5/7/08…who are these guys anyway?
May 7, 2008
Bloomberg Quote of the Day: “Egotism is the anesthetic that dulls the pain of stupidity.” - Frank Leahy…let’s hear it for Frank for his frankness! TB
…that line made famous by Robert Redford (Sundance Kid) to Paul Newman (Butch Cassidy), sums up TB’s thoughts on the stock market. They ignore economic data, preferring to rely on what usually happens at different points in the economic cycle, and merrily turn down days into plusses and occasionally vice versa. Could the impetus for yesterdays reversal from down 107 on the Dow to up 51 have been due to the WSJ article that stated that about a third of hedge funds have between 5% and 10% of their assets in cash…unheard of! For whatever reason we had a 185 point swing on the day and on volume of just 1.23B shares or about 320 million below an average day! You figure it out!
Today’s Topics:
1. Economy slowing in Europe while inflation is rising there and in Asia
2. Da Fed…pulling out all the stops…stock junkies think it is just for the fun of it
3. You and us…UBS…add tax evasion to their problems…E.F. Hutton revisited?
4. Securities regulation…was it an ‘oversight’…or just a lack of oversight?
1. Europe and Asia. TB used to joke that euthanasia (youth in Asia), was a student exchange program. But serious folks…like Larry Kudlow, Brian Wesbury, and David Malpass…all were and are convinced that goldilocks is alive and well and the great thing about a global economy is that even when the US has a slow growth spurt the rest of the world will carry us…so no problems on the horizon. How they can maintain that stance is beyond comprehension but that’s there story and they’re sticking to it.
Overnight it was announced that retail sales in Europe fell 1.6% in March…the biggest decline since at least 1995 and twice the forecast…yet the ECB remains concerned about inflation. TB has no idea how serious economists (the triumvirate above is not included in that statement…they are street economists), can think that raising interest rates or holding them steady can cure a problem that is caused by soaring food and energy costs not from a wage price spiral…instead we have stagnant wages and soaring inflation caused by too much demand and thanks to the US obsession with converting corn to ethanol we have exported that inflation globally. Over the weekend six of the largest rice exporting nations said they were forming a cartel to control prices…we know how well this worked for OPEC. The newfound wealth in Asia…especially China and India is driving up demand for all things and thus Asian inflation is rising. No add to that an incessant demand for more food and energy to power all those new cars and buildings and you have a major problem. But what started a year ago in Mexico with corn prices causing the price of their staple, tortillas, to rise to one-fifth an average workers pay is now spreading globally. In the US ranchers are killing off cattle and hogs because they lose money each day they feed them, so once supplies are in balance watch for huge increases there…we are already seeing them in dairy and chicken prices. Still the US is just beginning to say…not admit stupidity as our political ego’s won’t allow that…that maybe, just maybe, this is driving up corn prices. TB read the other day that we have just gone thru the most ideal growing season in the past 200 years…and what did it get us? Furthermore, we are still getting rain in the Midwest which will shorten the growing season for corn which is critical. So let’s just keep interest rates high in the rest of the world so they can join us…and remember, the Fed is not responding to the economy so far…it is responding to a credit crisis of epic proportions…and failing.
2. The Fed. How can anyone be taken seriously who says that the worst of the credit crisis is behind us? Perhaps in magnitude they are correct…or not…but the write-downs and charge-offs continue…and if it is behind us how come the Fed is stepping up their measures. First, after cutting the Fed Funds rate by 1/4 to 2%, they increased the size of the two biweekly TAF auctions from what started at a total of $50B to $150 billion from an interim $100B. Yet we think of this as no big deal…this is an exchange of crap…oops, securities that are disadvantaged in the marketplace for US treasury obligations…in advance of this they bought $15 billion of treasury’s outright in the market…let’s see…isn’t that flooding the market with money? Well, they had to do it since they added as ’suitable’ collateral credit card obligations and student loans…note on the TAF auctions which are for 28 days but can be rolled for six months, after the initial loan there is on ‘mark to market.’ You try getting a deal like that…and here’s one better: as if TB is finding out that having been involved in banking since 1972 he knows nothing…he got hit with another one overnight: the Fed, scheduled to start paying interest on commercial bank reserves starting in 2011, essentially at the Fed Funds rate…has asked Congress to allow them to do so now. Do you honestly believe this is a sign that the worst is behind us? TB does not!
3. UBS. TB finds this painful to write as he has friends as UBS, but on the heels of that announced $10.9B write-down due to subprime, and accompanied by a cut of 5,500 jobs, half in investment banking, by mid-2009 (question if you were a banker there with a future would you stick around or leave while the leaving is good?…thought so), they announced they were exiting municipal bond underwriting as it didn’t offer the returns that they require on capital…this, even with a huge retail base that absorbs much of that product. Then, overnight we learn that a former senior officer defected and is cooperating with German investigators with proof that they aided and abetted customers tax fraud. Of course, if it happened in Germany, every country they do business in will be checking them out. This is what destroyed E.F. Hutton in the 1980’s…not tax evasion but kiting to inflate their assets. Credibility is a hard thing to gain but an easy one to lose…and owned by a Swiss banking conglomerate to boot.
4. SEC regulation. Here is comes…the excuses…the SEC doesn’t have enough funding to prosecute white collar crime and has lost over 200 employees in the investigation division. Well, what is interesting about this is that the problem has morphed from subprime mortgages to asset backed securities to the new new thing, credit default swaps, which was argued for years was a ‘contract’ and thus not a security. With the pending bankruptcy of Birmingham, Alabama, which will dwarf Orange County in 1994, we are now finding out that there is a tie between swaps and ‘bribing’ public officials…horrors…and that brokers in credit default swaps were spending millions wining, dining, and laying, the decision makers. This precisely what got the municipal bond industry regulated 20 years ago. In the case of Birmingham the mayor was a partner in a local muni bond firm which engaged in swaps and investigations are under way into he and another partner in the firm. The SEC has turned it’s back on all of this for years…and instead made the markets more volatile by eliminating the uptick rule for shorting and at the same time allowing naked shorts to run for too long a time period before covering…for hedge funds that is. Don’t forget the Greenspan Fed’s role in this either…by ignoring the advice of Fed Governor Ed Gramlich, and earlier for saying the stock market was in a bubble…yet then allowing all Nasdaq stocks to be made marginable including IPO’s the following day…electronic trading firms loved this as they could really make money off the day traders while the major firms were much more restrictive on marginable stocks.
If you sense a frustration in TB you are very observant. The Government and its agencies allowed this mess to happen and are now trying to fix it with Band-Aids…and that simply is not going to work.
Look at Citi…keeps selling more and more stock, both common and preferred and this is viewed as a good thing; Merrill Lynch raises more capital and doesn’t cut the dividend…stock rallies; Fannie Mae loses $2.2B in quarter and cuts the dividend by almost 30% and the stock rallies 9%, while cousin Freddie Mac rallies 7%, they halved theirs in Dec. Wachovia, a loser if there ever was one says oops, losses are bigger than we thought but stock doesn’t decline.Have we totally forgotten what investing is all about? Apparently!…either that or we are merely seeing fun and games among the big spec accounts…likely!
TB thinks stocks should go down today which means they will probably have a big rally. Think of this as a learning curve…and hopefully you will make more money than you lose.
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 May 7, 2008
