TB’s Quote of the Day: “Any CEO who is worth his salt will diversify as much as possible.” Man on the street in commercial of an energy company. Obviously not one of those who invested with Bernie Madoff
…necessarily. Let’s say you notice your tire is going flat…first you jack it up and the leak slows or may even stop. Then you insert a plug into the hole…assuming you can find it. Now, if you take it off the jack and drive off what happens? You ruin your tire! That is because you stopped the deflating…in two stages, first by removing the pressure, and then by plugging the hole. But you lacked air…something to pump back in. Note that whether you drive it without plugging the hole or continue to drive after plugging the hole the result is the same: the tire is destroyed.
Yesterday, the FOMC in an unprecedented move cut the Fed Funds rate from 1% to a range of 0-0.25% and said they will “use every tool at their disposal” to fight the recession, now entering its second year. Also, the announcement came as late after 2pm EDT (about 2:20pm) that TB can recall…either a big battle for consensus or trying to prove that they spent a long time deliberating. The action was greeted by glee in the bond market and the stock market. One of them is wrong…dead wrong.
Consider that we are in the greatest financial deleveraging in history, that consumer and investor confidence are on the skids globally, that all of those brilliant financial derivatives as well as the worst of the subprime mortgages originated right here in the good old US of A! As if things weren’t bad enough with mutual fund, hedge fund, and private equity investors trying to pull money out as fast as they can…further deflating equity valuations…along came Bernie Madoff. As bad as it is the worst is yet to come: further declines and in some cases decimation or worse of charities and foundations, and worse, a further loss of confidence in investment managers…and hedge funds…for their stupidity in not kicking the tires, performing continuing due diligence such as asking how he was obtaining those terrific consistent returns instead of settling for “it’s a black box”, which can resemble a casket (this is not to be confused with Jim Simons, whose Renaissance funds are strictly black box, unfettered by Wall Street brains and who has posted double digit returns for decades). There is a total lack of transparency, honesty, integrity, and sadly those who act responsible as money managers are suffering too.
So the Fed is now pushing even further on the string. No doubt it will stem the deflationary aspects but can they truly reflate? TB thinks not…at least until investor confidence returns and Madoff set that back immeasurably. Banks do not trust one another, dealers do not trust one another, investors due not trust their money managers. So unless the Fed can restore ‘trust’, it cannot restore confidence and we will continue to languish at what appears to be very ‘cheap’ prices for stocks…but beware of lower earnings going forward and if we cannot get off the bottom first we will see new lows.
There was one very positive note yesterday and it came from Geoffrey Immelt, CEO of GE. He said that he would no longer provide quarterly or annual guidance on revenues or earnings! Good for him…finally someone willing to make analysts work for their money. Perhaps he got the idea from Meredith Whitney, who it appears is the only thinking analyst remaining on Wall Street! TB has long suggested this because guidance causes ‘clustering’ of earnings estimates in a relatively tight range…hedge funds love this because they can make a ‘bet’ on an earnings announcement…thus the sharp selloff when a company misses by a penny…or even makes the estimate these days. A wider range means that more offsetting bets will be made, allowing the news to be absorbed.
On CNBC, just before the announcement PIMCO’s Bill Gross, along with others on CNBC, said they will likely start buying bonds (massively) but he thinks in the 3-7 year range…that is because after Volcker’s run on inflation, Gross made his reputation by buying the five year treasury…the reason being that they had to recapitalize the banks and by driving five year yields down, banks could do so easily. But there is a big difference today: first, the banks have already tapped the TARP, and furthermore with FDIC guarantees on their debt are issue 2,3, and 4 year debt at Libor plus 65 basis points, or fixed at less than 3%. The others who didn’t make their reputation the way Gross did, said to sell bonds. Well we had a huge rally in bonds with the 30 year up 3-1/2 points, the 10 year up 2-1/8 and even the 5 year up 13/16 to a 1.32% yield. 2’s and 3’s rallied much less but their yields fell to 0.65% and 0.89% respectively…imagine having to go out four year or more to earn 1%!
But the weird thing is that TIPS rallied too…in a deflationary environment and after we just saw a 1.7% decline in CPI, the biggest decline in the post WWII period! iShares on the TIP ETF had already suspended the dividend for a second month due to declining ‘inflation accurals’, and they will be not only negative in January but will more than offset the interest accruals! Is this a good reason for a rally. About a month ago, the yield on the 30 year TIP was over 3.25%…on Monday it closed at 2.31% and last nights close was 2.02% (that was a rally of almost 6 points!). Is this rational? Maybe for five or ten years but like stocks: does that mean you need to buy it now?
Commodities were mixed with the only moving sectors (>1%) being Grains, Precious Metals, and Livestock, while Industrials and Soft Commodities were down by 0.7% and 0.3% respectively and Energy was up but just 0.7%. This despite a huge decline in the dollar meaning economic fears trumped currency concerns.
The Dollar lost against all major currencies and fell to a 15 year low versus Yen. The Euro gained 4.25 cents and Sterling 3.05 cents…both huge moves but the gain in Sterling still pushed it to a record low (since inception 1/1/99). versus the Euro More to come!
Now what you all want to hear about…stocks! For a seventh straight session, the major indices fought the 40 day moving average after the setup to close just below it a week ago Monday. Like Tuesday a week ago, yesterday spiked right thru it on all major indices, so it must be good right? Wrong! Stocks are so weak that the 23.6% retracement from the cycle lows of November 21 is still much higher and it is inconceivable that we will take it out. IF we had a chance it would have had to be on the rally a week ago. Overnight Globex stock futures are off significantly…about a third of yesterday’s rally. Here are the levels to watch:
Resistance Support
12/16 close 23.6% Fib 40 day
Dow 30: 8925 9042 8557
S&P 500 913 938 889
Nasdaq 100 1243 1307 1209
Russell 2000 482 486 422
Those should prove to be formidable resistance given the liquidity drying up and the continuing deleveraging…no doubt redemptions increasing thanks to l’affaire Madoff! Also note that 20% is a very good countertrend rally…to expect more is wishful.
A last comment on Bernie Madoff…investors may have lost $50 billion…but TB agrees with Vanguard founder Jack Bogle, that Madoff did not ‘make off’ with $50 billion. TB believes it wasn’t originally a Ponzi scheme but merely an ill-advised strategy that once it began to fail it turned into a scheme…like the employee who takes money, fully intending to repay it but the amount becomes so large he becomes an embezzler…in for a dime, in for a dollar. Bernie, no doubt paid himself well, but most probably vaporized – to margin calls or worthless options. Yesterday, we learned he is trying to get released on $10 million bail but needs two people to vouch for him…due to the severity of his crime and the flight risk/suicide risk, he should remain in jail…and rot there!
Hope you have a good day in the markets…and in the real world!
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 December 17, 2008.
