TB’s Quote of the Day from Merrill’s David Rosenberg: “You have three vicious cycles going on simultaneously. A liquidity vicious cycle — in which asset prices fall, people sell and therefore prices fall more; a Keynesian vicious cycle — where people’s incomes go down, so they spend less, so other people’s income falls and they spend less; and a credit accelerator, where economic losses cause financial problems that cause more real economy problems.” - Larry Summers, former Secretary of the Treasury, in the FT. TB
…today’s title comes from TB’s wife who when she was growing up had a popular doll…poor pitiful Pearl. For some reason it came to mind yesterday when the Treasury Secretary was mouthing words.
Today’s topics:
1. Paulson, the press conference and S&P…strange bedfellows, the pushme/pullyou effect
2. Recent market volatility and why this is merely short covering -movers aren’t shakers
3. Auction rate securities/muni update
Paulson. If you are like TB and the professional friends that he has discussed the markets with, you are wondering a/ how Paulson ever became the CEO of Goldman Sachs, b/why he accepted the position of Secretary of the Treasury in the waning years of a lame duck President when the first was ousted for not going along with the Administration’s flawed game plan and the second was never more than a jovial mouthpiece for the Administration as most of the other Secretary’s have been over the past seven years, and c/ how he feels he is doing anything to solve the problem when he holds a one hour press conference detailing boilerplate ideas such as banks should not only conserve capital but build it, even if it means cutting dividends…unsaid was whether this would be voluntary or mandated by regulators, and does this apply to all banks or only the problem ones we have heard about for the past six months?
Almost under his breath was a statement, again boilerplate, that we support a strong dollar. Not unnoticed was the fact that the dollar index was hitting a record low at the time in the 47 years since it has been tracked, and the Euro was hitting record highs of $1.56 while the Yen briefly traded below par (strong as it is inverse to the dollar), for the first time since 1995, while Sterling traded above $2.03 as it marches back towards the $2.1162 high set on 11/9/07, and the highest level since May 1981. Who is he kidding?…or trying to kid. All this on a day when Gold topped $1,000 and Crude hit $111! As he spoke the Dow, which opened down -14, dropped 234 points or 2%…in fact the more he spoke the more it fell. Guess he was just waving the flag…as he has done on at least two occasions with proposals that failed. At least he spoke confidently and smoothly yesterday for the first time since last August, that is until the questions came in. Definitely a dog that wouldn’t hunt!
A question, and a good as TB sees it, has been raised regarding the Treasury financing auction that is only accessible by primary dealers and will soon include for a first: non-agency collateral. All that a primary has to do is submit a bid and swap his hard to repo collateral for UST’s! But what about their clients…especially their prime broker accounts who like Carylyle Capital which folded yesterday are highly leveraged…Carlyle was an unbelievable 32x! Never trust a bank or broker when they are squeezed for capital (recently banks have been aggressive in the reverse mortgage market that they wouldn’t have touched with a 10 foot pole six months ago…call it predatory as the rates are rising rapidly…as are all mortgage rates despite a 3% Fed Funds rate…till Tuesday…and meanwhile rejecting almost everything that crosses their desk). What controls are to stop a primary dealer, and of the 20 many are banks, from making a margin call, then when the hedgie can’t pay up, seizing the collateral which they already have in their hot little hands and then pledging it to the Fed in exchange for t notes! What a mess and yet as the dollar falls Bernanke believes and has stated that we have a printing press to turn out dollars at virtually no cost…so long as it is sterilized but look at the dollar and ask yourself if the forex traders believe that piece of nonsense…from the biggest debtor nation in the history of the world!
(TB is still shaking his head how Carlyle turned $670M into $21.5 billion?…dwarfs Blue Rivers $1.8B to $15B (8.3x)…and in muni bonds which are reasonably liquid until you need to sell them in size. TB is hearing all over now his mantra: in a crisis you sell what you can sell not what you want to sell!)
Then, just when things were bleakest along came rating agency S&P with the pronouncement that subprime losses would peak at $285B and most of the bad news was in for banks. Two questions:
1. Why in God’s name would we trust a rating agency that can’t even rate municipal or corporate bonds properly, gave monoline insurers a AAA rating when they only have one thing to sell: their reputation, and rated pools of high quality (sic) and low quality debt AAA when whole was more than the sum of its parts quality-wise?
2. Is subprime the extent of the problem? No, in fact it is only a small part of the problem as it is the derivitization of those loans that is the problem also with the monoline insured credit default swaps (CDS). Do they think we are fools?…before you say it, yes that was a third question!
No matter, as the stock market immediately reversed course, with the Dow rallying 140 points in the next half hour before slipping a tad and then marching into the black for the rest of the day, at one point having a 105 point gain…a swing of 345 points! This despite an announcement of an investigation into S&P’s rating practices…you can’t make this up!
Just when you think it can’t get worse, Bush is speaking to the Economic Club of New York this morning…oxymoron? Remember the joint Bernanke/Paulson press conference. They were talking recession and from Iraq, Bush says we aren’t in or will be in recession…simultaneously! Can’t wait! CNBC is going to broadcast it in entirety live…perhaps we can still have a 300 point swing today!
Stocks. Remember that ‘faux’ rally back in January? Well, it didn’t look faux at the time…it looked real! It ran for a 9.7% gain in just 8 sessions…everyone is now circulating those eight tips of investing like missing the first 5 days of a rally will cost you 25% of the entire gain…that is if it is real…this one was Memorex.
The other point here is IF you had been able to buy on the low as of last nights close you would have been up not 9.7% but 4.4%…but if you bought on the close of the rally’s first day you would be DOWN 1% and be wringing your hands ever day since Feb. 6! If you bought on the close the day before the rally began you would be up just 1.5% and very nervous. To see the difference between what happened then and now let’s look at the action on those two events:
1/22 Range: 458 points and closed -128 this was the first sign that a bottom might be in
1/23 Range: 632 points with low just above the prior day and closed +299…classic capitulation trade!
If you were short you had no choice but to respect this move!
3/11 Range: 420 points and closed +417 also was culmination of the two lowest closes of the cycle and the lowest low since 1/22-23. A big difference as this was just a weak market not capitulation.
3/12 Range: just 212 points AND closed -47!
3/13 Range: 345 points and closed up just 35…less than Wednesday’s selloff. In fact, only the Russell 2000 did better and the AMEX…but that was due to one stock BTI which was half of the gain! Barron’s 400, a high quality stock index (although they treat it as proprietary and won’t disclose the members!), barely eked out a plus but it has been in a tight range since 3/6 and is just halfway between the Jan. low and the 2/27 high…during which period, even though the 40 day moving average was declining it only closed above it 4 times then plunged lower. Both Nasdaq indices, while up, did not recoup the prior day’s losses in full and the rest of the major indices were weaker. The NYSE Energy Index closed just below Tuesday’s close despite Crude hitting $111…there is a disconnect here…same for oil services?
As TB noted the really strange thing has been that for the most part over the past four or five trading days, the movers have been the same stocks: up one day, down the next. Let’s look at a couple of them:
XOM: This has been the most volatile of the stocks and is impacting the Dow, S&P 500 and NYSE Energy Index. Since the 3/5 close at $87.19 it has been -$2.70, -$2, -.03, +$4.20, -.75, and +$1.10. It has been a top mover in all but 1 of those days. Net change: down 14 cents! Yet it confused the indices…on Weds it was 114 points of the Energy Index!
IBM: Since those blowout earnings announced on 2/26 the stock has been a mover 9 of the past 13 sessions…Nice if you owned it the day before but if not you are up 1.3%; -0.5% if you bought next day.
RIMM: Since 2/29 it has been a mover 8 of 9 sessions. Net change: +$1.85…on a $100 stock!
BTI: The stock that was half of the AMEX gain yesterday. Gapped down to the 40 day m/a on 3/5 and went sideways for three days then has been higher four straight days, gapping UP big on two of them and up 7.8% to $79.53 since 3/7. It has been a mover of AMEX for all four, yet is still shy of the 1/11 high by $1.50. This is British American Tobacco and bought back 250,000 shares AND the UK increased the tobacco tax at the same time.
IMO: Imperial Oil has been a mover of the AMEX for 7 of the past 12 sessions. Net change? up 84 cents to $55.99, a gain of 1.6%.
ARS/Muni’s: Aside from 7 and 28 day the auction rate preferred’s which are toxic waste, the AAA VRDO’s which have a takeout by a bank and the 7 and 35 day muni bond backed issues are stabilizing or rebounding. VRDO’s are strong due to money market fund interest and that means lower yields to come. On Weds. an issue of Puerto Rico which is BBB without the insurance was auctioned and talk was 5-5.10% (remember tax free and triple tax exempt). It came at 12%…in other words if you held it 3 months at that yield you would earn the same as for an entire year before the blowup! Puerto Rico is a territory and thus cannot fail, regardless of the underlying rating…imagine what would happen to the US image if you think of FNMA and FHLMC as too big to fail! Yesterday a 7 day Cal auction which looked like it would come back of 5%…it was 5.50% a week ago, came at a 4.93%. This may be due to the fact that over a billion of Cal Water adjustables were called and the underlying bonds were re-issued. So if you don’t have a need for liquidity you can earn 5-5.5%…or even 12% till this works its way back…or you can buy a Cal Water Rev. in 2025 at almost 4.5%…compare to the 10 yr note at 3.543% or 30 yr bond at 3.34%…see they are back on top of treasury’s in the long end…where they should be at most…that is until the next wave of margin calls pumps supply again. Also, note that the bonds are now being sold without insurance…why pay AMBAC, the insurer, when they provide to protection or widen the field of potential buyers. It’s back to doing your homework for buyers! Good!
Look at the volatility these four stocks closed and for what? This has to be black box program trades and boy are they making money off it while the rest of us are getting squat. TB hopes you will research some of the other headline stocks as you will get the same thing! Most notably GE and MSFT.
Cutting off now as that is plenty to digest for today and this week. Look for a volatile day today and next Friday is options expiry again so there will be a flurry of activity between now and Tuesday, last day for T+3 settlement.
Hope you all have a great weekend…leave now if you value your health!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 March 14, 2008
