Archive for November, 2008

11/26/08…suppose they held a rally and nobody came?

November 26, 2008 at 9:56 am · Filed under economy, financial, markets

TB’s commentary can also be accessed at his blog www.traderbill.com with the market summary updated usually by 6pm EDT, overnight markets at 7:30am, and then followed by the daily commentary. It also has an index of other features…you can put cursor on calendar date and by clicking get column for that date…back to Nov.!  Over 19,500 hits since 11/9/07. See blog for new format…much easier to read. TB

 

…better still, two HUGE days of rally that were devoid of technical significance. Even the premise…the appointment of Tim Geithner as Treasury Secretary…while positive provides no indication that what he will do will fare any better than Paulson. Do you really want to be ahead of the curve as we slip into recession with no sign of when we might come out. Furthermore, unemployment will definitely rise and infrastructure investment takes time…and what if the populace starts paying down debt or God forbid, begins to save! Once again TB heard yesterday that the consumer is not dead…well if not he is definitely in a coma, and one he might not be coming out of anytime soon. Laugh of the day: falling gasoline prices are a tremendous stimulus! Hello? First, we have been drained through rising food and energy prices which has buried the average American in a sea of credit card debt, and because gas prices are now lower all will be well again.

 

That is what TB meant yesterday by accentuating the positive! TB notes that yesterday was the first day this month where movers on the Dow weren’t bifurcated. The rest of the time they have been heavily positive or negative…like 28:2. But Yesterday they were 16:13 and every index almost had an inside day (the Dow had a true one). Readers know that an inside day (lower high and higher low than the prior day) is a sign of uncertainty and that is not good after a 1,000 point rally. The other indices ‘barely’ posted higher highs and then retreated. Overnight markets are weak and with a four or five day weekend for the big players, that is not a positive since Friday is also monthend! Think about next week too when on Friday we get ugly payrolls numbers and while holiday sales will look good due to heavy discounting (already 40-50%), that too doesn’t bode well for the economy…or the stock market.

 

TB has been a proponent of buying stocks with dividends…but you have to be careful as Citi halved theirs, Genworth has cut and according to Bloomberg this is the worst quarter since 1958 with 91 companies cutting divvies. Note that the dividend yield on the S&P 500 is 3.53% which is not only more than a 10 year treasury (3.01%) but now a 30 year (3.54%). Normally one would say that stocks look attractive but IF earnings are being cut and dividends too now, that case may not be nearly as compelling.

 

TB read a Euromoney article this morning that ‘fails to deliver’ among the 17 primary government dealers for U.S. treasury’s exploded to over $2 trillion over the past three weeks and still are more than $1.3 trillion. That is because Broker/Dealers of government securities have stopped lending them on repo in fear that they won’t be returned to them (another fallout of the Lehman bankruptcy as the referee has frozen the assets).

 

This however has created a paradox: the most liquid of instruments should be U.S. Treasury TIPS yet as TB has pointed out they are incredibly weak…TB has suggested that due to deflationary concerns traders are long bonds and short the equivalent TIP. This morning the 10 year note yields 3.01% while the 10 year TIP yields 2.65%…so investors are willing to risk inflation for a mere 36 basis points…but worse, the 30 yr TIP is yielding 3.19% vs 3.54% on the equivalent bond or just 35 basis points.

 

Here is another anomaly: while the 3 month T-Bill yields just 0.10% the January 15, 2009 TIP with a 3-7/8% coupon is yielding 14.6%! That folks, is an 8.76% money market equivalent (due to actual days accounting). Part of this is that a lot of holders of these notes do not wish to pay the tax on the phantom income which if they have held them all year is substantial…even though they will get the income 15 days later…so it is more of a window dressing issue. The other of course is that inflation declined last month and, due to a three month lag, there is one more month necessary to calculate the actual yield on the security. IF it is unchanged the yield will drop about 30 basis points…in a worse case situation it might drop to 7%…hmmm 7% vs 0.30%…isn’t that a no-brainer? There are of course other factors…for one even though they are trading at about 98-5/8, the cost of $1MM would be about $1,335,000 and the accounting is a bit convoluted. Still…   

 

Lastly, don’t trust the recent rally in commodities…sans energy. Entire energy sector is vulnerable…note China cut rates overnight and if they are in that much of a slowdown what does that say for the U.S. economy?

 

As if we didn’t need more grief…according to Bloomberg, Pete Hastings, an analyst with Morgan Keegan says to survive GM may have to cut its debt below the current $43 billion, even if it gets the $12 billion in government loans it seeks. As a result he says GM may have to ask unsecured debt holders PIMCO and Franklin Resources to accept as much as two-thirds less than the face value of their bonds. GMAC which is owned 49% by GM and 51% by Cerberus (also proud owner of Chrysler), has an exchange offer whereby the holders can get 55 cents on the dollar OR swap their notes for an equivalent amount of senior notes and preferred stock  Oh groan…

Hope you all have a great Thanksgiving. TB will be out of town until Monday.

All the best,

 

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 November 26, 2008.

 

 

 

 

 

 

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11/25/08…accentuate the positive

November 25, 2008 at 5:43 am · Filed under economy, financial, markets

Bloomberg Quote of the Day: “Give me the luxuries of life and I will willingly do without the necessities.” – Frank Lloyd Wright

 

You’ve got to accentuate the positive
Eliminate the negative
And latch on to the affirmative
Don’t mess with Mister In-Between

You’ve got to spread joy up to the maximum
Bring gloom down to the minimum
Have faith or pandemonium’s
Liable to walk upon the scene   

…a good way to live…a terrible way to invest! The words and music of Johnny Mercer sum up the best and worst of America. We are so upbeat that we can’t see when we should be downbeat.We are in the greatest financial crisis in a century and we think it will end quicker than it began. It is as if we look at the world through rose-colored glasses and all we see, or Larry Kudlow sees, is Goldilocks.

Can anyone ‘splain to Tb why a huge bailout and the second one in a short period of time of Citigroup, who’s former leader Sandy Weill, and Vice Chairman Robert Rubin snowed everyone and drove them into trouble. TB will go off the sage advice of analyst Meridith Whitney, the first to see a problem with the financial system…it won’t work! What we have done is transfer all risk to the taxpayer and at the same time precluded private capital from coming to the rescue. Look at AIG…do you want to invest in something that is now 80% owned by the federal government? As for the broad market rally, one possible explanation is yesterday was the last day for T+3 settlement for November…hedge funds and while it would normally not be an issue with their balance sheets being scrutinized by their prime brokers…watch the close today!

The Fed which is now levered by 55 times (John Merriwether’s hedge fund this time stopped at 40x and he has now shut it down, better than with LTCM which had 100x leverage). Is this the target for the Fed? How many bailouts…oh and Laura d’Andrea Tyson who TB normally sees as a voice of sanity was on Fast Money on CNBC and was asked if the management should go…after all we are pumping in billions while they took out hundreds of millions. Surprisingly, she said you have to forget about that…after all nobody expected the housing market to collapse! What??? Excuse me…Schiller saw it coming, Roubini saw it, Fed Governor Ed Gramlich saw it…yet we are supposed to move on? Sorry Dr. Laura but you are dead wrong on this one! Bet that song is one of her favorites…let’s keep pandemonium away, right?

Then there was the Obama press conference…sure he said some good things but it isn’t big enough yet to amount to anything and we are going to be well into the first quarter, after dismal holiday sales, more layoffs, more bailouts and we will be lucky to stabilize let alone rally.

One of the funny things that happened at lunch Friday was some Republicans there said again, as they did last week…he promised us change yet he hasn’t done one thing yet. TB reminded them that he is not President yet and that had he done something it would have been impulsive and the GOP would have attacked him with: who does he think he is, anyway?…the President?…not yet. The pace was measured and appropriate for this stage of the transition…and Dubya seems to be cooperating…something we all want to see, but for Obama to unilaterally act would not be a sign of leadership but of interloping. It has to be done as a joint move by both men.

Take a look at the headlines below and tell TB…tell anyone…that the rally was real and warranted…it was NOT! It was short-covering and there are even questions about what Geithner, the source of the rally, knew and when he knew it…or what he will even do! That is the height of irrationality unless you are short. This despite about 1,000 points of light…er….rally…nothing happened technically! The closest was, of all things, the Dow Utilities which closed right on their 40 day moving average. All we did was wipe out the last five days of selloff in two sessions…period! The Dow needs to breakout above 9,000, the S&P 500 above 920, Dow Transports above 3,500…and folks, those are light years away. Once again, the bulls are saying this is it…what it is is yet another two day wonder…a rally without teeth. We didn’t test the lows we put in new lows and have little to show for it! Look before you leap or you might be in for a very hard landing.

Who is the most hated man in America right now? Chris Cox, for a total failure to regulate. Worse, when the answers are right in front of him he has been like a deer in the headlights…he hides…some SEC Chairman. Murphy would say he has risen to his highest level of incompetence. A pity because the nation and the world is paying for it!

 

Note in the headlines that BHP Billiton has pulled its offer for Rio Tinto…that is not a decision to take lightly…and the market knows it. Debt saddled Rio Tinto is in the tank and BHP says the decision was made due to plunging commodities prices and credit market problems, which would hamper its ability to sell assets…they will pay a huge penalty for backing out of the deal too. As for BHP the spread on their credit default swaps tumbled 130 basis points to 320 while Rio Tinto climbed 50 to 800.

 

Speaking of swaps….leave it to Wall Street…now they are peddling credit recovery swaps, largely on GM where you can bet on how much the bondholders will receive in a bankruptcy settlement. One more way to gauge where credit markets should be based on pure psychology and no research…what fools we are…

 

Deja vu…all over again. Bush pardoned 14 people including two drug dealers and a man convicted of environmental destruction. Add to this Scooter Libby whose sentence was commuted which TB thinks will happen in the final hours of Dubya’s administration and think how upset we were with Bill Clinton…what a country we live in…

 

Have a great day…just get through it and tomorrow and you are home free…then take Friday off…have fun, kids!

 

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 November 25, 2008.

 

 

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11/24/08…grand ole expiry!

November 24, 2008 at 7:01 am · Filed under economy, financial, markets ·Tagged , , , ,

…TB apologizes for not reminding readers that Friday was options expiration…and although it was a ‘minor’ one…not a quadruple witching…you can always count on it to throw a monkeywrench into the works. There were about 400 million shares traded in the first hour and 250 million in the first half hour…200 million on the open. Let’s dissect it:

 

First it opened up 140 on the Dow Industrials then reached about 160 before starting the first of NINE downlegs to zero or negative. After falling first to zero it bounced back to the highs then back to zero 5 more times in the first hour  then back up 130 before plunging to down 150 in the next 20 minutes. From there back to up 120 in the next 45 minutes, back to zero, back to up 160 creating a triple top, then racheted down to zero, back up 60 and then continued this process six times in the next 90 minutes! On the last down leg to -50 which was just before the final hour. From there it rebounded about 600 points closing up 494. Volume in that final hour was about 600 million shares…360 million in the final 2 minutes! Final volume was 2.37 billion shares, highest since the Oct. 10 ‘capitulation trade of 2.95B shares and second only to the 2.997 billion share record on Sept. 19…there have only been eight 2 billion plus days since June 30!

 

Now that we have looked at it forensically, what caused the rally? Ostensibly, it was the announcement of NY Fed President Tim Geithner as Treasury Secretary. TB met friends for lunch and just as he arrived the announcement had been made…that he was the ‘likely’ choice (over.the weekend that has been said in various ways but the announcement will be this morning at noon east coast time, along with Christina Romer as Chairman of the Council of Economic Advisors…from UC Berkeley and an expert on the New Deal and the Great Depression). A major money manager also was at the lunch and when he came in a few minutes later, TB asked what the market was doing…up 100. TB quipped to him that he wouldn’t bet a dollar on where the market would close and the money manager agreed.

 

He then went on to say that Thursday was the worst day of his career at which point TB’s ears perked up…as he had had the same thought in the plunge to down 445. To both of us it was as if our entire careers had provided no training for this event. It is due to the candor with which he spoke that TB will not provide his name of the name of his firm but suffice it to say it is one of the largest in the world…and refreshing to find someone who didn’t give us the same old song and dance…a truly nice guy, and an intelligent one!

 

Over the weekend, a lot of good stories came about about Geithner…his experience at Treasury during the Asian Crisis…he is an expert on Asia and speaks Chinese and Japanese…arigato! TB was particularly pleased that he did not choose Larry Summers, not that he isn’t qualified but because he is an academician as are most of the Fed Governors and Bernanke…and even more so Robert Rubin who should not be considered for any post or even as an advisor since he was part of the problem by helping overturn Glass-Steagall by convincing Clinton but then taking Vice Chairman at Citi where he suddenly says, like the Germans “he knew nothing.”

 

Also over the weekend there was talk that Citi would not exist by this morning. Instead, once again the Treasury bailed them out….they need to be broken up…fast! Smith Barney (which they stupidly abandoned the name in their neverending ego for the Citi name and that has turned out to be a liability), could be spun off…as could the commercial banking side…drop the investment banking side and fold the holding company…and good riddance! But not with the Paulson treasury (if you ever needed proof that Paulson is too close to these people here is the proof…he is an investment banker, nothing more and he thinks like them…Geithner on the other hand has dealt with them from the other side of the fence and knows their B.S.! TB had to laugh this morning on Bloomberg News when a reporter asked if Geithner had the gravitas…incredible, the last time we heard that was with Dick Cheney and we know how that turned out!

 

Now let’s look at why you should not get euphoric about the market:

 

1. This does not solve anything, but market feels good by removing some concerns and a Treasury, whose motives were good (TB thinks), but who has lost investor confidence.

2. Chris Cox, wherever he is, is still a lame duck and the lamest SEC Chairman ever!

3. The Fed has now put out guarantees on $7.4 trillion of debt!

4. We are sliding down the slippery slope of guaranteeing anything in sight (a friend heard an interview with Ted Turner who owns a lot of restaurants who said they should be bailed out since people need to eat!).

5. Think how stupid the government would look now if Wells Fargo hadn’t prevailed in its bid to buy Wachovia…whereas the government wanted to put two bad banks together to make a good one (isn’t that what we did with mortgages to start this mess?)

6. See Barron’s this week: Has the Fed Mortgaged Its Own Future? Leverage is now 53 times vs 25x at yearend; Capi9tal ratio is 1.9% vs 4%; Term Auction Credit $415B vs $20B; US Treasury portfolio $475B vs $785B; Securities Lent to Dealers $218B vs $14B

 

Is the above any reason to believe the stock market can have a sustainable rally? What about the deleveraging of hedge funds that will continue thru yearend (any countertrend rally will end abruptly by Dec. 26, as hedge funds close out their fiscal year and then sell into the calendar yearend…and likely well into January…at least till Inauguration Day!

    

Sorry this is late but Comcast server was down and have been playing catch-up ever since. TB had wanted to show how market and select stocks performed last week, how just a handful of stocks were the index movers almost every day last week. This is not a market…it’s a lottery!

 

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 November 24, 2008.

 

 

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11/21/08…is it all toxic waste?

November 21, 2008 at 6:18 am · Filed under economy, financial, markets

Note: Beware as today is options expiry for volatility with no clear since it will provide no direction.

Gallows humor on Wall Street is usually a sign of being near a bottom as they are finally able to laugh:

 

*TARP: Try another Ridiculous Plan

 

*The Somalian pirates have applied for commercial bank status so they can tap into the TARP funds. TB would allow that…for two reasons: first, they are the only ones who are honest about what they are doing, and second, they seem to be the only people in charge of anything that know WHAT they are doing!

 

*TB poses whether the Saudi’s paid the ransom to the pirates: not after the fact, before as  payment to remove millions of barrels of oil from the market place.

 

But now to be serious, has the U.S. forgotten about the Barbary pirates…the very reason we formed a U.S. Navy? Why do we have SEALS, Special Forces, Delta Force, if they cannot go in and beat a rag-tag bunch of pirates? It isn’t as if we don’t know where the ship is…unless our spy satellites have failed us. True, the crew might be harmed…but somebody has to stop this madness before an LNG tanker is taken and blown up! We stopped the air hijackers with force (prior to the  9/11 attack), and that is what we have to do now…this is utter insanity. 

 

 

…did you know: 25% of the S&P 500 is now trading below $10 a share and at least 50% would not qualify for inclusion in the index based on market cap? Is that a ‘rational’ market? No, it is a market governed by FEAR (and lack of liquidity)…more like panic!

 

A friend wrote:

 

“Capitulation”.  I have fairly unsophisticated notion of what it is; 
very simply shareholders giving up, selling for whatever they can get 
because they can’t stand the pain anymore.  But who are the 
shareholders nowadays? If the stock market were to be made up of only 
individuals, then it would be easily defined, and capitulation would 
have been long ago achieved with a huge down thrust of negativity.  
This would include mutual funds because of redemptions by individuals 
farcing them to sell.  But with hedge funds and sovereign funds and 
whatever other institutional funds there are thrown into the mix, 
doesn’t that forestall or even eliminate the possibility of a true 
capitulation?  Perhaps sophisticated investors like Buffet or Alaweed 
actually prevent that capitulation trade from happening, and we just 
continue to drift into oblivion until things get so-o-o cheap that the 
market eventually turns haltingly into a stuttering upward path.  What 
do you think about all of that?

 

 

As we approached the close Sue Herrara of CNBC fame, bless her, said this is definitely a capitulation…wrong Sue….well, partly. In the strict sense, a capitulation is a regurgitation of securities, like throwing in the towel, but that is useless in the market because as we just saw on back to back days the market dove by more than 10%. It is in the technical sense that a capitulation should be considered, but as one observer commented, it is hard to have a capitulation when everyone keeps looking for it.

 

So to review, a technical capitulation is a sharp downdraft, followed by value buyers swarming in for the kill and causing a sharp rebound, ideally above the prior day’s close, and…most importantly…on overwhelming volume. The classic is October 1987:

 

10/16/87 Friday, 2246.74 close range 149 points

10/19 Black Monday, 1738.74 close range 390 points but gapped down on open by 200 for a net loss of 508 points

10/20 Capitulation Day. Opened +110, plunged to -122, then rebounded to close +103

10/21 2027.90 close

 

The capitulation was done on huge volume (for the time but average volume then was around 200M shares) …TB can’t find it as Bloomberg doesn’t have data back that far for some reason, but the point is that we are seeing the ‘revulsion’ stage in markets, which comes near a bottom. Here is how James Montier describes the investment cycle:

 The details of each bubble are different but the general patterns remain very similar. As Marx said, history repeats itself, the first time as tragedy, the second time as farce. It is the general pattern of debubbling that I wish to explore this week, particularly in the context of the market’s apparent attitude that the worst of the problems seem to be behind us.

Bubbles: a framework for analysis

We have long been proponents of the Kindleberger/Minsky framework for analysing bubbles (see Chapters 38 and 39 of Behavioural Investing for all the details). Essentially this model breaks a bubble’s rise and fall into five phases as shown below.

Displacement – The birth of a boom
Displacement is generally an exogenous shock that triggers the creation of profit opportunities in some sectors, while closing down profit availability in other sectors. As long as the opportunities created are greater than those that get shut down, investment and production will pick up to exploit these new opportunities. Investment in both financial and physical assets is likely to occur. Effectively we are witnessing the birth of a boom.

Credit creation – The nurturing of a bubble
Just as fire can’t grow without oxygen, so a boom needs liquidity to feed on. Minsky argued that monetary expansion and credit creation are largely endogenous to the system. That is to say, not only can money be created by existing banks but also by the formation of new banks, the development of new credit instruments and the expansion of personal credit outside the banking system.

Euphoria
Everyone starts to buy into the new era. Prices are seen as only capable of ever going up. Traditional valuation standards are abandoned, and new measures are introduced to justify the current price. A wave of overoptimism and overconfidence is unleashed, leading people to overestimate the gains, underestimate the risks and generally think they can control the situation.

Critical stage/Financial distress
The critical stage is often characterised by insiders cashing out, and is rapidly followed by financial distress, in which the excess leverage that has been built up during the boom becomes a major problem. Fraud also often emerges during this stage of the bubble’s life.

Revulsion
This is the final stage of a bubble’s life cycle. Investors are so scarred by the events in which they participated that they can no longer bring themselves to participate in the market at all.

The problem with revulsion is nobody knows how long it can or will last. It took until 2003 after the DotCom bust…As we saw above in 1987 it was almost instantaneous. But this time is even worse than the great Depression for so many reasons:

1. We have forgotten how to save and while that is the solution, saving will further slow consumption and thus the economic recovery and stock market recovery.

2. Before we can even begin to save we have to pay down debt: home mortgages…especially home equity, credit cards, auto loans, etc.

3. Loan losses will surely soar and thus further impair the capital of banks so that even with huge infusions of capital it will not make them ‘willing’ lenders.

4. Then there is the stock market which was severely overvalued at the August 2007 highs due to euphoric forecasts by analysts (consider Google which relies totally on advertising revenues…that allowed ridiculous p/e multiples…which makes the investors look ridiculous (note: beware of any company that relies on advertising revenues here)

5. But the real revulsion has to come from within…from within the leadership (sic) of our government…that they through a total failure to regulate caused this problem and further permitted it to bring down the entire global economy and financial system…someone must admit they are culpable…but will they? Who created all those derivatives such as CDS, CLO’s, SIV’s? Wall Street, and now we are forced to bail them out. Who aided and abetted them: the banking system by creating loans they wouldn’t touch with a ten foot pole, real estate for phony, appraisals, credit checks, etc. The auto industry for making zero down, zero interest loans on SUV’s etc for short term profit…meanwhile they were borrowing from future sales (Waggoner disengeniously blamed easy credit without saying that GMAC and FMCC provided the easiest credit of all).

6. Revulsion at corporate management: the headhunters who ran up the salaries and perks of CEO’s so that they could extract higher fees; the inter-locking boards of directors who shirked their responsibilities to shareholders and embraced the CEO’s so that they would do likewise for their boards, and the CEO’s who as Mitt Romney so accurately wrote: brag about cutting costs thru plant closings and layoffs but give up none of their perks: excessive bonuses, corporate jets, country club memberships, etc.

Back to the readers question, here is what is happening now as TB has pieced it together: first, according to Hedge Fund Research’s (HFR) CEO, hedge funds are now flush with cash…this is evidenced by the near zero yields on treasury bills. Due to the long lag between notification of redemption to the funds for yearend with a cutoff of Nov. 15, they have cashed out huge amounts of stocks but not repaying the loans as they are afraid they will not be able to borrow it again. Add to this the uncertainty in the market and they are not players which has driven up options volatility to record levels again. Furthermore, as they willingly or unwillingly reduce leverage it is a moving target as the lower prices fall the more margin calls on equity holdings. Then there is the problem of competition for funds. This is why even the best performing hedge funds are seeing massive withdrawals. Here is an example:

A pension fund has $10 million which is allocated as $5 million to stocks, $2 million to bonds, $3 million to alternative investments. Alternative investments are further broken down to say $1 million each: hedge funds, real estate, private equity.

Since private equity (also venture capital if there was a market for that these days), like hedge funds employs leverage, but does not have a constant stream of potential investments, takes a contractual commitment for the $1 million…perhaps taking down only $100,000 but with a ‘call’ on the remaining $900,000. So the pension fund puts the remaining portion in a hedge fund till needed. Real estate has collapsed so they cannot tap that when their commitment is called as it is now as private equity sees lots of opportunities out there. Soooo…they tap hedge funds for the $900,000 and thus further strain the stock market as securities are sold…with 4x leverage that would require the sale of $3.6M in stocks or more if they are trying to reduce leverage.

That is where we are now. The hedge fund industry will be decimated, as well it should be as there were far more funds than qualified managers for them.  

Today’s column was not meant to be pessimistic but more, a realistic assessment of where we are in the investment cycle. If a good company’s stock is valued at $5 or less. CBS at $4.51 with a p/e of 3.9x and a dividend of 23.8%, which if you buy by 12/1 will get you the 27 cent dividend (but the caution is that they derive their income from advertising), Citi (C) at $4.71 with a 13.6% dividend (which could be cut and the board is now meeting to determine their options), and there are hundreds of stocks out there that due to the price falling have seen their yields soar. So the question is do you want to be a traditional stock investor focusing on capital appreciation…which may take years to arrive or be able to live off the income until the market comes back? Bonds, which had their greatest single day gain ever yesterday (although not TIPS and the 10 yr TIP yield now equals the 10 year treasury note!), but are yielding only 3.5% or less, and could give back half the six point gain of yesterday easily today; corporates which are cheap but could get cheaper; junk bonds and mortgage-backed paper which are now at spreads of 1700 basis points over treasuries!; Commodities don’t look good…gold has to hold $750 today or retest the $681 low while Crude is in freefall along with the rest of the energy sector, cash which is essentially zero…take your best shot, but remember even if stocks fall further at some point the good ones will rebound…the trick is determining which ones…it won’t be the layup of 2003-2007 that is a certainty, and it won’t be as fast!

TB hopes you found today’s column helpful…by quantifying the risk…and trying to remain objective, but then markets are psychological…always have been, always will be.

Have a wonderful, fun, weekend.

 

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 November 21, 2008.

 

 

 

 

 

 

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11/20/08…the world as toxic waste

November 20, 2008 at 6:21 am · Filed under economy, financial, markets ·Tagged , , , , , , , ,

TB’s Quote of the Day: “Twang your magic Twanger, Froggie.” That, kids was from the Buster Brown Show (“I’m Buster Brown, I live in a shoe…that’s my dog Tige…he lives in there too!). Froggie was mean but offset by the affable Midnight the Cat who always meowed: “Nice.” This bit of trivia brought to you by Trader Bill who wishes to hell there was somebody out there with a magic twanger to put us out of our misery!

 

…what could be more appropriate than three, rich, spoiled, auto company CEO’s testifying before Congress (Alms for the poor), and begging for that magical $25 billion to get them thru to the next Congress so they can beg some more. But what did these lightbulbs do of late? Each flew down in his personal corporate jet which ABC picked up and prompted one legislator to ask: “Two questions…did any of you NOT fly down here in your personal jet?…secondly, are any of you willing to sell it today and find another way home?” Dead silence with looks like “what’s that supposed to mean?”

 

Thus the three blind men returned home empty handed…for use of a plane…there was a great op ed by Mitt Romney in the NY Times…is he gunning for energy czar? Specifically he talked about those CEO’s bragging about cost cutting thru plant closing, layoffs, etc…but give up their perks? No way! This is what you get when you have spoiled kids running major corporations…for their own benefit. He mentioned that Mullally (Ford), as part of his contract, is flown home to Seattle and back every weekend on the corporate jet…think about that cost…downtime etc…guess they have never heard of jet leasing plans…but then a CEO cannot be expected to fly like a common millionaire.

 

They didn’t quite leave empty-handed though because overnight GMAC applied for status as a bank and in case you think there is any doubt they have already began an exchange of $38 billion of debt…it is no longer what is good for GM is good for the country but what is good for GM AND Cerberus (co-owner of GM and owner of Chrysler)…they have so many ways to get you….and just what do we get for this? A pile of bad loans three feet high!

 

Then there was Citi, now having bought back the last $17.4B of SIV’s…good riddance! Remember that song from Camelot? Some Day My Prince Will Come…funny name but used frequently in jazz…well, Prince Alaweed is proving himself a prince…you thought they got rid of ‘Prince’ but that was the CEO…he is increasing his stake from 4% to 5%, call it a massive averaging down…heck it worked once for him…but will it this time?

 

Meanwhile, stocks turned into toxic waste as even the best of the best sold off…industrials! While financials tanked even more (-10.3%). KBW Banks were -10.3%, Nasdaq Banks -6.8%; Insurers -7%; and Brokers -11.6%! REITS tumbled 13.5% and are definitely toxic waste. Energy is a disaster too: all 138 stocks in the NYSE Energy Index were down and the Index fell 5.4% while Oil Services fell by 6.6%.

 

So what do you do? Yesterday, TB suggested Gold might be ready to rebound…and it did, to $764.80 before failing to hold $750 once again…in the 21 sessions since 10/22 it it has closed above $750 exactly twice and immediately failed, now we will probably head south and test the $681 low…that could be the buying opportunity. TB thinks a ‘hedge’ might be long gold, short crude…he’s just sayin’…

 

Yesterday, TB also discussed how common stocks of some of the best companies are trading in low double digit p/e’s or mid-high single digits and that dividends are attractive. Now recall he had advocated preferred stocks but on the basis of dividend yields on the common they could be a better buy. ‘Could’ because of the following:

 

1. the dividend could be cut…especially for financial stocks…look at GE, on last nights close the yield was 8.57%, p/e is 7.4x and p/e to growth is deep value at 0.7x…BUT they have tapped the TARP so they could be forced to cut the dividend…while the dividend on the common would continue to be paid. At last nights close GEC, the 6.10% preferred yields 8.07%. Now look at AT&T (T), the yield is 6.34%…and not a financial company, p/e is 8.9% but p/e to growth is 1.46x so not cheap. The preferred (ATT) has a 6.375% dividend  but closed at $23.40 throwing off a 6.81% yield. Taking more risk are the financials. Bank of America’s 8.20% closed at $19.77 for a 10.36% yield with upside potential of 26.5% while, yield on the common is 9.8% with a p/e of 8.3x and PEG of 1x; Wells Fargo’s 8.625% closed $25.10, so yield is the coupon and there is no upside…if interested it has spiked down as low as $19 once and $21 once…so that is the way to buy it…below par. Foreign banks: Royal Bank 6.75% yields 23.24% at current price of $7.25 with potential 344% capital gain; Barclays 6.625% yields 15.3% at current price of $10.82 with 271% upside; ABN 7.25% yields 17.7% at $8.31 with 300% upside. Note nothing was said about the downside…you have to determine the risk (caveat: you do NOT buy preferreds like common stock…if you just put in a buy/sell order at market you are going to get killed…you have to know the market and get inside. Also, all preferred’s are not created equal…TB avoids those of Citi due to the cards being stacked in their favor…did you expect otherwise? Also if cumulative you have a tax liability even if the dividend is not paid (like a zero coupon bond), and trust preferreds receive the dividend from the company but may not have to pay it out…like Citi. Lastly, while ‘qualified’ dividends are subject to 15% tax a dividend paid in a ‘loss’ year does not qualify.

 

2. DILUTION. Also last night G/E announced they are in talks with for Asian sovereign wealth funds to raise capital…this could mean serious dilution depending on whether they  want common or preferred…remember Buffett took the 10% preferred! Wachoivia’s CEO Steel spoke at a breakfast meeting and said that there are seven different financial regulators and we need to do something about that…he also said IF they had raised capital it would have diluted shareholders equity by 60-70%…get it?

 

3. Some of the preferreds, again to cite GE as an example are trading at deep discounts meaning you could have huge unheard of capital gains with the preferred too…and that could take much less time than for the common to recover. There is 31.8% upside in GEC and 6.8% in ATT…so you can see which is the better buy.

 

Now about bonds…there are bonds…and there are bonds. Treasury’s are rich but will likely get richer…but that could be problematic down the road, plus the intraday volatility has made them as risky as buying preferred’s from a market risk perspective. Federal Agencies provide more yield but with a wide spread if you need to sell early. Junk bonds are being pounded as are mortgage backed paper. So what is left: high grade corporates and municipals:

What is a high-grade corporate these days? …and if you find one will it be by tomorrow? The answer is in diversification as many including PIMCO’s Bill Gross see corporates cheaper and thus more attractive than common stocks and you have seniority in a bankruptcy. The secret is in diversification! For non-institutional investors buying bonds is expensive…except for new issues where you get the bonds at the same price as the big guys…also many municipal issues now have retail order periods where the individual gets preferential treatment. For the small investor, consider a corporate exchange traded fund like the iShares iBOXX Investment Grade Corporate Bond Fund. It has out performed the index over the past year and its peers while fee is just 15 basis points (0.15%), has tremendous tax efficiency compared to a mutual fund as most ETF’s do, and no one bond is more than 1.5% of the portfolio with the largest positions being IBM and JNJ at 2.3%, and the top ten (Barclays, PEP, BRK, ABT, AZN, and WMT) totalling just 11.9% of the portfolio! Now THAT is diversification. the indicated yield is 5.75%, pays monthly, and fees are subtracted daily at 1/365 of the annual rate…so you only pay while you own it. Since 9/15 it is down 8.6% (7.7% with dividends reinvested), but is well off the lows…ytd it is down 13.4% (-9.4% w/divs). There are also muni etf’s but they are thinly traded but still very liquid…you can buy California (3.7%), New York (3.5%), or general market (3.8%), if you don’t need state tax exemption…consider trade off of yield for diversification in the general market names as without insurance muni’s are a lot riskier than in the past…especially in a deep recession! Remember odd lot (<$1MM) muni’s are highly illiquid and thus costly to sell! Junk bonds will have their day, like all dogs, but this is not the time to speculate on them.

There are no easy trades in a bear market…especially during a credit meltdown…but at some point it will be cash that is toxic waste…witness those low money market yields..uh hopefully that is. TB does not profess to know what is or isn’t a good investment these days but one thing for sure if you trust analysts who insist on projecting revenues based on past results you will get what you pay for…and remember in a period of declining rates p/e’s rise and thus cheapness evaporates. You have to think, not just react.

 

 

 

  

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11/19/08…cheap is

November 19, 2008 at 6:02 am · Filed under economy, financial, markets ·Tagged , ,

Bloomberg Quote of the Day: “Know how to ask. There is nothing more difficult for some people, nor for others, easier.” Baltasar Gracian. Hence the 3 automotive wisemen!

 

..what is ‘cheap’? Ask a hundred people in a room and you will get 50 or more different answers. More importantly, with a plunging stock market, what truly is cheap? The problem is time horizon. Some day we will look back on this as the great buying opportunity of a lifetime…someday. On the other hand we might look back on it as we did the market six months ago, or a year ago and see it as the selling opportunity of a lifetime. The reason of course is the three “L’s:” Liquidity, Leverage and Legislators. A fourth would be LUCK, be it good…or bad. Welcome to the biggest casino in the history of the world except perhaps Holland during Tulipmania…at least there was some value to the bulbs…but then they never did come back in value either, did they? As we speak, not one of the four is working for us.

 

If you listened yesterday afternoon to the grilling (well done, please) of the Big Three Auto CEO’s yesterday, it was very obvious when they were lying: every time they said they would not be back for more money if Congress would just give them $25 billion, or was it $50 billion…whatever. Of course they ‘couched’ it in terms of an anti-ceteris parabis…if all other things are changed…and over the next six months. Now get this straight: the credit crisis will be solved; the economy improving; and buyers back in droves. TB thought that the real estate sector had high hopes but this trumps it (not a pun on The Donald, he isn’t worthy of one, he is the joke).

 

So what does one do? TB would tell you but if he did he would be violating what he said yesterday in his ‘prognostication’ piece, and be just another charlatan. In point of fact, TB doesn’t have a clue. Six months ago…heck three months ago, he didn’t think we would be at this point, not that he expected stocks off to the moon but he believed a floor would be in with a long, long slightly upward trajectory…not that that makes for a dawning of a new bull market, but perhaps a chance to  take a breather.

 

TB felt, and still does, the income be it from bonds, or stocks would be the key IF they were sound, viable companies. Thus one can look at it as a bank account where you live off the income and see the value of the investments coming back…sure beats relying on growth stocks. But since then we have seen some of the best companies…or at least they were the best companies plunge in value…and of late it is the industrials that are taking the biggest hits. Take HP yesterday with their blowout earnings…the stock rallied 14.5% but is still trading at just 9.3x estimated earnings…for a tech company…and a p/e to growth rate (PEG) of 0.7x, which is deep value, not growth! Then there is CAT, which would benefit from infrastructure spending, right? 6.1x p/e, PEG 0.6! IBM, 9.2x/0.8. Boeing (BA), 8.5x, 0.8x. Alcoa (AA), 6x p/e, 0.4 PEG and 7.2% dividend yield! Northrop Grumman (NOC) 7.5x p/e; 0.8 PEG…and the list goes on.

 

Then there are the stocks being hit lately with p/e’s in the low teens: MMM; JNJ; KO (although PEG is 1.5x); or Verizon (VZ), which not only had great earnings but raised the dividend? Dividend yield jumped to 6.45% while p/e is 11x and PEG 1.5x; United Technologies (UTX) 10x 0.9x PEG; 

 

These are not recommendations, merely a reality check. With the exception of NOC, these stocks were gleaned from the ‘movers’ of the past few days on the Dow 30!

Remembering back to the Depression…TB wasn’t there…the companies that survive or prosper are no respecter of the past but these companies seem more likely than most to do so, right? Some day we will all look back on this era and laugh…yeah, right, just like our grandparents used to go into hysterics when the told us about it!…if they spoke at all.

 

TB is not constructive on commodities, especially energy…did the Saudi’s hijack there own tanker as a way of reducing supply…hold on, that was just a joke…sort of…but you can bet they aren’t as upset as they would have been three months ago! How do you hide a ship like that? These aren’t the days of the Barbary Pirates…we know where it is, just like the other ships…either that or we have wasted billions on those spy satellites. But one think TB has back on his radar screen is gold…now you all know TB is not a gold bug but demand for the yellow metal hit a record high in Q3…interesting as it hit a low of $681 on 10/24 and has traded below $700 once since then (11/13). After bouncing the next day, Monday and Tuesday were BOTH inside days (lower high, higher low than the previous), and so far today is even inside that! So with stocks weak, and inflation down, and the greatest financial market crisis in history, should gold be weak?

 

The answer, TB believes, is in the securitization of a commodity…what else is new, wasn’t securitization what caused this mess? The vehicle is the Gold ETF, of which there are two. They are a perfect vehicle (especially in an IRA since they are taxed as ordinary income no matter how long you hold them since they represent ownership in the physical commodity…so why invest in the gold stocks which are so easily manipulated…buy the real thing…IF you do invest, right…and it beats dragging gold bars around with you. So TB would like to see one more test…or a breakout from where we are…again this is not a recommendation, merely an idea to consider…TB does not own it in his own or client’s accounts…yet. Also, Silver is not Gold…got it?

Over the past 28 sessions, since putting in the low on the Dow (7882 on 10/10), we have tested the lows FOUR times (in 8 sessions), and broken 8000 once…sadly that was on 11/13, over a months since we put in a low, and yesterday was the lowest one since that test…that does not sound like ‘building a base’ to TB…not at all.

 

A good day to all!

 

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

 

 

 

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11/18/08…prognostication

November 18, 2008 at 5:51 am · Filed under economy, financial, markets ·Tagged , , , , , , , ,

TB’s Quote of the Day: ”It is easy to see thru people who insist on making spectacles of themselves.” Anonymous

…have you ever heard so many people talking about so many wonderful ideas to make money in the markets and they keep coming up with new ones as fast as the old ones falter? Who do they think they are anyway, Hank Paulson? Or…have you ever listened to adults (sic) on financial news stations (sic as in CNBC), scream at one another incessantly so that nobody can understand what they are saying?…perhaps that is the service they are providing. As TB has said before, no wonder GE’s stock is in the tank!

All day long you hear one strategist/manager after another telling you …not suggesting mind you, but telling you…what you need to do to make money. TB was astounded yesterday to hear veteran Vince Farrell join in saying they had looked back for a hundred years and the market is at a bottom…shame on you, Vince! ..or in the same debate, Merrill Equity Strategist Brian Belski saying his research shows we are at a bottom only the buyers are scared. What is that kind of help worth? Exactly what you pay for it…arguably some readers would say TB is worth that…and he has the receipts (or lack thereof) to prove it.

Run the nest time somebody tells you the lows held. Yesterday, and TB warned it would be bad, was ugly…as indicated by Friday’s miserable trade….while there were no new cycle lows on the major indices, both Nasdaq indices, and the Philly Semiconductor Index (SOX) had new low closes while the S&P 500, Russell 2000, Dow Transports barely had their second lowest closes. There is an old saying: if you can’t take ‘em up, take ‘em down and that is where we are…we have spent far too much time down here and the longer we stay the more bad news comes out, be it economic or corporate earnings or worse, credit. If things are so good, why are so many hedge funds shuttering their doors? Why is the 3 mo. T-Bill yielding just 0.11%?…the 1 mo Bill just 0.05%? Why isn’t gold attracting buyers and indeed looking ready to plunge again? Why did the lead crude contract fall 13% in one week (over the same period RBOB Gasoline is down 15.5%, a cycle and three year low), putting in a new cycle low and low close yesterday and another new low overnight…while Dec ’15, the longest contract with sizeable open interest only fell 2.3%? The longer dated contract is now $30 above the lead which TB believes to be a record? Why does everyone in the U.S. know we are in recession (except perhaps Larry Kudlow and his accolytes), except for the economists who get to declare one, meanwhile in three days, Germany, Japan, and now the U.K. have slumped into recession? That is not the backdrop for a significant stock market rally, if any.

Please don’t try to explain to TB how the stock market is 6-9 months ahead of the economy either. In his 36 years it has puzzled him how the stock market always knows but bonds don’t have a clue? …perhaps it is actually the tail wagging the dog. Makes sense too since sentiment drives investment and consumption, right? Yet, the pros keep ignoring not only the economic data but the consumer sentiment data and coming up wrong over and over….taking with them each time more vulnerable investors who now seem to be saying: enough! So enough on that topic for today.

TB received many requests and favorable comments on the Michael Lewis article. TB can forward it to you if you haven’t seen it. It is a 9 page mini-book but so very telling on how Wall Street sold us out to line their own pockets. This is also what TB said of the banks writing commodities swaps with commodities index funds…without limit which is the ONLY reason that commodities prices surged in mass and took the market weakened by Wall Street’s gaming credit default swaps and collateralized debt obligations (which is the heart of the Lewis article), and pushed the entire world over the edge by driving up food and energy prices to ridiculous levels that were not supported by demand. Worse yet were those ‘peak oil’ experts who saw supplies being exhausted and thus oil could only go higher…well now we know who was right and it wasn’t them…it was artificial demand produced by a loaded commodities market and nobody doing their own thinking!

Let it be said that when TB first read Liars Poker, Lewis’ first book, he was appalled, not at how the trading was done, after all TB spent six years as an institutional bond salesman and know the transactions with Orange County and others. No, what shocked him was that a 25 year old ‘kid’ would write a book mocking his own clients as he, with no investment experience or even a finance major, was spoonfeeding them, what his trader was spoonfeeding him, while he was at Salomon Brothers. At the time, 1989, TB and his oldest friend in the business, Louis Levitas, a muni bond salesman with integrity who also worked for Salomon, discussed this at length and that while the book was funny it was not typical of how things are done…that most institutional salesmen are knowledgeable and have integrity. But the latest article shows how the Michael Lewis wannabe’s…even he says that students wrote him for tips on how to be like him and get a job on Wall Street…have overtaken the sensible ones while the bosses…the John Gutfreund’s were either too greedy or too stupid to see it.

TB has written more than once in this missive of the fact that the demise of Wall Street came from within and from the top. As partnerships became publicly held corporations, risk transferred from the partners to the shareholders while freeing up the wealth that they could not tap…and then allowing them to make the big money while the shareholders went along for the ride…for better or worse…usually worse. That, folks, is the difference between a broker/dealer and a hedge fund…the management of a hedge fund is the only one left with some ‘skin’ in the game…see TB can say something good about hedgies!

But the really sick part is that now we are bailing out the bastions of greed, and we have no choice because the alternative is a total collapse of the global banking system, and who is engineering it for us: the Goldman alumns…Hank Paulson, CashandCarry (Kashkari), and now Robert Rubin who was instrumental in Citi’s fall from grace, people who made millions scamming us are now our salvation? Hopefully, the new administration can provide new leadership and get an SEC Chairman while he is at it tht isn’t bought and paid for by industry lobbyists. Sounds harsh, eh? Damned right it is!

You have nobody but yourself to blame if you buy into this market. If you want to do that play CNBC’s Million Dollar Stock Challenge…which is in itself a mockery of how to invest wisely…but someone will win. Want to know how screwed up it is? The first prize of $500,000 is paid in installments…like Publishers Clearing House…and included in the first prize is 25 hours of flying time on Marquiz Jets…worth $66,000 and fully taxable. Yep, just another way of scamming you…oops, TB is entered so he might get disqualified!

 

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. Coyright TBD Capital LLC November 18, 2008.

  

 

 

 

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11/17/08…the dying bull

November 17, 2008 at 5:12 am · Filed under economy, financial, markets ·Tagged , ,

Joke of the Day, from Jay Leno: Joe Biden went to Dick Cheney and asked him what it is like to be number two. Cheney said, “Don’t ask me, ask George Bush.”

 

Quote of Dubya: “More harm is caused by too much regulation than by too little.” How would he know? There has been NO regulation during his tenure…of anything! TB  

 

…on Friday morning, TB wrote the following:

 

Yesterday’ rally had most of the elements of a capitulation trade but not all:

 

1. We put in new cycle lows on most indices, but NOT Dow 30, Transports or Energy!

2. Rather than plunge at the opening, inexplicably we rallied 160 points at the open, then plunged, and rebounded…not a classic capitulation trade.

3. Volume was 1.97B shares, highest since 10/16, but nowhere near the 2.9B or more that would be required for a true capitulation trade; also included 350M in the final 2 minutes!

4. Advance/Declines were under 3:1, contrast to -12:1 on NYSE Wednesday, -7:1 on Nasdaq and -4:1 on AMEX; Breadth was good but again compare: NYSE 14x vs -26x; Nasdaq 8x vs -23x; AMEX 3.4x vs -12x….get the picture?

5. The movers yesterday were…almost without exception…the very same stocks that suffered the most on Wednesday…look at the stock summary and see the relative changes, it is eerie…and makes the rally meaningless.

6. Despite the global follow-thru overnight, ex-India, Globex futures are WEAK! That portends a weak opening…and since it is Friday, profit taking (sic)

 

So despite all those guru’s saying that the low’s had held (which they still have but do you want to risk your money to prove those are the lows?), the market did as it has in every key reversal (lower low, high high than prior day and close above the prior day’s high) thus far in the selloff…failed to sustain even three days of rally…this time not even one!

 

A capitulation is the most powerful of technical indicators, a key reversal is the second most powerful as it is tantamount to a capitulation, so when we get an in your face selloff like Friday we have total proof that the deleveraging is far from being over.

 

The picture of the dying bull above…some say he is already dead was used in an article titled “The End”, by Michael Lewis on Portfolio.com. A friend sent it and TB finally had time to read it slowly and in depth on Saturday…it is shocking and without a doubt the best description of the crisis TB has seen (it is punctuated with strong, tough, street slang so if you aren’t up to profanity be advised). The article is nine pages making it almost a sequel to Liars Poker…only it is far more meaningful. If you wish to read it TB will forward it to you in word format with the above caveats.

 

If you are a ‘free market capitalist’ you will be ashamed at what the street has done in its constant search for more wealth…while the risk was born by the shareholders. The good thing is there are heroes in this story such as Meredith Whitney who, like Fortune’s Bethany MacLean had the nerve to speak out. Both were ridiculed at first but in the end both were right…more right than even they imagined! If you thought Wall Street was filled with a bunch of bright guys…think again…they were idiots…greedy idiots.

 

On a similar vein, TB’s friend, Mark Gilbert, a Bloomberg reporter in London wrote the following piece which in a humorous format shows how widespread the complicity was.

 

Here is the piece that was on Bloomberg for non-Bloomberg subscribers and is available there at NI Gilbert if you care…also look at his other articles…they are all good.

 

Credit-Crunch Villains Pass the Buck, Party On: Mark Gilbert
2008-11-13 00:01:00.2 GMT

Commentary by Mark Gilbert
     Nov. 13 (Bloomberg) — The great and the good of capitalism
and free markets held a requiem dinner for the global financial
system at a secret hideaway this week. As the waiter decanted a
fresh bottle of 1985 Chateau Margaux, the blame game began.
     “I blame the central banks,” growled the bond trader,
stabbing the air with a forkful of raw steak. “If Alan Greenspan
hadn’t kept interest rates so low at the start of this decade, we
wouldn’t be in this mess. Talk about refilling the punch bowl
when the party guests are already as drunk as skunks!”
     “We told you we were not in the business of identifying
bubbles, let alone trying to puncture them,” replied the central
banker, nibbling at a lettuce leaf. “We warned you that credit
spreads, emerging-market yields and volatility in stocks and
bonds were all too low, and that you were under-pricing risk.”
     The central banker took a sip from his refilled wine glass.
“Can you imagine the outcry if we had tried to halt the
explosion in home ownership? I think you’ll find that the true
villains are the mortgage lenders; if they hadn’t trashed their
standards with self-certified and liar loans, the crisis in the
housing market would have remained self-contained.”
     “That’s not fair,” said the mortgage originator. “We
weren’t on a level playing field. Fannie Mae and Freddie Mac were
using their implicit government guarantee to distort competition
in home loans. We were forced to take on more subprime borrowers
just to stay in the game; if it hadn’t been for all those clever
derivatives products, we would never have been able to recycle
all that toxic waste and keep the pyramid scheme afloat.”

                            Above Board

     “Ah, the derivatives bogeyman,” chuckled the structured-
finance specialist. “Listen, derivatives don’t kill markets.
Markets kill markets. Everything we did was designed to promote
efficiency by allowing investors to disaggregate their risks. I
can show you the bills from my lawyers to prove that every
product we invented was legitimate.”
     “All we did was offer advice on the best method of
structuring securitization transactions,” the capital-markets
lawyer said. “There would never have been a market for the
racier collateralized-debt obligations if the rating companies
had done proper due diligence, instead of slapping AAA ratings on
anything and everything that offered to pay them a fee.”
     “You can hardly expect the finest minds in finance to come
and work for us when they can earn gazillion-dollar bonuses doing
the same work for an investment bank,” said the credit-rating
assessor. “We relied on the computer models that the banks
helped us build, and those models turned out to be, shall we say,
less than perfect. Besides, everything was fine until the money-
markets froze. The problem wasn’t over-optimistic ratings, it was
an over-reliance on wholesale markets to fund leverage.”

                            On the Hook

     The waiter cleared away the dinner plates. The diners all
declined dessert — “Humble pie? No, thanks.” — agreeing
instead that a couple of bottles of 1982 Chateau d’Yquem would
round off the evening nicely.
     “I’d never even heard of Structured Investment Vehicles
until they started to blow up,” said the central banker. “We
believed the banks when they said their business model was based
on originate-to-distribute; how were we to know that once the
music stopped, they were still on the hook for trillions of
dollars of liabilities they’d slipped off the balance sheets?”
     “Look, domestic savings rates just weren’t high enough to
provide the kind of leverage we needed to juice our returns to
match those of our peers,” said the commercial banker. “We had
to rely on money-market funds, rather than our deposit base. And
the money markets wouldn’t have frozen if it hadn’t been for
those ridiculous mark-to-market rules forcing all of us to
prematurely disclose that we owned huge piles of securities that
were rotting, before prices had any chance to recover.”

                        Capital Inadequacy

     “We gave you plenty of leeway to play fast and loose with
the truth so that you could stay solvent,” said the regulator.
“Besides, you were just doing your job of maximizing returns to
shareholders. If those greedy investors hadn’t forced you to take
on more risk, our rules on capital would have been more than
adequate to keep the banking system solvent.”
     “How on Earth was I supposed to fund the retirements of
thousands of ex-employees when returns were collapsing
simultaneously in every market?” asked the pension-fund manager.
“Of course we wanted the banks to work their capital harder. We
were in the same boat, trying to move money into new arenas to
make a buck or three. We bought derivatives, commodities, we even
held our noses and gave money to the hedge funds. That didn’t
turn out to be such a good idea.”
     “Hey, we warned you there would be times like this,” said
the hedge-fund manager. “If you want years when we deliver 50
percent, 60 percent returns, you have to expect periods when we
will lose 20 or 25 percent of your money. You won’t see us lining
up with our begging bowls at the government bailout window.”
      The waiter coughed, proffering a slim leather folder
containing the reckoning for the evening’s entertainment.
     “You are a taxpayer, I take it?” asked the investment
banker. The waiter nodded. “In which case, we were rather hoping
you would foot the bill.”

     (Mark Gilbert is a Bloomberg News columnist. The opinions
expressed are his own.)

 

So when Dubya spoke on free market capitalism before the Manhattan Institute Thursday and said that it is too much regulation of the financial markets not too little that is to be feared most it was most disingenious. Not only was it a total failure to regulate as Mark Gilbert’s piece illustrates, but the pain will be felt most by the very countries that were the last to benefit: emerging markets. Furthermore, this time around…unlike in the Asian Crisis, those countries did everything right…they built up their infrastructure, etc.

 

It is also not surprising that the first communiqué from the G-20 meeting was a statement of unity on stabilizing the financial markets and the global economy. But think about what that means. In this country we don’t even have agreement between Hank Paulson and Congress on what it means…now take 20 countries with diverse interests and each of them has the same goal but their internal characteristics imply perhaps as twenty different solutions.

 

Take the U.S. and China…how can implementation of a means to stability be the same when one is the largest user of capital while the other is the largest provider of capital. Do Germany and France benefit from any action the same as the U.K. would? What about Iceland? Ireland? Latin America? Canada? …the point is it is a lot more complex than promises of unity.

 

If you listened Friday to the grilling (well done or burnt to a crisp) of Kashkari (Cash and Carry to TB), by Congress you saw how much difference in interpretation there is of a simple term: Troubled Asset Relief Program. Congress wanted those assets that were killing the mortgage debtors protected while Kashkari and Company was doling out blocks of $25 billion to banks with no stipulation of how it was to be used. Furthermore, they say there are an additional 1,000 requests for capital from small and regional banks and it takes time to get the money to them…nobody has asked how long it takes the government to print $25 billion let alone $290 billion…then follow that up with another $60 billion now that Paulson said his focus was on the wrong area.

 

Paulson also went on to say that it was because Congress took too long to pass the legislation that his ‘plan’ did not work…but he also said it did work since it did stabilize the global financial system…never mind that both AIG and Freddie Mac were back at the trough on Friday and Citigroup by virtue of its stock falling below $10 on Friday (despite Victor Pandit and friends buying 1.3 million shares…which is not even $15 million…Pandit  sold his hedge fund to Citi for $168 million…so why wouldn’t he be willing to toss a few sheckels back into the game?

 

While Kashkari was being served up…memo to files: do NOT appear before Congress wearing a PINK tie…perhaps he was merely showing his support for breast cancer research but whatever it didn’t work…so there he sat looking like Howie Mandel but without the goodlooking models and briefcases full of money…deal?…or no deal? NO DEAL!!!…where were we?…oh yes, while Kashkari was trying to make his point, Hank Paulson was being interviewed by Maria Barteromo…an impromptu simulcast. Paulson kept saying “when the facts change I react to the changes”, an obvious paraphrasing of John Maynard Keynes famous: “when the facts change, I change…what do you do, sir?” Not as eloquent and if Keynes could decipher just what Paulson’s plan was or is, TB would be amazed at his brilliance because no one else on the planet has a clue!

 

Then TB read Barron’s with a list of 10 ‘must’ things that Obama should do immediately. First was an additional $100 billion stimulus package proposal he should make now (to cause Christmas sales to pick up…huh?), and follow up with another $100 billion after he takes office…huh? He isn’t even President yet but this fact seems to have escaped the Barron’s/WSJ/Dow Jones group. Second was to ‘invest’ $25 billion into GM and Ford but let Chrysler go under. Third, was to HELP homeowners by allowing the Treasury to inject another $100 billion into banks to pay down loans…and the list goes on and on and is more mindless blather.

 

Ah, Chrysler…aka Cerberus which not only owns them but GMAC Financial. Cerberus is asking for ‘relief’ too…as well they should as this stellar group has cost their investors plenty thus far. Note things in private equity are not going well as when one invests he signs a commitment for X dollars which is only drawn down as needed. Now the funds are coming back for more money from investors who are in no mood to pony up.

 

Then there is retail…such a buy…after all, retail sales can only go up…you know, just like home prices. Yet, despite evidence to the contrary in both areas, we keep hearing buy recommendations in both areas…nevermind that both Mervyn’s and Circuit City just went belly-up and more will likely follow after the holidays…or that Sears is resorting to resurrecting ‘layaway plans’ which they abandoned twenty years ago.

 

Enough…the point is that those who caused the problems got rich (although their wealth is diminishing lately), are either gone or begging for bailouts while those who have not benefited for 10 years…the working class…along with their children and grandchildren get to foot the bill…so much for ‘trickle down’ theory!

TB has been pretty harsh on Arnold Schwarzenegger but he gained a lot of points Sunday on This Week. His answers were clear and made sense. Like the comments on the G-20 meeting above he sees that it will be up to the federal government to sort through the request…triage if you will…in order to allocate the resources meaningfully.

 

While, as TB has said in the past, the crisis couldn’t have come at a worst time, he is rethinking that statement. Yes, it could have…at the beginning of Dubya’s second term!

 

Apologies for the length of today’s column but that was due to inclusion of Mark Gilbert’s excellent column.

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 November 17, 2008.

 

 

 

 

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11/14/08…the world according to Dubya

November 14, 2008 at 5:24 am · Filed under economy, financial, markets ·Tagged , , , ,

Sign of the times: A friend was driving thru Prescott, Arizona this week and noticed a sign on an office: AIG, and in smaller letters: Financial Advisor. Below it someone had written with a Sharpie: how can THEY advise ME when they can’t even keep THEIR stuff straight? Thanks for sharing, William!

 For discussion of yesterday’s markets skip to end of column. TB

TB had intended to include the following photos:

Sanford I. Weill, the greatest swordsman in all France, and the world, Alice, the world!

Robert Rubin who aided him in creating the mega-institution Citigroup became, who made over $100 million trading securities during his Goldman career, who was Vice Chairman of Citi and served on the audit committee…but didn’t understand what they were investing in…how very special. Let’s hope he isn’t the next Treasury Secretary!

…the connection between Dubya’s brain and mouth is a weak one as we know. In fact, he once told Katie Couric that he was often misunderstood because of this. He cited the example of the MISSION ACCOMPLISHED speech when he meant to say that the aircraft carrier had completed its mission, not that the war in Iraq was over…hope that clears things up for you, right? But how about in the waning months of the presidential campaign when he gave his ‘free trade’ speech and cited Columbia as a perfect example of how free trade should work. He said they have no tariffs on our imports but what he forgot is that their largest export…which goes mostly to us…is not taxed anywhere: cocaine!

Then yesterday, in his ‘free markets’ speech before the Manhattan Institute on the eve of the G-20 meeting, he lauded the U.S. and especially New York as the Financial Capital of the World (must be listening to Mark Haines on CNBC who now calls it the ‘financial center of the known universe), and that it always will be. Please forgive Dubya since he is not a history buff or he would know that the financial capital and economic capital of the world have both been moved several times: Rome, Venice, Bruge, London, and finally New York…note also that at different points the financial and economic capitals have been in different locations too.

He then went on to say how important free capital markets are and that while we are now in a financial crisis it was NOT due to the U.S. but was merely an event that occurs from time to time (reminiscent of Rumsfeld’s ‘democracy is messy’ speech). He also said, to great applause from the Wall Street group gathered, that over-regulation is the worst thing that can happen, not over-regulation. TB hopes that phrase is emblazoned on his tombstone so the youth of today and their children will have a target to throw rocks at!

Dubya once again went on to give examples of free capital …such as Taiwan, and Singapore, ignoring the fact that they are the most highly regulated markets in the world!

That is why we are where we are today…we let Wall Street…who has never seen a money making idea it didn’t like and used it till they drove it into the ground, devoid of any further value…create wealth…illusory wealth…by constantly lowering standards

It was a total failure to regulate that created the mess that we are in today. True, over-regulation stifles competition and innovation, but if we take the basic tenet of capitalism, which is that a company will do whatever it can to deliver the most profits over the long run. That is true and wonderful in theory, but nobody factored human greed into the equation. Nor did anyone know that the long run would become a year, a quarter, or the holding period of a stock (or short position) by a hedge fund. One has only to look at the way our corporations are run to know that the long-run is never more than the current CEO’s tenure…and he is protected because if he should fail and get fired he has his golden parachute that rewards him at several times his annual salary.

Everyone was culpable: Congress (for repealing Glass-Steagall  (hence the picture above of our beloved Sandy Weill…should have found one of Robert Rubin so you could see the Dream Team), with no provisions for the future regulation of the banks and brokers as one entity – financial institutions so that various asset groups fell through the cracks, then the bank regulators and the Fed for failing to control the growth of derivatives (a former CFTC Chief tried to do just that but Congress shot him down), the SEC for a total failure to regulate markets, the entire real estate industry for creating the greatest asset bubble the world has ever seen, and the banks along with credit card companies for the accompanying credit bubble…and we, the people, for failing to throw out the elected officials for not doing their jobs and for living beyond our means for the past 25 years!

——————————————————————————————————————

Yesterday’ rally had most of the elements of a capitulation trade but not all:

 

1. We put in new cycle lows on most indices, but NOT Dow 30, Transports or Energy!

2. Rather than plunge at the opening, inexplicably we rallied 160 points at the open, then plunged, and rebounded…not a classic capitulation trade.

3. Volume was 1.97B shares, highest since 10/16, but nowhere near the 2.9B or more that would be required for a true capitulation trade; also included 350M in the final 2 minutes!

4. Advance/Declines were under 3:1, contrast to -12:1 on NYSE Wednesday, -7:1 on Nasdaq and -4:1 on AMEX; Breadth was good but again compare: NYSE 14x vs -26x; Nasdaq 8x vs -23x; AMEX 3.4x vs -12x….get the picture?

5. The movers yesterday were…almost without exception…the very same stocks that suffered the most on Wednesday…look at the stock summary and see the relative changes, it is eerie…and makes the rally meaningless.

6. Despite the global follow-thru overnight, ex-India, Globex futures are WEAK! That portends a weak opening…and since it is Friday, profit taking (sic)

 

So TB’s advice, should you accept it, is to not get sucked into the euphoria. Live to trade another day. Was there any fundamental reason for the market to rally yesterday? NO!!!    

 

Hope you all have a fun and relaxing weekend!

 

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 November 14, 2008.

 

 

 

 

 

 

 

 

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11/13/08…Henry at the bat!

November 13, 2008 at 5:54 am · Filed under economy, financial, markets ·Tagged , , , , , , ,

Bloomberg Quote of the Day: “A bore is a man who, when you ask him how he is, tells you.” –Bert Leston Taylor

 

Oh, somewhere in this favored land the sun is shining bright;

The band is playing somewhere, and somewhere hearts are light,

And somewhere men are laughing, and somewhere children shout;

But there is no joy on Wall Street— the mighty Paulson has struck out.

-Casey at the Bat, Ernest Thayer 1888 (with modifications by TB)

 

…another stuttering, stammering press conference yesterday by Treasury Secretary Paulson (Bush has wisely decided to keep his mouth shut). How long now has it been since Congress approved the TARP? It is hard to imagine that this man who came on board 28 months ago was the highest paid CEO on Wall Street. The reason for his stammering is obvious: he has no confidence in what he is telling us.

 

Every ‘plan’ he has put forth has ended in failure and not been well thought out. The initial request for authority was written in not many more words than Art Laffer’s cocktail napkin description of supply side economics and only drew the ire of Congress at the gall to ask for unlimited spending authority with no accountability and no recourse to the courts. This from a man who had less than three months on his term no matter who was elected. Yesterday, he ‘implied’ that the delays getting the ‘plan’ thru Congress hurt its effectiveness…but a plan is just that…a plan of action and there was none other than to pump money in every direction hoping it would stick somewhere.

 

Yesterday, he openly admitted that the original course of action was wrong….that is after $290 billon has been spent and now he wants to take the remaining $60 billion and use it for credit card companies and other lenders. TB was hopeful the first time (what choice did we have as the global financial system was imploding?).

 

The problem, as TB has been saying for months is we are trying to treat the symptoms rather than the disease. We are in denial about what caused the problem: a total dereliction of regulatory responsibility, which extends from Congress, to the Administration and to its appointees like SEC Chairman Christopher Cox. It also extends to former Fed Chairman Alan Greenspan.

 

A top story today is about Brooksley Born, CFTC Chairman in 1998 who wanted to regulate derivatives and saw them as a source of instability to the financial system. That concern was overridden by Congress. This is similar to the computer programmer who wrote the Value At Risk (VaR) model who warned the SEC in 2004 under then Chairman William Donaldson, that risk in the big five brokerage firms was much higher than they thought as they were all using the same model, and that it would be a mistake to deregulate the big five brokers…of which only two remain today and both, Goldman and Morgan Stanley are now categorized as ‘banks’…recently joined by American Express!

 

So what are we doing? We have been bailing out Wall Street (sans Lehman which was a mistake), AIG, and now likely the auto industry. We are even bailing out banks that don’t need to be bailed out to cover up which ones are the bad ones and the Fed, with our money refuses to disclose which banks have received money. Wells said they didn’t want it and had $25 billion force-fed to them…yet just raised $10 billion thru common stock issuance (is this however a prelude to paying the government back early?). Likewise, Bank of America said they didn’t want it and were forced to take it…yesterday on CNBC Becky Quick posed why didn’t we just give a million to every taxpayer at least that way we would know where it went and know it would be spent. Congress is now demanding that Bernanke tell where the money went…the $2 trillion in loans backed by questionable collateral. Also, in a Lehman like move, Bernanke refused to lend to Genworth against its commercial paper forcing them to turn to the banks on their back-up lines and once again adding pressure to the system.

 

TB has mixed feelings on the auto industry as there are over 2 million jobs involved. Not just the big three but their suppliers…some of the last remaining manufacturing jobs in the U.S., so unemployment there would have huge repercussions on the economy. But the question is: even with a bailout how many of those jobs will be lost to cost-cutting?

 

Paulson has now come around to an idea proposed by Hillary Clinton in the primaries: rewrite the mortgages so people can remain in their homes and the pay back out of equity appreciation. Stabilizing the housing market is key to rebuilding confidence and while Paulson says he wants to do that, he wants to dole out money to securitizers of assets such as student loans, credit card companies (who sent out all those unsolicited cards that are now causing pain thru usurious…if there was a such thing anymore…rates).

 

If you get the feeling they are stumbling around in the dark you aren’t wrong. The market was already in freefall when Paulson held his press conference yesterday having opened down 140 or so then falling to down 300 before climbing back to -200 when he began speaking, then like the slippery slope of bailouts we are doing, the market descended for the rest of the day finally closing -411 points and just off the lows. It was the second lowest close for the Dow and the only ‘positive’ is that the trendline from the 10/10 low is intact…this being the third test…but for how long? Meanwhile the Nasdaq Composite and Philly Semiconductor Index made new low closes…the latter also a new low and took out the 11/4/02 low…that’s a six year low! Honorable mention goes to the S&P 500, Nasdaq 100, Russell 2000 (which had one of the worst day’s TB has seen, -6.1% and 22:1 declining), and the Barron’s 400. Dow Transports had their third lowest close, but just barely. If you get the impression TB is bearish you are right, but read on.

 

What we have needed and still need is a true capitulation trade. Slam it down early in the session…in this case take the Dow thru 8,000 (it closed 8,283), to say 7,800 or lower. THEN rally it back and end the day on a positive note…but we will also need big volume (at least 2 billion shares), solid advance/declines and breadth. New 52 week lows would be expected to rise but then fall sharply by tomorrow. This would instill confidence…at least for another 2 day rally…but could run up until Christmas with some nice gains. As TB has warned however, from the 26th on the hedge funds are trading ‘next year’, so with the huge withdrawals it is likely they will do exactly as they have for the last four quarters: drive the market down thru yearend (which also makes conventional money managers look bad), and well into January or worse (the selloff that began 12/27/07 didn’t end until the January 22 low (11,634 on the Dow), was followed the next day by a faux capitulation most of which was given up as we traded back down until March 10.

 

In other words, TB sees only a major countertrend rally…if that, but the keystone is a true capitulation…if we don’t have it we are going to have one ugly yearend! Paulson has not helped the outlook and has no muddied by casting doubts on whether we know what we are doing.

 

A look at the losers yesterday shows the market was no respecter of fundamentally sound companies. The big losers were largely industrials (also Energy led by CVX and XOM). Here they are in order of Dow points: IBM, MMM, UTX, AXP, MCD, WMT, HPQ, PG; CAT, JPM, BAC…only GM was up…but we know that story, right?

 

As for the Nasdaq 100, all the big stocks led by AAPL and QCOM were hit hard. Note that AAPL and GOOG are particularly vulnerable as they are heavily owned by hedge funds and given their high prices they need to sell fewer shares so it is easier to reach their targets. Tomorrow is the last day to notify hedge funds of withdrawals by yearend which is why the market behaved so poorly yesterday but also means that the selling could be nearly over…hopefully it ends with a rout this morning then a sharp rebound.

 

One last thing about yesterday: the dollar was en fuego…as was the yen lending credence to the theory that there was a major unwind of the yen carry trade. So watch the dollar today…and the yen for confirmation…at 7:15am EST the dollar index was about unchanged and the yen about 1 cheaper to the dollar.

 

Commodities are a disaster….Gold and Crude have broken down with targets of $686 on the former while Crude took out the 3/20/07 lows…there has been only one safe harbor: CASH…and it is still king. Money market yields are plunging and with the 1 month T-Bill at 0.05% there is a ton of money on the sidelines…but the question is: what will bring it back into play? Also after fees, etc. the one month bill would have a negative yield. It is against this backdrop that Paulson said he is abandoning the bailout plans he

so fervently called for. Pray for capitulation today…pray hard and often…like a Muslim!

It is hard to advise what to do here…so under those circumstances it is usually best to do nothing…the ‘deer in the headlights’ approach. But IF you see the capitulation trade, be ready for it and know what you want to do…move in the direction that causes YOU the least grief and pain.

 

Have a good day!

 

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 November 13, 2008.

 

 

 

 

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