…it was anything but mundane Saturday when TB read Alan Abelson…so elated was he that he sent in his subscription for another year…don’t worry, he didn’t pay retail! Why? first, if you recall TB titled Tuesday’s missive, April Fool’s, and said don’t let the joke be on you. Then, on Wednesday, he claimed it all was a bad joke that would be corrected…by Friday’s payrolls which TB predicted would be worse than the consensus (not so hard to figure since most of those surveyed take the ’safe’ middle of the range, so when there is a trend they undershoot in both directions.
Today’s Topics:
1. April Fool’s was anything but mundane and why the market was only mixed on Friday.
2. The consumer and credit…Beauty and the Beast revisited?
3. More signs of the times and they are dismal
1. It took Abelson to lay it all out but here is the way it played out: first, when TB was writing early Tuesday morning…he heard in the background some blather that Doug Kass had turned bullish. Now this is significant as he and Morgan Stanley’s Stephen Roach are the only two bears that make TB look like a raging bull. As TB said, Doug Kass, a well known Florida money manager, has been bearish and was one of the first to see the significance of the housing bust. Kass has been short but early Tuesday declared he had an epiphany and was now bullish…and looking for a 26% rise in stock prices before year’s end and a turnaround in housing, that the consumer was ’pent up rather than spent up,’ and there would be no recession. Lastly, he is now co-authoring a book with Jeremy Siegel titled Dow 56,000. Can you believe that any educated investor doesn’t own a calendar? But the media ran with it and was calling everyone for their take and all were speechless. So they bought…in the first half hour (remember that is supposed to be the smart money), and to a lesser extent in the second half hour but at the end of the day that huge rally, largest for beginning a quarter in decades, only to end up with a slightly above average volume day. TB had said it was hedge funds sitting on huge cash balances so their investors and prime brokers would know that they were solvent…just don’t inhale the fumes. Well, everyone drank the Kool-Aid without really knowing the reason…TB predicts they will see their quarter evaporate for a second straight and that means a horrible half year…or is it ”sometimes you just have to close your eyes and buy”?
Much has been made of the drop in volatility on the VIX and VXN. TB interprets it differently. IF, we remain in a broad trading band as we have since the 12/26 selloff, a lot can be made trading the range on sound large cap stocks…this is why we have the same leaders every day…one day up, the next down. 150,000 shares with a point or more profit each and every day is pretty good. You have probably seen those commercials for channel trading…you know buy at the bottom, sell at the top…again and again. But there is always a problem…what if the channel is broken? Simple…IF you trade in size and this is a big IF…and it helps to be leveraged, but when you buy at the bottom of the channel you also buy an out of the money put at a point or more below the channel…an effective stop loss…then you buy an out of the money call a point or more above the top of the range…you make money so long as the stock or market goes in a sideways pattern…and your losses are limited it you are wrong…this means the ratio of puts to calls shrinks and that folks, is why TB believes the VIX is below 25 and the VXN below 30.
Not that there wasn’t good reason for a major rally…no…after all Lehman, who said they required no additional capital tapped investors for $4 billion…while UBS’ Chairman resigned and not to worry as they were going to raise $15 billion in new capital…those are good reasons for a rally right? Especially in financials as the risks of cratering are now less…but that means shortcovering unless the new math that we sent our kids to school to learn at great expense doesn’t include earnings dilution. By the way, Washington Mutual is getting $5 billion so that stock will move up. Now if you are short this all makes sense but if you are an investor this means lower earning, higher p/e’s or both…what kind of fool’s are we anyway? Oh but it gets better…
According to Bloomberg this morning there are more than 1,000 equity analysts and Wall Street and what Bloomberg found should put about 950 of them out of work? These rocket scientists are predicting 2008 earnings will be $99.67 per share vs $87.72 in 2006, a record…2007 was just a hiccup. That is a 10.5% increase, and why shouldn’t you believe them? Well, in 2007 they saw them 8% higher but you say no one could have foreseen the housing bust…yet in Q4 33.5% of the estimates were higher, and analysts ‘buy’ and ‘hold’ recommendations composed 94.5% of the total!
TB said when Morgan Stanley reported surprising to the upside that it was a function of a bid emerging in all that derivative paper…from no bid…or lets say a dollar price of 25…now with buyers becoming more confident it goes to 35…do you honestly believe this detritus will continue to improve till it is back to 75 or 80? NO! But it gets better as we have been hearing a lot about ‘mark to market’ accounting being incredibly unfair…of course they didn’t complain when ‘mark to model’ over-inflated the values as if $100 million gets the same bid as $1 million in a fire sale (remember TB’s sermon about all pricing being done at the margin?…as in the last trade). Oh, but this one is rich…remember during the 1998-2000 equity bubble that companies with defined benefit plans were able to count the money they would have had to contribute to the plan as additional income…when it was merely a theoretical saving…or banks and their silly loan loss reserves accounting…well here is one that beats all: as you know debt prices have plunged on weaker credits…especially brokers…well according to market rules you have to mark everything to market…sooooo….lets say that they have $100M in bonds outstanding trading at par and they drop to 75…that means they can…no not can, must, mark to market and before you say that is a bad thing the arcane principal says that is a credit…in other words if the company was to buy back its debt it would save $25 million! …ergo that is into earnings! What could go wrong with this? Well, first, the company could go bust…second, do you honestly believe they are going to buy back their debt? With what? …instead most are issuing more…perhaps for this reason since they can then pad earnings as the price of the debt declines? Accounting and economics have become ridiculous! Stop the world!…and no that is not an April Fool’s joke…nobody would believe it!
2. If things are so good how come commercial real estate is now feeling the pinch…landlords are bargaining. Thanks to Merrill’s David Rosenberg for pointing out that, from a NY Times article and the for the rest of this segment. Airline industry taking hits and both ATA and Aloha have filed for bankruptcy. By the way, TB had a former colleague once point out to him how bankruptcy reorganizations are bad for the markets. First, the company goes belly up…then a judge tosses out those costly leases and other negative contracts…if they have a defined benefit plan that is upstreamed to the taxpayers…THEN the company can sell its wares with a higher profit margin than its competitors and thus lower their prices reducing the profits for the ones who didn’t screw up…Capitalism at work. Also, demand for TV’s is shrinking…right when they thougt everyone would be snapping up those digital TV’s with the phase out..of course now that little secret is out that all you have to do is rent a cable box and any TV will work. Rosenberg poses this: “how could financials rally 7.5% on the day we hit the $232 bln mark in asset writedowns and credit losses since the mortgage/housing crisis began last year (10% of that figure was announced (Tuesday) — and once again investors believe the worst is over.”
He also points out a WSJ article (4/1 C-15) that says sales in NY in Q1 sagged 34% while unsold inventory rose 5%…yet prices are still +13% (median) over the past 12 months…and notes that 30% of closings in Q1 were contracts taken out “before the credit crisis and bear market took hold.”
Then there was the ABC/Washington Post consumer comfort index at -33 in the March 30th week from -30 the prior week…and the buying climate index fell to -48 from -42. Auto sales were 15.1 M units annualized in March, ex-Katrina the worst in ten years. David also says that CNW Research reports that just 90% of applications from prime auto buyers have been accepted, down from 92.5% last year and for subprime just 57% vs 68% a year ago! But here is the worst part (also a TB prediction): “27% of trade-in in February were ‘upside down’ on the loan…in other words they owned $4,400 on average more than the vehicle was worth…another record! Blame it on high gas prices and all those SUV’s…you do remember zero down, zero percent five year loans on those behemoths, don’t you?
TB could go on…and on…but you get the picture…someone is wrong and it isn’t Doug Kass…or TB!
3. What is wrong with us? We let out elected officials run all over us…bailout homebuilders to the tune of $6 billion by increasing the tax loss carryback from two years to four…and of course letting the execs keep all those bonuses that were made by putting people in their homes who should never have been able to qualify in the first place. What is wrong with us? TB is going to raise the bar: he will vote for the first candidate who says that ethanol is a bad use of resources…and a major cause of the inflation we are experiencing…a safe bet since no one would touch that with a ten foot pole. To those of you who saw, There Will Be Blood, chronicling Edward Doheny and Teapot Dome, you will probably enjoy a book reviewed in Barron’s: The Teapot Dome Scandal: How Big Oil Bought the Harding White House and Tried to Steal the Country by Laton McCartney. He talks of how Albert Fall was a bumbling governor from Arizona and only got the Sec of Interior post because the insider, Jake Hamon “the Oil King of Oklahoma who was to make sure his buddies…he and Sinclair kicked in $4 million…a huge amount in those days to convert just 39 electoral votes…died after his mistress shot him for cheating on her…you can’t make this stuff up! So Fall is convicted and serves time, Doheny who bribed Fall gets off Scot free, and Sinclair only went to prison because he hired detectives to follow the jurors around! Now THAT is American justice!…blind as a bat.
If you saw 60 Minutes last night, the lead story was on China’s sovereign fund, run by a guy who came over and was educated at Duke and became the first Chinese national admitted to the New York Bar. What is interesting is he seemed quite rational…and said transparency is forthcoming…perhaps when they do what everyone is sure they will…on the other hand communists do quite well at adapting to capitalism once they see there is money in it…see, greed is universal. The concerns that China will dump US debt are insane as they would only destroy their own assets…perhaps we should do what the Brits did to France when they owned a ton of their debt…devalue…bigtime…abandon the strong dollar policy and voila…problem solved. But TB lauds them for investing in US financials…heck, nobody else wants to! The concern is that they will become activist and extort deleterious corporate actions…you know like activist hedge funds do every day…at least they would have had an interest in preventing what the hedge funds did to the Bear! The head of the China fund asked why he and other sovereign funds should be forced to be transparent when hedge funds are opaque…he had no problem if they were not singled out! The time to regulate…and regulate properly is here…and it won’t be solved in time by Paulson’s proposals…if they are even enacted…eventually. How about cleaning house at the SEC and put some former hedge fund managers in charge…it worked with Joe Kennedy when it was first founded, why not now? They know what the abuses are and who is committing them. Someone like a Soros, or Steinhardt or Robertson would fit the bill…by the way whereas John Merriwether’s latest fund was leveraged 24:1, an improvement on LTCM’s 100:1, Soros says he uses little leverage…think about that.
TB reiterates…it ain’t over till it’s over…and it ain’t over…not by a far sight! Keep hands in pockets.
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 7, 2008
