Traderbill’s Financial Markets Weblog

…was going to title this ’vindication.’ Not only did yesterday’s stock market fail again…it did so after what would normally unequivocally be a breakout on Thursday. Then it failed to hold on and only after the buying late in the session Friday that can only be labeled ’short covering’ it managed to eke out a gain, albeit a meaningless one. As for yesterday, it doesn’t get much worse. Not only was it unable to hold on but the Dow declined by 89 points and on just 1.1B shares…the lowest volume of the year! and this at a time that markets are usually humming. The average daily volume since March 24 has been just 1.34B shares…the same period last year averaged 1.55B shares…about average…and the lowest volume was on April 5 at 1.25B shares and the highest was 1.94B shares. Since 3/24 we have had just 3 days with volume above 1.5B shares, the highest being 1.7B on April Fools’ Day, and we have had four days with volume less than 1.2 billion shares…that doesn’t even begin to pay the utility bills. This begs the question: what will the summer doldrums be like? Last year there really were no doldrums as the average daily volume never dipped below 1.5B shares. Last year there never really were no doldrums as the stock market was roaring to record highs but August averaged 1.37B shares…about the same as now!

 

An answer to the low volume might lie in today’s WSJ Heard on the Street column which states that according to a Deutsche Bank survey about a third of hedge funds are holding 5-10% cash! This is unprecedented as it should be…because if investors are paying you 2% to manage their money their return on cash is negative. This is either fear or as the survey suggests waiting for opportunities to buy distressed assets. Who would you believe: a hedge fund manager with his own money invested in the fund or some stock junkie on CNBC who says this is as cheap as stocks are going to get and you should be buying now? Don’t bother answering, it was a rhetorical question. So the next time someone tells you the S&P 500 is cheap at 22.6x earnings with a whopping 2.13% dividend yield…blow them off.

Of course they are quick to point out that the 22.6x includes financials and consumer stocks, many of which have low or negative returns, but it also includes AAPL at 38x, GOOG at 30x, AMZN at 41x and RIMM at 35x…all of these are estimated earnings so trailing is a lot higher…all well and good so long as the growth rate in excess of 25% continues to infinity. According to Merrill’s David Rosenberg that p/e is now 15% higher than it was in October at the market peak! The Dow, if you want quality, is at 74.5x earnings with a dividend yield of 2.42%…and remember both of the indices are well off the lows!

 

TB discussed several times that role options have in the current market. When we were going sideways so long and the bands were clear it was a lay-up for the big hedge funds. When a stock is at the low end of it’s ‘band,’ buy it and along with it an out of the money put as well as an out of the money call…very cheap protection against breaking the band…but then we went down again and the band on the big stocks was broken, and the puts exercised. Since this event the cost of options has risen dramatically (TB looked for the reference but wasn’t able to find it yet but it was a big number).

 

Rosenberg makes an interesting point that while the worst of the write-downs may be in that they will drag on as the banks continue to be forced to take them. For subprime mortgages taken out between the second half of 2005 and first half of 2007, 25-40% of the borrowers on average are more than 60 days delinquent…for 2005 it has ’stabilized’ at 30% for the last four months. This is supported by the Fed’s Senior Loan Officer Survey which was released yesterday and is prepared for the FOMC meetings. It deteriorated sharply with the main takeaways being banks are trying to rebuild their margins and are making fewer loans. It is clear they don’t trust one another so why would you trust them as an investment?…OK, if you are a short term trader but there are literally only a handful of regional banks that are still attractive and hopefully have no land mines. Rosie, like TB, thinks it is ridiculous to believe those stimulus checks will have any positive impact on the economy…where Goldman came up with 50% being used for consumption…other than gas and food, certainly not autos which are selling at levels not seen since 1993. TB could go on and on…one factoid he presents though is that according to the Inter-American Development Bank only half of the 18.9 million Latin immigrants now send money back to their families at home…down from 73% two years ago…he adds transfers to Mexico were down 2.3% year over year in the first quarter.  

 

This morning UBS announced another $10.9 billion in write-downs and plans to cut 5500 workers by mid-2009…half of these will be in investment banking (probably a lot by attrition after reading this…the best ones). They also sold $15 billion of subprime assets to BlackRock. Sound like the worst is over to you? Not to TB.

 

Yesterday, TB commented that the Fed will not release the eligible collateral to the public…well it turns out they did…sort of…this information only was disseminated from some dealers to clients but is still vague. The combination of repo, TAF, and other auctions after increasing the limit on TAF to $150 billion is now $450 billion…that is a huge chunk of the assets of the Fed! Furthermore, the TAF does not require daily repricing of collateral and on May 2 they announced they would accept student loans as collateral. As Joan McCullough points out…when asked by Sen. Dodd if they would accept them, Big Ben deflected it…of course Congress passed a law last year that made it less profitable to underwrite student loans so we lost a lot of issuers…anyway, now in a dramatic but quite reversal, they will now accept student loans as well as credit card ABS. Question: if the worst is behind us…how come they are increasing the size of the TAF auctions and adding more weak collateral? Makes you want to cry! Out!

 

TB’s thoughts Monday were his own…not influenced by his readings as he had gotten behind in them. But after reading, Rosenberg, McCullough, and John Mauldin yesterday afternoon, there appear to be a growing number of ‘infidel’s out there who are refusing to drink the Kool-Aid-that is not good for stocks!

 

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 May 6, 2008