Today’s topics:
1. Bear redux – Sold!…or not!
2. Visa IPO – the $44 sure thing? ‘V; for Victory?
3. Global Markets – trending lower? Asia and the ETF
1. The Bear. This is number one because of the turmoil and emergency Fed meeting Sunday that it triggered…unprecedented two days before an FOMC meeting and the only other one was a tightening on Volcker’s Saturday Night Special to curb runaway inflation. A writer TB likes and former Bear employee said from the get-go that the sale was a sham. She may be right…it was to provide comfort and who better to do it then Gip’em with $90 trillion in notional derivatives exposure while Bear has a mere $13 trillion…if you are having trouble comprehending these numbers you are not alone…consider in 1970 the US hit $1 trillion GDP for the first time ($1.038T)…TB knows this because he was taking Econ 101 at UCLA at the time and stuck with him. Last year it was $13.843T. With semi-annual compounding that is a growth rate of 7.1%…but chain weighted in 2000 dollars (they change it every year so TB can’t readily get the rate from 1970 but it is currently $11.567T), so inflation has taken its toll…but TB digresses.
The three largest shareholders of Bear are Barrow, Hanley, Mewhinney, & Lewis, a Dallas value oriented investment advisor that stands to lose over $1 billion (11.5M shares or 9.7%), Joe Lewis (11M shares or 9.4%), Morgan Stanley (6.3M or 5.4%) and Jimmy Cayne (5.8M or 4.9%). Now, those four entities plus other Bear employees have the power to blow that $2 offer to shreds and they will. Further there has already been a lawsuit filed to stop the sale. Now who is ‘gipped’? What the aforementioned writer said was that this was a way of restoring stability to the market…better yet if it gets sold at a much higher price. as Gip’em was getting it for half the value of the headquarters building alone. So in one stroke we salvage the integrity (in the nautical sense only) of the two firms and prevent a cascade of failed CDS swaps, etc. that would endanger the entire global financial system…the point is that Bear while big is not that big in terms of the entire market…and the swaps are in weak (highly leveraged hands), and stacked atop one another so that even if they appear hedged they are exposed.
That is why BSC traded as high as $8.50 yesterday and closed at $5.91 and also why the entire financial sector…OK, the majors, rallied sharply but don’t expect more and remember how far off they are. Still, large sound (oxymoron?) firms could be a good buy here…especially large banks. Wells and USBancorp come to mind although WFC could have ongoing loan problems while USB is clean, so far as TB knows and that was why he bought it although he is now at a loss…and learned from it!
2. Visa (V) IPO. After months that seem like years of discussion…even longer to the banks who desperately want to get some much needed capital, it was priced last night at $44…above the range of $37-42…not bad for the biggest IPO ever! That values it at $17.86 billion…for a cash register? Most of that money will go to the member banks and then to a reserve for the AMEX lawsuit…and $220 million in underwriting fees! Can you believe that? Now THAT is inflation! This is even bigger than the AT&T Wireless IPO. It could be an interesting barometer for the market given the success of the Mastercard (MA) IPO which was much smaller (61.5M shares at $39, peaked at $227 and is now $210 and still has a P/E of 27.6), and issued in a strong market. Some call them cash registers because they are simply transaction fees…not sure but am hearing that it is a FLAT fee per transaction not the overall fee to the merchant which is on a scale. This could be a plus as more small items…if you can call groceries small items these days but credit cards are being pulled as credit deteriorates so don’t even the number of transactions have to fall? Seems so to TB.
3. Global Markets. On would think global markets would follow suit after that huge rally yesterday. Well, they started to but then dollar concerns over the worsening credit crunch took hold and what started as strong rally in Asia gave back most of the ground and Europe opened up then quickly went negative. TB checked three ETF’s he noticed rallied sharply yesterday and it appears they LED Asia: EPP – Asia ex-Japan; FXI – Mainland China; and INP – India. Here are the returns over last 12 mos., year to date, and yesterday and yesterdays change in local market in parenthesis:
EPP +3.2% (8.2% w/div); -12.9%; +3.9%! (n/a)
FXI +32% (+34%); -22%; +5% (-5% ave)
INP +35%; -33%; +3.9% (-6%)
TB has followed INP for some time and noted on big change days the local market tends to follow the ETF’s here…wag the dog. This caused the India market to gap up sharply and hit a high of 15466 shortly after from 14810, a 4.4% gain, then drop to 14930 or just 0.8% and close up just 1%! Also checked the Kospi and Shanghai for similar patterns and found them.
Former Soros fund manager Jim Rogers overnight said he sees a good year for US stocks but is short the Financial ETF, not individual stocks which he sees as too risky. It seems there are two camps on this: the first that sans financials the other sectors look attractive. A look at the sectors in the daily summary tells another story, one shared by those in the other camp: going nowhere and with a staggering number of CFO’s and CEO’s saying we are already in a recession and no relief till 2009, any rally seems way to premature…except for a countertrend rally…worse, we could be in a secular bear market. The line of thinking goes: stocks are valued on an earnings stream, that stream is inflated by successive record earnings and record stock buybacks, in a recession the ‘P’ is supposed to fall first as it did, then when stocks appear cheap, the ‘E’ begins to fall and then bottom and turn up but investors are no longer willing to pay as much for the earnings, so any rally is impeded. Choose your category but choose wisely as it could impact your wealth and retirement for years.
Gosh if one failed financial firm and a rate cut less than expected, and more importantly there were two dissenters who wanted even less of a cut, then perhaps a second failed firm and at least one homebuilder should do wonders, right? Markets are valued at the margin and that distorts reality as does mark to market on derivatives. You overshoot, but then comes the other factor: liquidity…just how many are out there with the cash to buy…even as hedge funds are being forced to delever…or worse? Your call.
One last point and it is key: stock markets on average peak six months prior to a recession (which they did this time almost exactly…except Bear which peaked 13 months ago), and rally six months after the recession starts. So if we say it was December that would mean it would be June before we should have a rally, but this is no ordinary recession…this is a credit crisis not seen since the 1930’s…so shouldn’t it take even longer…yet we tried to rally 1 month into it and again less than 3 months into it…and the Fed is running out of bullets. Last time, following y2k, the Fed Funds rate got to 1% and they became worried about deflation. That was without a housing market collapse and a huge loss of employment that the data is currently understating. The 2001 mild recession that produced those panic tax cuts which should have been rescinded as the economy came back, saw growth resume in the third quarter of 2002, yet stocks didn’t rally for another full year and declined another 20% over that period…that is why TB thinks this is merely a countertrend rally with a lot further to go…this is evidenced by a double bottom not a capitulation trade and an early options expiry tomorrow (sorry thought it would have been pushed back), then followed by a three day weekend and a lot can happen in three days. Just be careful and watch V…after all, it’s all about the ‘V’….or is it ‘O’?
Have a good day and remember nobody is a guru…nobody has the answers, we are in uncharted territory. Good luck.
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 18, 2008
