Archive for August, 2008

8/26/08…lazy Lake Marion days

August 26, 2008 at 9:54 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , ,

…TB hasn’t written for six days and as much as this is a vacation he planned not to unless something important happened. Minnesota is beautiful this time of year…and as opposed to last year it is not hot as Hades. We are staying in a small cabin on Lake Marion about a mile from his daughters home…it has a dock and we have a ‘family’ boat. The sunsets are beautiful and there is always a gentle breeze. If only the peacefulness extended to the markets which can best be described as highly volatile.
 
TB left with financial stocks well above the lows established on 7/15, the day that Wachovia announced its dreadful earnings. The next day Jim Cramer declared a bottom to stocks…which has so far held but not by much. Most financials are struggling with their 40 day moving averages and that is just the good ones. Goldman is even showing signs of weakness…even the loosely connected financials like Mastercard and Visa are now feeling some pain…as TB said with multiples of around 30x it takes a huge pickup in transactions to justify the price…and while it is the credit card companies…not to mention banks like JPMorganChase, Citi, and BofA (ranked in terms of their credit card issuance)…who are feeling the squeeze, with delinquencies and defaults rising doesn’t it stand to reason that transactions will slowly dwindle?
 
One avoids missing a credit card payment for as long as possible as it can be jerked on you in the blink of an eye…and as standards are raised it is better to forego that mortgage payment…especially since most contracts see a default on one card as a default on all. Besides, it takes months…or possibly a year or more for your lender to foreclose these days so people are doing the unthinkable. But first it was mortgages, then auto loans and now credit cards…and we haven’t even looked at commercial loans yet. TB reminds that USBancorp’s CEO said that credit card loans were only about 7% of their assets and yet they comprised one third of the chargeoffs…so think about JPM, Citi and BofA. Wells Fargo’s 10Q appears to indicate that loan losses were higher than reported in their quarterly earnings report…this could be due to the way loan loss reserves are calculated…you cannot reserve against more than 100% of the prior years realized losses even though you know they are going to be higher…this is because the banks abused this category for so long in order to smooth earnings…how many companies in any industry have been brought down by using similar tactics over the years? Far too many!
 
A darling of the analysts was Marshall & Illsey (MI) due to their specialization in commercial loans yet even they are now feeling the pressure as loan losses on REITS etc take hold. A friend commented that how can a bank lend to another bank when they don’t know their own financial condition and are thus skeptical of balance sheets of other banks? …and if your bank can’t be trusted…who can? Certainly not Fannie Mae or Freddie Mac who have already tarnished their reputations. That, TB believes, is the crux of the problem. Nobody knows anyone else’s financial condition let alone their own.
 
Congress approved and Dubya signed that financial relief act…the one he was opposed to (and then had the audacity to blame the Dems for not acting sooner), until his Treasury Secretary ‘Bazooka Hank’ Paulson convinced him there was no choice and right he was. But already, like every other Band-Aid Paulson has tried to apply, they simply do not work! TB never liked the analogy of a bazooka…how many even remember what one is…besides it was an anti-tank weapon and not nearly as accurate or flexible as an RPG. That reminded TB of when bubble gum was 1 penny….Bazooka which featured a cartoon of Bazooka Joe and his gang on the inside…now if you can find it, it is a quarter…you used to be able to weigh yourself on a penny scale too but even that now costs a quarter…if you can find one…TB wonders why he would pay a quarter to depress himself…dunno…
 
So while TB is vacationing he still has his consulting clients and managed accounts so he could not ignore the markets. Whereas the Dow was +44 a week ago Friday it went like this last week: -180, -130, +69, +13, and +198. So what, you ask. Well, a review of the volume shows that the volume never exceeded 1.07B shares all week…recall that the average since 7/25 was just 1.2B shares…about 400 million below normal…so clearly we are in the summer doldrums. Now look at this: yesterday’s volume was just 865M shares!…the lowest session volume of the entire year…and only about 100M above the shortened 7/3 day…this on a day that the Dow dove 242 points??? So the average for the six days is an abysmal 956 million shares. These markets are devoid of anyone willing to step in front of the momentum. Thus it is daily momentum, not volatility we are experiencing…and in spades in the financials which are rallying sharply today, albeit from depressed levels with FNM +26%, FNM +18% and even Thornburg Mtg +35%! 
 
TB then studied the two key volatility indices, VIX (S&P 500 options) and VXN (NDQ 1000. When he left the VIX was 19.65 and this morning it was just 20.61% well below the 30 that most worry about while TB watches 25 as an early warning indicator in these markets…the 40 and 200 day m/a’s are way up at 23 or so. As for the VXN it is 24.14 vs 22.54 and still well below the 40/200 which have merged at 27…again TB watches for 30 and most regard 35 as problematic. There simply is not enough volume to do much and TB believes options strategies are so widespread that these indicators have been rendered useless. 
 
Next, lets look at the percentage changes thru this morning from Friday, August 13th: Dow -2.2%; Transports -3.2%; S&P 500 -2%; Nasdaq Composite -1.5%; NDQ 100 -3.3%; Russell 2000 -3.9%; and the financial sector -4%. Meanwhile, Energy is up 4.4% and Utilities +2.4%. Subtracting yesterday’s losses none of these would be that bad.
 
Bonds provided not much more….which could be viewed as a sign of little fear…although TB sure felt it when he looked at the others before analyzing the moves.
 
Here are the changes in bonds: 2’s 2.35% vs 2.39%; 5’s 3.07% vs. 3.10%; 10’s 3.81% vs 3.84%; 30’s 4.41% vs 4.47%…see much change for the volatility in stock! TIPS which have been mercilessly hit are back in vogue with the 30 yr 2.03% vs 2.06%…this got above 2.20% in the prior selloff. What gives?
     
As for the dollar the index closed at 77.19 on Friday the 13th and is now 77.62 with the 40/200 day m/a major support and merged at 74.10. The only significant change in the major currencies has been Sterling which has dropped to $1.8395 from $1.8629 while the Euro is unchanged and the Yen slightly stronger.
 
The price increases in Gold, Crude and other commodities can hardly be viewed as meaningful…certainly not enough to spark the price moves in energy stocks that we have seen and should instead be viewed as temporizing. Crude is up just $2 from Aug. 13 and Gold $35…both are off the interim highs and the corrections are totally devoid of relevance…especially in a thin market!
 
While some of you would question the wisdom of this exercise while on vacation TB feels much better about things than he did seeing the world apparently collapsing last week. He is not nearly as sanguine as Jim Cramer that we have found a bottom…not when yet another $700M bank in Kansas City imploded on Friday. But at least there is hope and that should keep one from panic selling…or buying!
 
Hope you all have a good rest of the week…those of you that are in, which doesn’t appear to be many…then get away for a relaxing three day (or more), weekend.
 

TB 

Leave a Comment

8/15/08…flying blind

August 15, 2008 at 5:33 am · Filed under economy, financial, markets

TB will be on vacation until September 2 but will occasionally write if something significant happens. Thank you.
 
Bloomnberg Quote of the Day: “Facts are facts and will not disappear on account of your likes.” – Jawaharal Nehru. Well said!
 
…TB’s recent lack of concern for economic data merely reflects the markets lack of interest. Take yesterday when it was announced that CPI rose 0.8% in July, double estimates and yet bonds rallied! Of course, the culprits were a 4% increase in energy and a 0.9% increase in food prices. Year over year CPI is up 5.6% making TB’s prediction that the 5.4% rate announced last month would be the peak. This was based on sharp drop in energy prices we have seen as the commodities market implodes. Not imploded, but still imploding. Despite an attempt to rally crude, at one point it was up $1.42, it closed at $115.01 down 99 cents while up marginally on the long end. Since the 7/3/08 high of $141.62 it is off 20%.
 
Meanwhile, Gold plunged another $17 to $814.50 and overnight broke the $800 barrier ($792.60). This means that in exactly one month, Gold prices have plunged 20% from the secondary high ($989)…the record high was set on March 17 at $1,048)…from this high to the overnight low of $777.70 it is down 26%…in five months!  

 
Now the most meaningful part of this: since July 15…the same day that stock bottomed…the CRB Commodities Index, which peaked on July 2, is off 14%, and the GS Commodities Index which peaked on July 3, is off 17%…which is assuming that those involved in commodities only learned of the study on position limit problems due to banks being the only ones with unlimited positions…so if we go back to the aforementioned highs they are off  24% and 21% respectively. This is not due just to energy and precious metals. Grains are particularly weak: Wheat -4%, but did not participate in the rally actually peaked on March 13 and is down 32% since then; Corn -30%; Soybeans -24%. Furthermore, commodities have been crushed overnight: Precious Metals -5.6%; Grains -2.8%; Soft Commodities -1.6%, Energy and Industrials down 1.2%.
 
So what is happening…for the first time since the commodities trading issue by banks came to the fore, TB heard in a mutter on CNBC this morning that positions limits are being applied equally to everyone now…even banks. But Michelle Caruso-Cabrera got it wrong when she said their are only two groups in commodities and stalwartly defended the laws of supply and demand. This is the problem…people do not differentiate between the INVESTORS that have bought commodities ETF’s and index funds and the commercials and speculators. These funds then entered into limitless swaps with dealer banks and upset the balance horribly.
 
For the CFTC to have announced a change in the rules would have caused a much sharper drop than we have seen…perhaps down limit for days as banks tried to exit positions (in some cases like cotton as TB has reported the limits became meaningless after the ICE set a rule that the closing price would be determined by the options close, which is ridiculous. It is the tail wagging the dog! As TB has suggested, this proves that the CFTC knowing they screwed up quietly told the banks to unwind their positions…a wise move. Could it possibly be that the Cox-led SEC talked to dealers on naked shorts?…possibly but why does the latest posting of Threshold Securities (naked shorts) as of Aug. 13, show no change in those securities that have had fails to cover and the longest running for over one and a third years??? Mr. Cox…explain this to me and the American people!
 
Isn’t saying the American people quite a stretch? No, and we have proof of this too: The Dollar which has been in a prolonged decline since 2001 and is down 26% since then has rebounded from the March 17 lows from a sharp one month selloff has recovered all of that loss…again, since July 11. TB does not believe in coincidences and neither should you. This is precisely why TB feels that our perceived inflation problems are really asset deflation problems and by taking these actions on commodities and hopefully stocks the dollar can improve…or at least remain stable…thus simplifying the Fed’s job.
 
For the first time ever we have had an economic recession caused by a credit crisis, not vice versa. That in turn was caused by a lax Fed under the direction of Alan Greenspan…lax not only in his failure to raise rates as the economy picked up but for failing to heed the advice of the late Edward Gramlich to do something about subprime lending which was spiraling out of control. He had the power of his voice to put a stop to it…but did nothing…he who warned of ‘irrational exuberance’ yet failed to do one thing (such as raising margin requirement…even allowing all Nasdaq listed stocks to be marginable after he made that statement). So there was the source…and fueled by huge numbers of new hedge funds that required new MBA’s and PHD quants who had studied the same things and utilized the same models then scratched their heads when it all came tumbling down. Worse, it is still tumbling down, and the banks and brokers financial problems are being exploited by speculators of all sorts while the SEC stands idly by. This is a failure of government…a failure to regulate…and a victory for lobbyists and the neo-cons who believe markets should be totally unregulated…what a hair-brained idea. Yet these are the same people who slash taxes in recessions…mainly for the top 2% then bristle at the mere suggestion that the tax rate be restored to where it was when they made the emergency cuts…who receive incredible tax benefits and have strategies such as generation skipping to drastically reduce what taxes they pay. Meanwhile, many are still trying to evade taxes by hiding money offshore.
 
So that is why bonds rallied yesterday…despite the headline inflation numbers…the economy is weak and weakening…we continue to be plagued by problems in the financial sector…see Heard on the Street in today’s WSJ on Wells Fargo…which appears to be understating their potential loan losses as well as having a huge increase in Level III assets for which there is no active market…still think bonds are rich? But the problem with bonds is the volatility where the swings are swift and then reversed the next day so you can be whipsawed…therefore you have to buy them when they look their worst…a quandry.

As for stocks, recall when the other countries would carry the US…IF it was required…after all Larry Kudlow has never acknowledged there is a problem and that Goldilocks is alive and well (perhaps Goldi is a transvestite???…or at least a cross dresser). Now, believe it or not the US is the best market in the world for either industrialized or emerging market nations. Many are down 50% year to date. This week, the two best, Brazil and Mexico have swung into the red but are still better than we are doing…especially after currency conversion. But the point is what were you told to do when the problems began?
*diversify to Europe and emerging markets
*get out of stocks into commodities…or buy commodities related stocks
*buy multinationals to protect against the weak dollar
*sell financials and buy energy…just a month ago when the first was bottoming and the later topping
*buy tech since capital investment will pick up…we have heard this for eight years
*stocks are cheap…despite earnings and revenue slowing in most companies
 
Note that as these ideas have failed you never hear them apologize or even correct themselves…they just keep on truckin’…and that is what you get…a lot of truck! Also, none recommended bonds…including Bill Gross…and only recently are dividend payers being advocated…including preferreds. Note too that despite a short spurt, value stocks in all size categories continue to beat growth!

Yesterday, on CNBC, where the moderators have become protagonists for capitalism in its broadest sense rather than to try to control the opponents, Robert Reich argued with Stephen Moore on tax hikes using much the same terms as TB did. The moderator…a new one TB didn’t recognize…jumped into the fray shouting that it isn’t fair that the top 1% pay 40% of the taxes…hello? They have about that proportion of the income and well over 50% of the assets…would she prefer that it be distributed equally when we have the widest income gap since the late 1900′ (era of robber barons), and the working class has had virtually no ‘real’ income gains over the past ten years! Hopefully, you can see this problem!

Remember in the waning months of the Clinton administration the neocons were spreading the story that a state of emergency would be declared so that Bush couldn’t take office…ridiculous. But is it so ridiculous this time…or more likely that we will be in another conflict? First, the concern was Iran, but now it is Georgia. Robert Scheer writes that the timing of this Georgia/Russia conflict is suspect. That the Georgian President’s advisor, who resigned to become a lobbyist, is now a strategist for McCain. He asks if Georgia would have invaded Southern Ossetia without being confident that the US would provide cover. Sadly, this makes sense…Georgia has been friendly to the US and hopes we will support them for admittance to NATO which the Russians do not want. So did we set this up? After watching the antics of Cheney for the past eight years…and his mentor Rumsfeld for much of that time…it is not out of the question that they will find a reason to get us into yet another conflict…when we do not have the resources to do so. If only we had not invaded Iraq, perhaps we could have Afghanistan and perhaps Pakistan under control…Musharrif has announced he will be resigning soon and Afghanistan is getting worse not better. We would also not have provided the fodder for Al Quaida to recruit more Muslims after seeing what they think we are as a people. But then, where would Halliburton be? 

Have a good two weeks…hopefully a fully rested TB will be back with new vim and vigor.

TB 

Leave a Comment

8/14/08…TB/Cramer v Cox

August 14, 2008 at 5:59 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Quote of the Day: “Adversity makes strange bedfellows”…just one of the variations on ‘politics makes strange bedfellows’ which goes back to the 1800’s…but Margaret Mitchell more likely made if famous in Gone With The Wind in 1939. Thus TB and Cramer as bedfellows (God forbid), versus Chris Cox. 
 
Where have all the young men gone?
Long time passing
Where have all the young men gone?
Long time ago
Where have all the young men gone?
Gone for soldiers every one
When will they ever learn?
When will they ever learn?

Where have all the soldiers gone?
Long time passing
Where have all the soldiers gone?
Long time ago
Where have all the soldiers gone?
Gone to graveyards every one
When will they ever learn?
When will they ever learn?
(Music and lyrics by Pete Seeger)

 
Today’s Topics: Shortselling and the SEC; Financial Sector Returns, Commodities and the Dollar:
 
Shortselling:
…hard to imagine TB in full agreement with CNBC’s Jim Cramer (who is next? Larry Kudlow? uh, no). But you have TB with 36 years investment experience and Jim Cramer having run a hedge fund being the only two people to have stuck out their necks to make the case that the SEC and its Chairman, Chris Cox are not doing their job…not doing it?…they have failed miserably not only to protect investors but to maintain orderly markets! Do not take this to mean TB is now a Cramer acolyte…he is not…just that the three greatest showmen of the past 100 years have been P.T. Barnum, Mohammad Ali, and Cramer. TB did not agree or feel it was appropriate for Cramer to give his emotional rant on Bernanke and the Fed…it was stupid and out of frustration. Nor did he believe Cramer’s declaration that a bottom was in for stocks was right (although at the time, TB felt that July 15 might have been a bottom for financials). 
 
Yesterday, during market hours, Cramer calmly said that allowing the ban on naked shorts of the GSE’s and the primary government securities dealers (while leaving the other financial stocks exposed and thus the focus of the thrust for the hedge funds), while the others were left dangling in the winds, was open season on financials. They took ‘em down…a move which actually began in forces on Tuesday when the longs exited knowing that if the ban was to be extended it would have been announced before the expiration. Financial stocks were down 3.5% Tuesday and 2.6% yesterday as the shorts piled on. The KBW Bank Stock Index fell 10.5% in the two days (-6.4% and -4.1%), while Brokers fell 6.8% (-5.4% and -1.4%). As for the two GSE’s, FNM was off 8.5% while the battered FRE was lifeless (but over the past 12 months they are off 87% and 90% respectively and both are trading at single digits).
 

Bank and Dealer Returns:

 
Why is it so hard for other people to see what Cramer calls ‘conclusive evidence’ that naked short selling…and lack of an uptick rule are a license to steal for highly leveraged hedge funds and more importantly an effective deterrent for legitimate investors to buy any financial stock as they cannot overcome the tsunami of short selling: fool me once, shame on you, fool me twice, shame on you! TB says, shame on Mr. Cox and whoever the hell is advising him on this matter. This is not about deterring short-selling…only by making everyone play by the long established rules…rules that the SEC has failed to enforce during this administration and by repealing the uptick rule as a useless relic rather than to modify it by making it ten .01 upticks, the SEC has aided and abetted the destruction of our financial markets and even the foreign banks. Here is a table showing 12 month returns for banks and brokers, then year to date and from yearend to the 7/15 lows…the day Wachovia (WB) announced its disastrous quarter, and beginning of ban on naked shorting of the select financial stocks:
 

Banks: 12 mos to 8/13 YTD to 8/13 12/31/07-7/15/08
WAMU (WM) -88% -70% -74%
Wachovia (WB) -68% -61% -76%
Royal Bk Scot. (RBS) -61% -51% -62%
B of A (BAC) -40% -30% -55%
Wells Fargo (WFC) -13% -3% -32%
ING Bank (ING) -12% -13% -24%
US Bancorp (USB) 2% -5% -28%
State Street (STT) 2% -18% -27%
PNC Financial (PNC) 4% 7% -22%
Averages: -30% -27% -44%
Brokers:
Lehman (LEH) -71% -76% -80%
Merrill Lynch (MER) -64% -52% -54%
Citigroup C -61% -40% -54%
UBS Securities (UBS) -58% -58% -56%
JPMorganChase (JPM) -15% -15% -29%
Goldman Sachs (GS) -3% -23% -27%
Averages: -45% -44% -50%
       
Note that among the banks, only 3 have had positive returns over the past 12 months. TB did not include dividends which would not have turned any of the others positive. Also note how much improvement there has been since the 7/15 lows…not also that the three winners were hit hard by shortselling until July 15th even though they did not have the significant problems of the big banks. TB said that if a big bank was to fail it would likely be Wachovia, and WAMU may be the next Countrywide.
 
As for the brokers, since we no longer have Bear Stearns to kick around, poor Lehman has become the goat. But note what has happened to Goldman…it has lost its luster along with JPM. TB has warned that JPM’s exposure to derivatives…mainly credit default swaps would be a major problem had the Bear gone done creating a cascading of defaults…JPM’s positions dwarf the Bears…also the way they were accounted for was balancing longs vs. shorts, not exposure per counterparty and thus does not provide any value in the event of several counterparties, or a few major ones defaulting on their obligations. A recent survey of hedge funds showed that their greatest fear is in this area. (Heard on the Street today suggests that options indicate a high probability that Merrill will slash their dividend…something they have not done since going public in 1971…and a possible reason Thane has cannibalized the company while maintaining the dividend at a cost of over $500 million per quarter while raising more capital?)
 
If looking at the last two columns does not convince you, or Mr. Cox, on the reasons to eliminate naked shorts for all financials…and it should be for all stocks…nothing else will. Worse, is their failure to even enforce the rules by allowing naked shorts to run as long as 1-1/3 years…as with Chipotle. Insanity!
 
Commodities and the Dollar:
 
The dollar has come back sharply from its lows and is now back to the levels pre- Feb 26, although it was in a steady decline then. TB does not believe in coincidences and this ties directly to the upsurge in crude and gold prices as well as the broader commodities. Due to the commodities decline the easy gains have been made but for the dollar to advance will take much more, but the good news is the panic selling is over. TB reported earlier about the Gene Epstein article in Barron’s about a month ago on the impact of index funds and hence commodities swaps on prices…TB said then that we had seen the peak in inflation at 5.2%…it came out this morning at 5.6% but Energy added just 4% this time and Food 0.9%…the Core is up just 2.5% over the past year…so now TB says this is the peak. (See today’s Ahead of the tape on how owners equivalent rents are pushing up inflation due to falling home prices while they deflated them during the housing boom) Epstein pointed to wheat contracts held by index funds which equaled 50% of the production. This gave speculators a bad name (whose positions are strictly limited and monitored by hedge funds) and almost caused a panicked Congress to pass legislation limiting speculation when the problem was investing and, like the SEC, a failure by the CFTC to enforce the rules. See yesterday’s WSJ for the article on Cotton futures which shows how true commercials, with a need to hedge, have suffered losses as they sold forward and then were forced to cover due to margin calls…TB believes this is also what happened to crude carrier SemGroup, not overtrading although it may have appeared that way…or it is possible that to offset the losses from the margin calls they took on additional long positions. The point, however, is that this is a form of price manipulation and the ICE which now controls cotton, has failed to see it…even though they studied the problem but only for the two day period when it spiked…not the events leading up to it…a pity.
 
In conclusion, if the SEC, and CFTC would do their job it would be an immense help to Bernanke and the Fed as well as the BOE and ECB. TB believes the release of the CPI data confirms this as bonds are rallying on what should have been bad news…after all, crude and gasoline prices are down about 8% since the CPI survey was done. Bonds do not rally frivolously…particularly in this environment!  

A friend corrected TB on sex scandals not being limited to the Dems…the GOP has had its share including Newt Gingrich, and the details of McCain’s divorce…probably why they are not making much of the Edwards affair. It does seem however that the Dems have adulterous affairs while the GOP divorces wives after having the affairs…you decide what that means…trophy wives?

As for the Beijing Olympics a big black mark for them: the 7 year old girl singing was actually lip-synching a la Milli Vanilli, while a 10 year old sang in the wings…she was not used because she had bad teeth.  How reprehensible that is…also some of the things we saw as live were not actually happening in the stadium…special effects…all is not always as it appears…but then, you knew that!

Hope you all have a good day and that TB has provided you with some useful information to do battle with the markets.

All the best, 

TB 

Comments (1)

8/13/08…where have all the flowers gone?

August 13, 2008 at 3:55 am · Filed under economy, financial, markets ·Tagged , , , , , , , , ,

…Where have all the flowers gone?
Long time passing,
Where have all the flowers gone?
Long time ago.
Where have all the flowers gone?
Picked by young girls every one,
When will they ever learn?
When will they ever learn?
(words and lyrics by Pete Seeger)
 
The same can be said for the markets…when will bulled up buyers learn that the big rally on Friday on low volume followed by a creeping higher to levels not seen since early June on most indices but also on low volume spelled trouble? How could the expiration of the prohibition on naked shorting of GSE’s and select financials which just so happened to be primary government securities dealers go unnoticed by CNBC and the other cognozanti?…or is it illiterati? So when JPM announced a $1.5B write-down of mortgage assets which is a pittance these days it was the biggest down stock in the Dow and the S&P 500, followed by Bank of America. Wachovia which also added $500 million to loss reserves for auction rate securities fell 1.5% but held above the 40 day moving average. During the ban short interest in these stocks declined by 78% in relation to other securities and fell by 13% in the two weeks ended July 31 vs. a decline of just 1.5% in all other shorts. As for the brokers, Goldman Sachs fell 6% yesterday, its biggest drop since Feb. ‘07 but is still up 6% during the period of the ban. JPMorgan. Thus the July 15 lows may not hold thanks to the SEC’s failure to extend the ban. Meanwhile short interest in the SPDR financial ETF ROSE 13% during the period. Berkshire Hathaway which had toyed with the 40 day for two days failed. Transports were taken apart on a day energy prices were falling. Why did SEC Chairman Chris Cox not extend the ban and at the same time extend it to all financial stocks? Why not enforce the other rules of shorting and demand those on the threshold list be covered…if someone goes belly up doing so good! Let them fail…aren’t you tired of seeing the only losers being homeowners, investors and taxpayers? This at a time we find out that the wealthiest along with corporations despite all their tax breaks are not paying their fair share? Yep, three out of four corporations pay no taxes and small businesses with losses are the biggest cheaters on taxes. This brings us to commodities which TB wanted to mention yesterday.
 
TB has long contended that the inflation problem has been caused by one and only one thing: index buying of commodities futures which are in turn invested in commodities swaps without limit. If only, when they saw what was going, on the CFTC had enforced position limits on banks instead of beginning to study the issue about two months ago when if enforced someone big was going to get hit…think JPM! But due to the orderly yet rapid decline in commodities prices, especially crude and gold, it appears that someone whispered in someone’s ear to unwind positions for their own good…perhaps it was to JPM and the other dealer banks…someday we will learn the truth. Meanwhile it has taken all this time to find out about options manipulation to the tune of $1.7 million out of the money calls by 50% at that time that the Fed was trying to assist Bear Stearns…somebody either knew something or was spreading rumors. If not, it was a blindly stupid bet that paid off…and those folks, just do not happen!
 
If you are thinking of buying a financial stock…any financial stock…think hard before doing so. We are now back to destroying any stock in that sector…this is truly pathetic. Who is advising Cox? Not TB! TB has nothing further to say…color him disgusted!

We have now returned control to the speculators at the expense of individual investors and pension funds. The SEC is supposed to protect investors. Instead it is aiding and abetting those who would destroy an entire market for their own personal gain. If you can’t see this, TB pities you.

Hope the market helps you today…a big hope!

TB 

Leave a Comment

8/12/08…a monkeywrench in the works?

August 12, 2008 at 4:51 am · Filed under economy, financial, markets ·Tagged , , , , , , , ,

Bloomberg Quote of the Day: “When everyone is somebody, then no one’s anybody. – W.S. Gilbert. TB’s corollary: “then everyone is nobody.” .
 
…readers know that the way to push TB’s buttons is to defend the repeal of the uptick rule, or worse yet naked shorts. They also know that he feels that these two factors exacerbated the problems at Bear Stearns leading to their demise and subsequent bailout by JPMorganChase who had the most to lose if the Bear had gone belly-up causing a domino effect as credit default swap counterparties imploded. They also know how distraught he has been with the Cox-led SEC over this and the CFTC (Commodities Futures Trading Commission) over their failure to enforce position limit rules equally by allowing banks unlimited positions and those are in the investment bank areas of commercial banks such as…JPMorganChase…and profited at the expense not only of their clients misery due to rapidly rising commodities prices which have distorted inflation and caused the Fed grief…egregious!
 
Cox’s ban on naked shorting of select financial stocks…originally the GSE’s (FNM and FRE), then extended to the 17 primary government securities dealers, has been extended once and expires again today…no word from his high office as yet. The ban was modified to exempt market makers which some felt confusing but in fact had to be done so they could…well…make markets. So Mr. Cox, the world is waiting while you continue to dilly-dally on a permanent rule…and are still considering restoring some sort of uptick rule. Perhaps too many years on Capitol Hill has distorted your view of what one is supposed to do as a regulator and perhaps believing you are above regulating…time waits for no man.
 
Mr. Cox could start by exercising his power by enforcing the provisions of the threshold report on naked shorts that equal 10,000 shares or 0.5% of the float in any stock beyond three trading days. Why spend manhours…womanhours too…compiling this report then not doing anything with the data? Perhaps he learned from the Alan Greenspan who was so loved and adored…particularly by Wall Street who he was making rich while allowing the country to be destroyed in a sea of mortgage debt and derivatives. He might take notice that the only one defending Greenspan’s moves and his failure to raise interest rates (just like the Administration-controlled Congress tried to make the emergency tax cuts from the 2002 slowdown permanent…by saying to restore them would be raising taxes…hence the ideal tax rate is zero, and if that sounds ridiculous it is right out of the credo of one Sir Lawrence of Kudlow!).
 
Why, when you have futures, options, options on futures, and any number of derivatives…not to mention ultra-short ETF’s that lose two to five times as much if the market rallies as they make as it declines  …should we not enforce the rules on naked shorts and while we are at it put in a new uptick rule requiring TEN upticks before you can short more…needed since we converted from eight’s to decimals? The answer is a resounding: WE DON’T!…only those who wish to give themselves an edge over real long-term investors need that power. TB would also point to the fact that the uptick rule which went out on July 2, 2008 nearly matched the peak of the stock market, and that options volatility, as measured by the ratio of puts to calls, has declined rapidly over the period despite moves of 100, 200, even 300 or more points, frequently reversing direction the next day! Also, many of the major movers reverse dramatically from one day to the next and due to capitalization weighted indexes can move the index by 25, 50 or in the case of Exxon Mobil (XOM) even 100 points on a given day…so we have exchanged options volatility due to the prevalence of collars, straddles, and strangles for broad market volatility. This allows the hedge funds to insulate themselves against major moves thru puts and calls while creating enormous daily price volatility. Enforcing naked shorts and reinstating a new improved uptick rule would reduce this volatility dramatically and entice small investors back into the game…and it is a game!
 
Yesterday, TB meant to include a breaking story on Bloomberg that said while the Fed was trying to determine what to do with the Bear Stearns (BSC) crisis, someone bought $1.7 million of puts on BSC at strike prices of $30 and $25. So?…so the stock was trading at abouit $60 at the time! More significantly, the options were to expire in three weeks! This, as one hedge fund manager, said was like buying $1.7 million of lottery tickets! No rational investor would do this…unless…he either knew something or was spreading rumors and shorting the stock too…follow the money…somebody is going to jail over this one!
 
That is just another abuse the SEC has failed to do anything about until well after the fact. Late yesterday, Wachovia (WB) issued a mea culpa saying they overreported earnings by $500 million due to an increase reserve for legal expenses related to auction-rate securities, and will lay off another 600 employees in addition to the 4,400 previously announced…they are apparently in discussions for a settlement such as Citigroup (C), Merrill (MER), and UBS. In addition to WB, NY State is now going after JPM and Morgan Stanley. Now the question is ($64,000 question according to the Treasury Secretary showing how dated he is since that amount is now chump change), with the banks weakened capital structure how are they going to pay the fines and buyback the securities from their customers…Bingo! Get financing from the federal government…is there no limit to their hubris? First, they took your money and now you, the taxpayer are expected to just keep bailing them all out…with no recourse to those who made the money in the first place! As Secretary Paulson said…he doesn’t like any of this but the alternatives are worse. Yes, they are…far worse. While the Dems face another adulterous scandal as is their wont, the GOP has amassed a record of bribery and corruption over the past eight years…Alaska’s Senator Stevens being the latest. Paulson said that this is what happens without the proper regulation and TB says quite right! TB has also said that the proponents of unbridled free market capitalism with cheerleader Larry Kudlow, are its biggest enemy…it is all about balance! and that is lacking!…sorely lacking! This is why we need change in Washington…not whether Obama or McCain is the better choice but because…and TB is a skeptic…we at least need to rearrange the deck chairs on the Titanic. The point is that we need to restructure and only party change can do that…McCain cannot do it on his own…even if he is so inclined. That was not a political statement…merely fact supported by Paulson’s comments and even Dubya’s when he thought the camera’s were turned off…they never are!
 
This morning we learned that the lily-white JPM is taking $1.5 billion in mortgage securities write-downs, UBS is splitting the Investment Bank and Wealth Management and Michael Price is shorting Wachovia, Citigroup and says few others are worth owning! Thus financial stocks after doing so well since Wachovia announced their earnings on July 15 and put in a floor for the sector…at least a temporary one as this news will probably shake investors and unless the naked short rule is extended to ALL financial stocks, the lows might not be in…and that means that, as expected, we have had a countertrend rally.
 
To those of you who are tired of discussing naked shorts and regulators, TB would ask: why aren’t you outraged? It’s your money…your children’s and grandchildren’s money…where is the outrage? Dunno! 

Well, the Olympics are underway, we have protested the Russian invasion of Georgia and bombing of Ossetia…a major source of oil and friendly to the US, and the Russians have said they made their point and are now withdrawing…the Dalai Lama has prayed the games go well while the Chinese could care less…the IRS is now finding that the wealthiest are the biggest tax cheats along with small business owners including those who report no income…this has flown under the radar screen but now audits are being stepped up. guess that is the kind of world we live in…and it ain’t wonderful!

Hope that all of you have a great day though.

TB 

Leave a Comment

8/11/08…a whale of a tale

August 11, 2008 at 5:22 am · Filed under economy, financial, markets ·Tagged , , , , , , ,

Today’s Topics: Stock Market Volatility, Merrill Lynch, GSE’s, Corporate Governance
 
…”got a whale of a tale to tell you lads…whale of a tale or two…about the whopping fish on a night like this…and it’s all true…I swear by my tattoo.” Sung by Kirk Douglas in 20,000 Leagues Under the Sea. If that doesn’t accurately describe this market TB has no idea what does. You cannot believe anything you hear…or see…it is all smoke and mirrors and the worst part is people holding themselves out as experts making the stupidest of statements! It would be far better for us to have sustained double digit rallies than to be down 200 on Wednesday and up 300 on Friday. All of this on the lowest prolonged volume of the year (averaging just 1.3B shares since July 25th. Barron’s Alan Abelson cites Merrill’s David Rosenberg who noted:
 
“…since the current bear market began a year ago, there have been half a dozen of these muti-hundred point bursts upward, but interestingly, there were none – zip – during the 2002-2007 advance that preceded it. Be aware, too, in case you’re not the counting kind, that there have been 10 days in the current down cycle in which the Dow closed down 300 points or more and, in the bear market of 2000-2002, there were nearly twice ass many 300-point up sessions as 300-point down sessions.” 
 
Abelson then goes on to report that Merrill’s asset sales are not all they are hyped up to be and were actually aimed at sanitizing the balance sheet with little shareholder value: the sale of their 20% interest in Bloomberg PLC to the company for $4.3 billion was for just $110 million in cash (TB adds it is about 25% of its quarterly dividend), and the rest in notes with maturities of 10 to 15 years.
 
But wait, it gets better, the sale of the $20.6 billion in paper of dubious quality was billed at 22 cents on the dollar, BUT Merrill is financing 75% of the purchase price with the only recourse being the paper itself! Barry Ritholtz estimates the actual sales price works out to 5.5 cents on the dollar…wouldn’t they have been just as well off to hold it? (TB learned long ago to be leery of companies whose sales are suddenly boosted but the receivables jump up accordingly as in that case the recourse is the receivables too.
 
This comes at a bad time for Merrill…along with Citi and UBS and soon probably Wachovia who are being forced to buyback their auction rate securities…which are tax-exempt and given their tax loss carry forwards those rates…some at 2% or less and some at zero…are a bad utilization of capital (but better than issuing stock and continuing to pay the dividend which by TB’s calculation is $540 million a quarter as Merrill is doing). TB can’t get off Merrill’s case as not only the asset sales which we were told by CEO John Thane (who is no Jamie Diman), their capital needs were met yet within a week they were back at the well for $8.5 billion…so? they raised it but not without triggering the clause in the prior sale that said if stock was sold within one year at a lower price the stock price would be adjusted to it thus they received a payback of hundreds of millions (and they are receiving the aforementioned dividend which when you are losing money is actually a taxable return of capital isn’t it?), they gratuitously plowed that money back into Mother Merrill which further dilutes shareholder equity…you have to wonder!
 
One has to wonder about all that credibility Thane was supposed to bring to the table…being squeaky clean is not enough and he never had the financial background (although he came from Goldman to the NYSE…his expertise was in operations and computers).
 
Meanwhile FNM slashed its dividend 86% from 35 cents a share and FRE cut theirs 80% earlier in the week (TB missed this as he was out of town and it didn’t show up because the board has not yet declared the dividend for the quarter). TB does not like coincidences and one has to observe there was a slight (?) nudge from the regulators to cut the dividend? One would think…and hope! Note that their preferreds have clauses that they may be forced to withhold the dividend by regulators. 
 
We are on a learning curve of epic proportions…one we have placed ourselves in, or more accurately have been placed in by the very people who were supposed to protect us: regulators and boards of directors. A little less backslapping and more attention to business at those board meetings would have prevented this grief.
 
A friend in London sent a piece by ousted CEO Phillip Purcell who was replaced by John Mack…TB believes that what Purcell says is of importance to us all and confirms what TB has said all along: that the problems began with investment banks when they shifted from partnerships to publicly held corporations…as in other peoples money! One of the very first of these was Merrill Lynch. Another area is compensation…based on current performance and thus revenues, not on long term profitability. Three other areas cited are: leverage…what adds to the bottom line in an up markets detracts even more on the way down; recurring profits…in other words should capital be allocated to an area just because it is ‘hot’ and profitable at the moment?; board responsibility to assess the options rather than leave strategy up merely to the CEO who has a much shorter time horizon.
 
TB believes Morgan Stanley may have replaced the wrong man…although it didn’t appear that way at the time…also as it turned out MS was the canary in the coal mine. Purcell’s main problem is he came from the Dean Witter side of the firm whereas Mack was from the MS institutional side. Lastly, while Purcell directed his comments to the investment banks, it applies even more so to the commercial banks who without Glass-Steagall or any meaningful regulatory restraint since 1999 have used the assets and standing of the commercial side of the bank to leverage into areas that have destroyed confidence in their financial condition. A Bloomberg top story today cites how high wealth investors are exiting UBS in droves…due to mounting losses (but also TB believes to fears of being swept into IRS audits due to the parents concealing assets). 
If you are like TB, you are not amused by the Olympics…from China or otherwise…it is nothing but big corporate hype sprinkled with athletic events. Surprisingly, Meet the Press took time from its Sunday political banter to interview Treasury Secretary Paulson who agreed with Dubya’s assessment of the condition of the financial sector at that fundraiser where he asked the cameras be turned off…hasn’t everyone learned by now nothing is off the record? Poor John Edwards knows this and finally admitted it…he pulled a Gary Hart and thankfully for the Dems he is not a contender…and right before the convention too! One thing about the Olympics however….nobody…ever…will be able to recreate those opening ceremonies…unless it comes to China again. All TB could think of was poor Greece who is hosting the next one. TB’s advice: don’t even try…go back to basics as the Olympics were originally intended…of course the sponsors won’t go for this…by the way they are exiting in droves…say they will not sponsor the next ones…the big winner? NBC, the GE sub who also owns CNBC sadly. Someone please tell those reporters that that is what they are…not like Erin Burnett who on Chris Matthews referred to the Treasury Secretary as Hank Paulson…are they equals?…apparently in their eyes.Have a terrific day!

TB 

 

 

Comments (1)

08/08/08…what to buy?

August 8, 2008 at 4:40 am · Filed under economy, financial, markets ·Tagged , , , , , ,

“If I didn’t procrastinate, how would I get anything done?” – Trader Bill 
 
…it is 08/08/08 and strange things are happening. First, Russia has invaded Georgia and it looks like all out war with them. Overnight the Ruble hit a two year low and the Euro is at a five month low. Yesterday the ECB voted to ignore Chairman Jean Claude Trichet and hold the line on rates rather than inflation. Readers know that TB has felt all along (for the US not Europe with its declining worker productivity…especially in Trichet’s France), that inflation here is a combination of rising food energy prices and a weak dollar, and that without wage increases…which CEO’s have been hoarding for themselves, we only have cost push inflation…and that without being fully able to pass on rapidly rising input costs…not the dreaded demand pull variety.
 
TB believes Bernanke has understood this all along despite the plethora of economists and Wall Streeters (who most certainly are not economists) begging for rate hikes…even if it plunges us into a major recession or worse. How one can read the newspapers and be afraid of runaway inflation, or that the Fed raising interest rates would solve something beyond our control defies logic. Not only have we lost nearly 500,000 jobs this year, not to mention the failure to count discouraged workers and part-timers who want to work full time, but the birth death census of businesses due to timing quirks has probably overstated the number of jobs by 600,000 or more. Yet the Kudlovian principle is that unemployment is just 5.7% and that is not bad…but adjusted for part-timers and discouraged workers it stands at 8.6% and the truth be known is more likely closer to 10%!
 
So what does one do here? TB has listened ad nauseum to the ‘eggspurts’ on CNBC…you know, the ones who told you to sell your financials a month ago and buy energy…who said buy commodities…who said buy tech a year ago and are still saying it…who said buy the retailers for the past six months which defies logic…need TB go on? These brilliant people have no concept of market history…other than to say “over any 20 year period you have made money in stock,” the mantra of Fidelity’s Peter Lynch. By the way that statement is false…the reason is the changing composition of the indices and that it does not take into consideration inflation or taxes. What they ignore is that the stock market selloff has only been half the average bear market and what has happened to the US and been exported to the rest of the world over the past year is anything but average. Yet, Jim Cramer declared a bottom the last week. He may be right but history is not on his side and who cares when you buy a stock one day and see moves of 1, 3, 5, or even 10% in almost random fashion…up one day, down the next. How can a rational investor know when to buy, let alone what to buy.
 
Normally bonds have been the place to be, but they have offered little solace. The moves there have been much like stocks…and if inflation is such a big concern, how come TIPS have been the worst performer. If the bottom is in for stocks, how come the one month has fallen from 1.62% to 1.47% since Friday and that with a 2% Fed Funds rate that is allegedly going higher. TB has been saying that on weakness bonds have appeared to be good value in light of economic conditions but far be it for him to try to buy as whenever he sees value they immediately rally a point or more only to be slammed the next day.
 
TB believes that bonds will provide value over the rest of the year and possibly much longer, that the Fed Funds rate might still be cut below 2% this year, and that if you want to buy common stocks, consider buying solid dividend payers (not like Fannie Mae that just slashed the dividend from 25 cents to 5 cents…was that by choice or government imposed?), and preferred stocks with stout dividends. If earnings are to decline which typically they do, the p/e’s of growth stocks will be inflated making them vulnerable.
 
Look at Berkshire Hathaway which was one of the best performing stocks from 2001 to 2005 or so…and is now suffering with the rest…despite the constant hyping of Warren Buffett by CNBC for the past month…diversified?…it is largely an insurance company. TB noted however that after several years of value stocks outperforming growth on Wednesday growth clobbered value in all size groupings and even on yesterday’s 224 point decline value fell much more (Weds Mid CapGrowth up 1.35% vs +0.5% and yesterday Mid Cap Growth -1.4% vs -1.9%)…beginning of a new trend?
 
If anyone tells you…as Cramer did…that a bottom is in or which stocks to buy…they are either preening or looking for company…TB makes no recommendations except that you examine the options.

Hope you all have a terrific weekend…easy for TB to say coming off a two day week!

TB 

Leave a Comment

8/7/08…commodities commonalities – and follies

August 7, 2008 at 4:54 am · Filed under economy, financial, markets ·Tagged , , , , , ,

Bloomberg Quote of the Day: “The art of being wise is in the art of knowing what to overlook.” – William James…one of TB’s favorite philosophers since his first and middle names are the same.  
 
…why are all commodities taking a hit all of a sudden? TB believes it is because they all benefited about the same time and for the same reason: demand from investors, not speculation. Meanwhile Congress has focused on speculation as the problem but fortunately killed a bill that would have prohibited or at least limited speculation in commodities. The fact that they are now falling sharply and in two unrelated commodities especially: Gold and Crude (or for that matter the entire Energy sector), should give one pause. So what is causing the selloff that has resulted in the CRB Index falling 16.2% since peaking on July 3 and the industrial weighted GS Commodities Index falling 18% over the exact same period? First, some definitions:
 
*Contango - when the lead contract is priced lower than the further out contracts. This is a function of the cost of carry and storage costs on the commodity as well as a belief that prices will rise.
 
*Backwardation – when the farther out contracts trade at a discount to the lead contract and is an expectation that future prices will decline…Silver only traded in backwardation for a brief period in the 1980’s after the Hunt brothers were forced to liquidate their positions.
 
Obviously, when the curve is flat there is confusion as to the direction of prices and that does not last long.
 
A misconception is that futures are a zero sum game since the number of longs equals the number of shorts. In the past it has been true but only recently have banks exploited their position limit exemption to take on positions as a ‘hedge’ against commodities swaps they have written with index and hedge funds. This is a violation of the rules which specifically define a hedge as against the underlying commodity. 
 
Then there is the argument that speculation does not matter since at expiration the futures and spot price converge. BUT this only applies to the lead contract and that can be rolled out to a longer dated contract. Studies show conflicting evidence whether futures prices are more accurate than spot prices, especially in long dated contracts…TB believes that they are only as useful as any consensus that applies at a point and reflects psychology at that point in time…the same as the predictive ability of Fed Funds futures, or any implied interest rate, on whether the Fed will tighten.   
 
TB believes the sharp drop in commodities is due to a deleveraging of positions…or more accurately…net withdrawals from commodities index funds which started the problem back in February. Consider:
 
*Both Gold and Crude began their selloff on July 15…just after we learned that the CFTC was looking into the impact of index funds on commodities prices due to banks having unlimited position limits and thus being the only ones that could write commodities swaps with the indexers in unlimited quantities (while the SEC contemplated its naval on naked shorts and lack of an uptick rule).
 
*Since January, pension funds have been rapidly increasing their exposure to commodities thru commodity based hedge funds and commodities funds (note that a few commodities hedge funds have gone bust recently due to short positions and huge margin calls)
 
*Backwardation to contango…using the spread between the lead contract in Crude and the Dec. ‘15 contract (the longest dated with significant open interest), when the lead contract in Crude first closed above $100 on Feb.19th (TB’s wife’s birthday and at that time the most hits his blog had received), the market was still in backwardation (where the longer dated contracts are below the lead contract), also, at this point the ‘peak oil’ argument was taking hold that we have maxed out or will soon max out on production and then it will decline causing prices to rise…to $200 or more according to some sources. TB did not subscribe to this theory and subsequent finds by Petrobras off Brazil and also discoveries above the Arctic Circle make this less likely (when TB was in elementary school some scientists believed oil reserves would be exhausted in 50 years…long since passed). Oil prices remained in contango until May 13 when they were flat all the way out the curve but by 5/15 there was a $2 premium on the Dec ‘15 contract (contango), which held until July 25-29 when there was key reversal down (higher high lower low and lower close), followed by an inside day, then another key reversal down. TB believes this was significant as it showed indecision (futures then moved up for 3 sessions before tanking again. At that point the curve was FLAT but by yesterday’s close the Dec ‘15 contract was $5 below the lead!
 
This indicates, at least to TB that some of the positions supporting those commodities swaps are being unwound. It is possible the banks have increased the cost of the commodities swaps significantly due to fear of regulation (TB pointed out earlier a Barron’s article by Gene Epstein that warned of forcing the banks to unwind positions could cause serious losses for them), would expose their investment bank side to losses which in turn would negatively impact the commercial bank side…nobody seemed to think that while they were writing these swaps and hedging them by buying contracts (Epstein pointed out that one half the wheat production was held in index funds!), they were in fact harming the banks customers and in turn the banks themselves. TB believes JPMorgan was the biggest writer of these swaps as they are of credit default swaps…and thus why the Fed turned to them to bail out the Bear (a collapse of Bear would have caused an implosion in the swaps that could have seriously impacted JPM).
 
So perhaps the CFTC ‘talked privately’ with JPM and the other banks and ‘jawboned’ them into cutting back their positions gradually which in turn caused the commodities indexers to cut back on their positions and money to flow out of the index/hedge funds…time will tell, but the point is that at least $25 a barrel was speculation…TB believes it was $50 or more! Regardless, think of the pain that has been placed on the economy, the problems caused for the Fed as they tried to balance inflationary fears with a recession…can anyone deny it truly is a recession at this point? The ’proof’ to TB that this is what happened is that Gold and Crude should have no relationship to one another yet the lead contract had a secondary peak on July 15…same as crude and the patterns since are quite similar. The damage that has been caused to producers (commerical accounts), especially farmers hedging their crops cannot be understated. Those who sold their crops forward were hit with unprecedented margin calls…as did SemGroup (which may have then tried to overtrade their way out of the mess)…and when they went to their capital starved bank were told they would not finance the margin calls…this is the destruction of the most efficient market on the planet and one that has served well for more than 100 years. 
 
Thus TB concludes that there is no oil crisis…that while there has been a significant upward shift in demand due to emerging markets…oil prices above $100 have been a function of commodities funds (investing not speculating), hedging of longer dated contracts by users (i.e. airlines), and even holding up of supplies by producers (Iran with ships anchored in the straits), and shipping lines (moving slowly allegedly to conserve fuel…but that could not have happened without agreement by the shippers themselves). But he is also concerned that even a modest backing off of prices will cause us to revert to our old habits and for Congress to put energy conservation on the back burner as it has for 20+ years. Interestingly, commodities were a poor investment over that entire period! Oil dropping below $100 would be a big boost to stocks (countertrend rally)…and bonds and the dollar…until we realize of course that we still have a credit crisis but even that would be mitigated.
TB had a great time in Oregon. Terrific weather and he got to listen to his nephew audition for the UofO band which he passed with flying colors. He is an incredible musician who plays 48 instruments both woodwind and brass. Still, a long drive but a pleasant one.

Hope you all have a great day…and week!

TB 

Leave a Comment

8/5/08…da Fed speaks!

August 5, 2008 at 10:47 am · Filed under Uncategorized

Next comment will be on Thursday but wanted to cover the Fed meeting. TB
Listening to CNBC today it is incredible the number of people including Tony di Crizenzi who think the answer is for the Fed to tighten..no doubt they would have been calling for the Fed to tighten in the 30’s too!
 
There was only one dissenting vote (Fisher who wanted to tighten) on maintaining the Fed funds rate at 2%…as TB has said they will for the remainder of the year at least. Inflation is not a problem or THE problem. Bernanke gets it…most economists do not…we are in a recession for heavens sake…as for the inlfation as TB has said it has peaked…and will decline from here now that commodities prices have peaked and are rapidly declining. It never was the dangerous demand pull variety but cost push…and where are the drivers to cause inflation to increase from here…certainly not wages or home equity loans!
 
Also, TB firmly believes that the decline in commodities prices most notably energy and gold is due to unwinding commodities index fund positions by pension funds and that is the primary cause. We are ignoring Iran and hurricanes so what else could it be.
 
The CFTC got us in this mess by failing to enforce the rules (as did the SEC with stocks), and to suddenly enforce them and make an announcement could seriously impair dealer banks…yes, like JPMorgan! So TB believes they told them quietly to pare down positions which in turn meant telling the index funds they would do no more commodities swaps or at a huge premium…and those positions are now working their way off. The prove to TB will crude trading below $100 which he believes it will before stabilizing…then return to arouind $100…it was index funds which pushed it above $100 in January and created the problem! That’s how TB sees it.
 
Having a great time in Eugene and back on Thursday…good luck to all!
TB

Leave a Comment

8/1/08…cramered and cratered

August 1, 2008 at 5:40 am · Filed under economy, financial, markets ·Tagged , , , , , , , , , , , ,

Note: TB will be on vacation until Thursday, August 7, so this will probably last commentary until then.
 
…a year ago on August 3, Jim Cramer went on the rant of all rants and declared a credit crisis saying Bernanke and the Fed had “no idea” of how bad things were. That is the beauty of being Cramer you can say what you want and the worst that happens is you sound foolish or a lunatic. Nevermind that leading up to this Cramer was a bull, but talking to his buddies from hedge fund days (he says they told him to speak up), and that thru the entire bear market he has continued to say there are always opportunities as one by one they have evaporated. This is not going to be a rant on Cramer but it is timely since on Wednesday night he declared a bottom was in for stocks in a loud…but tame compared to his Bernanke rant…manner. TB did not hear that declaration but yesterday morning CNBC began playing it over and over again all day…Cramer came on to say he was proud to be the first…but the problem was that the market never traded up all day! Last night, he was just as positive but added “I said the bottom was in and that doesn’t mean it can’t go down but we have seen the lows.” TB has to wonder how many of his loyal followers were taking advantage of that selloff and feeling a world of hurt.
At the end of the day the Dow was down 1.8%; the S&P 500 -1.3%; Russell 2000 -0.6% and the AMEX Composite -1.3%. The NYSE Energy Index which was up 4.4% on Wednesday fell 2.9%.
 
TB was not nearly as sanguine (but then Cramer is a bull by nature and TB a bear), feeling good that having watched the bank stocks that the shortcovering had removed the fear but was not enough to make investors want to climb on board and that while we had eradicated the losses since June 30 on most indices we needed another strong day since after putting in new cycle lows on July 15 we had a similar two day rally that then went sideways and plummeted, approaching the lows again.
 
So is Cramer a fool? You be the judge but he has a lot of trading experience as a hedge fund manager. Also, the lower than expected GDP plus downward revisions to Q4 2007 and Q1 2008 set the tone before the open. TB does believe the lows are in for financial stocks (as a sector not individual stocks like Downey Fed or WAMU…but those would be related to their own financial condition as it should be not mindless shorting of the good stocks in the sector like Wells Fargo and US Bancorp. Please give both Cramer and TB credit for sounding the alarm on naked shorts and elimination of the uptick rule!
 
One story out there is that we have felt our pain and now it is the rest of the world that will suffer. But as the returns on major indices have shown, even at the lows we were not nearly as badly off as all major exchanges around the world…most were down two or even three times as much as our markets. TB has had concerns about emerging markets more for the amount of money that was pumped into them such as China and India and those fears have proven out as they are the worst performers year to date in the world. Even the hot Mexico and Brazil oil economies are still down almost 7% ytd and also the only ones to have really benefited from currency translation as Mexico is still +1.5% against the dollar while Brazil is up nearly 6%!
 
Yesterday in the US splitting up your company was good (Marathon Oil [MRO] +9.7%), while good earnings didn’t do it (Exxon Mobil [XOM] -4.7%…and down 6.3% for the past 12 months and back to levels of May 2007…would you have guessed that?; and Chevron [CVX] -3.1% and flat for the past 12 months…what happened to that energy rally?), and it was worse elsewhere.
 
In the UK, British Tel (BT) announced Q1 earnings that missed by 0.4 PENCE! The stock gapped down and plunged 15.6% and is now -47% for the past 12 months…this is hardly a financial stock and although they have lost market share to some wireless companies they are not in bad shape. PLUS they had already declared a dividend of about $2 US that doesn’t go ex-div until August 20…their 12 month yield is 9.18% after the selloff…this seems irrational to TB.
 
Meanwhile Unilever (UL) reported a 19% decline in profits and had the biggest price drop in five years. Unilevers problem was caused by increased input costs…notably palm oil. On the other side of the coin their plan to increase revenues from emerging markets is paying off…the stock plunged 9% and now down 11% for the past 12 months! It paid a dividend in June but has an indicated yield of 4.8%. Is the dividend in jeopardy? No…so to TB this too is irrational.
 
TB has been grousing about Merrill Lynch (MER) continuing to pay the dividend even as they raise capital. The same day as they announced raising $8.5 billion thru stock sales they declared a 35 cent dividend…and it will apply to these new shares. Ex the new shares the cost is $540 million per quarter…in other words since their problems emerged last August they will have paid out over $2 billion in dividends! That doesn’t say much for John Thane to TB…you decide.
 
Disclosure: TB does not recommend any stock mentioned and owns BT and UL, but not MER.
 
Back to the problem with commodities prices…TB has reported on the poor farmers and other commercials who have tried to sell their products forward and due to the huge price increases fallen victim to margin calls. He also reported on SemGroup, one of the top marketers of oil in the country that just filed for bankruptcy protection. While the story isn’t out yet, TB believes they were the victim of margin calls and then overtraded to compensate so they could recover losses and got trapped…time will tell. Supporting this argument is that Chesapeake Energy (CHK) which is a well run company reported earnings yesterday and while beating analysts estimates by a penny declined 1.6% on the day, even though they affirmed their forecast. BUT they lost $1.8 billion on hedges. So will someone please wake up the SEC to this problem…banks must have position limits…same as commercials and speculators! TB does not own CHK. 
 
GM just reported and swung to a loss again…story is cirulating that there is a buyer for the Hummer division…hummmm. Not looking good for them. How many times can Wagoner keep ’splainin’ it?

Is the bottom in for stocks? Possibly and for financials most likely, but unlike Cramer, TB feels it will be a long, slow climb back and that unless you are a major investor you have plenty of time. Almost everyone TB hears on CNBC say that some stock or sector is a buy qualifies it with it may be six months or more…and they could go down before them…be careful of bottom fishing.

Have a great weekend…until Thursday…ciao!

TB 

Leave a Comment