Traderbill’s Financial Markets Weblog

…one of TB’s favprite old standards and appropriate for how he and other technicians are feeling not that stops the motor mouths on CNBC every afternoon from sounding like they know exactly what you should do.

 

Take a look at the overnight markets section for all the news that is driving the stock markets south.

 

 

1. Bloomberg on credit. Bloomberg unleashed some new functions and to those of you who were impressed by the rally yesterday…which didn’t even qualify as a dead cat bounce as not even 50% of the loss was regained in any sector except gold/silver stocks. Even energy just retraced the prior day with a modest net gain, despite record highs in crude both days. Anyway, Bloomie set up some new functions that are quite useful in determining whether the worst is behind us yet…TB contends it is not or if so, we will suffer for much longer than expected.

 

The first function is WDCC which is worldwide write-downs and credit losses along with capital raised by quarter since 12/31/06. First, global write-downs and credit losses have totaled $318.5B of which $152B was by US financials. Meanwhile, globally financials raised $238B in new capital with $130B going to US entities. Here are the most important ones and their ranking in terms of losses:

1. Citigroup (C). $40.9B in write-downs; raised $44.1B, $12.9B so far in Q2.

2. UBS (UBS). $38.2B in write-downs raising $28B, $12.9B in Q2.

3. Merrill Lynch (MER). $31.7B in write-downs raising $16.1B, $2.6B in Q2…and did not cut or omit dividend…in other words raising capital to pay it out!

4. BofA (BAC). $14.8B in write-downs raising $17B, $4B in Q2.

19. Wachovia (WB) $7B in write-downs raising $10.5B, $7B in Q2…they just realized they understated the losses too so these are adjusted figures     

 

Isn’t it of concern that we are talking about the worst being behind us when the write-downs continue and both UBS and Wachovia keep raising the losses? All we are talking about is the subprime and related derivative losses, mainly by the brokers. Banks on the other hand are faced with rising delinquencies and foreclosures which require additions to the loan loss reserves and these are now morphing into credit card and auto loans. More of the same to come.

 

A broader function is WWCC which is ‘worldwide credit crunch’ and has a broad menu of functions. In another function Bloomberg reports that 650,000 jobs have been cut worldwide due to the credit crisis, and they are much better paying than those hospital and leisure jobs…a staggering number.

 

2. Financials deteriorating. Wednesday, Financial stocks declined by 2.8, followed by a 0.8% decline Thursday. While big banks were down 2.9% followed by -0.7% but the Keefe Bank Index of smaller regional banks was down 3% and 1.6%. Brokers however fell 3.4% and 1.6% for a total of 5% in two sessions…still sound like the worst is behind us? The brightest spot was Insurers which rose 0.6% Thursday after falling 2.4% Wednesday…but then AIG reported after the close and it wasn’t pretty. They took the stock down overnight and it will be a big drag tomorrow. Clearly insurers are dragging down Berkshire Hathaway too…perhaps we should be saying the best (worst) is yet to come?

 

3. AIG. Posted a Q1 loss of $3.09 a share due to write-downs but had had an adjusted loss of $1.41 vs. estimates of 34 cents a share. Also, they will raise $12.5B of which $7.5B will be equity linked. $5.92B of the loss was for AIGFP market to market losses, citing weak US housing market, credit market disruption and equity market volatility for the problem…poor baby’s. But then they had to increase the quarterly dividend by 10% to 22 cents a share…what is this, good faith? Now get this: they also said they are looking for a new CEO…duh! So what happened afterwards: S&P cut their rating to AA- from AA with all ratings on watch list - negative and stand alone subsidiary International Lease Finance to A+/A1 (the latter is their short term rating from AA-/A1+. Fitch also cut ratings. The stock sold off 7.7% to $40.75. TB thinks the entire board should resign for raising or even maintaining the dividend in a true sham…that is even worse than Merrill maintaining the dividend and paying out $341,220 as on AIG’s 2,180.48 million shares at 22 cents that is $479,705,600! What fools!

 

4. State Street and Wachovia. Here is a motley crew if there ever was one. State Street reserved $625 million for litigation over subprime derivatives they put in pension funds…but that is the low end. The high end is about $7.5B. Contrast this to Merrill during the Orange County bankruptcy which reserved the max and then later was able to bring the remainder back into income…if memory serves they reserved over $600 million (remember, that was 14 years ago), settled for $35 million plus legal costs. On this news State Street (STT) fell about 1.7% yesterday to $72.73…now get this: UBS after the news raised their target to $82…this goes a long way towards explaining UBS’s problems.

 

As for Wachovia after a near riot at their shareholder meeting a week ago Kennedy Thompson was deposed of Chairman but remains a director while Larry Smith, an outside director assumed the mantle. Smith however was critical of dissidents at the meeting saying they should have expected a dividend cut. Not a good sign and he omits that their problems was the purchase a couple of years ago of Golden West Financial with a big portfolio of option ARM’s.

 

5. Auction Rate Securities. The implosion of this market due to monoline insurer problems, as well as broker capital problems, is now costing the taxpayers. Citi was the biggest underwriter of these issues to the tune of $55B in a $166B market with UBS number two (they truly are number two) at $42B and Morgan Stanley at $22B. When the problems developed, rates of 10% or more were not uncommon, and in the case of the Port Authority of NY and NJ it reached 20%. On the other hand, those with index resets tied to LIBOR fell to unattractive rates of 1% and in some cases zero…really, but those were taxable issues. In the tax exempts, issuers entered into interest rate swaps with the issuers for healthy fees and we all know what happened to Jefferson County, Alabama (Birmingham), although that was largely stupidity and greed on the issuers part…but also officials were ‘entertained’ lavishly and induced to enter into agreements. Under the swaps they would issue bonds, convert them to auction rate securities and then pay the lower short term rate while receiving the fixed…it worked for years and in some cases decades…until it didn’t. Now they are hit with high penalties to exit the swaps so they can issue the long term debt to reduce exposure. Bloomberg did a great article on this and some of the data comes from it. For instance, Sacramento County had to pay Morgan Stanley $5 million to get out of a swap so they could refund $79.5M of bonds…that is 6.2% of the value; Redding California had to pay Citi $6.7M to refund $67.3M and Wisconsin Public Service had to pay $11M to refund $192M to Bear Stearns (now JPM) and to JPMChase directly…a dynamic duo. The problem continues although TB does see some relief in the rate area but two-thirds of the auctions are ‘failing’ every day…meaning you can’t get out of the bonds or there aren’t enough buyers to allow everyone who wants to redeem to get out.    

 

6. Regulation. Muriel Siebert, 75, and the first woman to hold a seat on the NYSE and later the first woman to found a member firm was interviewed by Maria B. on CNBC yesterday afternoon. This, soft spoken woman, Muriel not Maria, talked on market volatility and like TB laid it right in the lap of the SEC for eliminating the uptick rule. She has studied the moves since July 2 when the rule was eliminated and says that the volatility is worse due to piling on as stocks are declining since much of the shorting was done without an uptick or an even plus (same as last trade). She almost begged the SEC to examine this and replace the rule. This is the biggest blunder of Chairman Christopher Cox’s tenure, additionally he has not been firm enough on ‘naked shorts’ which take on even more significance without the rule.

 

Cox, the subject of WSJ’s Heard on the Street as he gets tough on dealers over there heavy reliance on short term funding for their leverage positions and wants them to raise their long term capital. The article questions their ability to do this in the current environment and to TB shows how Cox learned from his years in Congress to not fix something until it is totally broke then go overboard to correct a problem that happened on their watch. This goes for the Fed, FDIC, and every other regulatory body in this country except the CFTC which may also have to do something with commodities markets driving prices and expectations higher and higher. Goldman this week said Crude could reach $150-200 in the near future and overnight Nigeria problems drove it above $125 and raising havoc with global stock markets.

 

With commodities prices surging, some are pointing to retail sales not being all bad…but that is distorted by food and energy and that is becoming a bigger component of sales of stores like WalMart and Costco. Stands to reason and you can bet those rebate checks WalMart will cash will be used in those two areas as well as for over the counter drugs which they just reduced in price for a second time. Meanwhile the high end retailers like Coach and now seeing problems and relying more on their outlet stores to produce revenues to hold prices at retailers firmer. That solution is unlikely to last. We are in a recession and without the juice of home equity withdrawals, consumption will undoubtedly slow. The only two solutions are saving and higher wages and those are illusive and will take years to accomplish. 

 

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 9, 2008