Bloomberg Quote of the Day: “I’m not a vegetarian because I love animals. I’m a vegetarian because I hate plants.” – A. Whitney Brown
….that’s double ‘peak’ not ‘speak’ although that too might be apropos. For the past three sessions the dollar has hovered at the lows and just off the June 2 lows…on the edge of a precipice. Meanwhile the Dow came within 25 points of the June 11 HIGH (8878) three days ago (8855), then took it out in the following fashion: 8927.13, 8949.80. The first day was a slight ‘outside’ day and the last two were higher highs and higher lows, but yesterday the Dow closed -34 from it’s 8915.94 high close for the rally from the March lows. The fact that the highs were taken out but with so little additional gain…just 0.8%, high to high, begs the question of whether this rally is long in tooth?…or worse.
Additionally, we have been in an earnings period of unprecedented (in TB’s memory) lowering of earnings estimates in which most companies handily beat them…so where do we go from here? Will the analysts start raising the estimates based on these earnings which in most cases were a result of significant cost cutting…and can only be replicated by laying off more workers…although TB did note that Mattel said one of the main ways they did it was to reduce advertising expense!…something TB always felt was overrated.. MAT must be doing something right because the rewarded the stock,which had been trading on the 40 and 50 day moving averages with a ‘gap up’ and surge of 13.3% in three days to the high…but it has settled back since, closing just above the first day’s high…still that is the highest level since Oct. 2008 and up 70% from the March 5 low.
Then there was Wells Fargo yesterday, who dazzled like Goldman, JPMorgan and BofA, and like Mattel had been trading right on its 40 and 50 day m/a’s, plunged 3.6% when it was disclosed that loan losses were soaring. Write-offs increased 35% to $4.39B) while non-performing loans jumped 45% in the quarter ($5.3B). These were primarily Wachovia loans. This resulted in an immediate credit downgrade by Fitch from AA to AA-. See how you have to look past the numbers?
Poor ole Morgan Stanley (MS – stock symbol not the disease), however took a loss due to rising employee compensation costs and a drop in trading revenue…odd man out against GS, JPM, and BofA. The road gets tougher for MS while the strong get stronger. This is what happens when ‘too big to fail’ is not only applied but encouraged by the Fed and other regulators…first Wall Street gave investors an uneven playing field…or more accurately the SEC allowed them to do it…now the Big Five has turned into the Big Three. Is this a good thing? You decide…after all…it’s your money!
A friend wrote yesterday that rather than attack Goldman Sachs he should just buy the stock and watch from the sidelines…happily. But if there was a water company that had huge influence on the government and cornered most of the available water and was charging extortion rates for it…would you want to invest in that? Perhaps you would, but morally TB cannot…and then there is always reversion to the mean…always. GS is trading at a multiple of just 10x estimated earnings (down from 27x) while MS is 78x. JPM stands at 27x and is overvalued by 2.6x to the earnings growth rate (PEG) while GS stands at 0.85x. BAC’s estimated p/e is 20x and the PEG stands at 2.4x…while WFC has an estimated p/e of 15.8x and PEG of just 1.16x. Do any of these stocks look ‘cheap’ to you? Time will tell…it always does.
Yesterday, TB listened to a one hour discussion with the economist, domestic and international managers of a well-known global financial advisor…don’t speculate on who it is as you will be wrong and TB won’t say…that isn’t the point.
The point is this: the economist who is well-known believes we are far too optimistic on an economic recovery as evidenced by the stock market which he feels is over-priced. The domestic manager was looking for sectors of growth but also felt we had come too far too fast, and the international manager said the he sees emerging markets, due to their huge runup at fair value at best…he likes India, China and Japan. On China he said that they can sustain 7-8% growth but not double digit without a global recovery to boost their exports…in analyst terms ‘organic’ growth can sustain the lower level but a global rebound is required to boost that growth…similar for India. As for Japan…and this is the only disagreement TB had in the entire discussion…he feels there is value in the stocks as they have felt their pain…but TB feels that the pain is only going to get worse with the aging of their population which will require multiples of workers to support the growing number of aged. They are, and have been, on the forefront of that global phenomenon.
Golden Glider? Wendelin Wiedeking CEO of Porsche has agreed to leave immediately after 16 years and is the last stumbling block in the merger of VW and Porsche. For this he is to receive a 50 million euro severance package. What were his accomplishments?
First, he was opposed to a merger between the two companies. Second he accumulated VW shares so that Porsche had a 50% plus stake and bought options on an additional 20%…which roiled the German markets. Third, he did this by raising Porsche’s debt to 10 billion euros in turn causing the company to turn to the owning family and to try to get Qatar to take a stake in the company. The CFO also agreed to step down as well he should for allowing this to happen in yet another case of a megalomaniac – usually relegated to dictators. To the CEO’s credit he will give half of it to charity leaving him with a paltry 25 million euros…before taxes. Performance based compensation?
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Obama is blinking….it started out with a minor ‘tic’ when he said he would extend the deadline to August if there was very close agreement this month…now he is saying by year-end which to TB if he misses August it won’t happen by yearend.
There are two arguments against healthcare which he addressed last night. The first is the cost, and that remains to be seen despite his projections…which if you note are ‘over the next decade’ they won’t cost the taxpayers…but what then? Along with Medicare and Social Security. The second is who will decide on healthcare…that was answered by the Mayo Clinic, which had been opposed, having signed off on how it will be administered. Remember, right now you are relying on your insurer to decide what you do or do not need. What will be the outcome? We should know pretty soon.
As for Obama’s declining ratings, Bloomberg conducts a quarterly poll of institutional investors. Overseas he has an 87% approval rating which is unheard of…while in the U.S. it is just 49%. On the economy only 25% of U.S. investors rate his policies ‘good’ or ‘excellent’ versus more than 50% in Europe and Asia. Bloomberg ascribes some of this to the distaste for Bush but is it possible that we, like humans everywhere, resist change but once the die is cast we adjust to it…unlike any other species? The GOP, following the break from the ‘contract with America’ era of Newt Gingrich spent like madmen…while refusing to raise taxes and in fact dropping them sharply for the wealthiest Americans. To them, even a return to the pre-1972 cuts is anathema…and was even when the economy was booming…you simply cannot lower taxes forever…although TB doubts this is the time to be raising them…especially when the states are grabbing the stimulus from the taxpayers faster than the Feds can dole it out.
TB listened to GOP Senator Bonior last night as he said we cannot afford this healthcare plan which he says will be over a $1 trillion over the next decade…yet he said nothing of the cost of our ill-fated Iraq excursion which is still costing us money…and remember we were told that we would get the cost back from sales of Iraq oil…they no longer mention that point…or that had we focused on Afghanistan…where the terrorist were…we might not be having the upheaval there that will protract our involvement. Isn’t it great to be a politician on criticize while ignoring your own foibles?…and get paid to do it!
Have a great 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, © July 23, 2009.
