Traderbill's Financial Markets Weblog

 

 

…that’s what they did yesterday. Wouldn’t you if you were a big trader with big positions ahead of the Memorial Day weekend in the U.S.? You would if you had any sanity left in you. Consider the hot spots in Iraq, Nigeria, South Africa, and gold surging, the dollar weak, the Asian Contagion possibly becoming a virus as India, China, and Korea are all weakening. We have had two major disasters in Burma (TB refuses to acknowledge a junta that takes advantage of it’s people and rejects aid from the U.S. Navy that could provide food, equipment, medical supplies, and millions of gallons of water. If you saw the Admiral on TV, sitting on his thumbs and seething inside but trying to be politically correct, you know how bad it is. Admirals are not used to being ‘dissed’, and he knew he could destroy the entire  revolutionary government in an hour if given the go-ahead…where is the UN when you need them?), and China. Anything could happen on a long weekend…perhaps U.S. citizens even stopping to think it is Memorial Day…oh yeah, we have the Indy 500…but we now have it on the last Friday of the month instead of the 31st further blurring it from ‘memory’…now they could have chosen a Friday or a Monday but TB would bet it was due to the Indy 500…because when it gets rained out…they can still run it on Monday with more than just a few diehards watching…think advertising, will you?

 

1. Stocks. To hear it on CNBC, yesterdays rally was amazing…all atwitter…on a day the Dow rallied 24 points after declining by 200 on two straight sessions and creating serious technical damage. TB chose the quote today from a Bloomberg story that affirmed his comments on the volume since 3/24 being well below average as well as the fact that since the selloff that began on his birthday (12/26), rallies have been on low volume and only the down days have anywhere near average volume. TB is a closet technician although readers might think he is an avid one. He does not invest based on technicals as his horizon is much longer term…but he does time his entry and exit points on technicals. That has become key in a market where fundamentals have little or no value and who can even guess what the average holding period of a stock is these days…last he saw it was 11 months, down from 5 years, but that is stale data from three years ago or more…if anyone knows the answer please let him know. He suspects they don’t want you to know or you would be going to Las Vegas rather than playing stocks.

 

But even technicals…or as some call it with stocks…momentum…you can’t do it accurately without all the details…transparency…there’s that word again that is nearly totally lacking in this environment, replaced by opacity. Ralph Acompara, one of the most highly respected technicians on stocks said in the Bloomberg piece, “Technicians should be losing sleep on this. I can’t be as trusting of my indicators because I don’t have all the data.” The missing piece he talks of is the same one that has appeared over the past week in the stock market summary in this column: you can’t rely on technicals if there is no volume to support them. We all know the expression: never short a thin market. The opposite holds true to a lesser extent. Going long on low volume when there are players out there who can move stocks at will is dangerous to your financial well-being. The article states that trading on the NYSE this quarter is down 26% to the lowest since 2001…1.27B shares vs. 1.57B in the comparable period in 2007…but thne readers knew this already since TB has been harping on it for the past month and a half! But here is what is interesting: volume is not the only answer because electronic trading is replacing the NYSE and with it goes transparency! In 1990, NYSE volume was 70% of total but today electronic trading has lowered that to 59%…pretty much explains the decline. But it also means that when a hedge fund or other big spec account wants to do a trade and be seen they can do it on the NYSE while adding to, or possibly reversing it on the electronic trading platforms.

 

Here are some key areas of concern in stocks. First, of course is financials. They rose in the rally but have returned to their weakened state…sure they bounced yesterday but only by 0.8% following a 2.3% loss. Large Banks and Insurers gained twice as much as they lost Wednesday, but Brokers declined another 0.1% yesterday following a 3% hit…and rightly so. While the banks sound better remember that is large banks…looking at the KBW Bank Stock Index they were up 1% yesterday following a 2.1% hit.

 

Housing is bizarre…TB thinks since the first decline last year that on no less than six occasions have they tried to rally it…each failing…and despite the fact that the sector keeps getting more and more dismal, they did it again leaving TB scratching his head…until Wednesday when the sector dove 4.3% followed by another 0.9% drop yesterday.

 

Tech, especially semiconductors (SOX) was coming back from hell but then reversed again and looks to be headed back down. Healthcare can’t get off the dime.  

 

What is happening here…well ‘what it is ain’t exactly clear’ to paraphrase Buffalo Springfield…but TB believes…after having had conversations with friend who study stock market history, is that investors are trying to put their money in sectors that rally at this point in the cycle. The trouble is this, while the antithesis of the 1990’s, is not a predictable cycle. The ’90’s boom was extended by tech, dotcom, and globalization, while this recession is unlike any other since the depression…if then. We have had 25 years or more of living off future earnings, thanks to credit…the stock market bubble…and then replacing that when it busted with the real estate bubble…and more credit as homeowners extracted equity from their homes taking trips, buying SUV’s and luxury cars, paying for education, etc. So to a large extent we are bankrupt: we have blown our savings…many do not know what the word means since we were first told our stocks were our savings and then that are homes were…despite a lack of wage increases for the general population. The home equity loans were the driver of the economy for four years and now they are gone as we become mired in a sea of debt. Hopefully we have learned that their is little satisfaction in immediate gratification rather the dream of owning something…TB would bet that those billionaires with their toys aren’t really happy…they are just happier than the rest of us! The cure for this will be painful, since we are a consumer economy…we don’t make much…we even replaced a lot of agricultural land with homes, especially in California…and what we grow we are converting to fuel instead of food (a gross generalization but it makes a point).

 

So how can you predict which sectors you should be buying if you don’t know where you are in the cycle? Sure we are in recession, but not all sectors…yet…but buying retail or homebuilders is not right. Some think that Tiffany can withstand this…or Walmart…but can they? How do you explain them being near highs other than expectations that they will continue to outperform? Tiffany sells at 20.3x trailing earnings or 17x forecast. While Walmart is about 16x vs its nearest competitors Target (15x) and Costco which is trading at 24x…both are back in the trading ranges of the past five months. If everyone is thinking the same way that is what you get…but then nobody ever got rich following the herd. for long.

 

2. Banking. The industry that TB has been involved in since 1972, yet knows nothing about today. What he sees out there makes no sense to him…zero rate loans for a year for those who can afford to pay and 25% credit cards for those who can’t. Before we let the government regulate us out of this remember that the repeal of Glass-Steagall in 1999…with Clinton as President…although TB believes this was the brainchild of the GOP as was revising the Bankruptcy Act to protect us just before Katrina in 2005. Robert Rubin was Treasury Secretary and was in favor of it…he then became Vice Chairman of Citigroup which got the most from it and now is suffering the most damage. Sandy Weill, bless him, said today that he screwed up in 2003 due to his succession plan…please! You screwed up when you tried to change basic banking! The buck stops with him and the only cure is to revive Glass-Steagall so we can once again trust our banks. Investment banks can do their thing…so spin them off or do whatever they have to do but get back to the business of banking…instead we have a Federal Reserve who, if you trust Alan Greenspan, had its hands tied…if he had any cajones he would have just done it…regulated anyway as Volcker did…not let us fall into the mess we are in today.

 

When TB was a banker two regional banks he remembers…of course he also remembers Continental Illinois and First Pennsylvania Corp…were Fifth Third Bank and National City Bank, Cleveland. They were well respected…who would expect them to become problem children? Well, they have. Fifth Third along with…drumroll please…Wachovia on their BOLI’s (Bank Owned Life Insurance) producing lawsuits and write-downs, and National City is so bad off they are trying to split the assets into a ‘good bank and bad bank.’ Meanwhile in Texas, Lewis Ranieri former Salomon Brothers mortgage guru first founded a bank and sold it out…then another Franklin Bank (FBTX), which is down over 90% while on his watch they made 1/3 of loans to homebuilders and 40% of mortgages were in California and Florida. TB recalls that Ranieri was a stickler for diversification so how could he have done this? Not only that but he was preaching over the past 2-3 years that the housing market was a bubble? On his watch??? Oh, and guess what? Taking a page out of his former colleague John Merriwether of LTCM fame playbook, who resurrected himself with a hedge fund (having learned from his mistakes at LTCM though he used 25x leverage rather than 100x), is starting a $1 billion fund to buy mortgages! You can’t make this up! Now do you see what TB means about a lack of credibility in the banking system. He still likes two: USBancorp (USB) which he owns, and PNC Corp (PNC)…but could something go wrong there too? In this market anything can happen…by the way he bought Provident Bancorp (PBKS) and lost about 1/3 of his investment when they screwed up on REIT investments and cut dividend by 60%…after raising it 0.5 cents a share per quarter for year but the stock rallied on the news…short covering…back to the lows now. Just what is a bank anymore? …and how about an online bank which are all the rage?

 

3. Sovereign Wealth Funds…the term envisions the Saudi’s or Chinese…but the second largest in the world is Norway which lost $22B (5.6%) in the first quarter for its second biggest loss since inception in 1998! You remember the small Norwegian town that was wiped out in mortgage derivatives, don’t you? The money comes from royalties on oil and gas reserves. They didn’t even do well on their fixed income investments which only earned 0.9% in the quarter. So should we let sovereign funds buy our financial institutions? Heck yes…let them suffer with the rest of us…kind of like TB’s view on gay marriage: why shouldn’t they be able to pay alimony like the rest of us?

 

 

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 23, 2008