Traderbill’s Financial Markets Weblog

…turnabout is fair play…after all if it wasn’t as bad as it could have been on Friday, then the opposite should hold too, right? But look what happened: Sorting through the chaff of an Exxon Mobil which has created huge swings in opposing directions on a daily basis in the NYSE Energy Index, plus the four horsemen moving the Nasdaq 100 (yesterday 8 stocks contributed 22 of the 37 point gain), the same two stocks, BTI and IMO, were the only two movers in the AMEX Composite, with IMO adding 9 points and BTI subtracting 3 of a net 8.49 gain on an index of 627 stocks.

 

 

1. AIG and MBIA. TB’s concern is the reaction to the problem stocks. Consider: every time some financial stock gets an infusion of capital the stock rallies…even when they cut or eliminate the dividend. No concerns over dilution where the future earnings are going to come from but if someone else is buying they must know something, right? Now look at AIG with that big loss…and raised the dividend by 10% because they didn’t want to break a string of increases that goes back for years…is that a good reason for a board of directors to raise it at a time when they are looking for new capital? The board has proven they are not qualified to run this company and should be replaced. Robert Willumstad, 61, is Chairman and was brought in when ‘Hank’ Greenberg left. The only younger director is Virginia Rometti, 49, from IBM. But of the 13 board members 8 are 64 or older with 3 over 70. Age is not TB’s concern but the changing financial market is and none seem able to cope. Martin Feldstein, 67, is Chairman of the National Bureau of Economic Research…the organization that tells us if we are in recession…as an economist he should understand why they should not have raised the dividend. Business Week has a website where you can get all the data on boardmembers. Feldstein is on 129 boards with 5 directors and 3 are with AIG. Richard Holbrooke, 67, runs Perseus LLC, a private equity firm and is on 492 boards…surely he understands the importance of capital? Frank Zarb, 72, is with Hellman & Friedman, another private equity firm based in SF and is on 103 boards…how can he not understand it?

 

TB thinks that Holbrooke and Zarb illustrate a problem with American corporations…hedge fund and private equity managers do not look at the long term…still…how could they support raising the dividend when they should probably have moved to cut it? Besides, if they had cut it the stock might have rallied instead of tanking for two straight days for a total loss of 13% and bringing the decline over the past 12 months to 47%! In fact, over the past 5 years it is down 32%…28.9% if you reinvested the dividend, for annulized losses of 7.3% and 6.6% respectively. Did they blink?

 

The above are just opinions and a warm-up to MBIA Inc. (MBI). As you all know, MBIA is a monoline insurer that got into trouble by not sticking to what they knew…insuring municipal bonds which is about as risky as sniffing oxygen. The stock which is -86% over the past year reported a big loss but then camoflauged it by saying that you can’t measure the company in the standard way, so they provided a new metric…one that, not coincidentally made the losses look better. But get this…the rating agencies cut AIG’s rating, and their stand alone finance arm International Lease Finance, from AA to A, but maintained MBIA’s rating at AAA. This for a company that now has no credibility and no product to sell. TB would be much more likely to buy insurance from AIG than to insure a portfolio with MBIA!

 

Remember that analysts expected a $1.21 a share loss for MBIA, not the $3.01 they reported. Yet on Friday the stock declined 9% to $9.43, only to rebound by 4.5% yesterday…presumabley it could have been worse. Note also that the low close was set on 1/18/08 at $8.55…making the events even more puzzling. In what investment hell do people think this way? Certainly the worst is not behind them, not yet anyway.

 

But TB believes the fact that the same handful of stocks move the indices daily…and in opposite directions most of the time…and AIG and MBIA are connected…a thin market…we set a new low volume for the year yesterday…with huge range trade bets on stocks and then hedged with out of the money puts and calls. How else does one explain the blend of inside days, outside days, key reversals - occasionally even back to back? There is no momentum to this market but if they can continue that for the next six to nine months they might be able to generate a meaningful rally…doubtful that that is! 

    

2. Treasury refunding. A long-time friend with significant government securities experience pointed out to TB yesterday that the May refunding of 10 and 30 year bonds, which totalled just $21B replaces $74B maturing on Thursday, May 15. He asks where the extra $53B will be invested. Hard to say but depending on leverage, how many long term investors still hold the maturing issues, it could spark some buying of bonds…or not…simply be aware of it.   

 

3. Beranke and liquidity. Bernanke just gave a televised speech to the Atlanta Fed in which he cited problems for some institutions even borrowing in the repo market…and cited his concern over the relatively high LIBOR rates vs. Fed Funds…currently 40 basis points for one week rising to 5/8 for two months which is in turn driving up commercial paper and other short term rates. He cited the liquidity concerns which forced the Fed to take unprecedented actions to be the ‘lender’ by taking in collateral that no one else would…not mentioning that they have committed over half the Fed’s balance shee to this.

He said that when normalcy returns they will be able to eliminate these term lending facilities.

 

On LIBOR it is interesting since a top story on Bloomberg this morning says that for the first time since 1998 the British Bankers Association is considering changing the way it is set…this is because the reported rates which are used to set all types of commercial and mortgage loans are being understated so the 8 reporting banks, the two outliers are thrown out and the remaining six averaged, but the reported rates are lower than what is indicated in the marketplace. For instance on April 7, the BBA reported the one month LIBOR rate as 2.72%, yet that day the Fed reported a 2.82% for secured loans which traded at lower rates than LIBOR. So it is interesting that Bernanke said high LIBOR rates concerned him. On April 16, the BBA said that anyone reporting false rates would be banned causing an immediate increase of 18 basis points in the three month sector. This has implications for the US consumer but illustrates that banks do not trust one another and are afraid that anyone see they are being forced to pay more for money than other banks. No, it isn’t over yet!

 

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 13, 2008