectations sic months out fell to 57.9% from 69.3% and you have to back to the 1991 recession to match that! Additionally, Same Store Sales were mixed following a weak January (Starbucks closed for an hour to train barrista’s to make coffee again?).YET, IBM carried the day? Don’t you think that odd? So although the markets are down ytd, the Dow rallied 400 points over the past three sessions? …oops, forgot, it climbs a wall of worry…by its very fingernails!
3. Monotonous Monolines:  TB wishes to express his gratitude to his literary idol (both of us write in a whacky manner but still manage to get it out to you…and both get up early in the morning to do it), Joan McCullough of East Shore Partners, and before that with Bear Stearns…told you she was smart! Can you imagine she could write anything meaningful at Bear these days and get it past compliance? Newbies, if you watch Law and Order you know about IAD (Internal Affairs), and this is the equivalent…does nothing productive but dictates how everyone in the firm acts…or else. Anyway, we are kindred spirits although we have never met, or even talked on the phone. She too, rights a daily commentary that picks up the obscure but meaningful. Anyway, this is from yesterday’s commentary (if you would like to receive it and have some equity commissions to toss out let TB know because she deserves a reward and you need what she writes about). Per Joannie, on Friday at 2:23pm EST the rating agencies gave the monolines a six months reprieve on ratings…you think they were made an offer they couldn’t refuse? Moody’s even said that if there was reinsurance they wouldn’t charge again for the rating, bless them. Then 32 minutes later, she continues, this hit the tape:
“Goldman, Sachs & Co. analysts increased their price estimates on MBIA Inc. and Ambac Financial Group, Inc., the world’s two largest bond insurers. The US Brokerage raised its forecast for MBIA to $14 a share from $11 perviously, it wrote in a report today. The estimate for Ambac rose to $9 from $7. Goldman also raised its price forecast for Security Capital Assurance Ltd. to $0.80 for $ 0.50 a share.” 
From the get-go on this bailout it was intriguing as, just like with the Super SIV, the sponsors were the ones with the most to gain. Goldman has billions of affected securities…so does JPMorganChase. We have to save the insurers to save ourselves right? Now get this, on Friday, the market spiked in the final 20 minutes of trading after CNBC’s Charlie Gasparino breathlessly broke the news that there was a consortium gathering for a bailout…the usual suspects. Wonder who called Charlie? Read between the lines. So we were primed for an announcement on Monday and took it hook, line and stinker…er sinker.
As TB said the other day why should a company have a AAA rating that if it drops just to AA it has nothing to sell…but wait it gets better. MBIA and AMBAC are the two largest muni insurers…according to a table presented on CNBC yesterday though, not only have insured issues declined from 80% or so of the market to 52% over the past year but MBIA’s share has declined from something like 20% to less than 2% and AMBAC similarly to 0.6%. See why they were insuring all those derivatives…or focusing entirely on them. Of course in muni’s the two still have the biggest exposure.
This morning on CNBC, Charlie Gasparino was defending himself against charges of being manipulated by the above mentioned firms, saying he just reported what he had learned. Joe Kernan compared it to the Enron crisis when they were asked to delay a story by none other than Treasury Secretary Rubin. If you don’t remember him kids, he was vice-chairman of Citigroup who knew nothing of the problems. 
Gasparino said that the SEC must do something about enforcement on bond matters but also said they had bowed out previously saying they lacked authority…wait…didn’t Greenspan say the same about subprime mortgages and the other regulators too? We have a crisis of authority and that is a very bad thing in a capitalist society…see Schumpter quote at top of today’s column. What a mess! 
So buy if you dare, but don’t blame TB when this mess implodes again, and it will as both Joannie and TB have been reading the same things about state and local government. Deficits are rising due to a loss of income tax revenues, sales tax revenues…thought consumption wasn’t slowing?, and the next show is declining property tax revenues. It is a crisis in some locales. In Caleeforneea, our Governator solved the last mess or so he said by funding the deficit with bonds in effect. Then we passed four propositions he proudly endorsed to issue billions more of bonds for infrastructure. Even the rating agencies will eventually see thru this…they did two decades ago and will do it again…and it’s a hard climb back, especially without insurance.
TB wonders why headlines aren’t being made of agriculture, especially with wheat prices now rising to follow corn? Yesterday, we saw the impact of food and energy on inflation. In Washington, they planted corn where wheat was even with a lower yield…remember this in Econ 101? It is not practical…next year out with the corn in with the wheat. That is what a flawed insane energy policy or lack thereof gets you and don’t count on it to change even with a new Administration. Popular opinion holds that government is the worst allocator of resources which it is…witness Ethanol…but leave it to capitalism to ‘capitalize’ on their stupidity…especially when you no longer manufacture anything…thus the ‘bubble’ in commodities prices and make no mistake it IS a bubble. We have destroyed some of the most productive ag land in the world to make homebuilders rich, although that might be fleeting for their companies, last night TB heard that in some central California cities they are still approving more homes despite huge foreclosures and declines in price. But in others they are leveling some homes to put it back to agriculture…although it can never be the same.

Now for a whacky close: Vallejo, Ca. will likely be the first city in the state to go bankrupt due to the housing crisis. The entire Solano County faces a huge drop in property taxes too as they are reassessed…down! Yesterday, the city manager recommended filing. Tonight the council votes on it. But here is the best part: in the mayoral race just held, it was effectively been a dead heat and the lead changed about three times after all the recounts. The loser is now filing suit to get the job…imagine…a battle to run a bankrupt city? Haven’t they anything better to do? Now that we might need muni insurance we might not have it!

Have a good one! Really late this morning!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 27, 2008

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2/26/08…a rally for all seasons

February 26, 2008 at 6:52 am · Filed under economy, financial, markets ·Tagged , , , ,

TB’s Quote of the Day: “Future shock…the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.” – Alvin Toffler. Who can say that this is not a daily occurrence? TB
…and all the wrong reasons. Keep in mind four things: the reasons were, the envelopes please: the bailout of AMBAC which is expected to be extended to MBIA and others although there is no certainty and no real details…isn’t the devil always in the details? New life to LBO’s as an SF-based private equity firm, Hellman and Friedman, did a relatively small deal…is there a lot of capital around for loans though? Lastly, the long-awaited IPO of Visa, big brother to Mastercard (MA)…perhaps stock symbol for Visa then should be PA?…Ma and Pa?…oh forget it! Then there is the hedge fund as the enemy. Lastly, today is last day for T+3 settlement for monthend which is also mid year for some big financial companies including Goldman and Lehman.
Today’s topics:
1. monotonous monolines
2. LBO’s, AKA entrepreneurs using OPM and OPD (debt) to buy companies and get rich
3. Veni, Vidi, Visa…or I came, I saw, I spent…now I’m broke…do IPO’s really help? 
4. Hedge funds…helpful, disruptive, or both?
5. Monthend when viewed as expiration
1. Monolines. Can you think of anything more boring than a company who insures municipal debt? A Aa corporation has more chance of going into bankruptcy than a single A municipality…of course we know that is a distortion since during the Depression, 80% of the municipal defaults had been rated Aa or better.
When TB came into this whacky and wonderful…wonderful and whacky?…business in 1972, there was no insurance – municipal that is, he isn’t THAT old – some had tried it but failed as the terms were wrong…they insured the bond issue…the new wave merely guarantees the principal and interest, and since municipal bonds are weighted with more principal and interest on the long end even if the insurers have to pay the amount is small. Furthermore, when a municipality goes bankrupt there is generally a way of reorganizing as it is in everyone’s interest to keep a city, county, state alive. Examples of this are New York City in 1975 and Orange County in 1994. Of course if it isn’t a good enterprise and organized properly there is no protection and that is where municipal bond insurance should come in. The best example of this are hospital and industrial revenue bonds, but note insurance is only available on the ones with little risk of failure. The biggest failure was Washington Public Power Supply System which had two classes of bonds…some AAA rated due to a Bonneville Power Authority guarantee…and others that were A rated and had an implied guarantee according to two First Boston whizbang analysts who cost a friend of TB’s his career since he believed them and swapped his AAA’s for single A’s and then came the bankruptcy…shortly after thanks to a populist judge in Washington.
WPPS was the real reason that municipal bond insurance came into being, and the world is worse off for it as investors would see those AAA monolines insuring and buy without doing their own research. Still, all would have been fine had it not been for several new entrants who made it harder to make those profits although they had the invested reserves and an annuity of 25 basis points a year till maturity. Most enlightened investors like TB would have preferred no insurance and give us the yield. But it became like the UL or Good Housekeeping seals of approval. As with credit default insurance, it became issued for all the wrong reasons and relied on accordingly. Investors like major corporations, dare we say Bristol Myers Squibb again?, began to rely on that rating to make a 30 year bond a 35 day piece of paper with no liquidity risk…and the issuers went from solid muni’s to muni bond funds and then on to nonprofit foundations like Metropolitan Museum and Deerfield Academy. Without the AAA insurance provided rating these issuers would never have made it to market…especially the muni bond funds like Nuveen who used the leverage to buy more bonds to boost current yields and that is about to change as the market shrinks and they are forced to divest or at least post lower returns…sharply lower.  
As for the bailout…it will either mean splitting off the muni side or backing, so far with $1B and $2-3B more to come, the risky collateral like CDS and other derivatives. Will this really help liquidity in the marketplace? No, like all of the plans before this, it only stops the deterioration in liquidity. So should the market rally on this…other than for shortcovering purposes? You decide. 
2. LBO’s etc. Some of yesterday’s rally was attributed to private equity coming back into play. If that is the case, it didn’t show up in Blackstone (BX) or hedge fund manager Fortress Group (FIG) as they continue to skid along the lows. Since their IPO in June, Blackstone has targeted 26 companies…don’t know any more details but of the ones who they did buy, how many have done well?…recall the peak was in July! Lenders are not willing to give them money with same ‘covenant lite’ terms. Also, if a project is unsuccessful within a time period…one year?…they have to rebate fees. So don’t expect mountains of this like the one Hellman & Friedman pulled off…by the way they are a really good, reputable company.
3. Visa International. There is a conception that investing in stocks is good as it raises capital for the markets. This is patently false…as unless it is NEW capital all you are doing is letting someone else out, or more accurately of late letting a short term player profit at your expense. When Mastercard (MA) went public on 5/24/06 at $39 a share it rallied to $582 on 12/11/07 or 582%, since then it has declined by 13% from the high, but still 500% is nothing to sneeze at. TB avoided it and it did have a mildly rough start after much hype but never fell below $40 then it was up, up and away. One reason he didn’t like it was the pending lawsuit with Visa which was a major reason for the IPO. That was settled and investors never blinked. Now we have a credit crunch and it became even more popular since credit isn’t involved, merely transactions…make sense, no? Yes, but at a price. The stock si selling at 27x projected earnings and 34x trailing…but the economy is slowing…yes but groceries are now charged and that means more transactions…more smaller transactions at lower fees. Also, the Beta which is now understated is 1.08x so you have 8% more market risk than the S&P 500 and given the historical growth rate of 19.7x (with tighter credit do you expect this to continue?), the P/E to growth rate is 1.35x, getting pretty fully valued that. Dividend? oh, just 0.30% that’s it. Now what about big brother, Visa? Will probably be priced at $37-39 assuming a 27x P/E (same as MA, aren’t they going to leave anything on the table?) and raise $37-42B. How will this be spent? $3 Billion for a reserve for an AmEx lawsuit and $10-12B to the shareholder banks. Think about it: will this money be loaned out? No, it will be used to shore up capital as the biggest investor is JPMorganChase. So while there isn’t a rat’s chance in hell of TB getting in on the IPO…and if he did he would wish he didn’t as you know what that would mean…he is content to watch how it does. Question: if a stock is trading at 27x earnings, just how much dividend can it pay?…and where does the future growth come from? They say Europe…ok. A visa isn’t necessarily a passport to wealth.
4. Hedge funds. We are constantly told that hedge funds are good for the market…some are but as a group TB disagrees. Apparently so does Congress as a study says they may be disruptive largely due to multiple prime broker agreements. This is much worse than with LTCM in 1998 due to the proliferation and the reliance on credit at all levels. Quant hedge funds by the way were down 6% in January. A quick glance at funds of hedge funds showed a decline although not nearly as much as the market. You decide.
5. Friday is not only the 29th (leap year) but monthend and that will have the same effect as options expiry but perhaps even more amplified due to credit and liquidity risks. Therefore it is significant to TB that most of the major indices rallied to the 40 day moving average which most have not seen since 1/2! See summary below for more details and in light of the economic data releases this morning looks like it could well be a case of thus far and no farther. TB has noted over the past 10 years that the 40 day provides major support in a bull market and when we start to fall below it a warning sign which then becomes resistance on the downside. The worst even is when the 40 day crosses below the 200 day as with both Nasdaq indices, the Russell 2000 since early November and before that in late August…there was your warning: SOX has been thus since Halloween with the 40 day providing resistance all the way.
As you all know TB has paid particular attention to the wealth gap which continues to widen. The top 1/10 of 1% have as much wealth as the rest of us combined. If consumption is 70% of GDP, how can this happen without the rest of us spending our way into oblivion. When hedge fund and private equity managers get rich where does that money go? How much of it these days goes into new enterprises when it is so much simpler to buy companies, borrow against them, slash expenses, then take them public again only to flounder? That is the game plan and that may be capitalism but it is not a capitalist ideal.
TB is late this morning but the ideas just kept on flowin’ and you have to go with the flow. 
TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 26, 2008

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2/25/08…a lot of damage in four days

February 25, 2008 at 6:42 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

TB’s Quote of the Day: “It is thrifty to prepare today for the wants of tomorrow.” – Aesop, The Ants and the Grasshopper. Lived 500BC, what did he know? ‘Tis true but oh so un-American. TB
Today’s topics:
1. Savings and debt
2. Turning turtle…bankruptcies
3. Hedge funds and pension funds
3. Stock index scoreboards
4. Select financial stock performance 
5. Monoline bailout
…imagine if they had had a full week!
Savings and debt: TB heard an interview of a non-profit that is encouraging saving by Americans by setting an amount to be withheld each paycheck…hope the employer doesn’t buy the company stock with it like Enron did. We must stop this blasphemy…if 70% of GDP comes from consumption and it is already slowing (not according to Kudlow and Wesbury), this will surely do the trick. Of course, we have no worry here because our saving is in the form of monthly payments to credit card companies that have grown over the past 25 years. Nice of them to allow cash advances now (for a small fee of 3% (and even the purchase of non-staples like food and amusement tickets). TB has reported before that in one of Mork’s conversation with Orson he commented that you can’t buy food with a credit card…too hard to repossess. Looks like they found a way to get it out of you.
Bankruptcies: We all heard about WalMart doing better but did you hear (this is from Arch for Architects: 
What do the following well known retailers all have in common?  Sharper Image (high-tech novelty items), Lillian Vernon (catalog gifts and gadgets), Tweeter Home Entertainment (consumer electronics), The Bombay Company (home furnishings) Levitz Furniture (home furnishings), Harvey Electronics (audio-video retailer) Wickes Furniture (home furnishings) and Fortunoff (jewelry and furnishings).
The answer: in addition to have all filed for bankruptcy in the last couple quarters;

They all have recently experienced deteriorating gross margins, volatile credit and financing markets which have impacted the cash flow and corporation’s liquidity, rising costs, and have experienced aggressive competition and slowing revenues in this period of expectant recession. In many cases, the top Chief executive has been replaced, such as at Sharper Image (with crisis-management expert Ron Conway). 

Hedge funds and pension funds: First, Citigroup had to put their proprietary Falcon Funds back on the balance sheet and injected $500 million to save them. Then, two hedge funds have sued Yahoo! for not taking up Microsoft on its offer. Meanwhile, two US based union pension funds have filed suit in Canada against CPA giant Deloitte for negligently auditing Nortel Networks…there may still be time for TB to go back to law school to cash in on the coming gold mine. Also timely, with the Oscars tonight, hedge funds should get an award for Best Investor in a Supporting Role: they pumped $13 billion into 150 films. Good thing they are using OPM since everyone knows it is the actors and directors who make the money, not the investors…go see The Producers again…hmmm hedge funds and old ladies in the same paragraph. Meanwhile in London, the FSA is considering retail investors to invest in hedge funds…looking for more capital to take Northern Rock of the hands of the government? What a time to bring that subject up again. Transparency as even TB can see thru it.
Stock index scoreboard since 12/26/07:…much more shocking than year to date!, TB’s birthday and beginning of selloff: Dow -8.2%; S&P 500 -9.7%; Dow Utilities -7.5% -surprising!; AMEX Composite -6.5%; NYSE Energy -7.9%…also Oil Services (OIH); B400 of the strongest ‘fundamental’ companies -10.5%…talk about no place to hide; Russell 2000 -12.7%; Nasdaq 100 -17%. The Philly Semiconductor Index is off 15.9% and almost at a five year low Lest TB be accused of cherrypicking over the past 12 months some of these indices have done quite well: AMEX and NYSE Energy +20% for example. Oh what about the Dow Transports? …not a bearer of good tidings here especially if you are a believer in Dow Theory: unchanged for the 12 mos and down 4.5% since 12/10/07…note it sold off two weeks before the other indices…got it? It works!
Financial stock performance: Walnut Creek, Ca. based PMI Group, the big private mortgage insurer who TB reported a year ago had cut back to FIVE the number of insured mortgages an individual can have…five? what about ONE? Founder and former Fed Governor Preston Martin died about that time and being an old line conservative banker TB has an idea what killed him. What about private equity funds? Ah, we have a benchmark, Blackstone which went public on 6/21 and the stock is down 49% since the opening day close (59% from the session high) and 41% from the IPO pricing…Friday it had a new low and new low close. They have had 28 takeover targets since the IPO…and loans are now getting hard to come by to close the deals. Also, contractually they have to rebate fees from unsuccessful buyouts…oops. Blackie also advised Fortress Group (FIG), the hedge fund manager on their 2/21/07 IPO..a year now…and it is down 57.4% from the opening day close, just 55.7% with divvies reinvested. It is off the low set 1/22 when it was -60%. Countrywide (CFC) is down 81.6% over the past 12 months, while BofA which is buying CFC and down on their investment significantly is about unchanged from 12/26…but like Ken Lewis’ rookie who ran the investment banking division and was the fall guy for subprime, he has now appointed the head of CFC’s mortgage unit, David Sambol as head of the combined mortgage group! Heads are shaking…see WSJ 1/23/08 and ask yourself if you want to buy this stock! Oh almost forgot, golden Goldie is down 18% since 12/26…precisely what they are down over the past 12 months! Of course those big bonuses were paid off the 18% positive return they had in their fiscal year ended 8/31/07. Wonder if they will give back some of the bonus? NOT! Any discussion of financial markets wouldn’t be complete without mentioning Citigroup, the fully integrated financial company. It is down 53% over the past 12 months, 17.5% since 12/26, and 27.8% since 12/10. TB thinks this is priceless: on 7/20/2007 Jim Cramer said Citi was a buy…at $46! Then on Jan. 25 with a $26.50 close he gave it a buy with a $30 target which it hit for one day and has since fallen to $25. Follow his advice, ignore commissions and taxes and you might just break-even…if you are lucky.
Monoline bailout: Tell TB Wall Street isn’t creative! 20 minutes before the close Friday, CNBC announced a meeting of several banks to bailout troubled monoline insurer AMBAC with the suggestion that if it works it might extend to all the monolines. that is what produced the 242 point swing in the Dow. Isn’t that amazing…and the rally started 10 minutes prior as word obviously was on the street although CNBC in usual form laid claim to breaking the story…how sad…is that all there is? More likely, it triggered shortcovering as a bailout of the monolines is seen as the holy grail but if you think Only benefit TB sees to monoline stock is covering by shortsellers…any bailout will only be for the muni side which is the low risk side of the business. A great line TB heard: how can a company be rated AAA who has nothing to sell if they slip to AA?
TB has an admission: he was wrong about the stock market. Well, wrong in that he was not bearish enough! He read most of the weekend from some of the wiser people he knows who contend the problems we face are much worse than conventional wisdom holds. Interestingly, one of the bears on the monoline mess, David Kotok of Cumberland Adivsors, saw major problems a couple of weeks ago, yet on Thursday he was on CNBC…out of breath…literally…and saying he is bullish on stocks even though he thinks the bottom isn’t in and we might see nothing for quite a while…huh? This is a long only manager speaking…saying the only thing he can…someone may have chided him for his recent bearish stance. So, TB will spend the rest of the week on what’s wrong and wronger. A teaser: why are highly rated Collateralized Loan Obligations of major banks trading cheaper than junk bonds? Default risk is minimal. Supply and demand is the answer as what bank wants to buy the paper of another and the market is being flooded as they try to become more liquid…told you it is like a game of Whackamole! 
TB wonders if there is some study equating the Oscar’s to the stock market  …heck we have the Super Bowl, World Series, even hemlines…why not this? How about political parties? We know the stock market doesn’t do well in the first year of a new administration no matter which party it is…bad news considering 7-8 year returns and those of the past 12 months. For the record, stocks do better with a Dem President than a GOP’er, and best with a Dem President and a GOP Congress (which is not to be…they are either quitting or indicted it seems…New Mexico Congressman (R) indicted on bribes…but he had already decided not to run.
Truth?…can’t we handle the truth? Is that why no one running wants to tell us anything. Why are we being told things are better in Iraq as the government is coming around and proceeding with rebaathification? That is a good thing as the Baathists ran everything…but Bremer in his first official act there outlawed them! 50,000 armed highly trained troops who offerred to serve as police, most of whom were Baathists only to get the good jobs…not to mention teachers! Don’t take TB’s word, the original plan according to Bremer’s predecessor Gen. Garner was to let the Iraqi’s take out the bad guys since they knew who they were. Have you heard anyone admit to this stupid blunder? Not in D.C.

As for the Presidential race…when can we start discussing the economy…in real terms? We have 25 years of excess consumption, lack of savings and borrowing from the future to contend with…do it!

Hope you have a good week,

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 25, 2008

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2/22/08…why isn’t it obvious?

February 22, 2008 at 6:33 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

Bloomberg Quote of the Day: “In prosperity our friends know us; in adversity we know our friends.” – John Churton Collins…don’t have a clue who he is but he is on to something. TB
Today’s topics:
1. Current economy and markets…stagcession?
2. Housing – coming around?
3. Credit and derivative markets – risk or opportunity?
…somehow the Dow managed a 76 point rally out of the chute which was curtailed by the fourth consecutive decline in Leading Economic Indicators – generally regarded as a recession and that along with  a sharp deterioration in the Philly Fed Survey did the market in  …worse the outlooks six months from now was -16.9 fro +5.2, the first negative number since Jan. 2001…meanwhile prices paid continued the sharp increases of the past three months while prices received increased but at a slower pace. Then the selloff was on but what is lacking here?
What is lacking over the past three weeks is direction and a lack of volume to support a stock market rally…but the reason should be obvious: not only do we have a rapidly weakening US economy and rather than the rest of the world being able to carry us, the emerging markets are failing rapidly (see China and India in the overnight commentary). Emerging market growth is also being impeded by rising inflation, high energy prices and a lack of power generation even though they are putting plants on line rapidly…just can’t keep pace. While energy prices may have peaked temporarily at $100 crude, it won’t decline below mid-$80’s if that, so no relief in sight. TB has coined a word which he will now define:
Stagcession – a situation of moderately high inflation that persists even as the economy sinks into recession.
Perhaps it will become as popular as Gary Schilling’s coining of stagflation, but hopefully won’t make a pariah of him as it did Schilling for two decades. But if the situation persists all of those brilliant economists who have declared that consumption will not slow…after all it hasn’t for 25 years…are going to look very foolish. They fail to understand the meaning of a credit crisis and excessive leverage on all of their brilliant calculations. Interesting that the two most accurate people these days have names starting with ‘Schill’, Schilling and Schiller…and neither is a shill like those representing the financial sector.
There are signs of acceptance of the problems we face yet they are only spotty. There has been no attempt to understand the problem more of denial. Kudlow has only shifted his stance slightly (still leaning far to the right of course) from Goldilocks is alive and well which he has repeated ever since the subprime problems came to light, to: we must keep Goldilocks alive. It is unclear whether he means that as a market analyst or as a supply-side neo-con. Last night, Jim Cramer who has been all over the lot from tirades at the Bernanke Fed to stopping recommending individual stocks (briefly) because everything he liked tanked, to last nights: to make money you have to be in the market not sit idly by on the sidelines. Of course the opposite is true in a bear market…especially a secular bear which TB believes we are in that is not aided by demographics or slowing emerging market economies (still strong but less likely to be able to carry anyone else). But as TB has said it isn’t enough to come to grips with the problem you have to watch all the others in their failed attempts to rally it and then step in. Listen to anyone who says they like the market on CNBC and while they still outnumber the bears, the bears are becoming more vocal. The comments are like: “I like tech stocks (or retail, or homebuilders) here.” Followed by: are you buying here? “No, we are long the sector and fully invested.”  Question: IF they are long and fully invested and retail is out of the equation, doesn’t that leave the market at the mercy of the only other active players: hedge funds? Yes, and you can make money at it, but you might win one or two and give it all back on a third. This will be a string of ‘hit and run’ rallies…countertrend ones and as you saw yesterday many stocks were up 3, 5 or even 8% intraday. The pattern is clear: the most popular momentum stocks, most notably the four horsemen, then got hammered, then were perceived too cheap or more likely heavily shorted so a short-covering squeeze ensues. But this has happened by sectors even daily, up, down, up, down…going nowhere but some big players are making money and they are making it on technical, not fundamental analysis. Look at yesterday: JC Penney spiked on the open on strong earnings…only to close near the session lows and about at the prior days high. Garmin which surprised…TB wasn’t, as they flooded Costco with their GPS navigators…the stock sold off big. How about Microsoft’s BIG ANNOUNCEMENT…publishing all their source codes…the stock surged early in anticipation then went negative as soon as it came and the lowest close since 8/26/07! Starbucks down and the lowest close since Jan. 2004 on job cuts…cutting jobs and partners by 600 and a reorganization…gosh and all was supposed to be good once the founder announced his return in January a la Steve Jobs  …but he is no Steve Jobs and there is nothing magical about selling coffee. Ah, but Research in Motion (RIMM), the only one of the four horsemen to stage a rally rose on a positive surprise and higher forecast…readers may recall the comments of Fred Hickey on how many units were shipped out but not activated or TB’s observation of 35% discounts. That stock was the only significant gainer in index points on the NDQ 100…5.8 index points while the other three subtracted from 1 to 3.3. There were no other significant contributors. Now some more points:
Housing: A friend in Florida reports big money is starting to buy distressed real estate…remember that makes sense IF we are near a bottom and have a lot to invest…plus deep pockets to wait it out. No hurry for a small investor, you will get it cheaper. This is why the Buffets of the world are announcing their buys…to get company. Meanwhile in California, last weekend there was a 2 day foreclosed real estate auction in Oakland with more than 300 parcels on the block. A warning: this is not the same as a foreclosure sale, like TB has been reporting on. The real players would never buy into this  …also note they can go through 500 parcels in a single day at about 5-10 seconds each whereas this took two days. The auctioneer is never on your side. In this case the auctioneer was Hudson & Marshall from Dallas, the largest real estate auctioneers in the country. A spokesman interviewed after the sale said it was a success and people got some great auctions, then added: we are moving on to other areas of the state now but don’t worry we will be back in 2-3 months and will do so for probably the next two years. This as Bay Area real estate sales slowed to the lowest in 20 years while foreclosures in Oakland have tripled. Also look at all the seminars on buying foreclosed property as well as all those gimmicky stock systems that come out every day. Time to buy? Not yet…but a good time to sell once the conforming guidelines are set…remember that mortgage rates have risen for the past three weeks despite 100 basis points of easing by the Fed. Also, don’t forget the subprime problems are spreading to prime and even commercial properties and REITS…Sam Zell might be the smartest man on the planet! 
Subprime and monoline insurers: TB heard the other day that there was starting to be a market again in those subprime derivatives…although you could drive a truck between the bid and offer. The monoline insurers problems have focused attention on RISK, when in all but the ones with investment grade ratings of A+ or better, the issue is not CREDIT RISK, but LIQUIDITY RISK. Here too, after the headline 10-20% tax free rates for 7 days and 5-7% for 28 and 25 day paper, smart buyers are starting to emerge  …in one auction yesterday that came a week ago at 12%, it came at 9.4%. If you don’t need the money soon why not. TB is skeptical of the ones issued by muni bond funds like Nuveen or from non-profits as they are funding a long term asset but the ones backed by muni bonds issued by state and local governments they can ‘relink’ them and issue the underlying bonds outright…and the calendar is building of those that are doing so. TB believes this increased issuance, along with deterioration of the insurers (a temporary event as they will be split off, but the insurers will likely go down the tubes due to their real risk problems), will result in a sharp increase in long muni bond yields (the further out the curve you go the fewer number of buyers…also, they know enough not to chase markets and bide their time). This too will prove temporary and we could see the best high grade muni credit spreads in years…a buying opportunity! That’s how TB sees it…so muni’s could be a buy over the next 1-3 months…meanwhile your money market fund yields will decline sharply…while real estate related investments could take from a year to three years or more to pay off. This is not a recommendation, merely an observation but one that should be explored. One must exploit fear not run from risk…again, timing is everything.    
The point of the above is we are finally coming to grips with the issues…don’t become so absorbed with headline risk and some truly poor reporting of issues that you stay sidelined forever…just for now. 
The swift boating is on the way…damage control will be the operatives as anyone and everyone tries to  keep the worthy opponents off pace. Perhaps though this is the best way to choose a President. Certainly not the Hillary reason of experience. The highly educated Presidents and those with prior business experience have been the weakest…it is not about managing it is about leading and surrounding yourself with qualified advisors. In the end, it is about who is the luckiest, after all timing is everything. Despite his foibles, Clinton is seen as a good President for a strong economy which all about the internet era…but he had the wisdom to not interfere. Dubya?…you decide.
Hope you have a terrific weekend…relax…it’s a long stretch…this week felt like a five day’er. 

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 22, 2008

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2/21/08…where is the love?

February 21, 2008 at 6:57 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

…and where is the pain…after yesterday’s dissertation on the blame (didn’t even get to the entire real estate and mortgage sector where 226 mortgage lenders have merged or gone out of business since Oct. 2006), TB decided to try to find some bright spots. Since everyone else is telling you where to invest, TB will take a stab at it. David Swenson, Chief Investment Officer of the Yale Endowment Fund did it last week and in a good column offered some investment tips (including TIPS), as well as a vicious blow at CNBC’s Jim Cramer. TB agrees in general but has a few contrarian thoughts  …what, you thought he would agree with someone?
Mr. Swenson gave some very good ideas for investors especially on the need to keep rebalancing and global diversification (15% international and emerging markets). He also recommended TIPS as TB has and even small investors can buy using the ETF (TIP). Of course his winning performance among all other foundations last year was also due to alternative investments including hedge funds which he does not recommend the average investor play in or anyone without a skilled staff.
But where TB differed was the same advice you get from everyone: invest for the long term, don’t panic and sell. 98% of the time that is true but it failed you in 2000 as even the best of stocks lost money and many such as GE and Bristol Myers Squibb (BMY) have done nothing for the past five years! It will also fail you this time if, as TB suspects we are in a secular bear market…not just a cyclical one and even if it is the latter we could double our losses over the next quarter. How can you invest for the long term in a world that thinks and is dominated by short term thinking? The answer is you can’t! Not profitably. This does not mean selling all of your stocks but look at each of them and ask yourself if you really want to own them…or would buy them today…remember when that comment was made about a house? Had we all done that, we wouldn’t have had the bubble we did…OK that’s wrong, Wall Street would have found a way.
Among those stocks you should want to hold are DIVIDEND producing stocks…greater than 3% and preferably more than 4% with double digit growth rates. A plus if they reported weak earnings but increased the dividend…a sign of confidence and an even better sign if insiders are buying the stock.
Let’s compare the two dead stocks mentioned above. GE has returned 7.6% over the past 5 years which becomes 10.6% with reinvested dividends, BUT all of that gain came from 2003 to 11/5/04. Since then it is -2.4% or 0.7% annualized and by reinvesting dividends you only get back to +2.1%. Pretty bad, huh? The indicated dividend rate is 3.61% according to Bloomberg but they increased the dividend in Dec by 11% so TB is going with the 12 month yield of 4.25%. P/E is 14x, Beta is .85, the PEG rate is 1.3x so it is ‘fairly’ valued AND the growth rate of dividends over past 5 years is 14.9%.
OK, now battered BMY trading well below its 40 day which is way below the 200 day and it gapped down on Jan. 22 and has not been able to close it (GE is trading right on the 200 day). BMY had a charge of $275M announced 2/6 along with firing the Treasurer (misreported as CFO), over auction rate securities of which $142M were subprime yet rated AAA. The rest of those ARS will pay off although they can’t get out of them now and so the reserve will likely go right back into income as well as some of the subprime so things are not as bad as they appear…note that the stock declined before the three weeks before the announcement and has treaded water since. Bristol Myers price return over the past five years has been zero BUT with dividends reinvested it is 24.1% or 4.42% annualized…not great but the stock has done nothing yet that 4.99%, 12 month dividend which was also increased 11% on 12/5 (true before the bad news), giving a 5.38% indicated yield looks attractive. The growth rate of dividends is 0.5% (much less than GE) while the P/E is similar at 13x Beta is slightly higher at 1.03 and the PEG rate is 1.03x…so all in all they are pretty similar and proof dividends will get you thru. TB has made a similar case for AT&T (T – which he recently bought, probably too early), yields 4.66% with a 6.29% growth rate, P/E of 11, Beta of .89 and PEG of 1.17…fits with the other three. Over the past 12 months it is -7.7% and -4.25% with dividends reinvested, so it seems closer to a floor. The return over the past 3 and 5 yrs has been double digit, yet since peak 10/31/00 the stock is down 60%, 50% w/divs which is -13.2% annualized. Over the same period GE is -41%, -33.5% and -7% annualized while BMY is down 69%, -62% and -15.8% annualized. These are some of the top…safest?…companies and that is how a buy and hold strategy would have served you.
How about the ‘hot’ HPQ which announced blowout earnings yesterday and bounced up to NEAR the 200 day m/a? High yesterday was $47.44 while the 200 day is $47.81…so if it doesn’t continue today, we may have a problem (200 day is below 40 day too). Since its peak on 7/14/00 Hewlett is off 49%, 44%, or 9.9% annualized. The dividend yield is just 0.7%, Beta is 1, P/E is 14x and the PEG is 1.00%. Again, similar to the other three.
TB firmly believes that since 2000 life has not been good for the big growth stocks and that that will continue for the foreseeable future. Therefore, expect more of the same if you buy and hold. We are now in a cycle of ‘hit and run’ momentum where the best become the weakest and vice versa, over and over. Yesterday we saw that as tech rallied sharply but meaninglessly, and healthcare sector sold off. Both merely reversed the prior day’s losses. The Nasdaq 100 was 22.64 or +0.9%…10 of those points came from the former but now bashed “four horsemen” stocks…please, TB hopes you can see a pattern here!
Swenson also recommended ETF’s as TB has for nearly five years. But they are not working generally as the Dow Select Dividend ETF (DVY), which has an indicated dividend of 4% is down 15% over the past year and 12.1% with dividends reinvested. The S&P 500 is down 6.7%,-4.9% for same period. TB still believes in ETF’s but by sectors and only if carefully evaluated for exposure and diversification, not in things like the QQQQ’s (NDQ 100) or Spyders which will not help since IF we are in a bear market the higher weighted stocks will be hurt the most proportionally. Even the Ryder S&P 500 Equal Weighted Index (RSP) is -10.1% and -8.9% respectively.
If you are using mutual funds they are a minefield. Furthermore, TB has been disappointed in Morningstar as well as brokers over their rating system as with both he keeps seeing touted funds as having high front loads…5% or more, fees of about .8 to 1%, and some with back loads, and many with 12(b)1 fees…the gift that keeps on giving to your broker. Of course American Century did a number on their zero coupon funds by eliminating the 25 basis point 12(b)1 fee and doubling the management fee to 50 basis points…all for funds that are buy and hold! TB is equally wary of the new improved target maturity funds which are expensive and foolish as well as the lifetime funds and ETF’s which purport to know your needs forever and with the target funds have a narrow window of expiration which could hurt badly in a market selloff.
Even more important are muni bond funds. Many…most?…of these funds buy municipal bonds at a high premium…to inflate the current yield while eroding principal…and may are also leveraged with auction rate securities which could lower returns and if the market for these shrinks as TB expects, they will force sales of some of the leveraged long term assets creating taxable capital gains while the fund manager reaps healthy fees. TB likes the new municipal ETF’s which are obviously not leveraged and based on a broad index of national, New York, or California bonds…Fees are fair too. They are new but TB fully expects them to track the index closely.
Lastly, hedge funds. While there are some very good funds and funds of hedge funds, TB believes the fees are excessive given the volatility of returns, and the lack of transparency makes them a poor investment for most unless they want to lose money…you need someone knowledgeable or stay away. The founder of the Lancer Group in Miami has been indicted for defrauding investors of $200 million by manipulating market prices….some mutual fund managers have also done this including a prominent SF boutique manager. Hedge funds have also added to volatility by using naked shorts, aided and abetted by the SEC who last July eliminated the uptick rule for shorting…look at market volatility since then.
Fees are starting to fall, funds are closing, some are refusing customer withdrawals and at least one could be forced into bankruptcy for doing so. This comes on top of the worst January for equity hedge funds in years. Sadly, many public pension funds eliminated their unfunded liabilities by investing in hedge funds, and are now underwater again…amid a slowing economy and budget cuts….Schwarzenegger is trying to cut $100 million by June 30….this on top of a $2B mid year budget reaction last week.
It’s a jungle out there and listening to the Cramer’s of the world will not only not help you but hurt you. His recommendations get runup overnight then they short them as you are buying…and he doesn’t count commissions, inflation or taxes either…all of which will kill you. Don’t trust TB, think for yourself! Also, remember that your money manager might be better than you think but may be hampered by working with all long, fully invested guidelines.
Poor ‘old’ John McCain…now he has some sort of relationship with a woman who went to work for a lobbyist as a secretary and rose to a senior position due to her relationship with McCain who used their jet several times. He says he terminated the relationship…with her?…at least the firm…yet he is grousing that Obama might use matching federal funds…let’s cut the crap,  John…we don’t need this. Where are the heroes?…TB asks again…

All the best,

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 21, 2008

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2/20/08…blame it on the boss of no one

February 20, 2008 at 6:09 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , ,

Today’s Topics:

1. Where is the blame…and the shame?
2. Auction Rate Securities and the monolines…misreporting and a scenario
3. Buffett’s silver armor is tarnished
 …why aren’t we outraged? Is it because the Secretary of the Treasury is former Chairman and CEO of Goldman Sachs, the most powerful investment house on the planet?…certainly he doesn’t want to go after his cronies who are only a part of the problem but they were the most significant as they allowed the subprime debacle to spread globally while hedging their own positions. Talk about loyalty among thieves: they paid themselves huge bonuses on record earnings (except for the bottom 10% that got zip), then, despite the fact that the entire derivatives market was unwinding, seemed shocked when they took some writedowns and lowered forecasts. Listening to Mr. Paulson it is hard to see him as a CEO. One can bet he never stammered like he has in recent press conferences in a presentation to clients or before the board of directors. He is thoroughly confused and despite the tone so far TB cannot blame him. Not only are there no easy answers, there are no answers and he knows it. This ‘thing’ has morphed beyond the power of all the central banks and governments and is built on fraud, ignorance, and deception at all levels. So instead, we are content to watch one bailout plan after another fail while the true culprits are banking their ill-gotten gains, many with some very nice tax preferences…game, set, match?
But signs of weakness for them are also emerging. The decline for private equity firm Blackstone (BX), headed by a cry baby who did more damage than anyone, started right after the IPO…it had a new low close yesterday; BX was also an advisor to Fortress (FIG), a hedge fund manager on their IPO which also peaked on its debut day and is just inches above the low. Even the esteemed Black Rock (not to be confused with Blackstone or Northern Rock…here is a name for a new fund: Northern Stone!), is having problems with the private equity commitments they made, they all are, and because the buyouts they recently completed didn’t pan out will have to rebate fees to investors. It’s called a cycle…a vicious one.
Aside from a smattering of CEO’s, most of the blame has been put on the department heads or entire derivative asset backed departments (notably BofA where CEO Ken Lewis wasn’t responsible for anything, or in the case of Merrill, new CEO Thane cutting bonuses for the entire fixed income group), who has had to pay? How about the investors…holders of the crap that emanated from them, or the shareholders themselves as we cheer lowballing investors injecting capital at the expense of dilution? Dilution…now there is a concept…much like stock buybacks do not equal dividends…especially when you issue preferred stock to accomplish the buybacks like Fannie, Freddie and others did.
We rewrote the rules of finance and now we must rescind them and start over. Until greed reared its ugly head the concept of securitization and derivatives made sense…we couldn’t have grown the global economy like we did. But that will prove illusory, much like startup companies who predict 25% or even higher returns forever. Without derivatives, investing is a zero sum game…for every winner there is a loser, but through the magic of financial engineering we produced incredible returns over the past 25 years only to give them back in a quarter or two…round trip to a zero sum game…well almost.
Go back to Enron, Tyco, and the other scams of the dotcom era. A few people went to jail, firms were destroyed of severely cut back, and one of the top CPA firms bit the dust…that’s it. The SEC failed us and instead got concessions to put money into a fund to educate investors on risks…much like the tobacco settlements where they advertise that smoking is bad for you. No sir, the SEC and all the other regulators including the esteemed Federal Reserve and its esteemed Chairman Sir Alan of Greenspan. Oh, there was another winner, Elliot Spitzer who parlayed being Attorney General of the Great State of New York by lining the coffers of the state with the spoils of his investigations. Of course he also went after a hedge fund manager (Bill Ackman) to see that his comments on monoline insurers were not just to move the market…of course they were but they were true…doesn’t PIMCO’s Bill Gross and every manager that appears on CNBC do the same thing? So what did Spitzer do after he investigated Ackman? Dropped it…didn’t look at the monoline insurers or tell them to clean up their act…didn’t get the Insurance Commission on the case…nope, he became Governor and that folks, is as close as we got to a white knight. Now we have a monoline mess and the Insurance Commission is wringing it’s hands and Spitzer says break it up or we will fix it.   
The monolines have totally destroyed the auction rates securities market where hundreds of 7, 28, and 35 day auctions have failed (no bidders but sellers and the underwriter refusing to take down the securities). As reported yesterday some are good fails as the rate can go to 5%, 6%, or even 20% tax free, so as long as the underlying credit is OK you are fine…can even borrow to pay your taxes and make money. We have even had failed auctions on AAA rated securities…it is not about credit, it is about covenants and restrictions on bonded indebtedness and loans. Also, some of the risker auctions that failed have actually seen the rates fall. That is because the indenture sets the reset in the event of a failed auction and many of those are resetting at 1-2%…the worst case of all. Many of those, such as the Nuveen issues are being used to fund long bond positions and a spokesman said that the low rate proves they are fine…wait till it clears up and you will have yet another problem: an unwinding of leverage and as these closed end funds have issues put back to them they will not be able to do this again  …they can play dirty and leave them out there for as long as they want though…this will mean they have to sell bonds which will mean lower returns and capital gains to shareholders. As for the issues resetting at attractive rates, they will be ‘relinked’ over the next few months. This will mean the state and local issuers will have to then issue 30 yr bonds or whatever the original maturity was at a higher rate. How high is a question ass there will be more supply than demand presenting buying opportunities but whereas with the stock market the question is how low is low, for muni’s it will be how high a yield is high? This is because with any security the longer the maturity the fewer buyers…which is why we split up mortgages into CMO tranches in the first place. The other end of the curve will see more cash chasing fewer securities, such as agency discount notes which are already yielding less than 2% and of course treasury bills.
It will be interesting and one thing we know is things will not go back to normal. Deleveraging will continue at all levels…hedge funds are going out of business again and one new fund is now charging a 1-1/2% flat fee for all expenses…a year ago you would have no interest in any fund that didn’t charge at least 2% plus 20% of the profits. Other hedge funds are doing just fine of course while still others are freezing withdrawals…although some have pulled out their own money and let some of their big investors do likewise  …which is why transparency is so important. TB read where some funds that are refusing withdrawals may be forced into bankruptcy which as we have seen from the two Bear Stearns funds doesn’t do anyone any good.
Lastly, is our white knight, Warren Buffett, who, aside from his ill-conceived (by his own account) $22 billion bet in foreign exchange just because he didn’t like the dollar due to Bush’s deficit spending, would be a guru. TB cannot make this point strong enough: there are smart people out there but no guru’s! To believe you are one is to set yourself up for failure as sure as becoming TIME’s Person of the Year, or the cover of Sports Illustrated…Swimsuit Edition excepted, but those aren’t guru’s anyway. So Buffett makes an offer to any and all monoline insurers to take the safe municipal insurance off their hands for 1.5x the premiums they are being paid…after all his insurer commands a premium. TB would have borrowed and set up a syndicate to do this…a layup! JP Morgan is chuckling in his grave as that is right out of 1907 when the National Bank backed his takeover of other ailing banks. Also out of it is Spitzer and the NY State Insurance Commission threatening the insurers if they don’t accept it or similar…no matter what happens don’t buy these stocks…OK? But wait…another of the culprits is the rating agencies who get paid fees and don’t even fully understand what they are rating! Buffett happens to be the largest shareholder in Moody’s (17%), and he now has a conflict of interest since they are threatening all the monolines with rate reductions…a mere AA is enough to destroy them. Also, as TB reported even IF Buffett takes over the monolines the rating is on the monolines so the rating agencies get paid for yet another rating…you go, Warren!
Hopefully, TB has identified some of the culprits, but sadly he cannot find a hero…where are the heroes? They are in Iraq and Afghanistan…remember? Also, you cannot be a hero if it is purely for monetary gain. Perhaps then, TB can declare himself a mini-hero (but you have to be anointed, you can’t claim it). He has done the research and presented it to readers in an attempt to educate for no personal gain. Monetary gain only, though as like the professor, he his the one who learned the most. The question is: when will we ever learn?
Hey, at least it was shorter today…and all structured around the same topic.Have a great day!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 20, 2008

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2/19/08…as we were saying (published Feb. 18)

February 18, 2008 at 10:57 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , , , , , , ,

Quote of the Day: “We didn’t lose, we just ran out of time.” – Vince Lombardi. The bulls lament?
A huge apology at the length of today’s missive…but TB feels it is important and not being said. This is getting quite serious and will affect our way of life and standard of living (already in decline) for decades.
Today’s Topics:
1. Friday’s options expiration and the Northern Rock bailout by the BOE
2. Paulson’s follies - three failed programs and the new improved fiscal stimulus
3. Auction Rate Securities and monoline insurers
4. Conforming, super conforming and jumbo mortgages 
1. …TB feels like Bill Billichek (aka Trader Bill Billichek…the traitor of the Patriots?), known for sneaking films of sideline signals from the other teams (nothing strange in that if you work on Wall Street, right?), or General George S. Patton when he exclaimed: “Rommel  …I read your book!” Look, TB isn’t all that bright…he just paid attention to trading patterns and what happened a month ago at options expiry…incredibly similar even to the point have preceding a national holiday. If you recall, Europe imploded that Monday while today it is up by a similar amount and then it tanked on Tuesday preceding the emergency rate cuts by the Fed that were then followed by a formal rate cut at the meeting the following week. Not so this time…why? Well, over the weekend in utter frustration in its efforts to find a buyer for Northern Rock (such an appropriate name don’t ya think?), the Bank of England nationalized them…nationalized them! OMG…and we thought Bernanke had gone round the bend in a panic over the fraud at SocGen which triggered that European selloff…only to find it had more to with the coming payrolls report…and TB still believes with the monoline insurers problems…which are rapidly becoming everyone’s problems! What if the Fed had bailed out Countrywide? Irresponsible and improper.
2. Now let’s look at that ill-conceived and ill-fated fiscal stimulus package along with two failed mortgage bailouts by our Treasury Secretary who is losing his ability to make coherent sentences…now there is a clear sign of stress! Paulson first:
Recall his Super SIV program that would have benefited BofA, Citi, and all those others saddled with subprime debt they needed to finance…it went bust…why take a rate even 5% above money market rates if the value could decline by 10% when it came time to roll it…result: nobody bought in. It took the Fed with their Treasury Auction Facility to provide liquidity which after a month is now up to $120 billion…far short of the $500 billion the ECB injected in one day…but they had more problems…more of their banks had exposure to the toxic waste created on Wall Street…now we are told all is well…uh huh.
Then came Project Hope…a hot line…hope you hit the right numbers or it might have been dial a porn where some confused woman might have had to listen to you babble about how you couldn’t make your mortgage payment for 5 minutes but heck, it was costing you $5 a minute to rail. Then it came out last week that this successful program had helped lots of people stay in their homes…good job, Hank! Yep, as he muttered under his breath in that Ben and Hank press conference, 869 families have been helped out! Hank…those are individuals not your Goldman Sachs corporate clients…it is a drop in the bucket! Ok, give him his due…there are people no longer out on the street. So not to be out-trumped, he came up with…another drumroll please (TB is using a lot of these lately), Project Lifeline! Yep, that’s the ticket! Give ‘em another 30 days so the realize the banks were serious and they can call the lender…er, servicer…that’s the only one they know. The servicer meanwhile only knows a Wall Street firm, who in turn knows a bunch of hedge funds and global banks who in turn stuffed them into their own SIV’s or sold them to little towns in Norway who still don’t understand how they lost their money.
But people not only need the ability to pay but have to have the motivation to pay. Fair Isaac & Co. (FICO) says that for the first time ever people are paying their credit card debt while they are delinquent on their mortgage. Not so hard to figure out is it? Your home is underwater, your credit card is being used for gas and food, the bank will likely take seven months to foreclose…8 now(?), and you can walk away from that huge home debt and be free as a bird…albeit with no credit for five years…but that is a business decision…want proof? Look at the banks and private equity firms trying to renege on those buyouts they made just a few months ago? You do what you have to do! So sue me! Lastly, in an FT article “inexplicably,” banks are taking longer to foreclose,get it? No more OREO’s on books!
An old friend of TB’s (not age…just known for a long time), is an attorney and says about 6-8 calls a day come from lawyers proactive holders (like hedge funds) wanting to know the status of a foreclosure. But due to attorney client privilege (if you watch Law and Order or The Sopranos you know what that is), has to refer to the servicer…who in turn hasn’t a clue who they are so can’t talk to them either. Thanks to MERS, a deed recording system…another brainchild of Wall Street similar to a depository trust company (except with DTC they know who all the owners of bonds or stock are), nobody knows who owns what…and you don’t know who owns what they don’t know they own which creates a major problem in sorting out the debts.
3. Oh yes, and that morphs into auction rate securities where corporations, municipalites, hedge funds, institutional investors and others are tied into one giant borrow short, lend long program. Now before you panic as everyone else is…including some auditors who are making investors write down the entire value of the ARS (if this makes no sense think of how we got to this point…it was in the interest of Wall Street to create this crap as it was for the banks and mortgage companies to generate those subprime mortgages for one simple reason: there is a ton of money in doing so…if you are an auditor, there is a ton of exposure in trying to set a value when you don’t know what it is comprised of). Who would have thought that staid old Bristol Myers Squibb would have held nearly a half a billion of ARS? …or that there would be a problem with it?…not their CFO who lost his job or a hundred other CFO’s who now want out so they don’t lose their jobs. Heck, they were all AAA rated due to monoline insurers (that is now becoming a buzzword…even hearing the term monoline banks now…means just one line…like Starbucks is a monoline retailer…see it includes related lines…insuring muni’s and mutual funds and foundations). The problem is that this worked so well for more than a decade that everyone felt it would work well forever…it even survived in the banking crisis of the 1990’s…and that was a bad one as rates were rising, driving down the value of the underlying collateral. Now, theoretically the collateral if it is muni’s, is appreciating while short term rates are coming down…then it was vice versa. As for it workiing for so long…BofA succeeded for decades in borrowing short (huge core consumer savings accounts plus cheap funds from their correspondent banks), and writing 30 year fixed rate mortgages…which almost put them out of business and eventually due to a weak economy, like First Interstate and others forced them to merge.
But when fear enters the equation, all bets are off and there is more than enough fear to go around and when that happens we all know what follows: cash becomes king…not mutual fund cash but real cash and treasury bills!
On Friday, TB discussed how the indenture impacts the rate on ARS in a failed auction. Some like the NY/NJ Port Authority are great for the investor…20% till next reset…don’t know if that is for 7 days or 28 or 35 but do know that Goldman has likely lost a huge account for not supporting the auction…but it tells you that even they have capital problems…more on capital later. On the other hand some like the Nuveen 28 day reset at a spread to LIBOR…close to 1% now…and that is the worst of all worlds since you can’t get your money back and you are earning a below market rate. TB has some at 4.50-5.50% tax free that you could borrow against and still have an arbitrage. The problem would have been much worse had it been at yearend but the tax season is the only other period where liquidity if an issue for ARS. So TB feels that this problem will rectify itself in one to a maximum of three months and as long as the underlying security is good…as with NY/NY Ports or the one’s TB owns no problem…if it is lesser quality collateral there may be a problem…so let’s look at the consequences.
Many issuers of ARS such as charitable foundations (Metropolitan Museum of Art, San Franscisco’s de Young Museum, Deerfield Academy – where the Kennedy’s go), will suffer as they will lose that arbitrage which helped them maintain their activities in a low interest rate environment. So along with decreased demand there will be decreased supply and that means downward pressure on other money market investment eligible yields. Even if, as TB suspects, the monoline insurance problem is solved, investment guidelines will be rewritten decreasing demand as well as now we know the unthinkable has happened: Wall Street firms failing to defend auctions which are their bread and butter.
The other fallout may be the long municipal bond market. Through ARS, states and municipalities were availed the option of issuing long term debt or creating a derivative with say a 30 year maturity that auctioned weekly or monthly lowering their borrowing cost…other investors did the same thing. The mechanics are simple: say buy $100 million of a 30 yr bond, create two new securities with it, one for $50 million with same terms as the original, and $50 million of floating rate debt. If the coupon is 5% and the rate is less than 5% they earn more (i.e. 3% 35 day rate vs 5% coupon rate + .5 x [5% - 3%] = or a 6% yield…only above 7% financing would they earn less than a market yield. IF that happens for one or two times you re-link the issue into a $100M 30 yr bond and you can then sell $50 million and you are no longer leveraged. BUT what if hundreds of issuers are doing the same thing. You are double whammied by seeing the market value of what you decline and the prospect of a lower return in the future…so far due to their penurious indenture, they are making even more money but creating a lot of investors who will never buy them again unless the terms are more favorable…consequently the yields on the underlying Nuveen funds will fall significantly…especially if the market value on long muni debt falls sharply. Hope that example is clear to you but be sure you know what is in your mutual fund and how highly it is leveraged. Also note that most have a current yield well above the underlying yield to maturity as they typically buy high premium bonds to inflate returns…while eroding your principal.
One way to avoid this is to invest in muni ETF’s (although if there is heavy selling of long muni’s the value could also decline but not as much). There are three issued by iShares (national, Cal, and NY), and another issuer has similar…TB prefers the iShares due to their experience and total transparency. 
4. In the beginning there were mortgages…then the Govt. Sponsored Entities (GSE’s) were created to keep the housing market going. Fannie and Freddie were then spun off as quasi-government agencies whose job was to create even more mortgages without requiring more government debt. It worked and generally well for investors until a series of incompentencies and frauds occurred. Then it wasn’t fun any longer. To their credit, and Wall Street’s (although the originator was the World Bank wit Citicorp), a new instrument or Collateralized Mortgage Obligation (CMO) was created. Rather than appeal to just long term investors like public and private pension funds there was something for everyone…especially for parsing them up into bits and pieces. Over time they became more exotic with Interest Only (IO’S) and Principal Only (PO/s), that speculators could buy depending on whether there view was of rising or falling interest rates. Then we morphed even further and finally subprime mortgages were packaged into CLO’s with the factor being rating rather than maturity. Ah but there was now risk…no problem as Wall Street then created the Credit Default Swap (CDS) which like the earlier CMO’s parsed risk protection out creating a market between those who felt they could divine the degree of risk…those securities grew to the point (as TB wrote earlier they weren’t retired but the other side, say selling insurance vs. buying it,
created layers and layers of swaps. Those swaps now total $45 trillion or so and while they may appear to be hedged as they create them on the spreads between buying and selling insurance, the weakest link can create an unhedged position which could cause a chain reaction especially when the players are highly leveraged and think they are hedged. That is why liquidity is so important here. Worse, nobody knows where the risk lies and that is why this situation is out of control of governments or their central banks. One day soon you will see someone fail…and probably unexpectedly like finding out the exposure to ARS of Bristol Meyers Squibb…and the multiplier effect…also like the ARS market will kick in. Now here is the clincher: the increase in the conforming loan rate for one year to $729,750.
$417k is now the minimum but depending on the area you live in (your SMSA, not county), the limit is 125% of the median home value up to $729,750. Great! …uh, not so fast. See since this is just for a period of one year and to curtail refinancing. FNMA/FHLMC will not allow a re-fi on a loan they have held for less than one year…after all they are the lender of last resort (recall there is also a move by the Dems in Congress to let a bankruptcy judge change the terms of a mortgage…a really bad idea). So it sounds good…loan consolidation you name it but remember you have to have at least 10% equity (might be higher for the higher conforming loans…hence super conforming), and no more than 35% of your income can be spent on the mortgage payment. Also remember these are 30 year amortizing loans. So?
Here are the problems:
1. the higher limit is for one year…what happens after one year since banks only want to make conforming loans so they can get them off their books? But they do want to continue to service them!
2. Not only the restrictions but the rate is higher on the larger superconforming…think the old conforming and jumbo…and we now have super jumbo (above $1MM)…so that makes four classes with subprime now a relic.
3. While FNMA/FHLMC may have the desire to buy the mortgages they not only need the money (of course they can resell them), and that requires more capital…they already have common stock, not a talking point, Preferred which they stupidly issued for stock buybacks and the new high interest preferreds which mean new classes will require even higher rates, as well as their senior and collateralized debt and subordinated. TB has said and had concurrence from some that nothing but the senior and collateralized debt will be paid under moral obligation in a bankruptcy…forget about too big to fail…only what the government guarantees is too big to fail…shareholders and preferred bondholders don’t count…recall Continental Illinois!
4. All of this will drive long term debt levels higher. According to the Mortgage Bankers Association, despite the rapid easing by the Fed as of Feb. 8, 30 yrs loans were 5.72% vs. 6.24% a year ago and vs 5.49% on Jan 18…the Fed is pushing on a string. 15 yr fixed is more promising at 5.18% vs 5.94% but also bottomed out at 4.96% on Jan .18. Only 5 and 7 year balloons continue to decline…4.78% and 4.34% respectively vs 5.93% and 5.31% a year ago. Now look at this 1 yr Treasury ARM’s: 6.80% vs 5.80% a year ago…they too bottomed out at 5.51% on Jan. 18…two 50 basis point easings ago! What will happen a year from now after the new limits revert down?…or will they be extended?
In conclusion, until we recognize the problem and get out of our state of denial, we cannot solve it. To do so, like with the dealers and ARS, requires the unthinkable: cut back consumption and raise the savings rate…if that happens a secular bear market is assured…yet that (along with World War II) got us out of the Great Depression. Do you really need four cellphones and four cars for your four person family? Cable with all the options…plus XMSR or Sirius with Howard Stern, the NFL and Baseball? For 25 years we have borrowed from the future to feed our habit. That has just come to a halt. Like with financial engineering which gave back decades of revenues in less than one year, it will take years to work off the excesses of the past 25 years…yet we will get through it. Talk to people who lived through the Depression…almost uniformly they will say they were never happier…friends and family meant everything…friends and family ARE everything. Do you even know your neighbors? We will survive!
As many of you know TB’s daughter lives in Minneapolis. She works at Children’s Hospital in St. Paul. A girl who works with her went with her aunt to tryouts for Deal or No Deal. The aunt wasn’t selected, but TB’s daughter’s friend, Katie Hinsler was. She holds two jobs, the other working for a church while her husband started a new business a year ago. She not only went on the show but it was the first ‘Million Dollar Mission’ where have the suitcases were $1 million. While that may sound easy, they made it harder by lowballing the deals thus pushing her towards going all the way. At the last two suitcases she had either won $1 million or $200…she took the deal nearly $500,000. It was great! Everyone affiliated with the show said she was the most worthy and nicest contestant they had ever had on the show. Only bad news? Her suitcase was the $1 million…so what, she played it right! Last night she held a party to watch the show…she couldn’t say how much she won…at a hotel there. See TB can tell an upbeat tale or too.  

Hope good things happen to you too this week. Again, sorry about the length but it could save you $.

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC February 19, 2008

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2/15/08…grand ole expiry

February 15, 2008 at 6:45 am · Filed under economy, financial, markets ·Tagged , , , , , , , , ,

Topics for today:

1. Options expiration – a hit or a miss?
2. CNBC and the financial (?) news – ‘hearing’ is believing
3. Auction rate securities – last but not least
4. Wells Fargo “Buffetted” again
1…yesterday was not the St. Valentine’s Day Massacre fortunately but it did negate the prior days uptick and puts even more meaning on today’s close. As in the January expiration, expect high volume in the first hour, then a slowdown until about 1pm EST and then where she stops nobody knows. At that expiry we had surprisingly high volume given two prior 2B plus share days so one would think the volatility would all be squeezed out…it wasn’t and Friday provided a third and more significantly a third straight down day. The following report TB wrote (in revulsion to the mean):
Stocks: Volume was 2.45 billion shares…three 2B+ days in a row…and all down! Can’t believe they blamed this on the Administration when it was pure expiration! New 52 week Highs fell to a new low of 52 from 83 while New Lows exploded to a new high of 1342 from 981. The ratio worsened to -26:1! Advance/Declines were bad ranging from -1.8:1 on NYSE/Nasdaq to -2:1 on AMEX. Breadth was weak again ranging from -1.5x on NYSE to -1.8x on Nasdaq to -2x on AMEX. Both Volatility indices DECLINED with VIX -4.5% to 27.18…still solidly above the deadly 25 and VXN -3% to 30.23 but still above 30…very unusual for an options expiry and a bad warning sign.
Another 320 point swing on the day with the Dow up more than 50 points and then crushed and came back to close 59 down…the rally on the open was definitely due to options expiry and boosted by GE’s earnings…but like IBM it could not carry the market…we have a lot further to go down.
Note that the volatility declined…yet the VXN was above 30 and the VIX above 25 which has been the hallmark of grief since the February 2007 short selloff which rapidly corrected. Since then the time spent above those levels has increased in each ensuing selloff…Yesterday however the VXN closed at 26.40 although it rose 4.1% and a 2.9% gain on the VIX put it at 25.59. TB’s bet is both will be higher at the end of the session today and if so the next leg down will have begun.
Lastly, the dollar broke 76 overnight which is a warning sign as TB has pointed out. This marks the first time in 9 sessions it has fallen below and worse yet the 40 day moving average is 76.19. This is the fourth trip below 76 since 11/7/07 that eventually set the record low. More reason for concern.
2. Has CNBC finally gone round the bend? They seem to have morphed into the Original Amateur Hour. Super oldies will remember that, hosted by Ted Mack (no relation to John Mack…TB thinks). It all began after the Super Bowl…you know all those serially correlated theories over which conference wins. Anyway on Feb. 5, while the Dow was down nearly 300 points they devoted an hour to coverage of the NY Giants victory parade! Some help they were and you would have thought from their comments it was just another boring day…the parade aside. On Wednesday, came the Roger Clemens steroid hearings and they focused on that for a half day uninterrupted. Early that morning the kept coming back to the SI Swim Suit Edition…with pix and boys will be boys comments. Yesterday, the spent most of the morning covering the press conference with team Paulson/Bernanke, or is it Bernanke/Paulson. Is it anything to take the focus off the markets? This from your best source of news…tell it to Bloomberg!
The Roger Clemens story is fascinating as you had him seated next to accuser Brian McNamee. The Rocket was so nice…so contrite never getting angry at McNamee, or anyone…simply repeating that he didn’t recall it that way. Note he did not say they were wrong…merely in their interpretation. Who do you trust? Well, the big thing here is while the financial markets are falling in a rat hole, Congress is more concerned with what a bunch of athletes do to hone their bodies…perhaps looking for some pointers considering most of their un-honed bodies. But wait…it gets worse! Roger is a friend of the Bushes…not bush league mind you but Bush 41 in particular, who apparently called to give him some words of encouragement. Seems to TB he got some pointers from Dubya too since he must have told him how to make someone look stupid or crazed without being insulting…remember Treasury Secretary Paul O’Neill? Bet he could sure pour on the compliments too as the prez did for Rummie. But the point is that in the ‘cross-examination’ the GOP attacked Clemens attacker while the Dems attacked the Rocket! This left both of them…all four of them if you count the witnesses and both sides of the aisle…looking…stupid!
Now for yesterday’s press conference. First, as background we had a plethora of bad economic news on Wednesday yet the stock market rallied 175 points…which TB attributed to short covering ahead of expiry. Then we had Bernanke…talking smoothly as ever and Paulson stuttering and unable to find the words to express his feelings on the financial markets and the economy…have you noticed how under pressure his speaking skills keep getting worse and worse…go back to when he first signed on! Both said neither the Fed’s monetary policy nor the government’s fiscal policy can solve this problem. Huh? Truth in D.C., a milestone! Under questioning by reporters they became even more negative and unsure.
Appropriately the Dow gave back those 175 points of the prior day’s faux rally.
Now what did CNBC miss? Well, yesterday was the hearing with hedge fund wunderkind Bill Ackman who blew the whistle on the monoline insurers four years ago and put his and his clients money where his mouth was shorting them all, and AMBAC CEO Michael Callen…like in the prior hearing they were to be seated next to each other…if this were an Islamic nation, two hearing rooms would have been blown up. So CNBC interviewed each before but then what happened? …dunno…didn’t have time for that as it was time for Fast Money, Kudlow, and of course Cramerica. See how short our attention span is? (by the way Ackman is also at risk of violating the law by saying things that can cause a run on a financial institution if he can’t back it up…this is serious! TB encountered this firsthand with ESM Securities who he knew was going to fail but could have gone to jail for telling anyone…fact! A side story on Ackman: four years ago when he started chirping about monolines, then NY AG Spitzer had HIM investigated to see if he was attempting to manipulate their stock prices…he did not investigate the monolines…now the insurance commissioner is all over the monolines! Typical government: charge in…after the fact!
Hope you get the point is that too few are doing too little and the stock market is being manipulated by geniuses who have backtested data for 10 years and think they have found the Holy Grail. But you can only fight reality for so long…and that is why TB sees yet another down day today and more to follow.
3.  On Tuesday, a slew of auction rate securities auctions FAILED. What that means is if you held them and wanted out…you still held them as there were no buyers and we had the doomsday scenario of the sponsoring underwriters failing to take down the ‘puts’. This is the unthinkable as why would a dealer kill the goose that lays a perpetual golden egg? Simple, they have ballooning positions and a shortage of capital. Wonder why Goldman stock is so weak, down 15% since Feb.1? On Tuesday, Goldie the NY/NJ Port Authority auction fail. Michigan Higher Ed Student Loan Authority had to stop making loans affecting more than 100 colleges and universities. The malaise has spread to virtually every dealer in these securities including Lehman and UBS. One dealer told TB they have $1B in inventory of these securities and nowhere to go with them. Now the good news…all auction rate securities, like hedge funds are not created equal. Therefore some are fine 
While, due to the ‘put’ feature…it is a ’soft’ put as many are finding out the hard way…instead of a 7,28, or 35 day security that is a short term investment you may now own a 25 year or longer underlying security, or worse. This is the SIV crisis revisited although for the most part these will be good for the money eventually. Good news IF you hold a standalone investment grade security, BAD news if you are relying on the insurer. From an accounting standpoint IF it drops below AAA it becomes a long term investment which can raise havoc with a corporation that has debt outstanding as it can trigger covenant violations and with hedge funds holding a lot of these bonds they could force the company to call the bonds or pay a penalty for example. So once again this is NOT a credit problem…it is a liquidity problem that forces a credit problem elsewhere. Worse yet, we don’t know what the exposure of companies is. Bristol Meyers-Squibb..a fine company, right? they just fired their CFO because he had a quarter of a billion of these securities in portfolio! Now if you are a fellow CFO you don’t want to see any of this paper on your books…not if you like your job. CEO’s are likely to fire first and ask questions later…their own survival depends on it…ask BofA’s Ken Lewis!
But what if you are a holder…and you could be through a money market fund? Depends on the indenture if it is good or bad for you. TB feels this will be solved in a month or two but in the meantime you might be locked in. Assuming you have investment grade paper you will come out fine…just ride it. If you are a money market fund and word gets out you might suffer big withdrawals impairing your liquidity…but if your sponsor has deep pockets they can put up collateral to keep from “breaking the buck.” Here is a tale of three AAA issues with sound underlying credit ratings: Goldie’s Port Authority issue reset at 20%! No way these bonds will default. So for the next 7 or 28 days you earn 20% tax free…of course if the price drops 10% you are in a heap of trouble…but at least it is not at yearend so there will be no marking to market…only the tax date can be a problem for those requiring the advertised liquidity…but why not earn 20% tax free and borrow the money?…a nice arb IF your banker will allow it!…perhaps borrow from margin account? …trying to help you…and the market…here! OK, that is a bright story. TB thru clients owns several issues of AA to AAA 7/35 day paper. These are resetting at 5-5.50%…you can get 6% in lower quality hospital bonds…not 20% but still very good to borrow against. Now here is a problem…all of these securities have rate limits, high and low. If nobody sells and there are no buyers as we have now…the limits apply. Normally there is a buyer, even if it is the dealer, who will then set the rate, but in this case if there is none you go to the indenture…most are very fair and some are excessive penalties like NY/NJ…which will likely cost Goldman an account and could result in a lawsuit…you know what TB would do to someone who made money off him then gave him the shaft. So here comes the bad one…especially on the 7 day resets which are mandated by the indenture. TB held one issue that had been about the same as other 35 day issues but then dropped to 2.88% for two weeks…so he put them back (before the crisis), and moved to another 7 day adjustable at 4.50%…that issue reset yesterday at 5.45%!…the other one? It reset at 1.10%! Now if you are a holder, getting a below standard rate AND with no liquidity you are in deep doo-doo. Very deep!…and an unhappy camper. So it is the 7 day resets that are most vulnerable but you have to know: the underlying rating, the reset terms, and the final maturity. By the way, most of the 35 days can be relinked into the original bond thus pulling them off the market. The way they work is somebody owns 100M of a bond…they take 50M and issue as 35 day resets. If the coupon is 5%, once the yield on the auction rates passes 7% or so they are earning a below market return (5% x 2 -7% – 3%). So they will then ‘relink.’ This situation happened before only the curve was flattening and long bond prices were declining rather than rising as now…thus they were between a rock and a hard place…still we pulled through it. The impact of this will mean less supply accompanied by reduced demand…could get interesting. The problem though with potentially billions of long bonds thrown back in the market (especially from muni bond funds like Nuveen, Blackstone, Black Rock…you name it…who have leveraged with auction rates…and will have a side effect of lower returns as well as a drop in market price), will be HIGHER long term rates…who do you think has been buying the long end of the curve??? So you could have a widening spread between long treasurys and long munis until we reach an equilibrium. Whew…sorry that was so long…and complex.
4. Watch Wells Fargo today as Buffett has announced he increased his stake. Is this bullish for the stock? No…but it means two things: WFC will survive and prosper, and it is a good time to buy IF you are a LARGE buyer…you have to separate the big guys from the small ones…the big guys have to be contrarian to make money and can bide their time…you with your 100 shares can wait and pick it up later. The real positive here is Buffett is buying it at market prices unlike sovereign funds investing in the weak financials at a 13% discount to the market value and that can be negotiated lower if price falls!

Let’s close on something green following red yesterday. Besides the waste of trees (which create oxygen) and paper due to ads what is the biggest wasted resource? IMHO it is…WATER! Especially bottled water! Yet we complain about the price of oil…what about the price of an equivalent barrel of water? The Santa Clara Valley Water District, CA released a report from the National Resources Defense Council (NRDC) that analyzed bottled water and found contaminants in 1/3 of the bottles tested that exceeded levels of state or industry guidelines. Do yourself and the environment a favor and stop buying this stuff…TB’s worst is Aquafina that has no mineral value, nothing…hopefully no contaminants. Just get a plastic bottle and refill it…use one of those old bottles!

This brings up a question for you to ponder: remember that drought in Atlanta?…they had only a few weeks of water in the reservoirs? Nothing, nary a word and as upset as they were they did not curtail or to TB’s knowledge even ask Gatorade or Coca Cola to cut back or stop production…money talks! By the way TB just checked the blog there and the drought is on but they think you might be able to refill swimming pools this summer…while in Raleigh, NC, they have just 109 days supply. See how we can’t focus on more than one thing at a time. Don’t get TB started on woodburning stoves! aarrgghh!!!

Enjoy your weekend,

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.

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