Traderbill’s Financial Markets Weblog

 

As if things aren’t bad enough, tomorrow is the ides of April and we all know what the means…a sleepless night for a lot of people…the antithesis of Christmas Eve. Another lump of coal today too:

 

As if it wasn’t bad enough that GE shocked us on Friday…what is the point if you are going to hold their hands and then you go “oops”? Jeffrey Immelt, who took the helm from Jack Welch, four days before 9/11…not only was he good, he was lucky!…did a good job since and then suddenly blew it. Why did he tell the world on March 13th that “10% growth for 2007 was in the bag,” as well as beating the S&P 500, then not utter a word when reports had to be crossing his desk daily for the past two weeks? To his credit, he bought $5 million in shares in early March…before he uttered that statement though? 

 

You know the difference between Immelt and Immelman? Besides one being American and the second now the second best loved South African on the planet after winning the Master’s, Trevor Immelman (wonder if he is related to the German World War I ace, Max Immelman?…or if the Amen will corner will be renamed the Immelman Turn?). Immelt, on the other hand simply…well…melted (I melt?). Anyway, whereas the first created a doomsday mood on Wall Street it is doubtful the latter can reverse that psychology, as exciting as his besting Tiger Woods was Sunday. He is one cool cat!

 

Today it is Wachovia that is the bearer of bad tidings…although Philips Electronics paved the way. Wachovia (WB) is now in the tank after reporting a Q1 loss of 20 cents a share vs $1.20 in Q1 2007 and analyst forecasts (which are worth zip these days) of $.40. Loss was blamed on subprime loans and most significantly the option arms (pay or don’t your choice), which were a significant portion of the portfolio of Golden West…the Sandlers…a hubby/wife combination you would not have wanted to take on and who said their credit analysis meant they were only writing good option arms. If this is the case for them, what about Downey Savings that Cramer likes? They have a ton of them and as TB has said, the biggest problem is you get a double whammy when you write them down because you have already accrued income that you haven’t received and that has to be reversed…mein Gott!

 

But back to Wachovia who says their Tier I capital (not to be confused with Tier III assets which are mark to market and now being disclosed and increased by brokers), is 12.1%, despite a -2.1% return on equity which will cut that very fast…strange because according to Bloomberg analysis Total Capital at 12.3% was just 11.8% and Tier 1 was just 7.4%, which was better than Wells Fargo (11.7%/7.6%) while US Bancorp was 12.2%/8.3%. TB has never liked Wachovia and felt that IF a big bank was to fail it would be the one. Look at this: consumer and commercial banking earnings $1.2B down 17% from a year ago, corporate and investments -$77M vs +$550M. To rebuild capital they are going to raise $7 billion by issuing common stock, and perpetual convertible Preferred…oh but wait, it gets even sicker: they are cutting the dividend from 64 cents a share to 35.5 cents a share. If this stock doesn’t get pounded it is further proof that today’s investors have no concept of earning dilution!

 

2. A Bloomberg article on Friday that of the $300B auction rate securities market $41B or roughly 15% have been redeemed by issuing the underlying municipal bonds in the open market. This is good news as the fail rate lately has been running about 71%. In addition, another $43B are scheduled to be called by issuing bonds. The toxic waste ones have been the auction rate preferreds issued by closed end bond fund sponsor. Today, a Bloomberg article that TB contributed to on Bloomberg describes how despite the lack of liquidity some investors, including TB are selectively buying municipal bond backed auction rate securities…but not auction rate preferreds.

 

Meanwhile Fitch lowered the ratings on Van Kampen funds following cutting the rating on FGIC, a major insurer of muni bonds. VK California Insured Tax Free funs was lowered to Af from AAf. It is appalling that muni bond insurers thru their own mismanagement can now penalize those who bought their insurance! Furthermore, the problems of the insurers were in the derivatives area not insuring municipal bond issues but that may be about to change as the economy sinks. Furthermore, without the aid of Moody’s, S&P and Fitch, we would not have had the subprime problems…of course we could also say if the regulators including the Greenspan Fed, and the GOP governed SEC had done their job. This is a total failure to take responsibility…yet we hear daily how the problems of subprime borrowers were of their own making…for the flippers and some others yes…let them hang…but a lot of financially ignorant if not totally ignorant people got swept up into the mess. Not without a lot of help.

 

Last week, TB read that Schwab, billed as the safest of the brokerages has its own share of problems having directed some of its clients into a fund billed as ‘the same as a money money market fund’, were put into ultra short bond funds (short in maturity, not short the underlying bonds as compared to ultra short stock funds…too much confusing terminology!). The main one is -24% over the past 12 months, but Schwab has graciously offered to lend to the clients at a rate of less than 4%…ain’t that nice? Meanwhile the lawyers are already at work…as they should be…class action suits have been filed.

 

This morning TB talked to an investment professional, a friend with similar experience both in time and broad exposure to markets, who had money with Bank of America…a broker suggested a cash alternative of taxable money market preferred that was puttable every 7 days…in late February he was informed that there was a ‘failed auction’ where there are fewer bidders than those wanting to ‘put’ back the securities, and IF he wanted to sell them he might have to wait “for a few months”. The bank increased his line of credit based on his holdings of the securities and like Schwab, also offered a rate under 4%. Can you believe this? They sold him the bonds and are now gratuitously offering to lend to him near 4% for their error? This is what we have come to…where we cannot not trust our broker, or bankers. The good news is that he had the ‘taxable’ preferreds which are being called as they can whereas the ‘tax-exempt’s’ are wrapped up in legalities of ‘harming’ bond fund investors who have made huge returns off the added leverage. Where is the SEC in this? Why aren’t they stepping in and ordering them to cease and desist? What kind of a sick world is it where you can be sued for making money for somebody and then you stop…a clear fairness issue that is not in the interest of the fund manager?

  

3. Jefferson Co. Alabama has filed for Chapter 9 bankruptcy, now the largest ever, dwarfing Orange County. Like the OC, it was not based on greed or personal gain (for the county employees that is while JPM, BofA, and others reaped huge profits). They had entered into interest rate swaps (this is why TB would like to see the breakdown of interest rate swaps particularly at JPM which has been accused of charging fees that were more than the benefit to the counterparty), and like the leverage at OC, the total of the swaps was far more than the amount they needed to hedge. When the short term rates plunged and long term rates barely fell they were hit with a ‘negative carry’ and forced to meet margin calls (it doesn’t matter if over the long run your bet is right if you are unable to meet a margin call…it is then over). OC’s Bob Citron erroneously said he was not concerned when the market value of his derivatives declined…after all he held them to maturity. There are other Jefferson County’s out there although doubtfully …or at least hopefully…they weren’t stupid enough to make a bet of that magnitude…but what about the culpability of JPM and others…the rule is ‘know your customer’…and they had to know, and TB would bet that Jefferson County was bragging about how smart they were…Citron and others certainly did…if you can’t make money for yourself by gambling you at least want the bragging rights. That, is what all of this is about, folks, EGO!…the downfall of more investors than any other factor.