Traderbill's Financial Markets Weblog

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?

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