Archive for July, 2008

7/31/08..deja vu all over again?

July 31, 2008 at 5:32 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , ,

…that’s what it looked like yesterday when the Dow climbed about 160 points right out of the chute the proceeded to recede until it had given up almost all of the days games then after a brief struggle rallied again to close up 186 points and almost at the high. Furthermore, it has gained 452 points in two sessions and only the second back to back rallies since June 30th.  For the Dow and S&P 500 they have eradicated all of the losses for the month of July…who would have thunk? By the way, the earlier two day rally on June 16-17 marked the bounce from the July 15 cycle low on the S&P 500…which although claimed to be a capitulation was not since it still closed down 13 points on the day but the ensuing rally added 45 points…consider: the last two days added 50 points to the index! As for the Dow, it gained 483 points for the two days and then added another 50 the next day and then another 136 points before giving up but not before falling just 2 points short of 11,700 which should be regarded as resistance. The Nasdaq 100 has also recovered all of July’s losses while the Dow Transports, Russell 2000 and the Nasdaq Composite are actually up on the month. Energy despite a huge rally yesterday of 4.4% is just back to the July 22 close and has heavy resistance to overcome at the 200 day moving average (see market summary for levels). Whether this is the shorts in panic mode which could well be or just a setup remains to be seen. For the most part earnings are coming in better than expected although from a very lowered bar. Eastman Kodak (EK) reported this morning and while they clobbered estimates, they said forecast earnings would be at the low end of the range…let’s see how the market treats that news.
 
Of course it remains to be seen whether this is real…or just a cheap Memorex knockoff. But the shorts are feeling pain and ask yourself this: if you had made huge profits off your short positions but now arguably stocks are at least fair value if not downright cheap, would you be willing to plunge in again, especially since the July 15 lows have held. Furthermore, financials have withstood some bad earnings, most notably Wachovia which triggered the lows in the sector and a big bounce…albeit temporary, and even Merrill raising another $8.5 billion that a week ago it said it didn’t need…and did so without cutting the dividend, That is truly amazing!
 
Deutsche Bank write-downs, announced overnight exceed estimates and the CEO says he “remains cautious” for the rest of the year…Germans are always cautious…TB recalls billboards for Deutsche Telefon that warned people to keep their calls short…this was in 2000!…would you ever see that in the US?  Meanwhile GM may have lost another $2 billion on SUV drop.
 
Commodities lovers listen up: the CRB Index of 19 commodities is off 9.7% since June 30th…the worst showing since March 1980 when it fell 10.5% while the US economy was mired in recession. Keep in mind that this was mainly due to industrials like Nickel and of course energy…TB has already said that the 16% surge in energy prices last month heralded the peak in both CPI and PPI…and the Fed will be able to focus on the weak economy (more accurately weak financials, especially banks). Thankfully, Congress failed to act on a bill to limit speculation in commodities…Bush’s staff had said they would veto it. It is and should be up to the CFTC to regulate the futures markets and they should do their job: not to limit speculation but to limit banks from issuing derivatives and then covering them by buying unlimited quantities of commodities and that is what has created the problem…speculators like short sellers are good…so long as everyone plays by the same rules and the CFTC and SEC enforce them vigorously!
 
Not only have commodities, and hedge funds that played the short side suffered in July, so have bonds. The 10 year treasury note lost 0.5% this month and is now yielding 4.03% while the 30 year bond is down 1.7% and yields 4.64%. TIPS had it worse and the TIP ETF which is an index of all of the TIPS in the market is down 10% for the month…presumably in anticipation of lower inflation and hence the weaker relative performance. Related to this weakness are preferred stocks: the Merrill Lynch Preferred Stock Index is down 7.6% for the month…dragged down by financials but also the lower yielding higher quality preferreds. How much downside remains? Hard to say as it depends on the Fed.
 
PIMCO’s Paul McCulley wrote a great piece this week on deleveraging. It is a very important concept. He points to a conundrum whereby if everyone saves, consumption actually increases. That is because the money is put in the banks who have to do something with it…they lend it and that produces more products etc and the cycle continues. We are now however in a situation where savings is actually paying down debt and those paydowns if large enough will cause repayment by the credit card companies of their debt but that will eventually go back to the investors who will find other places to put their money. But McCulley’s point is that this deleveraging is dangerous as it leads to deflation of financial assets and the Fed and government must make sure that this does not happen. As reprehensible as it is to bail out the brokers and mortgage companies and banks that put us in this mess, the alternative is worse. Like TB, McCulley did not like the bailout of Bear Stearns but it was the right thing…the only thing to do. The same goes for the Recovery Act. The reason is that you create a vicious cycle if the Fed and federal government do not step up to the plate to prevent further asset deflation.
 
Here is what happens. A big bank makes a lot of mortgages…some good, some have turned bad. The bank takes big write-downs and earnings decline or turn negative and capital declines (as well as the stock price which impairs the ability to raise capital). So the bank sells off its assets to lower leverage and improve capital ratios…all well and good…so long as it is one or two banks, but when every bank and broker is trying to rid itself of financial assets that are already depressed basic supply and demand kicks in: the bid drops, the assets are sold for significantly less and there are more losses and the stock price continues to fall and thus the capital continues to decline while leverage remains high.
 
There is only one way out of this mess: the Fed and the federal government have to act as the buyer of last resort which puts in a bid’ for the assets and thus increases confidence of others to buy. Here are two examples that illustrates both sides of this form of intervention. First, the Fed during the Depression raised reserve requirements which caused banks to call loans and in turn caused businesses to fail and at the same time the remaining loans on the banks books became less valuable and capital again eroded, eventually causing the very banks the Fed sought to protect to fail. The second, is a different case but shows what can happen: in World War II the government had a huge need for money and that meant selling bonds…these were sold at rates of less than 2%…how could they keep coming back to the well without paying higher rates? The Fed created an ‘accord’ whereby they agreed to buy back any of these bonds at par thus creating a market for them. A friend worked for C.J. Devine during this period (later acquired by Merrill and the premier government house at the time). He said that was how CJ made their money: any time treasury’s traded below par they would buy and above par they would sell them…very small spreads but on high volume. The reason this worked was a combination of big buyers and sellers that had to buy or sell size quickly and small investors who had no place else to go. So it worked. Again, contrast to the first case where for a brief period T-Bills actually traded at a premium…there was that much fear…think of a Swiss bank account where they charge you a fee to hold your money.
 
Not only does McCulley approve of this process and the guarantee of FNM/FRE but he feels that the government should pick up that $30 billion loan made to JPM for the buyout of Bear Stearns. Someone has to do it and that would free up the Fed for other emergencies. Note when the Fed loans money it offsets it (sterilizes) by selling a like amount of securities from its own portfolio…this is exactly what is happening with the various lending facilities that have been created to provide liquidity to banks and brokers. The only way out of these facilities then is for the government to buy up the assets which would then allow the Fed to repurchase the bonds for their portfolio.
 
The fact that the government has acted responsibly…even Bush signed the bill blaming the Dems when it was he who was opposed to this but thankfully Paulson convinced him to back it…well at least sign it. Make no mistake it will be a long haul back but Congress throwing in the towel on curbing speculation would have made it that much longer…let the SEC and CFTC do their jobs…but make it NOW! Perhaps they will (TB always the optimist), especially with Congress looking over their shoulders and in an election year!
 
An interesting Bloomberg article by Jonathan Weil points out more problems: remember when TB cautioned against buying stock based on book value? Well, it turns out WAMU’s  goodwill is valued at $7.2 billion…that is the premium they paid for businesses they bought…it is likely negligible now yet the market cap of WM is $7.3 billion. In addition. they have a huge chunk of option arms (as does Downey Fed) that they have accrued income on but much…all?…of that will have to be backed out as the loans go bad…they own $52 billion of these or about 22% of their entire loan portfolio. So ignore book value and focus on fundamentals…book value is meaningless and a moving target for a financial company! By the way, in August 2007 Countrywide was trading at book value…pointed out by several analysts!
 
Also there is a new book out Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis by Paul Muolo and Matthew Padilla. In it the blame is first thrown at…Countrywide…for encouraging brokers to do subprime loans…recently TB learned that about 40% or more of subprime mortgage borrowers could have qualified as conventional! They paid premiums for these loans so they could sell them to Wall Street who in turn created pools and sold them to hedge funds and other investors…including foreign banks who packaged them up into SIV’s to keep them off their own books and eventually sold those to investors like that small Norwegian town…and it all ended badly. TB has just heard the author interviewed but he claims to have repeatedly warned of this but it fell on deaf ears. Check it out…it stands along with Schiller’s book but a different perspective and the book the late Fed governor Ed Gramlich wrote, Subprime Mortgages: America’s Latest Boom and Bust. Too bad, Greenspan refused to listen to him…a wise and very nice man.
Let’s see how July plays out…GDP just came in at +1.9% (consensus was for +2.3%) while Q4 was revised down to 0.9% and Q4 to a negative 0.2%…more importantly we get employment on Friday.

Happy Trading!

TB 

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7/30/08…the bludgeoning of the shorts!

July 30, 2008 at 5:36 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , ,

…the myth is busted: shortsellers aren’t always correct! True, there are those who have done their research and believe a stock…or commodity is undervalued…but they are few and far between. Just as investors are prone to run with the herd, so are shortsellers…and while they may not all be hedge funds it is they who, due to leverage, are the problem. Before we shoot all the hedge funds though, remember that others, such as ultra-short ETF’s that have two to five times the exposure to upside risk, are just as culpable. When you have that much leverage and then have rallies of 2% or more, the money you made on the way down evaporates quickly.
 
TB receives Google Alerts on mortgage companies and hedge funds. While the former has been reduced to a trickle and the stories have drifted to fraud and foreclosures, the latter is running strong with information that began two weeks ago talking about returns evaporating…to the worst month in five years…to heavy withdrawals…and now to how hedge funds (as a group) have the worst returns in five years and that is not only on a relative basis to conventional managers but absolute returns as well. In addition, more funds will fold this year than are started…this has never happened before. Meanwhile, pension funds in the UK profess their belief that hedge funds are good investments. Correction, that would be their actuaries (consultants)…the same ones who didn’t suggest they rebalance their equity positions in 2000…not only that increased their exposure to US stocks right after Y2k! Brilliant!
 
We interrupt this to bring you a special announcement…President Bush has just signed the Recovery Act…when the Senate came in on Sunday to vote on it, why did he wait until this morning to sign it? Especially after Monday’s selloff that was negated yesterday. Recall it was his people who blamed delays on the Democrats…who couldn’t bring the bill up earlier or it would have been killed by the GOP! (mea culpa: TB said that there was a provision in the bill that would provide loans to Chrysler. When googling the recovery act, the 2006 bill came up…imagine we thought we needed one then and that was when the GOP was in control of the House…and it was that act, not the 2008 act that had the provision for an unnamed auto manufacturer that bore an uncanny resemblance to Chrysler).
 
Both of the major rallies of the last two weeks were shortcovering rallies and both related to the SEC finally doing something about naked shorts! The first coincided with Wachovia’s miserable earnings report (which brought on short covering of all financial stocks for two days, while the second was triggered by Merrill’s raising $8.5 billion in capital yesterday.
 
Christopher Cox’s SEC has extended the prohibition of naked shorts on the two GSE’s and 17 other banks and brokers…all primary government securities dealers…it was temporary and scheduled to expire Thursday…why he put a date on it in the first place defies reason and logic. Then a week ago he wrote an Op Ed in the WSJ that was a ‘dog ate my homework’ piece, and it was clear he didn’t understand the issues. A Bloomberg top story this morning says it was extended to August 12…again a stupid idea. After all the piling on of shorts destroyed Bear Stearns and Indymac (not that they weren’t headed in that direction of their own volition), and almost took Lehman down. The sole extension, which was an afterthought, is to market makers to allow them to provide liquidity…this shows what a knee jerk reaction the SEC provided when if they had merely enforced existing rules in the first place we would not be where we are today: either in having to take emergency action (sic) or having our entire financial system on the ropes. Since the ban according to S3 Matching Technologies, which matches short sales for three of the top five retail brokerages, short sales decreased by 78% from July 14, the day before the ruling took effect! Pension Funds Worldwide, Inc. which clears trades for more than 250 firms is automating its systems after employees were forced to manually review short sales and work weekends in order to review the trades to insure there was no naked shorting (doesn’t this remind you of when they had to have trading halts on the stock exchanges to process heavy volume and the trading curbs that have been in place since 1987 which require manually entering orders once the market falls more than 2%?)…then last week Cox told Congress the SEC may have to reinstate a version of the uptick rule…a rumor was circulating yesterday during the rally that they would require a 5 cent spread between the bid and ask as well…which may have added to the rally…over 225 million shares traded in the final five minutes on the NYSE and stocks went out at the highs of the session.
 
Do not underestimate the impact of this unregulated shortselling, and allowing naked shorts to go uncovered for months…and in some cases for more than a year…on the US economy, not to mention global stock markets (especially emerging markets), and of course the global economy, which is now faltering under inflation fears even as the industrialized nations rate of growth slows. In virtually every one of the big moves, up or down, in the US markets, Europe has followed suit while the Asian markets have shown weakness that makes the US pale in comparison. While Europe is down year to date a bit more than the US (UK -16%; France -22%; DAX -20% vs Dow and S&P 500 -14%), Asia is in a world of hurt: Hang Seng -18%; Shanghai -46%; Shenzhen -41%; Korean KOSPI -17%; both Indian indices -30%. Note also that with the exception of the Nikkei which is down just 12.7% but only 9.5% in dollar terms…the rest of the world got no currency kick…except Korea that was kicked by devaluing the Won and thus down 23% in dollar terms…that is surprising and shows how long the dollar has been weak and could thus be a play here as it is now showing with the Dollar Index now above 73 resistance for the past two sessions…follow it closely! What is the best global stock index?  Hungary -3.7% and Sri Lanka, Prague and South Africa!…all down 4.4%! Besides Japan here are the only ones not down double digits: Mexico -7.5% (but +9.5% in $), and Brazil -9.2% (+3.2%)…but if oil prices continue to decline so will they.
 
Building on the increased regulation theme, commodities are tanking, especially crude and gold. The fear there must be that the CFTC is awakeing from its long slumber will put limits on banks positions in contracts…same as commercials and speculators. Speculation is a good thing…neglect by regulators is not. It leads to Congress which knows less about the issues then Cox or the CFTC enacting laws to punish speculation which is harmful to market liquidity…hopefully that can be avoided this time. TB’s chief objection to Obama’s plan is his ‘gas tax holiday’/oil windfall profits tax when instead he should just be in favor of eliminating the subsidies to oil companies but it makes for good soundbites and that is what this election is all about: rallying support from two different classes, the haves and the have-nots. Just as with regulation that is not enforced, when one group gains a distinct advantage creating a record wealth gap, the balance will be brought back in line. Remember the late Pat Morita in The Karate Kid? It was all about balance and once he got that point across to his pupil he became a winner…keep the balance and America can again become a winner, but as long as we give enormous tax breaks to the top 2% of Americans…when they already have huge ones in the form of generation skipping etc…the gap will continue to widen. Were we not a democracy TB believes we would be on the verge of revolution now. That is the beauty of our Constitution, despite the efforts of this Administration to trample it in the name of protecting us from terrorism. Terrorism is not the issue…it is a catalyst for change…the wrong kind.
 
Energy Secretary Samuel Bodman was on CNBC this morning railing at OPEC for high energy prices. Obviously he didn’t hear Iran’s President on the topic…nor does he read TB…or he would, rather than say the US must seize control of the energy markets from OPEC, be chastising the CFTC for allowing investors to become speculators in commodities to unprecedented levels and having caused virtually all the increases in oil since January…look at those year to date equity market returns above for emerging markets and tell TB that global demand is driving prices…it is not…purely unrestricted limits on futures. That, TB feels, has changed and since we broke $100 in January he feels that we will go back to those levels…only with an overshoot first, perhaps to the high $80’s…not scientific just TB’s gut feeling.
 
What started as a US subprime mortgage crisis a year ago, morphed into a derivative crisis globally that became a credit crisis by yearend, and due to the banks and brokers price declines made it difficult for all and impossible for some to tap the capital markets. One advocate of unregulated short selling, the woman on CNBC’s fast money, complained yesterday about the SEC not policing CEO’s. How else, she reasoned could Merrill’s John Thane say a week ago after selling off Bloomberg that they didn’t need any more capital yet yesterday rush to issue another $8.5 billion in stock…mainly to the same ones who stepped up to the plate before! When you see this think of what inexperienced investors do: double down…sometimes into oblivion. In Merrill’s case however they will not be destroyed and in fact will prosper but do not confuse this with the Merrill that bottomed out when the execs started buying and turned into one of the best investments one could make…had they sold last August! Even Nouriel Roubini as bearish as he was on brokers and dealer banks last August…and correct he was…did not see bankruptcy in the cards for Merrill or BofA. But the question that keeps haunting TB is still: where will the replacement revenues come from? Certainly leverage will be impaired for years to come…and of course financial stocks were so grossly overvalued that their comeback will be much slower than the bounces of late indicate. 
 
Now that we have covered currencies, commodities and stocks, how about those bonds? When the stock market has been strong they rally modestly…usually but sometimes have been weak along with them. When it is weak the rallies are small in contrast to the down days…especially in TIPS…which is remarkable if you believe inflation is a problem as so many profess…and while earnings for many, if not most non-financial/retail stocks…have equaled or beaten lowered bar estimates. Therefore, TB believes that bonds provide value but you will have to pick and choose. Timing is difficult since on Monday as stocks tanked the long end of bond rallied more than a point and long TIPS nearly two points! But yesterday, just as quickly both declined similarly and despite a bounce from the lows gave back most of Monday’s rally.  they are treacherous so be careful but TB believes once inflation fears are removed (remember that due to sharply higher energy prices TB predicted June was the peak in inflation and it will now continue to recede), and overestimating the timing and magnitude of a US recovery means that by year end bond prices will not be much weaker than they are now (in the long end), and possibly stronger. One caveat is junk bonds and municipal bonds due to credit concerns and deteriorating revenues. But the focus for now will be the stock market which not only could have a major countertrend rally but the floor could be, and probably is, in for financial stocks. Bet some US companies, especially the two GSE’s wish they had back the money they frittered away on buying back their stock and could buy back the bonds that were issued to do so! Shudda, wudda, cudda…
 
Interesting how much hype has been made of Buffett’s investing prowess of late. From 2001 to 2007 Berkshire Hathaway, was the best thing you could have invested in…that was the peak but you could have done better to sell before and move into other stocks. CNBC was asking yesterday of guests if Buffett had every made serious blunder…being shortsighted as most market mavens are, they could not think of one. Well, TB can…his bet against the dollar during the period when TB owned the stock that cost $15 billion and took the stock down…all of his managers performed well except him and to his credit he took the heat for his unfounded decision…just a hunch. Well, look at how Berkshire Hathaway (the nearly bankrupt shoe manufacturer he bought that failed) has performed over the past 12 months: up just 3% and remember, no dividends to reinvest! Year to date it is down 21.5%! Far worse than the major indices! He is far too concentrated in insurance and other financial activities than he should have been…all good companies but he obviously didn’t see how bad things could get either…to his credit he increased his position in Wells Fargo…and TB believes USBancorp…about the same time TB felt they had bottomed. Both of us were wrong. The point is: no man or woman is a guru…all are human!

TB doesn’t expect you to believe everything he wrote but instead hopes it made you think, or rethink your positions at least. That is all any reasonable writer should ask for…if you agree it is a windfall.

Have a great day…the markets willing and it appears they are…don’t forget we get employment Friday! 

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 July 30, 2008

 

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7/29/08…the bludgeoning of America

July 29, 2008 at 4:29 am · Filed under economy, financial, markets ·Tagged , , , , , ,

…surely some of you are tired of TB’s criticism of the SEC and its chairman, Chris Cox. But at least some of you are writing back and get the problem with naked shorts and the lack of an uptick rule. Cox took ‘emergency action’ against naked shorting of the GSE’s and the 17 primary government securities dealers but not the rest of the banks. Furthermore, the temporary rule expires on Thursday! Of course, it could be extended but as TB said in the first place why not make it permanent or at least have said “until further notice?” Cox is a cautious and thoughtful man as well he should be because he is no expert on markets…except what he is told by the financial community which doesn’t want any changes or even enforcement of the existing rules. Rule SHO as amended in 2007 requires a listing of all ‘threshold securities’ which have uncovered shorts of 10,000 shares or more or 0.5% of outstanding shares, and these have to be covered…yet as TB pointed out last week Chipotle Mexican Grills (CMG) has shorts that have not been covered for 466 days! Another, Redwood Trust (RWT) is 134 days and was the target of heavy selling yesterday falling 18%. Mr. Cox: why have rules if you aren’t going to enforce them? Also, why make rules that apply to only those financial stocks that the Fed has to support? Why not all financial stocks…why not all stocks? A very sad commentary on a man of little judgment.
 
Meanwhile, back at the ranch, Treasury Secretary Paulson unveiled yet another ‘plan.’ This one for ‘covered bonds’ is supposed to restore confidence in the banking system…by the way has Paulson ever explained naked shorts to Cox? While, Paulson is doing his best in trying times, the track record for his ideas is sadly lacking…first, the Super SIV’s which packaged up the subprimes and was to be backed by Citi, BofA, and JPM, was a non-starter: no investor interest…the second, the restructuring of mortgages helped very few and had to be incorporated in the recently passed…but not yet signed Recovery Act of 2008 by Bush…at least to TB’s knowledge. As Jim Cramer said yesterday (can’t believe TB is agreeing with him again but he is on a roll lately), that is a great idea but why not fix the problem first. The problem of course is a lack of confidence in our banks. With a covered bond, which is popular in Europe but had not been needed to sell bonds in the US, the buyer gets a bond backed with collateral and if that is not enough still has a senior lien on the assets of the bank if it fails…sure makes you want to be sure that every penny of your deposits is insured since the other assets will be cleaned out by FHLB or any other governmental agency that has made loans to the institution and before you even know there is a problem. 
 
As for hedge funds, as a group they are having their worst month in 5 years…that was before the close yesterday and after all…cutoff for them is T+3 and if you are counting that was yesterday! TB has pointed out how the last three quarters saw stocks sink and stink following the final day for T+3, as the hedgies can short without it being on their balance sheet until settlement date…have they now taken this to a monthly move? Furthermore, their returns are negative…and since they get those big bucks (2% +20), investors expect positive absolute returns and don’t care much if they are only -2% when the S&P 500 is down 3.5% as it was as of the close…but if they can drive the S&P down further perhaps that will help? It all sounds pretty desperate to TB who thinks confidence in fair and orderly markets is of the utmost importance…guess he is just old school. TB bets he can “visit” 1,000 hedge funds in one hour. Trick statement since there are now 1,000 hedge funds in the Cayman Islands and in Georgetown they are all in one building…law offices…nice work if you can get it…but where are the managers? Dunno, anywhere and everywhere. There are over 100 now in NYC too.
 
Moving right along…as Groucho Marx said, “why would I want to join a club that would have me for a member?” Remember when hedge fund manager Fortress Group (FIG) went public…then Blackstone (BX)…those were two IPO’s you can be glad you didn’t get into unless you flipped them on the first day. They are near their lows now and would have clocked you on your investment. Now, KKR is offering you the chance to get in on a deal with them…does this sound a bit like a desperation move? BX managed to get theirs off at the peak…but will KKR get theirs off at the bottom?…doubtful but it shows just how hard it is to raise money. Meanwhile, Goldie is forming a $10 billion fund to make loans for leveraged buyouts…this is getting too ethereal for TB. Oh, and Merrill Lynch who says they don’t need capital is selling $8.5 billion of shares to unload those pesky underwater CDO’s that got them into trouble in the first place. Something is not right…by the way a Bloomberg chart posted by TB’s friend, Mark Gilbert shows that it is about 10 times more expensive to buy protection against default on Merrill between now and January then it was a year ago…note that that 6 month period is over yearend when the capital markets will be especially tight for weak credits in particular.
 
Is it TB or has the world gone crazy? If all the banks are as bad as the market suggests…why isn’t everyone taking their money and putting it under their mattress…perhaps because the neighbor who is about to lose his home might torch it and burn down yours with your money inside. On Friday, three banks owned by First National Bank Holding Company in Scottsdale, AZ. (FNB Nevada, FNB Arizona, and First Heritage Bank, Newport Beach, CA), were taken over by the FDIC and the assets sold to Mutual of Omaha Bank…no run on the banks this time…orderly and opened as usual on Monday. Note FNB Nevada and FNB Arizona are no relation to the banks TB was affiliated with in the 1970’s and part of Western Bancorporation which later became First Interstate. The three banks were heavy in mortgages and TB has no idea of their capital or leverage issues. What TB would like to know is if every bank and broker in the country is going to go belly up…since the shorts are attacking every one of them is being taken down…the good with the bad…and that is a bad idea. THIS is why TB has been crusading against naked shorts so don’t be deceived by those who tell you it is OK because either they don’t understand it or have a vested interest in allowing it. Fine, short a bad stock, even if it is a bank or broker…but all of them? If you think this is OK, TB suggests you rethink it…soon.
    
Then there is the commodities market…specifically but not limited to crude where margin calls may have caused SemGroup, an oil market that handles about 2.5% of all the oil in the US, to cover shorts and actually go long…overtrading…will have to wait to see how it all sorts out but if losses were huge they may have jumped on board…why not? Commodities markets are no respecter of size or need. TB believes this never would have happened if there were limits on positions for banks.
 
So there you have it…the case for regulators to do their jobs…and not rely on studies that were done under different circumstances…such as studying the uptick rule or naked shorts in a bull market, or in the case of the CFTC, turning a blind eye at bank positions when they became meaningful and then waiting till a month ago to even begin to study them…that is a true bludgeoning…and what is interesting is our entire problem can be traced to flawed models…too many MBA’s and PHD’s all taking the same classes and reading the same studies and then not understanding that they only work in a random world and as we know things are seldom random or unrelated…not when the rice hits the fan! Somebody do something….please…and quickly. Where are the leaders? All TB knows is that he is sick of seeing the carnage in the markets…and for what? Greed! 

Poor John McCain…he is continually trumped by Obama…he goes to Ohio, Obama goes to Germany and the Middle East. He goes to Bakersfield and Obama holds an economic forum in Washington attended by Robert Rubin, Laura d’Andrea Tyson, Larry Summers, Paul Volcker, William Donaldson AND former Treasury Secretary Paul O’Neill…now that is a powerhouse. Meanwhile McCain had to dismiss Phil Gramm (“a nation of whiners”) while Carly Fiorina told CNBC that Obama’s idea of raising taxes for the wealthy is a bad idea…in spite of a recent CBO study that shows that perhaps $100 billion in taxes have been avoided by hiding the money offshore…mainly by the parent of UBS of which Gramm is Vice Chairman. Starting to look bad for McCain…he should have distanced himself from Bush earlier and more forcibly, and his stance on Iraq…and Iran…is not only not what the voters want…but at least Iran’s president is talking…whether you believe him or not…remember when we recognized China and Viet Nam? How badly has that turned out. 

A good day to all!

TB 

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7/18/08…net zero

July 28, 2008 at 5:15 am · Filed under economy, financial, markets ·Tagged , , , , , ,

…after the big selloff in stocks early in the week, a key reversal to the upside on Thursday, stronger than expected Durable Goods Orders (the most unreliable economic indicator due to huge revisions, usually in transportation), Existing Home Sales weak but better than expected, and improved Consumer Confidence…all improvements are from weak levels and thus rendered useless…besides this market hasn’t traded on fundamentals for months. The dollar attempted a break out and even got above the 40 day moving average for a day or so, then back to the range. It doesn’t help when numerous unofficial Fed spokespeople both past and present keep opening their mouths and taking us in all directions. TB continues to aver that there will be no tightening this year and if they do it will be a bad mistake. New Zealand just cut rates and were Trichet’s ECB not in a jousting match with inflation (at least their concerns are different from the Fed’s as they have horrible productivity in Europe, especially France. So at the end of the week the indices were essential unchanged…net zero…except for Energy which took a heavy hit. Which begs the question: if the cause of inflation is oil and commodities and they are showing signs of weakness, why are bonds performing so badly…especially when the dollar decline is contained?
TB is betting this week won’t be an unchanged one…after all on Friday we get employment data! Ouch! 
 
There is also good news on the horizon as Chris Cox has finally woken up and is doing his morning stretches…he is considering extending the naked shortselling ban that was initially for the GSE’s, then to the brokers and banks that are primary government dealers (thus allowing the shorts free reign to short the hell out of the other banks…hard to fathom that kind of logic).  Anyway, not only is the SEC considering extending it to all financial stocks but to the broad market as well…gosh what if they reinstituted an uptick rule with a 10 tick minimum? While this response comes way to late it is far superior to the drugged CFTC which is still studying the impact of index funds on commodities. It doesn’t take a rocket scientist…heck, even TB figured it out…that in January, pension funds stepped up their investment in index funds…and crude broke thru the $100 barrier…who in turn entered into limitless commodities swaps with dealer banks who in turn took advantage of their status to buy unlimited positions in key commodities…according to Barron’s recently, 50% of wheat production was held in index funds! While the credit crisis is severe, the lack of action by the SEC (who actually made matters worse by not enforcing existing rules on naked shorts and repealed the uptick rule a year ago), and the CFTC (who could have invoked existing rules to prevent amassing huge positions), the regulators caused the most damage by doing nothing while enriching some hedge funds and along with the index funds.
 
Regulator: one who regulates. Shouldn’t a commissioner and certainly a Chairman feel that regulation is a good thing? The Honorable Christopher Cox has shown no desire to regulate…furthermore shouldn’t a commissioner and especially a Chairman have some relevant experience? Perhaps, Mr. Cox has drawn on the resources of the hedge fund community and Wall Street to give him input into enforcing and deleting rules. This is by no means a personal attack on Mr. Cox who as far as TB knows is an honorable man…in fact the Senate Committee addressed him as such. Hopefully the next administration will put professionals in these positions (of course Sen. Dodd could at least bring the two nominees for Fed governor up for a vote…he owes us that much after all it is a crisis and no time to be political).
 
While those who fought in World War II were part of the greatest generation, we will be the generation of leaders who didn’t…who allowed our financial markets to run our economy and determine its outcome rather than to guide it…and we, the investing public, once we were aware of it, stood idly by…even as we saw our own wealth deteriorate and eight years of investing show no growth…if you were lucky, and to those who made nice profits ten years ago, likely didn’t look good adjusted for inflation and taxes.
 
So is it any wonder the stock market can go nowhere…except down…or that the bond market has not provided a safe harbor from stocks…and commodities had their best year in 25 or so…and we chalked it all up to global demand. Iran’s President today (since Obama made overtures to him, he is trying to sound more friendly), said that oil prices are too high…well above their economic value. Interesting, but two bad he didn’t comment on the cause of it…which was covered above. The worst thing is that IF it were to drop significantly we might go back to our old habits…certainly the government would.
 
How about that something for everybody Economic Recovery Act of 2008…the Senate even came in to vote on Sunday…and Bush says he will sign it…now that the Dems have gotten their act together…after all he was waiting…not if you listened to his speeches…only when it had momentum and his own Treasury Secretary endorsed it was he…and the GOP in the Senate and House on board. This is truly the funny season with the only leader seeming to be Obama as the Administration falls in line behind his agenda. Meanwhile, McCain is stumping domestically…in Bakersfield today to get a first hand look at the oil industry and attend a $1,000 a plate luncheon…hope his fact-finding goes well.
 
The Recovery Act is 599 pages…and we know that nobody read it…after all that is the safest way, right? Included in it is a provision for an unnamed auto manufacturer whose specs are uncannily like Chrysler, will be able to borrow under some circumstances and conditions…that and restoring the housing market to same old, same old…but with better credit requirements, right? By the way, they have been cajoling Wells Fargo to get on board and renegotiate those mortgages they wrote…after all they were the largest subprime lender…but then they are merely of servicer of those now…so are the banks supposed to track down the holders which in most cases are in huge pools and get them to all agree to restructure them? A long and expensive process…as they too don’t want to be sued…yet in the end everyone will be!
 
Enough for today…because frankly, TB has had enough…

Hope you all have a great day and week…beware of payrolls on Friday!

TB 

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7/25/08…classic bear trap

July 25, 2008 at 4:21 am · Filed under economy, financial, markets ·Tagged , , , , , , , , ,

Bloomberg Quote of the Day: “Success has ruined many a man.” – Benjamin Franklin. A good thing to keep in mind if you find yourself on the right side of a big trade and think you are smart.
 
…Tuesday’s big key reversals in the major indices were neutralized Wednesday as there was no follow thru and then dissipated yesterday as the financials were crushed yet again. Remember we never had a true capitulation trade – except in financials last Wednesday which it is safe to say was largely a shortcovering rally…they then reloaded and hit them again…SEC comments on naked shorts were thus dissed by those with no fear that they will actually do anything…why now? They haven’t for more than a year!
 
Yesterday started out well with the gaining a bit for the first half hour or so and then quickly turning to the red and proceeding down for the remainder of the session and going out at or near the lows. Some confusion in the form of rising oil prices was a factor in the decline. But one has to do more than just look at the lead contract. While September rose $1.05 the close at $125.49 had no technical significance. What was significant was that each successive contact rose by less and from August ‘09 out the curve crude prices were lower! The worst active contract was Dec ‘15 which fell $3.48 to $122.71. This is significant because:
1. For months now the contract curve has been either been flat or in a mild contango (rising as you go out the curve), and if one figures carrying costs much more significant as it is normally in backwardation (lower prices as you move out the curve), This marks the steepest spread TB has noticed.
2. Due to speculators most of the open interest is always in the lead and next two or three contracts but due to fear of rapidly rising oil prices it has pulled prices up further out as commercials who need to buy oil (Southwest Airlines for example), have to pay more and speculators require higher prices to sell to them.
3. What appears to have happened yesterday is longs got nervous and tried to get out of the longer contracts driving them down and at the same time since they were hedged by shorting the front contract had to buy those back thus causing the front end to rise while the long end fell…and as you would expect, by more!
 
Keep an eye out to see if this trend continues and also the participation by commodities index funds which keeps a strong bid to the market…or will until the CFTC gets off its duff and limits banks positions just as it does commercials and speculators. IF this were to happen and the SEC would enforce the rules on naked shorts and reinstate the uptick rule with a 10 tick standard, we could see a huge relief rally in stocks.
 
Make no mistake we would still be in a bear market but at least confidence would return and provide a floor.
 
Poor Jim Cramer’s favorite stock, or one of them, Crocks, is getting pounded and has fallen precipitously overnight as revenues fell…a combination of cheaper knockoffs and also their sales agreement with COSTCO which under cut the major stores like Nordstrom’s. There is nothing new about this…in fact it is capitalism. Build a better mousetrap and the world will beat a path to your door…and your competitors will try to match or better your idea. This is what happens with new ideas and the market is littered with them: Levitz Furniture, Winnebago, International Industries (IHOP), conglomerates, etc. This is precisely why TB has hurt his own performance at times by shunning stocks with 30, 40 or higher p/e’s. Google, Visa, Mastercard, Research in Motion, Apple and others trade at multiples that are unsustainable without growth rates of 25% a year or higher…at some point they are going to disappoint and when one extrapolates the downside is huge. That is the reason you rebalance…even if it is a home run…and it is precisely why Legg Mason’s Bill Miller fell from grace by his own admission…and when you try to compensate for it by bottom fishing as he did with financials you merely compound your problems. Miller is a great manager and will come back but in the meantime investors in his and other failed funds are heading for the exit doors thus making it that much more difficult as selling to meet withdrawals merely locks in losses…even if you are right.
 
“The markets can remain irrational longer than you can remain solvent.” John Maynard Keynes. TB started off the column with a quote that ties in with this one…no one is always smarter than the markets and the worst sin is to believe you are…pretty difficult if people are telling you that you are a guru…fool on the hill?
Today is a big day for Trader Bill: 10,000 hits on the website since November 8, 2007. Thank you!

Larry Kudlow on CNBC this morning giving his objective opinion on Obama…the man is pitiful. Thankfully, he is in no position of authority as his ultra right wing ideas which all evolve around no taxes for the wealthy are the best taxes and that the Fed should tighten immediately to combat a weak dollar and rising commodities prices obscures the obvious: we are in the worst financial crisis since the Depression, the Fed caused the depth of the Depression by effectively tightening by raising reserve requirements three times, and the fact that a 25 or even 50 basis point rate hike would do nothing to lower commodities prices or rally the dollar. Fortunately, viewership on his show will not bring down the economy…he is what he is…an effete fool.

Having followed this man for more than 30 years TB can safely make the above statement.

Hopefully, the downdraft in stocks yesterday will come to a halt and the shortsellers will be punished as the financial sector of the economy, while weakened, is nowhere near collapse. It would help if Cox’s SEC would not empower the shortsellers to the detriment of long term investors and the global economy. TB is not opposed to speculators we need them to make markets…he is not opposed to shortsellers as they correct major flaws in companies…but when they short an entire sector…without borrowing the shares or differentiating between the good and bad stocks in the sector that is destructive behavior.

A rally today or at least a failure to take stocks lower today would do a lot for investor confidence. Hang in!

TB 

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7/24/08…any port in a storm

July 24, 2008 at 4:24 am · Filed under economy, financial, markets ·Tagged , , , ,

…even a good Madiera! A week ago, Frontline (FRO), the largest operator of oil tankers said they were reducing speed due to cost savings…of course going slower increased the time and cost to those leasing the tankers. When do you think they resumed running at flank speed? Two days ago? You can bet they are jostling to get to port to offload the fuel…cost savings be damned and the lessees are no longer saying take your time. TB believes this is good for several reasons and that those in turn will cause energy to drop more than one might expect. By the way FRO’s stock is up 41% over the past year (71% with reinvested dividends) and despite the plunge in oil since 7/15 it is up 9.7% since…including a 4.6% gain yesterday. Dividends are 14% and indicated yield is 16.2%…but watch out if oil drops…as price ($67) could fall to $50 or less, the long term trend…TB owned it once but too volatile for him.
1. Already the fuel storage levels rose sharply and that will increase…refiners will start working harder as existing supplies are drawn down…this means lower gas prices and note how natural gas plunged even as a hurricane is knocking at Galveston’s door.
2. This will also cause withdrawals from commodities index funds and in turn canceling of commodities swaps and thus the greedy banks who wrote them will be cashing in their longs as fast as they can. This was so predictable and the pain of high prices and subsequent sharp drops would have been mitigated. Alas, like the SEC, no regulation is good regulation…and we just paid a vicious price for it.
4. This will cause a sharp drop in both PPI and CPI at exactly the same time as the neo-cons are telling the Fed to tighten to chase the inflationary ghost…don’t worry the capitalists had it well in hand all the time by not giving pay raises…oh, the new Federal minimum wage kicked in yesterday…way below what most are paying…another joke but one the neo-cons fought as if it would destroy business. See you help people by giving them a job…even if they can’t live off what you are paying them.
5. TB believes oil will overshoot past $100 and perhaps to the high $80’s before recovering…global demand…what a huge joke…or it would be if it hadn’t taken the steam out of the global economy…or what was left after it after Wall Street and the mortgage originators decimated it…but hey, the Feds bailed out FNM/FRE despite Sen. Bunning claiming it will cost taxpayers $1 trillion…if he shuts up it will likely cost them nothing! …just a guarantee…like saying “in God we Trust” on a dollar…God won’t have to pay a dime either!
 
A WSJ article today tells about the demise of SemGroup, a Tulsa, OK oil marketer which filed for Chapter 11 Tuesday, you have likely never heard of that was hedging oil in its pipelines to be sold. They controlled 15 billion barrels moving thru their pipelines. As a result however of the surge in oil prices they got huge margin calls on their positions and eventually reversed them resulting in a huge loss and went long (there are also indications of unauthorized trading), then when Bernanke spoke at the hearings on July 15, oil prices plunged (please do not accept the lame McCain claim that the drop was due to Bush’s action on offshore drilling), thus providing a double-whammy. Hopefully, before the dust settles enough money will flow from the commodities index funds to make the price drops stick…before they destroy every legitimate hedger in America and the world…don’t even think about the poor farmers!
 
Christopher Cox, front and center! Of his own volition…which is likely the only thing he has done of late except relieve bodily functions…he wrote an Op Ed in today’s journal on naked shorting and it validates TB’s concerns about his first protecting the GSE’s from the shorters…you know the ones that took down Bear and attempted Lehman…and then extended said protection to the primary dealers excluding the major regional banks like Wells, USBancorp and Wachovia, not to mention the smaller financials. What a crock…he did this to protect the Fed…by reducing borrowings at the discount window! Then he talks about how bad naked shorts and that his emergency ruling protects legitimate shorts…give…me…a…break…as brokers are protected if they had reason to believe the shortseller has the ability to borrow…either he is blind or stupid because TB has already explained how this game is played: several funds go to the same source and ask if they can borrow the share, then later they short the stock and say they were going to borrow from that source…only he has now lent it to one of the others he promised it too! Does this sound a bit like ‘the dog ate my homework’?…only the stakes here are much bigger…especially for you dear reader who are most likely long only! Very simple: lock up the shares before you are allowed to short…that is all they need to do…and all pension funds have to do is tell their custodians to not make the shares available for lending…then get out of those short hedge funds!
Once again, the SEC failed in carrying out its assigned duty to protect investors…from themselves? You know how they say a prosecutor can get a grand jury to indict a ham sandwich? The WSJ will print anything on its op ed page that supports their stand…i.e. less regulation, lower taxes, etc. 
 
As for the markets yesterday, bonds continued to get hammered and may well be a buy unless you believe that GSE bailout bill that passed the House and is on the way to the Senate will solve the problem. Furthermore, if oil and other commodities prices continue to fall there will be significantly lower inflation…TB will make book on that, so bonds could be a buy. Stocks failed to capitalize on the gains Tuesday but gave it a short in the morning as more shorts were forced to cover…no matter what the easy money has been made (unless you were short), and major indices (energy excepted) remain in the broad ranges (see the stock summary below). By the way the ratio of new 52 week highs to new lows shrunk to -1.2 yesterday…there have been only two occurrences this year where the number has been positive and then only briefly…so keep an eye on that…as for volume…thought we were in the summer doldrums?

TB longs for the days when we had the best government money can buy. He is also frankly appalled at the way the Obama team is hustling him around Europe and the Middle East as if he already is the president…but then again…what has McCain done lately? This must be very confusing to foreigners as to who is running the government…elected officials or wannabe’s…especially as Dubya is adopting some of his proposals!

Happy trading!

TB 

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7/23/08…and the bad news is…

July 23, 2008 at 5:35 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , ,

Perhaps the CFTC study of the past month, that should have began in February will bring the commissioners to their senses. It was in February that crude crossed $100…and where we should go back to if banks are prohibited from their limitless positions to satisfy the needs of commodities index funds who on their own are limited as a speculator. Hopefully, Congress in their infinite wisdom can sort out the difference between a speculator and a predator. The same goes with the SEC on shortsellers.
 
It is interesting that the shortsellers say nobody cared when the market was strong…duh…they didn’t matter…and the free market proponents of oil say nobody cared when it was below $20 or even $50. Yet both underestimate the ability of Congress to meddle in places best left to regulators…IF they do their jobs which sadly they have not. TB is sure that Chris Cox is a nice and good man…but as SEC Chairman he is a disgrace, as are the CFTC commissioners…and that kind of neglect destroys markets.
 
A Bloomberg top story today note that Paulson & Company (not the Treasury Secretary) is starting a hedge fund to provide capital to financial firms…is the bottom finally in? Was the massive short-selling merely a ploy to lift the restrictions on bank ownership? Time will tell.
 
Another top story warns that Freddie and Fannie are sitting on $5 billion of mortgages on unsold homes. This morning on Bloomberg, Hong Kong investors Marc Faber says that they should be split up, not get government aid…hello? Not support the debt that was tacitly billed as government obligations?
 
When CPI came out at 5% last week, TB said that was the peak…and with commodities tumbling since, especially oil with gas to follow as soon as they work of the supplies he may be proven correct. This is a good thing as it will silence the Kudlow, Wesbury camp, along with Poole and some other stalwart ex-Fed officials who have been hurting us with their talk. TB has maintained all along that this is cost push inflation that without accompanying wage increases is self-correcting…have you seen any wage increases? This will allow the Fed to cut its dual focus on inflation and growth and concentrate on the real problems: the credit markets and their impact on the economy.
If TB has been alarmist, sobeit, but if he has attracted at least some attention to make our govenment come to its senses it is worth that. We are now back from the abyss, a confidence of sorts is returning to the markets as witnessed by the weak bond markets and the rise in 3 month and under Treasury yields. What is not clear is whether this has been merely a shortcovering rally or whether a bottom is in. TB feels it isn’t although if the shorts will stand back it may be for the ‘good financials’ and perhaps even the bad ones as Wachovia showed yesterday. Even if this is a countertrend rally in a bear market (secular?), there will be sectors that one can make money. Certainly the advice of the past few weeks on CNBC to sell financials and buy energy was wrong…and will continue to be wrong for the groups as a whole but where will the new leaders come from? Unfortunately, tech and other sectors are now suffering from the weaker economy and to invest in housing or consumer discretionary seems utterly ridiculous at this point, as does investing in the GSE’s at least on the equity side. TB leaves that the assignment of where to park your money up to you…but hopefully you have gotten some ideas…have you considered preferreds?

Memo to oenophiles: Just read in the SF Chron that Cos d’Estournel, the underrated French Bordeaux producer is buying Napa’s Chateau Montelena for perhaps $150 million. True, not the $1.8B Constellation paid for Mondavi or the $250 million paid for Duckhorn but a weak dollar makes a lot of things possible. They had been scouting it for about eighteen months. Montelena which is owned by Beau Barrett and wife Heidi Peterson Barrett (winemaker for Screaming Eagle and others including TB;s friend Lamborn Family Vineyards), makes arguably the best French style Chardonnay in the valley (Au Bon Climat in the central coast doing likewise), and is a beautiful setting with a chateaulike appearance and pastoral lakes. It was Montelena that beat the sox of the white Burgundies with Mike Grgich as winemaker…a movie is coming out on the famous Steve Spurrier tasting that was recreated recently with the Americans winning again in most categories…vive la America!

Note the more uplifting tone in today’s commentary? In vino veritas!

TB 

Bloomberg Quote of the Day: “It is sad to grow old, but nice to ripen.” - Brigitte Bardot (actress). A rather depressing quote from woman who once attempted suicide…ripen?
 
…earnings! They really threw it at us: American Express, Wachovia, even Caterpillar!…but a funny thing happened on the way to the forum: suppose you got some bad news and the market rallied?
 
One of the guests on CNBC said perhaps six months ago: you will know when we have hit bottom when there is bad news and the market rallies. TB is not as sanguine. Believe it or not, Wachovia after a horrid earnings report and a conference call in which you couldn’t separate the inmates from the keepers at the asylum, fell nearly 12% then rallied 47% on the day for a net gain of 27% on the session! Nevertheless it is still down 54.3% with dividends reinvested…oops, dividends for the second consecutive quarter they cut the dividend: from 64 cents to 36.5 cents to…FIVE cents…this the 12 month yield at 13.67% due to the sharp drop in price became meaningless and the indicated yield is just 1.19%…ouch! This puts them in the camp with Citi (who should cut the dividend again), Provident Bankshares, and of course GM who discontinued (?) the dividend so a 6.98% yield went to zip.  
 
TB is not bullish here…although it is the first meaningful technical day to the upside in week’s…a look at the stock summary will show you that we are in very broad bands on all indices and merely at the highest point since the June 25th when the selloff began. Unfortunately, while the Dow and S%P 500 and Nasdaq Composite all had key reversals yesterday (higher high, lower low and close above the range of the prior day), and the Russell 200 was the biggest gainer (+2.8%), the performance was skewed by financials while tech stocks including the Internet were weak…you know it’s bad when Housing rallies 4.5% and REIT +3.1%. By the way in all size categories, value trounced growth and the smaller stocks outperformed the larger! So this must be viewed as a countertrend rally but one that could have legs…there are still a lot of shorts to cover. 
 
As for the shorts, TB likes to think (egotistically) that his blast on the SEC and their laissez faire attitude towards naked shorts and upticks had something to do with the rally…but it appears fear has replaced contempt by the shorts…they who have been shamelessly spreading the word that nobody complains when the shorts are getting crushed in a rally and after all they are providing ‘price discovery.’ John Mauldin’s Outside the Box Monday was a tirade in defense of the shorts. Last week, TB heard legendary hedge fund manager Michael Steinhardt say: “If one looks back and finds those stocks that have been picked up on by shorts, that have been the subject of all this sort of talk, and find out what ultimately occurs to the price of those shares, overwhelmingly, one will find that the shorts were right.”
 
This quote was used in the article and of course it is true…but we had an uptick rule…and until THIS SEC began closing its eyes they were enforced! Also, as Jim Cramer pointed out, the studies on naked shorts and the uptick rule were performed in an up market! TB is worried…worried about a Congress that having witnessed this shameless travesty…will enact laws that are far too restrictive to markets. As reported yesterday, the proponents of capitalism are its own worst enemy. TB is sure that a hundred years ago, the robber barons could provide data showing how good their monopolistic endeavors were for the markets and the economy. We have gone full circle…100 hundred years and are back to the same class warfare that was there then.  Stephen Moore the conservative-libertarian economist with the Cato Institute…note the group of these true believers: Kudlow, Laffer, etc. who have witnessed a record wealth transfer to the top 2% and still consider themselves doing a service for markets and capitalism.
 
Another proponent is former GOP Senator Phil Gramm…who as an advisor to the McCain campaign in typical neo-con style called Americans a ”nation of whiners”…perhaps because he hasn’t lost his job or his home…this got him bounced from the team since McCain would obviously like to become the next president. What you may not know and TB learned yesterday is that Gramm is a Vice Chairman of UBS Securities! Wonder how he got that position? This is the same UBS that is being investigated for sheltering funds of Americans in Switzerland thru parent Credit Suisse. Now it is getting interesting. Also, if you recall, his wife Wendy…a former CFTC chairman, was not only a director of Enron but on the audit committee…AND she sold her stock before the collapse as did Ken Lay and the other top execs. Is this just coincidence or is the affable Gramm not the kindly old man he appears to be? Self-serving!
 
The above is a leadup to the sharp drop in Gold and energy which occurred yesterday…TB sold his Gold ETF (GLD) yesterday as it plunged thru support. It appears the fear that something is about to give at the SEC and the CFTC is alive and well…after all: how long can they turn a blind eye to the destruction of the US financial system and global economy? Watch and learn.
 
For the umpteenth time, TB believes in free markets but they can only remain free and prosper when all investors feel they have a fair chance. If it came out that in Vegas they were stacking the decks, using loaded dice and other gimmicks to give them an edge would you be as eager to go? Only if you are addicted to gambling or a fool. We need regulation as we have seen since the 1930’s a little regulation goes a long way towards keeping people honest. You cannot tell TB that the entire financial system of the US is in need of some hedge fund shorting the stock to point out a problem…while they get rich.
 
On Friday TB reviewed the list of “threshold securities” as of 7/16/08. These are securities that have short positions that have failed to cover that are more than 10,000 shares, more than 5 trading days past settlement and represent more than 0.5% of the float in each stock. There are 113 of them: 44 failing from 1-9 days; 51 from 10-99 days and 18 greater than 100 days!. The longest, Chipotle Mexican Grills (CMG) has been in violation for 459 days!  They average about 8 days of average volume. Force them to cover and create efficient markets.
 
Shortsellers do no harm? As of March 31, at least 14 public pension funds own Wachovia stock of at least 250,000 shares for a total of 39.2 million shares. Cal PERS and NY State Teachers are the two largest at 6.9M shares each followed by Florida at 4.6M and Cal STIRS at 3.3M. At the low close on July 15 the value of these holdings shrunk by $1.14 billion! So? This was a poorly managed bank. Now look at USBancorp (USB) which for disclosure TB owns. Public pension funds own 42.8 million shares led by TIAA-CREF at 16.3M, NY Teachers 6.2M, NY State 6M, Cal PERS 5.7M shares. There is no question that this is a good bank and possibly the best regional in the US. From May 1 to the July 15 low, the value of these holdings declined by $524 million. As TB asked yesterday, how many of these public pension funds are lending shares that in turn are being used to short their stock? They should immediately instruct the custodian that the shares can no longer be lent out! Period! Utterly stupid!
 
Perhaps the CFTC study of the past month, that should have began in February will bring the commissioners to their senses. It was in February that crude crossed $100…and where we should go back to if banks are prohibited from their limitless positions to satisfy the needs of commodities index funds who on their own are limited as a speculator. Hopefully, Congress in their infinite wisdom can sort out the difference between a speculator and a predator. The same goes with the SEC on shortsellers.
 
It is interesting that the shortsellers say nobody cared when the market was strong…duh…they didn’t matter…and the free market proponents of oil say nobody cared when it was below $20 or even $50. Yet both underestimate the ability of Congress to meddle in places best left to regulators…IF they do their jobs which sadly they have not. TB is sure that Chris Cox is a nice and good man…but as SEC Chairman he is a disgrace, as are the CFTC commissioners…and that kind of neglect destroys markets.
 
A Bloomberg top story today note that Paulson & Company (not the Treasury Secretary) is starting a hedge fund to provide capital to financial firms…is the bottom finally in? Was the massive short-selling merely a ploy to lift the restrictions on bank ownership? Time will tell.
 
Another top story warns that Freddie and Fannie are sitting on $5 billion of mortgages on unsold homes. This morning on Bloomberg, Hong Kong investors Marc Faber says that they should be split up, not get government aid…hello? Not support the debt that was tacitly billed as government obligations?
 
When CPI came out at 5% last week, TB said that was the peak…and with commodities tumbling since, especially oil with gas to follow as soon as they work of the supplies he may be proven correct. This is a good thing as it will silence the Kudlow, Wesbury camp, along with Poole and some other stalwart ex-Fed officials who have been hurting us with their talk. TB has maintained all along that this is cost push inflation that without accompanying wage increases is self-correcting…have you seen any wage increases? This will allow the Fed to cut its dual focus on inflation and growth and concentrate on the real problems: the credit markets and their impact on the economy.

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7/22/08…the last day’s of America

July 22, 2008 at 4:20 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , , , , , , , , , , ,

(Today’s commentary is particularly timely as American Express, Wachovia and other financial stocks have reported and disappointed…a precursor to another big down day in stocks? Globex is trading down big since American Express and Wachovia released, watch out below.
 
In 1981, Paul Erdman, who TB crossed paths with in another life, wrote The Last Days of America, about a financial crisis that brought down the entire country. Today, we have a similar circumstance brought about by ‘unbridled’ capitalism…TB has frequently said that the proponents of capitalism are its greatest enemies. TB firmly believes we can and will beat this crisis IF we have true leaders but sadly they are lacking. The Greenspan Fed created the problem with cheap money too long and that encouraged the financial sector to make idiotic loans and then quants using the same models decided they understood risk…as did LTCM in the late ’90’s, but these models were LTCM on steroids…and not only did we weaken our system with them but we exported them to the rest of the world. The Bush administration with its laissez faire attitude towards everything let regulation devolve to a point of uselessness. The Fed, with two vacant governor positions, both appointees from the private sector, is run by academics at a time when we need people with real world experience…thanks to Sen. Chris Dodd who will not bring their names up for a vote in a shameless act of partisanship. Some members of Congress and Larry Kudlow and his disciples on political grounds want to see FNM/FRE fail…who needs them…the answer is: anyone who owns a home unless you want to go to the European style 5 yr mortgages…an already weakened sector would get that much weaker and thus the economy.
 
Meanwhile the SEC and CFTC which have served investors well have both been derelict in their responsibilities and are causing a total loss of faith in our financial system which is being overrun by hedge funds acting without limit to drive down stock prices…not individually but entire sectors. Another Chris, this one Cox, is not using the powers he has to bring this to an immediate stop…pain must be inflicted on them and it isn’t…just as culpable are pension funds who lend out their shares for a pittance and then invest in hedge funds that short, and commodities index funds who are buying commodities swaps from major banks…such as JPMorganChase…who then buy contracts while the CFTC turns a blind eye at the expense of both commercials and true speculators.
 
This is what happens when government fails to do its job. Oddly, a man TB has bashed repeatedly, Jim Cramer, is one of the few who, like TB, is challenging this irresponsible behavior. It is in this vein that today’s column is written…hopefully someone is paying attention. TB) 
 
…it started out so simply…oil prices rising leading to idiotic subsidies of corn-based ethanol which in turn led to higher grain prices…globally. Countries began to ban the exportation of rice…subsidies on gasoline began to cut deeply into budgets…and the government of the United States stood idly by.
 
The commodities market that has functioned properly for years, balancing buyers and sellers, speculators and producers by imposing position limits on both, failed miserably by allowing banks, through an exemption, to buy unlimited amounts of contracts so they could write commodities swaps with commodities index funds and thus throw the entire system out of balance in favor of the longs. Hedgers, which includes small growers of corn were faced with unprecedented margin calls that they could not meet and their weakened banks would not provide capital for…with grain prices this high who in their right mind would take on that kind of risk? Not a capital starved bank that has enormous capital needs and nobody willing to provide the mothers milk to the banks.
 
At first sovereign wealth funds rushed to the rescue along with a few private equity and hedge funds…but those capital additions were quickly neutralized and the providers no longer wanted to play even with big concessions. Imagine pumping $7 billion into Washington Mutual and seeing it almost evaporate within two months! Then it began to sink in…the more you put up, the more you lose. Capital dried up.
 
So now, not only can the client not obtain money, the lender cannot obtain capital…and meanwhile the hedge funds continue to short the bejeezus out of the stock…without peril…after all, if someone comes in to buy they merely overpower them…force them out.
 
But wait…to the rescue…a bit late…comes the SEC with a Cox’n that has all the appearances of knowing what he is doing…until, that is, he opens his mouth. First, he goes before Congress, knowing full well that he will be asked what he is doing about naked shorts. Also, what about that uptick rule he repealed a year ago?
 
To the former he says the SEC will start restricting naked shorts against Fannie Mae and Freddie Mac. That should do the trick…play into the stupid Democrats goals…those lovers of GSE’s. To his credit, no one asked the obvious: how can you stand there and defend the GSE’s allowing the rest of the banking system to take the hit as the shorts advance on them? …and what about the uptick rule? We studied it and found that it was obsolete so we discontinued it a year ago, he replied. Obsolete? Chairman Schumer suggested it was only obsolete because of the move to decimals from eighths so that an up tick became a penny…why not make it 12 ticks? That would have restored it, right? No need for that, the markets are functioning well.
 
But are they? The reason the uptick rule was obsolete was because they studied it, as they did naked shorts in a bull market! Well, we definitely are not in a bull market unless bulls roar! TB doesn’t hear any snorting out there lately! As for naked shorts, explain this: the next day, the Cox’n announced that 19 financial stocks would not be subject to naked shorts…this on Wednesday but not to be effective until midnight Sunday! Now that is brilliant and rather than until further notice, only until August 15th!
 
So what happened…on options expiry, Friday last, financial stocks rallied for a third straight day! Impressive moves of 30-45%…of course from ridiculous lows. Then came Monday…the day the rule took effect and kicked off by BofA having huge losses but a positive surprise…BofA rallied…Citi declined…FNMA rallied, Freddie Mac declined…as did almost every bank stock not included in the Fed moratorium! Please, if you can or will, explain to TB why any assault on our financial system should be tolerated? You can’t! It is wrong! Dead wrong and Cox knows it…but he doesn’t care…after all he is a Republican and the GOP favors free markets! The right to do anything you want to …a laissez faire doctrine! Do you believe that US Bancorp is a bad bank? Is it in danger of collapsing? Yet they took it down more than 4% because it was not protected! Show TB a small bank and he will show you a bank that declined…isn’t that great? Let’s make some hedgie rich! This is the selling out of our financial system that if completed will take the rest of the world with it!
 
Then there is the topic of naked shorts…TB pointed out the list of violations…459 days past the limit on Chipotle Mexican Grill??? All our illustrious SEC Chairman has to do is get off his butt and say no mas! But he is too weak to do it…or is it more than that? If TB who has only been doing this for 36 years can see it why can’t other money managers? Why can’t pension funds see that they are aiding and abetting those hedge funds that they are probably putting their money with for 2% plus 20% of the profits with…lend them your stocks so they can short them against you…now that is brilliant! Earn 0.25% and lose 10% or more!
 
TB said there are no leaders…well crises make for strange new leaders and TB has found one in the most inexplicable place: CNBC! Yep, the same CNBC that TB blasts daily…not only that but the guy he used to loathe almost as much as Larry Kudlow…if that’s possible. But TB has an open mind and he listened to Cramer today…to be honest, Cramer, along with TB has been a voice in the wilderness on shorting. He knows of what he speaks having been a hedge fund manager for five years…not only that he is a Harvard trained lawyer who has the ability to read SEC regulations and know just how far he can go in shorting without breaking the law. TB already pointed out that it is not illegal to short securities without being able to borrow them…it is only illegal to tell your broker you have arranged to borrow them when you haven’t. Mr. Cox should read the rules because if he did he would know that he has the power to enforce them…not whine that he needs special rules from Congress…or as TB stated earlier he could be a John Wayne or a Paul Volcker and just do it…dare them to sue him…or challenge him in any way! But no, that is not Gentle Chris.
 
TB has a friend who knows Cox from USC, same fraternity…says he is a great guy…well he may well be, that is not the point of this piece…but he is either a politician with an ax or a fool too. Why is he protecting the hedge funds instead of the markets and investors he is sworn to protect? Don’t ask TB, doesn’t compute.
 
This leaves TB with a conspiracy theory…one he doesn’t even want to own up to: suppose the GOP in their fight for capitalism wants to enforce no regulations…after all that is what they have done for nearly eight years! If you are a conservative, TB feels sorry for you but prove otherwise. Wait…don’t go away, it gets better! The GOP ignoring the fact that it was first excess demand that drove energy prices higher but is now driven by index fund ‘investing’ and longs outweighing the shorts and obliterating them. Meanwhile, the hedge funds short…under the guise of efficient markets are encouruaged by economist Stephen Moore on CNBC who said that you should have unlimited shorts in an efficient market because you need them to supply the derivatives markets…he actually said that…he who has no investment experience but TB is sure Kudlow said this is so!
 
What kind of hell is this? Where people who should know better can’t see market manipulation? Is it because they are blind, fools, or just choose to believe? TB believes the latter…and more.
 
T. Boone Pickens is paying for ads on alternative energy…and how he will sit down with both candidates and drive home the need for a comprehensive energy policy. Pickens made his money in oil…but now he is in alternative energy…while TB believes he is generally right, he stands to enrich himself in the process.
 
Meanwhile, House Speaker Nancy Pelosi says that offshore drilling is a dead issue. Kudlow asks whether they are trying to force a recession to get Obama elected. Then he and Steve Forbes insist that offshore drilling will solve the problems…by the way, neither has ever admitted that naked shorts or lack of an uptick rule are a problem…in fact, any regulation is the problem…get rid of it and let capitalism go unbridled and you will have no problems…Forbes bashes FNMA and Freddie as being Democratic tools.
 
This is what you have created…you in believing your politicians…who have nice health care and retirement benefits over your dead body. YOU, and TB, have been too lax…you have let them take control and they have given free reign to the lobbyists who give them the fodder to run their campaigns and nobody cares…nobody!
 
Do you really think we care about the Iraqi’s? Do you think we cares whether there were really weapons of mass destruction there? Whether Saddam was a despot? He was a tool…and in taking him out to establish democracy in a Muslim world we destroyed the balance…do any of you not believe that Saddam was a great poker player? He thought he was safe from the US but feared Iran and that the US would do nothing if they attacked…so he bluffed…and it worked…now Iran is blustering and will likely at some point overpower Iraq, unless we want to fight them. This is what the neo-cons have created…furthermore they could have won, but due to meddling and the idiot viceroy Bremer, we lost…and that is why we are still there…we blew it.
 
Sadly, this is what it is all about, ideology…ideologues on both sides who care only about winning at all costs, not about the American people…pity the founding fathers if they are witnessing this…and the World War II vets and especially those who gave their lives…for what? So private equity and hedge fund managers can pay 15% taxes…so CEO’s can prosper without giving even inflation adjusted pay increases to their employees?
 
TB is not proud of what he just wrote…he is thoroughly disgusted and hopes someone out there can prove him wrong. Can you believe that TB who has been asking where are the leaders, would find solace in of all people, Jim Cramer? Desperation makes for strange bedfellows.
 
Now go back and ask yourself why when BofA posted a positive surprise, only the financials covered by the naked short rule rallied…and even some of those like Citi and Freddie Mac didn’t! Then ask yourself why you want to risk money in this market. Do you go to Vegas expecting to break the bank?…or even make decent winnings. You know that if you stay long enough you will lose…you cannot overpower the bank and you cannot overpower the shortsellers…only a fool believes otherwise…Mr.Cox please stand on your hind legs!
 
Overly dramatic? The SEC is protecting the two GSE’s and 17 other banks and dealers from naked short covering…why not extend it to all financial stocks…in fact it is the smaller banks that are most in trouble from the shortsellers? Here are the percentage changes on some of the covered and neglected institutions yesterday: FNM +5.4%; FRE -4.7%; C +1.6%; MER -1.1%; LEH -4.1%; GS -1.1%; UBS +0-.5%; BAC +3.9%…those are some of the protected stocks. Now for those they didn’t bother to protect: USB -4%; PNC -2%; WFC -1.1%; WB +1.6%…will give back much more than that today!
The jury may still be out on Cox’s SEC but it appears clear that the verdict will be: guilty as charged.
 
Nothing bright on the earnings front this morning, nor was American Express last night…strap yourself in and hang on…Mr. Toad’s Wild Ride is about to begin…definitely an ‘E’ ticket!  

TB apologises for the rant but not for the content…we are allowing our financial markets to be manipulated and that is not only destroying confidence in them but in our entire system of government. We cannot let this happen.

TB 

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7/21/08…an unpopular truth

July 21, 2008 at 5:28 am · Filed under economy, financial, markets ·Tagged , , , , , , , , ,

Bloomberg Quote of the Day:  “When you’re as great as I am, it’s hard to be humble.” – Cassius Clay…more commonly known as Muhammad Ali. The problem with greatness is when everyone recognizes it and that is when one falls from grace. It’s hard to be number one…and stay there.
 
Today’s Topics:
1. Friday’s markets
2. Stock Market returns redux (updated table)
3. Short-selling update
 
1. Friday’s markets: They were all about short covering in stocks. If you recall, Friday was options expiry and if you forgot it you were in trouble. Volume was an above average by any standard 1.71B shares…since July 7, the normal start of the summer doldrums, volume has averaged 1.67B shares (lowest was 1.41B, highest 1.96B)…normal average is about 1.5B shares but from 3/24-7/3 the average was a paltry 1.32B shares. Due to expiry, more than 520 million shares traded in the opening half hour…most quite near the opening with another 110M in the second half hour…633 million shares in the first hour is impressive…unlike recent expirations but from then on it was ‘head for the Hampton’s’. Note that there was little of technical significance…the Dow closed 4 points below a psychological resistance level (11,500) for the highest close since June 25th. But we had inside days on Both Nasdaq indices (which by the way were down more than 1%), Russell 2000, Barron’s 400, and SOX which also closed down, and the NYSE Energy Index which close up, while the S&P 500 was unchanged. Therefore, chalk everything up to options expiry…CNBC’s options expert…note for him TB did not say ‘eggspurt’, Pete Najerian…talked about ‘pinned’ stocks…these are stocks whose ranges are determined by the options positions and thus cannot move higher or lower…or both in some cases…there are a lot of them.
 
Bonds of course had a bad day while Gold traded down to $950.20 before closing down $12.70 at $58…$950 is an important psychological level going back to January 31 before it spiked to the record high of $1,040.78 on March 17, and then came while the 40 day held $950 from March 18 to April 25…currently the 40 day m/a is $914.71…a level that should be respected if you are long and then the 200 day at $890.70…but note that both are moving higher by about $1 a day. Crude, which along with Gold is rallying overnight, could not get above the resistance levels established by the lows from 6/10-25 and had the lowest close since June 5th at $128.88, wiping out all gains since then when it hit the record highs to 7/11/08 at $147.27! It is also well below the 40 day at $135.15 which is further resistance. Note the August contract expires tomorrow. but also not the contract curve is not in backwardation or contango, but FLAT all the way out…Dec ‘15 the only active long contract closed $128.77 -.31!
 
TB believes that rallies in energy or crude should be faded…just an opinion…as the fears of re-regulation or merely enforcing rules on the books will make the longs very nervous…also, index fund activity and ETF’s could turn this into huge downside risk before prices rebound…Gold having much less reason to rally. Remember also there are millions of barrels in tankers and you can bet they are racing to port as fast as their screws (props), will carry them.
 
2. Stock Market Returns. If you played the SPX’s Friday you lost…but if you played the banks stocks you won. Here is the table TB included Friday, updated for Friday’s move and with corrections in the last column for NYSE Energy (higher) and Wachovia (sadly lower…much lower). Here is the section in it’s entirety and is worth reviewing. 
 
Look at the table below of key indices and financial stocks returns from the ‘peak.’ Note that the last to peak were the Dow, S&P 500 and NDQ 100 last October (aside from Energy and Transports which peaked in mid-May). Then note the following:
1. TB has repeatedly pointed out that for the last 3 quarters the markets have sold off from the last day for T+3 settlement in the quarter, which applies specifically to hedge funds due to borrowing, etc. He has also pointed out that no sane money manager wants to see the market down at quarterend due to a loss of fees, and hedgies thus can make money managers looks worse than they do…watch for this at the end of September…TB has not seen one other analyst make this observation!
2. Note how early the weak stocks peaked…i.e. Wachovia, and Citi…someone smelled a rat!
3. Despite the hype of the past two days rally note that not one of the indices or stocks is back to the levels of 6/25 (last day for T+3 in Q2!). Also only BofA, Transports and Energy are even close! This makes today all that more important and it is also options expiry!  
4. Notes: all returns are unannualized and include dividends reinvested in the index/stock.
 

 

 

 

 
Bank of America just reported and beat street estimates by posting 72 cents a share earnings vs. 54 cents…unlike Wells they did not raise their dividend but their Tier 1 capital rose to 8.25%! At yearend they were 6.8% while Wells was 7.3% then. Analysts love book value on brokers and banks…TB has much less regard for this metric since the deposits can disappear much faster than the assets can be sold. Also, witness the fear factor we have seen even when FDIC took over Indymac! BofA says that Countrywide will be additive to earnings this year? Countrywide losse was $4B…it is possible they are giving the banks some leeway on chargeoffs but the rules say you can not reserve more than 100% of actual loan losses over the past 12 months. Loan loss reserves rose by $4.02 billion in the quarter to $5.83B…note we have some huge resets, in fact this quarter will be the peak and that will lead to more delinquencies, charge-offs, and OREO’s. BofA says they will restructure $40 billion home loans over the next two years! Remember it is a trade-off between not having to write them off and the impact on earnings from lower revenues…again TB asks (for all banks and brokers): where will the replacement revenues come from to justify p/e rations?
 
Former FDIC Chairman Bill Seidman said Friday on CNBC, they changed the rules on FDIC takeovers after the S&L/Bank crisis…made it tougher to do and they had to prove that the institution was insolvent. He said that he felt that going in early allowed a seamless transition. That added with the new insurance rules which cut down on the insurance along with stories that FDIC was pretty well tapped out after Indymac also raised fear levels. TB was shocked as never in his 36 years did I see a run on a bank. Including C. Arnholdt Smith’s US National Bank in San Diego. 
 
3. Short Selling Update. TB just looked at the list of “threshold securities” as of 7/16/08. These are securities that have short positions that have failed to cover that are more than 10,000 shares, more than 5 trading days past settlement and represent more than 0.5% of the float in each stock. There are 113 of them: 44 failing from 1-9 days; 51 from 10-99 days and 18 greater than 100 days!. The longest,  Chipotle Mexican Grills (CMG) has been in violation for 459 days! Of local interest, SF based Redwood Trust (RWT) is 127 days in arrears. This is a disgrace…one call from the SEC and they would be forced to cover…and screw them if it bankrupts them! Downey Federal (DSL) by the way is 146 days and First Fed Financial (FED) is 209 days. Let’s take a look at a few of them:
 
CMG – the stock peaked on Dec 31 (in a down market!), at $155 and is down nearly 50% and is still near the low at $69.12 on 7/15. 459 days ago the stock was above $100…there is no reason to allow these shorts to continue a free ride!
 
RWT - this financial REIT is down nearly 50% since the Feb 4 high of $46.60. It is a portfolio of mortgage backed securities (before the August ‘07 selloff it traded to $55.  
 
TB will not defend DSL or FED but also feels that short-selling brought down the weakened Bear Stearns and almost brought down Lehman. Not that Bear didn’t deserve it, but Lehman did not. Either way the shareholders did not deserve to be destroyed so a few short sellers (who possibly spread the vicious rumors), could profit…how this leads to efficient markets is beyond TB’s comprehension. 
 
A friend sent a commentary on shorting stocks and why due to splits shorting is no worse than it has been…TB does not recall many stock splits recently and Barron’s this week even commented on the low number of shorts last month and for the quarter…perhaps it is time for reverse splits. TB continues to feel that there is no need…in fact it is counterproductive…for naked shorting to be allowed in any stock…not just financials. None of the stocks above have had splits…instead what we have seen rather than splits is record buybacks for the past four years and now that the prices are attractive…how many do you see doing buybacks? TB rests his case that dividends are better than buybacks for investors due to the self-serving interests of insiders.
 
TB believes we are very close to a ruling (although they only covered 19 financials…which screws the smaller regionals) on naked shorting…and perhaps a revised rule on ‘upticks’, and hopefully a rule setting limits on commodities positions by banks that allows them to write commodities swaps to index funds.

TB’s Quote of the Day: “A rising tide lifts all boats.” – Sean Lemass, Irish politician but popularized by John Fitzgerald Kennedy…until the bad caulking lets some of them sink again!

A friend gave TB a long but interesting article from the New Yorker (May 28, 2008) The Fall of Conservatism. TB found he could identify with why this is so, having been one himself but over the past eight years finding it impossible to be either a Republican or a conservative. The article puts the blame squarely on the neo-cons without using the term…Cheney, Rumsfeld, and their ilk, plus Gingrich (since softened), and the evil Tom DeLay, while Bush allowed it all to happen. It is an insightful article and one conservatives would do well to read…and heed if they wish to survive. In addition, to this TB heard Dick Morris discuss his book, Fleeced, and while he finds Morris one of the most egotistical and disgusting men he has ever listened to…the other extreme is Karl Rove…both however seem like the little boys in the classroom who cause all the trouble then sit back like little angels. A Pat Buchanan quote, which actually was the thought of social critic Eric Hoffer, sums it up: “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.” It was true of labor unions in the last cycle and true of conservatism today…a classic example is AARP…think about it.

The reason for including this is it sums up exactly what is wrong with our regulators who have failed to protect investors (as opposed to speculators) and the American people which has now extended to all countries in the world in it’s impact. The faster the regulators get their act together, the less damage Congress (you know how TB feels about them), will do to the financial markets…it’s an election year.

Hope you all have a good and prosperous week.

TB 
 

 

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7/17/08…kurtz und lang

July 18, 2008 at 5:41 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , ,

TB’s Quote of the Day: “A rising tide lifts all boats.” – Sean Lemass, Irish politician but popularized by John Fitzgerald Kennedy…until the bad caulking lets some of them sink again!
 
…anyone else remember that old German drinking song, Schnitzelbank? Ist das nicht ein schnitzelbank? Jah! Das ist ein schnitzelbank! Then among the various descriptives in the verses was: kurtz und lang (short and long). If this were a court proceeding it would be named Kurtz v Lang. You all know where TB stands on this and hopefully see the importance of balance in financial markets yet yesterday afternoon, a woman, one of the regulars on Dylan Ratigan’s Times Square carney show said this is all stupid…naked shorts, no uptick rule…she even pointed to the .01 uptick without suggesting that the fools change it to 12 ticks as Chuckie Schumer proposed (i.e. roughly 1/8 which would get us back to where we started).
 
Still cannot get over the dereliction of duty discussed yesterday and as one of TB’s favorite daily writers put it: “we need to clear everyone out of ‘effing’ D.C.” TB concurs but has yet to identify a true leader”
 
Bernanke: why didn’t he even consider raising margin requirements from where they have been since 1974 (50%) and the lowest they have been since at least 1968?…highest was 80% from 1968-70!!!
 
Cox: you all know where he has had his swollen head since he took over as SEC Chairman. It is inconceivable that he could go before the Senate knowing he would be asked about naked shorts, yet he in an off the cuff, yet calm, manner said that they were going to impose limits on shorting GSE’s. The next day they extended that to the 19 top financial institutions…but not effective till Midnight Sunday and then for a period of just one month…fool! …should have said until further notice!
 
Paulson: TB is stammering to find the words… 
 
CNBC is reporting this morning from Sag harbor in the heart of the Hamptons…once again they are mocking us over shorts…gee nobody complained when the market was going up…gee why only when things go bad…but they do have a point if the Cox-led SEC had been doing its job it wouldn’t have been sitting idly by but considering what rules we need…you do know there is a precedent for this, right? It’s called 2000…and note nobody did anything then either…TB only recalls a few pleas to pension funds to stop lending out their stocks.
 
 
Look at these top stories from Bloomberg this morning:
*Citigroup report ’smaller than estimated’ loss of $2.5 billion…shares gain   
*Freddie Mac $3 billion bond sale snapped up in Asia, Europe as yields rise. 3.358% for 2 yrs +88bps
*Merrill shares drop after $4.7 billion loss as writedowns dwarf estimates…this one is interesting as it is almost equal to what Mike Bloomberg and friends paid for their 20% interest in Bloomberg PLC. Thane says they have enough cash now but then we hear they are contemplating further sales.
*Schlumberger Q2 profit rises 13% as oil price climbs to record…yep that happened on 7/11 but it is down 12% since then!
 
Stocks were up overnight then weak on Citi earnings…following Merrill…you have heard all the breathless hype on CNBC about this rally…how meaningful it is…TB wishes to show you just how meaningless it is…and that IF we fail today we are truly in a bear market…secular? The SEC put on a Bandaid…more of a dissolving suture. TB is frequently asks what he does. He has answered to money manager friends: the things you are supposed to be doing but aren’t…because you have too many committee meetings, client meetings, compliance meetings, etc.
 
Look at the table below of key indices and financial stocks returns from the ‘peak’. Note that the last to peak were the Dow, S&P 500 and NDQ 100  last October (aside from Energy and Transports which peaked in mid-May). Then note the following:
1. TB has repeatedly pointed out that for the last 3 quarters the markets have sold off from the last day for T+3 settlement in the quarter, which applies specifically to hedge funds due to borrowing, etc. He has also pointed out that no sane money manager wants to see the market down at quarterend due to a loss of fees, and hedgies thus can make money managers looks worse than they do…watch for this at the end of September…TB has not seen one other analyst make this observation!
2. Note how early the weak stocks peaked…i.e. Wachovia, and Citi…someone smelled a rat!
3. Despite the hype of the past two days rally note that not one of the indices or stocks is back to the levels of 6/25 (last day for T+3 in Q2!). Also only BofA, Transports and Energy are even close! This makes today all that more important and it is also options expiry!  
4. Notes: all returns are unannualized and include dividends reinvested in the index/stock.
 

 
If you want proof that this is mere shortcovering, please explain why Wachovia (WB) has rallied 34% over the past two sessions…including 27% yesterday when state regulators swooped down on their St. Louis investment headquarters over auction rate securities trading…they are merely the first and there will be many more to come. Question: why are we not hearing any investigations into JPM over their confiscatory fees on interest rate swaps to Jefferson Co., Alabama…nary a word….and remember they are the big writers of commodity swaps (as well as credit default swaps). Caveat emptor! TB 
 
We had all better pray that after options expiration this morning we can rally and rally hard. TB doubts that the hedge funds will allow us to take out the June 25th levels…if so, it will only be because of those ‘frivolous’ anti-capitalist short selling rules, right? Think of this as Groundhog Day! No shadow, please!
TB hopes you found his research on returns useful and that it saves you from leaping into the fray. This is not a time for bravery but one for common sense which these days is not all that common.IF this rally is real, which TB severely doubts, you have plenty of time to buy in…instead look for those boats of your with the caulking rotting…and sell them to some other poor fool!

Enjoy your weekend!

TB 

 

 

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