Traderbill’s Financial Markets Weblog

…yesterday was Bern day…to day is a(n)ke day. A cheap pun true and not a very good one but that is the way it goes sometimes when one is trying to write and be creative. Now for some housekeeping, a few things TB has been meaning to comment on but his addled brain could not compute after staying up late to watch the PBS documentary “Carrier“.

 

First, over the weekend we saw reports of rising foreclosures, that nearly 20% of home sales are upside down or ’short sales’ where the home is worth less than the mortgage…not only are foreclosures and delinquencies rising but at an accelerating rate.

 

On Monday, the Chairman of OPEC said that if the dollar rebounds crude will drop to $60? See, it is all our fault…well it is starting at the Administration level…Clinton’s too…for a flawed energy policy…if there ever was one and now we are exporting food inflation to the rest of the world…including emerging markets…have you seen what is happening to rice prices lately? This could be a major cause of political upheaval and perhaps worse…and converting corn to ethanol will go down as the major factor which is raising prices of substitutes like wheat, and soybeans…now being substituted for rice in emerging economies especially China…chicken prices are up, and now hogs and cattle are being slaughtered early since the added value is not worth the cost of feeding them…wait till next year! Yet, nary a word from any of the three candidates…and that should scare you…again TB asks: where are the leaders?

 

On Tuesday, Maria Barteromo interviewed Eli Broad, founder of Kaufman and Broad Homes…now KB Homes, who said that this is the worst real estate market since the Depression and we are no where near out of it yet…who are you to believe? The Chairman Emeritus of the home building industry who has forgotten more about homebuilding than most of these morons will ever know or some overpaid Wall Street analyst or worse the National Association of Homebuilders? (Overnight, Bloomberg is reporting that home values in the Hamptons are declining - median sales price down 7.1% and sales off 29% in Q1` vs Q4 2007 - on slowing economy and Wall Street job cuts - 31,500 jobs and counting)

 

Yesterday and this morning, CEO’s of companies in several industries, especially autos…Chrysler’s Nardelli this morning on CNBC…expressed concern over declining consumer interest in autos. Yet we continue to be told…notably by Goldman Sachs…that consumers will spend at least half of those rebates. After all they did in 2001…don’t they get it? This is not a puny recession that most people never felt, and we have had virtually no income gains since…except at the top! TB will acknowledge that IF food and gasoline count as consumption…they do, in a broad and a narrow sense!

 

Also on Bloomberg this morning rising losses on CDO’s causing Fitch to overhaul ratings…in other words more downgrades ahead. The US economy probably grew at slowest pace since 2002. Not only is US Consumer Confidence at lowest level in decades, Europe has declined to lowest level since 2005 and inflation slowed to 3.3%…thought the rest of the world was supposed to carry the US? Not!

 

Now keep all that in mind as the FOMC meeting goes on and we wait with baited breath (originally ‘bated’ short for ‘abated’ or holding ones breath)…afterall, we only care about what the Fed does to rates don’t we? Who cares about them committing more than half their assets already to the credit crisis…and for what? …to rescue the 6th largest brokerage? True, it had to be stopped from collapsing and in turn causing the global financial system to implode but that was temporary. Besides, where was the Fed when the crisis was developing? Had Greenspan spent as much time ‘jawboning’ (the number one tool of the Fed), and stepping up surveillance of banks and their mortgage subsidiaries, we would not be in the mess we are today. Have we completely lost the ability to look beyond headlines? We already lost our ability to focus on one breaking news story at a time decades ago…logical progression?

 

So you can jump on the bandwagon with the stock market bulls if you like, but if it is as positive as they are telling us, then the basic rules of finance and investing are all in the trash can and revised. You know, like we financially engineered basic mortgagees until they had a mind of it’s own. Feed me, Seymour!   

 

Now recall, as we are reminded everyday by CNBC’s Mark Haines that New York is the financial capital of the world but like with CNBC, it is by no means the intellectual capital of anything. 

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 30, 2008

…today is Bernanke Day, Ben Bernanke…faster than a speeding bullet (TB’s daughter used to say “faster than a rolling speedit”), more powerful than a locomotive, able to reach tall buildings in a single bound…and who, disguised as Big Ben, a mild-mannered Fed Chairman, fights a never-ending battle for truth, justice, and the American way!  …on the other hand a fellow writer of daily commentaries has dubbed him ‘Bambi.’ Yesterday, mistakenly said FOMC was Monday/Tuesday but it begins today with the announcement around 2:10pm tomorrow (2:10 to Yuma?).

 

Not much in the mood to write as TB is feeling an ennui from 26 days of below average stock trading volume save for one: April Fool’s…you do recall that big meaningless rally don’t you? We have also twice set the low volume for the year and that is not a common occurrence in April…but rest assured that will not be the case much longer.

 

Focus remains on earnings whatever they mean with all the accounting gimmickry. Visa announced their earnings after the close as 39 cents a share vs consensus of 45 cents…but then ex-items, which for them was a plus, they came in at 52 cents…but since the ‘ex’ items can’t be expected to repeat themselves the shares sold off. Visa (V)…vis a vis?, and Mastercard (MA) are interesting in that they do not rely on credit merely transactions which someone was touting just as the earnings came out as being expected to increase as people run out of money…cash…but that would not seem to have been the case. Furthermore, at 38x projected earnings and with a long term growth rate of 21.6% that puts the P/E to growth rate at 1.77x which is rich by any standard and ripe for disappointment…MA is similar…way to similar. Now should we expect the number of transactions to grow at a rate equals or exceeds that in a huge growth spurt in credit?…one that supports the same P/E ratio? TB feels both are priced to fail, but then he missed on these stocks so let’s wait and see…furthermore V trades at $75 a share and MA at $242. MA just announced with Q1 earnings of $3.01 ex-items…$3.38 including. Consensus was for $2 however…so will it offset MA’s disappointment? Both look rich to TB.

 

The funny season is here too as CNBC has just announced its Million Dollar Challenge stock picking contest. TB entered the last time when the first prize was a new Maserati. You are allowed to have as many as FIVE portfolios…currencies have been added as sectors…and of course the usual gimmicky prizes for trivia questions, etc. If you decide to enter be advised that to do it right it requires a lot of time and it is not investing by any stretch of the imagination but trading…after all isn’t that what CNBC is all about? So good luck if you want to try to manage five portfolios in that matter and remember it isn’t about picking good stocks only picking the ones with the biggest potential percentage gains and then getting out of them when they plateau and finding new ones…a daunting challenge for a month or more. You can register at www.cnbc.com and contest begins on May 12…oh and be ready for playoffs!

 

Trying to avoid writing about the stock market so will make one last ditch effort…bonds…TB was about to buy some TIPs yesterday but the long guy looked about to break 2.10%…should have done it as for a second day it bounced back from the lows…but after Friday when it headed south again wasn’t about to make that move ahead of the FOMC…shudda, wudda, cudda…

 

OK, back to stocks…yesterday John Mauldin’s Outside the Box featured to essays on why the bottom isn’t in for stocks and TB wholeheartedly concurs. The first is by PIMCO’s Mohamed El-Erian…who is now being forced to sue to get his visa…if this guy is a terrorist so is TB! The second is by David Kotok. How can a bottom be in when banks and other financial institutions continue to tap the capital markets? Bulls aver that the mere existence of this capital means there is value in stocks…which are considered a screaming buy…except to TB apparently…gee, the p/e on the S&P 500 sans financials is just 15x…whatever happened to the single digit levels that normally signal a bottom? Remember this: how a large manager with billions under their control thinks is not how you want to think…you can’t invest that money except by scaling in all the way down…fail to do so and you will not only miss the bottom but be a cause for it to rally even faster than it otherwise would. Smaller investors however have more of a luxury…the ability to pick and choose and not to move markets…use that ability wisely.

 

There have been some interesting articles out recently that Sequoia funds that did well during the tech era are reopening after being closed to new money for years…but with that comes a warning that more than 50% of the asset value is in capital gains and mutual fund investors know what that means…you could be subject to taxes as they restructure the portfolio and all those gains are realized…so as Barron’s Michael Santoli writes it would be best to use them in a tax-free or tax-sheltered account (IRA/401(k). Just be sure to look before you leap…and kick those tires hard…which you should do with any mutual fund, or ETF for that matter…it’s your money and that is what matters.

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 29, 2008

 

… not “This Week,” but this week, could be of major import to market participants as we have a two day FOMC meeting (Monday and Tuesday)…will they or won’t they?…cut that is…April ISM Consumer Confidence Tuesday, Advance Q1 GDP on Wednesday, plus myriad other less significant dat and culminating with Friday’s payroll numbers which could be down for a fourth straight month.

 

The bulls point to the “fact” that since 1974, a decline in consumer sentiment below 72 it has signaled a bottom. Just what is fact and what is casual correlation? Is 24 years a long time?…certainly in a human life, although you see guys pleading out on Law and Order all the time rather than risk a life sentence.

 

Just because something happened once does not mean it will happen in the same manner again. In fact, just because it happened 5 or 10 times before doesn’t mean anything if there isn’t more than a casual linkage. Doesn’t anyone pay attention to the accuracy of weather reports? Now that is pure statistics based on observed atmospheric conditions. As pointed out in the Black Swan, just because you have a hundred year storm does not mean it can’t happen again next year. Worse, when people are devising models to make money…and all are working with the same ideas and often come from the same classes is it any wonder that books like Dow 35,000 are written and cost believers a bundle?

 

This is not meant to knock statistics or true quantitative analysis but merely to point out why a generation of quants trained in Monte Carlo simulations think they have found the Holy Grail…over and over. They do this by ruling out endogenous variables which is precisely why we are now in a global financial crisis. This systematic elimination of systematic risk…which is necessary to create a model is also why a model can work for years…until it doesn’t. One has to replace them with another variable: the smell test or common sense which has been sorely lacking for the past 25 years or more. If the model says it’s true, it is true.

 

When TB entered the wonderful world of investing 36 years ago…and believe him that even that is not a long time…else we wouldn’t be seeing comparisons to the Great Depression…computers were not a factor…in fact it was IBM who thought there might only be a need for 1,000 computers in the entire world. When one submitted a bid for a municipal bond issue they prepared the bids with just a calculator multiplying the number of bonds per year times the years to maturity times the interest rate then totaled it for the entire issue to get the total interest cost, then divided that by the total bond years to get the interest cost and subtracted underwriters commissions to get the Net Interest Cost…that was the bid that was then submitted to the issuer and the lowest NIC won the deal.

 

Then Wang created a desk top computer…actually analog that did all this but you still paid attention to the inputs and finally CompuCorp invented an even smaller desktop version that was more like one of the technical calculators in use today…later HP invested the 21C which did the same thing but was much more cumbersome except for conceptual use…such as the CFA exams.

 

A few years later TB heard of a bond dealer who couldn’t submit a bid because their Compucorp broke down (by the way, the Wang sold for about $4,500 and the CompuCorp for $1,500, while the HP 21C sold for about $200) and nobody could create the bid! TB recalls, and a friend sent a fascinating interview with Robert Rodriguez, CEO of First Pacific Advisors, in which he commented on trying to do financial analysis on the old IBM mainframes…creating a series of punch cards…really not computing but mere data processing. But when you did it you had to think…if something wasn’t right you sensed it in the voluminous printouts. Not so anymore…if the computer says it’s so…it’s so. TB wonders how many billions have been lost in bidding on all forms of contracts since the computer was invented and a number popped up which was treated as gospel.

 

Then along came Bill Jobs with Apple…and TB remembers it well…two little 6×6x2 inch boxes with a slot for a floppy disc…and a monitor. TB tried writing programs for it but never could get them to work right but a colleague at Merrill was a pistol with one. KKR would never have become the force in mergers and acquisitions that they did without Apple. He read of crunching the numbers, coming up with a bid, presenting it…having it rejected…then plugging in new numbers and waiting for it to grind out a new bid…sometimes taking as long as 30 minutes while everyone held their breath. Today, you can merge two companies on Bloomberg, press a button and instantly see the consolidated financials…but do they mean anything?…or at least anything you can make money from? Depends on the variables.

 

This explains how just 6% of the mortgage market which in turn is an even smaller fraction of the global economy has brought the financial markets to their knees. Too much modeling with the same assumptions, and ultimately the same conclusions without regard to the total volume. This is akin to creating a widget, finding that it sells and then taking that price and multiplying it by the total market to create total revenue…defying the basic laws of supply and demand…but who cares, the numbers are huge, right? That is how we created huge gains that ultimately turned into losses in conglomerates like Whittaker Corporation, Litton Industries…even Levitz Furniture…and now we are doing the same thing with the Apple’s, Google’s, and more significantly the Research in Motion’s and worse yet Amazon’s of the world…the stars of tomorrow’s market have not even been born of or even thought of yet. Think of that the next time you buy a stock with 40 or 60 times earnings. IBM was trounced by Microsoft who is in turn now being trounced by Apple and Google…but as sure as there is a market, someone will do the same to them…think about it…and bet on it…creative destruction is a fundamental trait of capitalism.   

 

A friend in the investment business was over last night and they debated whether the bottom is in for stocks. His friend cited historical evidence that the bottom is in…such as the consumer sentiment theory above…it was quite an energetic discussion that ended with both going away holding to their opinions.

 

TB cautions those who think bonds are expensive to look at the pullback we have had over the past four trading days. Just because the Nasdaq is down 8.6% year to date and the Russell 2000 is off 5.8% does not in itself make them good value. How the market reacts this week could have a major impact on perception. You already know where TB stands on this…now you decide.

TB has been meaning to comment on a wonderful series on American history: the John Adams series on HBO…there are six 90 minute episodes starting with the Boston Massacre and Adams defense of a British soldier, thru the struggle for independence, the presidencies of Washington, Adams and Jefferson and finally Adams retirement to his farm and the tragedies suffered there ending with the deaths of both Adams and Jefferson on July 4, 1826…the 50th Anniversary of the Declaration of Independence. TB highly recommends the series. Trivia: only Jefferson and Martin Van Buren held the triple crown: Secretary of State, Vice President and President…and it is doubtful anyone will again.

Also, on PBS is a new series that will interest former Navy geeks like TB. It is called ‘Carrier’ a ten part documentary on the USS Nimitz and just what life aboard her is like. TB’s only complaint is the constant reference to the SHIP as a BOAT by the sailors…you would have been rapped severely about the head and shoulders by any chief petty officer for making that blunder…something one-third of a mile long has got to be called a ship! First two hours were last night and it is two hours a night thru Thursday. Wow!

Have a terrific day!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 28, 2008

 

 

 

 

 

 

…Tuesday’s ‘reality check’ gives way to today’s ‘gut check’. In other words: do you believe all you hear about just how good this market is…and how cheap stock are? The most common observation one hears on CNBC is stocks have never been this cheap…that there are only two problem sectors: finance and the consumer. Last time TB checked those two sectors were joined at the hip and if what’s “good for GM”, as the old saw went until GM fell out of bed, “is good for the economy”, then pray tell, how can the economy do well without those two sectors? Look at Walmart you say, it is nearing its all time high of $61 set in March 2004, and yesterday and tied the high of Nov. 2004 of $57 (gas and food weren’t the big factors then…and still it has gone sideways (over past 12 mos. +19.1% w/dividends reinvested, since 4/23/04 it is -3.4% but +2.3% w/divs but annualized they fall to -0.9%/+0.6%), and still sells for 17x earnings…with 5 yr growth rate of 11.2%, the p/e to growth rate is 1.5x, fully priced).

 

Two “auld acquaintances” of TB’s Van Hoisington and Lacey Hunt wrote their quarterly investment letter and it is incredibly bearish. They give some horrible stats on why the economy will remain weak much longer than expected (not by TB). Mainly, we have been near recession levels for the past three years but just don’t know it…that is because ex-home equity withdrawals, 60% of GDP would not have been realized. They compare to the Depression and to prior economic periods and the problem is that housing prices rose for most of this period despite a sharp drop in the savings rate and no growth in wages. If interested TB will send you a link to the report which comes courtesy of John Mauldin.

 

Speaking of 60%, Mauldin stated in his April 18 commentary that 60% of the market for subprime products (CDO’s, CLO’s, SIV’s, etc.) evaporated along with subprime debt…in other words it decimated a market that took 15 years to create and those buyers are never coming back. TB can also forward that article or the link is www.frontline.com. Oddly, Mauldin, sees a shallow recession but bases this off his error on the impact of Y2k as did TB and cheerleader for the concept (Ed Yardeni), and that was a painful experience…but this time it is different…and without an incredible amount of resources pumped into correcting the computer problems of Y2k it would have been that bad!

 

There, in a mere two paragraphs TB, with the help of Van, Lacey, and John (could be a new song…has anybody heard from my old friends…), explained why both the consumer and credit markets will be detracting not additive to GDP growth for several years…at least. 

 

Going to end now and let you reflect on these concise comments…see also headlines in the Overnight Markets section…not pretty.

Is it Friday yet? No?…going back to bed…have a good one!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 24, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bloomberg Quote of the Day: “Without friends no one would choose to live, though he had all other goods.” - Aristotle. Well, save for a few CEO’s and hedge fund/private equity managers! 

 

…that is what we are told daily on CNBC. Then they trot out the usual trailing and forecast p/e ratios, that are as useless in predicting the future as hedge fund or mutual fund performance…it’s all bunk! Why?

Because we have just come off the best string of record earnings…accompanied by a record string of stock buybacks which have literally thrown shareholders money away…of course management will say, yes but where would the price of the stock be if we had not done the buybacks. Just what were those buybacks? Instant bonuses for management…first of all the stock was not retired in most cases; second, much of it was used in options and thus recirculated; third it inflated per share stock price and thus lowered the p/e ratios; fourth: it was a trifecta for management! Yee haw! Besides if they had paid it out in dividends…investors would have had to pay that confiscatory 15% dividend tax, right? Think of the millions of stock investors…excuse me, 90% of those are in tax deferred accounts…only the top 2% or so who control the bulk of the wealth in this country benefit from the dividend tax…but do they spend it? Nope, they invest more…if like Paulson & Company’s John Paulson who was the highest paid hedge fund manager…or anyone for that matter last year…with a cool $3.7 billion…and of course we want to just tax him 15% or he will take his money and go home as the risks are just too great. Sorry, to digress but this is not only at the crux of this but is also the reason that the majority in this country is mad as hell. (Would someone please tell Hillarious and Obama however that $103,000, which qualifies one for the top 10% of all taxpayers, is not a lot of money…certainly not in New York or California! By the way that number was $89,000 in 1982…you do the math!…$3.7B…$103k…hmmmm)

 

History shows that growth of sales, earnings, whatever reverts to the mean…yet we are led to believe that these earnings are here to stay…in spite of being in the biggest credit crisis of all time…certainly in size and it is breaking the bank…literally…with the Fed having committed more than 50% of its assets to it and now the Bank of England is going to solve the problem by extending credit which will force it, according to Goldman Sachs to issue massive amounts of long Gilts! Good for the Pound, bad for bond prices. Yet, we use statistics only to support our theories…didn’t we just see that with the derivatives created by subprime lending? History also shows that stocks do not become attractive in a major selloff until revulsion sets in…meaning the market p/e falls below 10x. In case you haven’t noticed the p/e on the ‘dirt cheap’ S&P 500 is 22x with a paltry dividend yield of 2.19%…after all we need that money for the CEO’s bonus…oops, stock buybacks which are the best way to enhance shareholder value! Remember too that that 22x p/e is based on fewer shares outstanding, right? Note that the p/e on the Dow is now 68.9x due to several companies with negative earnings…notably Citi and BofA…but heck the dividend is 2.49%! How about the Nasdaq 100 which boasts a 29x p/e and a dividend of just 0.5%?

 

Take a look at the famous ‘four horsemen’ of the Nasdaq 100: AAPL 36.9x trailing, 32.5x est; AMZN 71.6x trailing, 43.8x est…for God’s sakes folks this is a bookstore!; GOOG 37.8x, 26.9x est; RIMM 55.8x, 33.6x est. The average of the four is 50.5x trailing and 34.2x estimated…do you have any idea how small an error it takes to spoil your whole portfolio with those multiples and no dividend? Is there any reason to believe that even five years out they will maintain their competitive advantage? Yet these four stocks made up more than 25% of the Nasdaq earnings last year. (TB shaking his head)

 

Now let’s get to the whacky world of financials…who have for the most part proven that they have no understanding of risk!…nor the value of capital…as they are now giving it away and bank stocks then rally in the belief that they will start lending again and make gobs of money. Horse manure! This is about survival and meeting required capital ratios…try drawing down your home equity loan…or getting a new mortgage. Banks are like sheep…and for that matter so is Wall Street…how else do we explain all of them getting on the same side…sans Goldman who has made some bad mistakes in the past as former Chairman John Corzine pointed out…he attributed it to luck…is that what bonuses are based on: luck? Is that why Goldman paid out those humongous bonuses when everyone else was bleeding only to take huge writedowns in the next quarter? Is that why Exxon Mobil paid outgoing Chairman Lee Raymond $400 million?…because the price of oil went up? Makes sense to TB even as share prices fall…XOM excepted along with other energy stocks due to soaring prices…but is that good for the rest of the economy?…they keep trying to tell us it is…especially stocks…and that folks is why it is early in the game.

 

Take a look at the recent earnings…most disappoint, a few like CAT excel, GE lost credibility, and a few like McDonald’s have a nice profit jump but either hit the estimates exactly or barely surpass…you don’t want to disappoint and thus have people think ill of you, do you?

 

An article on Bloomberg today by Peter Robinson asks What’s an Analyst Worth?…not much as much of what we are seeing is accounting gimmickry. Yesterday WSJ reported in Heard on the Street how companies like Merrill could have had $3-5 billion more in losses with the stroke of a pen. First, earnings were inflated by mark to market…and mark to model accounting…and now they are “understated” by the same rules when the bid disappears…and while we are talking about those earnings think of the boost being given brokers and banks by the Fed! Borrow at 2.5%…what a deal…and there is suspicion that banks are understating their cost of funds (LIBOR), so they don’t show they are having to pay up for funds. Robinson says that at least 27 companies have matched or topped Wall Street estimates in every quarter since 2000 including Coach and Starbucks. GE just ended a streak of 32 consecutive quarters. Thomas Russo, a money manager is quoted: “Companies are smooth and steady and growing, right up until the point they collapse.” The article goes on to say that the reason this happens is something TB has frequently groused about: guidance! What a joke! Former SEC Chairman William Donaldson headed a group that called for abolishing quarterly forecasts and reducing the amount of executive compensation tied to quarterly earnings per share. Donaldson called the whole game: silly!

 

That is the monster we have created and it is time to pay the piper…expect more volatility…lots more!  

Hope you all have a good day…but if you believe this market, and those who promote it,  you are in need of serious help. Everyone you hear has a vested interest…except TB…he just wants the truth…even if he can’t handle it….can you?

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 22, 2008

Last Tuesday after the close TB wrote the following and here it is again updated as of Friday:

 

Where is the stock market going? IF TB had to guess, and believe me it would be nothing more than that…he thinks the next move will be sharply down. But look:

1. The market has ignored incredibly bad economic news lately in hopes the worst is behind us.

2. The market has ignored horrible earnings reports by GE and Wachovia…winners have been minor yet due to heavy options hedging the moves are exaggerated. CAT for instance who posted positive on Friday added 55 points to the Dow alone (25% of the gain)!

3. Volume today was 1.21B shares. Since 3/24 average volume has been 1.36B shares and there has still been just 1 above average volume (1.6B over past 6 mos.) day. Monday was low for 2008: 1.16B/

4. Ratio of New 52 week Highs to Lows. Since the selloff from 12/26, there have only been 8 sessions where the ratio was positive and each was followed by a selloff (2-1 and 2/4, 2/25-26, 4/4 and 4/7…a good indicator…and 4/17-18. The ratio is now +2.6:1. Advance/Declines and Breadth have also been much worse on the downside hitting double digits several times while upside is 2:1 or less usually.

5. Volatility, TB believes is key. Due to heavy options trading with straddles, volatility is low from buying out of the money puts and calls and range trading stocks. Despite the breakdown a week ago Friday,  volatility remains below 30 on VXN (NDQ 100) and 25 on VIX (S&P 500)…this is stopping major moves but it is hard to believe after breaking down they are still playing this game with a broader band? Incredibly, on Friday both plunged to the lowest levels since 12/26 when the selloff began!

6. There are about 25 stocks in the universe that drive the indices every day: WMT; IBM, BAC, XOM, AA, CVX are most on the Dow, while the Nasdaq is generally dominated by GOOG, MSFT, AAPL, with AMZN and RIMM pretty much sidelined these days. It is not coincidental that the 4 horsemen came back in force on Friday led by GOOG which added 15 to the Nasdaq 100 (25% of the gain). BTI and IMO dominate the AMEX Comp. TB believes it is options plays in these stocks that is keeping the markets under control.

7. The bad news a week ago Friday was that several major stocks closed below their 40 day moving averages, on Monday, most indices closed below the 40 day, and on Tuesday, the 40 day was resistance. By Friday all were well above again and testing levels not seen since January. There is something ghoulish about this kind of misplaced optimism.  

 

Listen…TB has been involved in banking since 1972 and now knows that he knows nothing of banking! If transparency and fiduciary duty are paramount then we have fallen into a deep hole. To see just how bad off our financial institutions are and how stupid it is to try to forecast see Heard on the Street in today’s WSJ…what a joke…experienced analysts…yes, even of the street variety…are throwing up their hands trying to do comparisons……and beware of small banks who don’t have the ability to raise capital except thru being bought out…and by whom? Now take a long hard look at BofA’s earnings!

 

Optimism is a good thing…but blind optimism is expensive and downright foolish! That is where we are!

Adieu from a still shaking his head TB.

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 21, 2008

…yesterday was the ‘eve,’ today is the Full Monty…tax date! For most Americans the most strenuous day on the planet.

 

Talk about stressful…we have the worst consumer sentiment since 1982, Business Inventories rising…and one cannot ascribe this to anything other than involuntary accumulation…although they started from a low level due to the Walmartization of America with ‘just in time’ inventories morphing to ‘just in case’ to ‘just a liability.’ At least inventory liquidation won’t be nearly as big as in prior recessions, prior being the operative word here, but there won’t be the light at the end of the tunnel of new jobs after they are drawn down. But the important thing is financing those inventories in the worst credit crisis of our lifetimes…despite what some bankers say…high rates are preferable to the current situation…at least you can get the money when you need it…heck, haven’t consumers been dealing with 20% interest on their credit cards for years now? If that isn’t a usurious charge, TB would like to know what is!

 

TB is still mulling over the mild reaction to Wachovia’s ugly earnings report yesterday…not to mention GE on Friday. What is puzzling is how the Dow was down just 23 on the Wachovia news after being pummeled by 256 points by the GE letdown? But the Dow or even the S&P 500 don’t even begin to tell the story.

 

What is shocking about GE is the fact that they misled investors by not issuing any kind of a warning which they certainly must have known was coming…and after Immelt had promised to ‘knock your socks off’ (who can deny that in fact they did?…more like blow them off though)…the tone on the conference call of some thoroughly peeved analysts told the story as the pelted Immelt with barbs.

 

On the other hand, as ugly as Wachovia was they moved up the release by four days…a wise move apparently as the market didn’t have to dwell on it over the weekend as it did with GE. But pondering (just one letter away from pandering) is a far cry from thinking…about the implications for the market.

 

Yesterday, despite the muted reaction in the broad indices note that only two had positive gains: Transports +0.4% and Energy +1.8% and if these aren’t strange bedfellows TB doesn’t know what is. A couple like utilities and Gold/Silver stocks were about unched and that was as good as it got. Call this a stealth selloff because virtually every major index, sans Energy which is really a sector, has broken below its 40 day moving average after most of the components did on Friday. But the sectors told a far worse story, especially Financials which fell 1.5% Monday following a 1.6% selloff Friday. Look at the components: Banks -2.7%; Insurers -0.8%; Brokers -2.8%! All of these were off the same or more on Friday. Worse yet, look at the KBW Bank Index (smaller regional banks) which fell 4.3% yesterday and 1.6% on Friday! The Philly Semiconductor Index, which has been fighting back from the lows took a 1.7% hit yesterday following -3.4% Friday giving up most of the gains and heading back towards the lows. Housing threw in the towel again and Healthcare including Biotech which was beginning to look promising caved too.

 

Now will someone please explain to me why Walmart is back near the highs? After a miserable Retail Sales report which shows that on an annualized basis sales are up just 0.7% over the past three months annualized and 0.6% over the past six months…which includes that big surge in Nov. due to the early Thanksgiving. Walmart is different you say…but different from Costco which has a much more favorable public image and treats its employees well and is more or less going sideways?

 

Now going back to financials, TB has mentioned Provident Bankshares (PBKS) which he bought early this year as a bank with a good franchise, that had been beaten up in the marketplace, and was supposed to show some upside…not to mention a dividend which due to declining price had grown to double digit figures. One of the strong suits of this stock was that for years they had raised the dividend by 1/2 cent each and every quarter…something you like to see as it shows confidence by management on delivering earnings. Shortly after TB bought it they took a huge write-down on their REIT portfolio, which sounded reasonable and TB felt that with REITS now off the lows…or were at the time…that that could end up being less than announced and thus offset some other loan charge-offs…he was wrong. Their earnings, also announced Friday were ugly too…and they announced a 40% cut in the dividend. BUT the stock rallied rather than sold off…the reason being there was a huge short position and some of the weaker ones covered…or at least as TB sees it…and he sold into it…and not for a gain…just thankful he is out. By the way TB found that the Baltimore Sun has been questioning management’s statements for some time now.

 

The point is that this is not a good time for financials, especially brokers and banks and while the former may have bottomed it appears the latter hasn’t and will continue to hold the brokers down.

 

What is most disturbing to TB is GE. How could a company that has had great earnings and credibility for decades, suddenly allow this to happen? Sure Welch was at the helm before, but Immelt has done a great job since taking over just before 9/11…a truly trying time for corporations. But why did they blindside us…even as the CEO himself was buying shares…usually a good sign? TB attributes it to the fact that GE is too diversified with the bad offsetting the good and vice versa. Did they understand their true exposure to credit…especially with GE Credit being a big part of the company? TB is trying to understand, not be critical as the analysts were…and why didn’t they spot the problems in the credit sector and plan accordingly…guidance…if the CEO says so it must be true…no need for thinking on it.

 

So we come back to the broad stock market and despite numerous attempts to rally we are still mired. The easy rallies from bottoms are proving to be merely countertrend and after how many times being struck across the face do we come to the conclusion that this time it is different? The worst part of this is earnings projections are way too high as they have extrapolated on past performance and ignored the effect of a series of record stock buybacks…and just what have those gotten for the shareholders? Zip!

 

 

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 15, 2008