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
