Friday, October 31, 2008

Not-So-Invisible Hand


JP Morgan today went out on a limb and "said it won't begin new foreclosure proceedings on some loans while it finds ways to make payments easier on $110 billion of problem mortgages."

It took a while for somebody, anybody post-TARP to do this on a large scale, but it's about time. I suspect that JP Morgan had a very large government whispering in their ear, but that's OK.

Better late than never.

Get Ready for Some Midwest Outrage

Reuters is reporting that GM will not get any money from the Feds to backstop/subsidize its takeover of or merger with Chrysler.

This one surprises me, if only from a political perspective.

We have a credit crisis and the Governement is propping up the banks and insurance companies. Not surprising. That auto makers who are in terrible shape get in line for some Fed dollars - also not surprising.

What is surprising is that the Feds are giving the Heisman to an industry that is so Main Street that it is like apple pie at a time when most on Main Street don't really understand why or how the financials need to be saved.

Billy, "Damn, banks are getting billions and Bush can't come up with a few bucks to save our jobs?"
Bobby, "Yeah, it's the crooks in Washington looking out for their asshole buddies on Wall Street again."
Billy, "The little guy has no shot in this country."

Thursday, October 30, 2008

Here's How I Could Be Wrong

I wrote this morning that "I fully expect most rallies to be met with selling from hedge funds and mutual funds through mid-January."

I could be wrong obviously but here's one exact way in which I could be wrong.

Due to mutual fund excise tax rules, October can be a nasty month for taking gains or losses - selling stocks - whether the market is having a good or bad year.
October is over.

There could be a lot of funds out there who:

  1. Are close enough to mediocrity that their year is salvageable

  2. Who know that they can handle the redemptions they have gotten or are going to get

  3. Whose long term record is so good that investors have told them they aren't pulling out

What these funds have in common is that the best possible scenario for them is a higher, or much higher close for stocks at year end. I don't think many are still pressing the short side given all that has happened. There has to be a lot of cash on the sidelines. It's not untinkable that a few dozen thought leaders in Midtown might lock arms and march some favorite names higher between now and Christmas.

A huge rally could happen but it's not what I'm betting on.

Another Nasty Close?

It's 3:27 and stocks may be rolling over again.

Let's get a few weeks in around this level before we do anything crazy. Earnings have been bad, 4th quarter forecasts have been worse, and estimates for 2009 are probably way too high. And even if they're only too high by a little bit, estimates are going to go down a lot before they go up at all.

Will the real equity market please stand up? I don't think it can since the credit markets are still in charge. It's ironinc that it was so bad that LIBOR has come in 14 trading days in a row and it's still too high.


Executive Compensation and Bad Shareholders

I was speaking at a client seminar yesterday and the topic of executive compensation came up. The crowd was older and not that sophisticated in terms of investment knowledge. They were very well dressed, though. The general tone from the audience was that both Wall Street and Washington are to blame for our current problems, and that both are motivated by self-interest.

Whether that is true or not, in my opinion or anybody else's, is not germane to the next few paragraphs. My question is this: If you are in favor of limiting executive compensation, bonuses, stock grants and golden parachutes, who do you want to do the analysis and implementation?

I for one do not want the government to control executive pay of companies in which I invest, although having some limits in the case of companies that participate in the TARP plan is OK with me.

I have two ideas:

1. There is already an entity that is supposed to be doing this. It is called the Board of Directors, who are elected by the shareholders to represent the interests of said shareholders. The Board approved every major pay package and golden parachute. Let’s stop giving them a free pass.

In the same seminar, a disenfranchised-shareholder-type asked me what she should do when she receives the proxy materials in the mail. I wish I hadn’t but I told her that by owning the stock, she was effectively voting with management so if she wasn’t willing to sell the stock she might as well vote with management. That was stupid of me.

2. If you own stock in a company, and the Board is approving decisions you don’t like, DO SOMETHING. Vote no. Write in Fred Flintstone’s name as a Director. Send a letter to the current Board or a newspaper. Go to the annual meeting and ask the hard question.

We need better Boards and better shareholders.

At the Risk of Stealing Research...

Citigroup strategist Tobias Levkovich published a report this week discussing the predictability of returns across assets classes.

In the report he looks at a normal distribution (it is normal or looks like it) of S&P 500 annual returns over the last 207 years. He concludes among other thins that there is a greater than 99.5% chance that the S&P 500 will not be down more than 40% in any given year. The S&P is down 37% YTD.

Maybe the Phillies winning the 2008 World Series was the outlier event this year and the market is done going down. Maybe.

This Market Needs a New Normal


Bernanke's work on the downside of rates is probably done for this cycle, as he went to 1% yesterday. The market reacted well to the news and was up nicely until the last few minutes when either (a) GE said something negative about 2009 profits, or (b) Dow Jones misquoted GE about 2009 profits, or (c) another hedge fund used the strength to raise a few billion to meet redemptions. I'm voting for (c) since I fully expect most rallies to be met with selling from hedge funds and mutual funds through mid-January.

Fast forward to this morning and Asian markets are up about 10% and U.S. futures are strong. The Delta/Northwest merger looks like it's done, the GM/Chrysler deal sounds like it's done. While I think the Fed Funds rate needed to get to this level, I have no idea where this market is going in the short term. Oh and by the way, I didn't make partner at Goldman Sachs again this year.

Wednesday, October 29, 2008


"348% Two-Day Gain Is Pain for Hedge Funds"
I won't rewrite the Volkswagen short squeeze story since it has been written to death this week, but let me just say that the above headline from the WSJ should not, under any circumstances, be written about a global company that has been around since 1937 and has a market cap in excess of $100 billion. Well, if it happened then it should be written. The whole thing shouldn't have happened is what I mean.
By the way, Volkswagen is down 40% in DAX trading today. If you see a stretcher in midtown today being loaded into an ambulance, it's a hedge fund getting carried out.

Maybe You're Pregnant

The day after.

Today is an important day for the market.

Yesterday's majestic move higher could have been the sign that it's OK to get back in the water. After all, stock are way undersold, interest rates are still low, house price declines may be decelerating, lots of smart people are saying to buy stocks now.

If however, today we give back a big chunk of yesterday's gains, we are pretty much where we were a few days ago. Don't forget that a slow move higher is healthier anyway.

All that being said, the Fed will make a move on rates this afternoon which will thoroughly confuse things. I recommend taking the rest of the week off.

Tuesday, October 28, 2008

A Tax Idea

If I'm right, Obama will win next week at least in part because Americans want change. Voting for change is fine but if the change leads to a different leader who does a lot of the same stuff, for similar reasons, what's the point?

I've got an idea for change that is so obvious in its merit that it's downright patriotic.

Don't cut taxes. On the rich, on the poor, on the middle class, on anybody. Not now. The U.S. has huge debt and a huge deficit. We need the revenue until we get to a recovery. Our balance sheet is in bad shape.

Redistribution of wealth is stupid. Promising to cut taxes in order to get elected is stupid if you really care about the country you want to run.

Cut it out.

Monday, October 27, 2008

The Lamest Attempt at Regulation Ever?

When Wall Street research was revealed to have been, at least slightly, or greatly, influenced by investment banking revenues, there was a grand settlement between the investment banks and the Keystone Cops (guys who don't know how to regulate Wall Street) wherein the offending investment banks agreed to not much at all.

The intention of the crappy regulation was that investors would be protected from biased proprietary research by being spoon fed access to less biased non-proprietary research. It doesn't really matter whether that idea works in practice or not, even though it doesn't. Most individual investors don't read research - especially research that you have to click through a link to get to.

Customers like a good idea, no matter where it came from.

In any case, the following is how one of the big Wall Street firms satisfies this "independent research" requirements.

You be the judge.

"Customers of [XYZ Investment Bank] in the US can receive independent, third-party research on companies covered in this report, at no cost to them, if such research is available. Customers can access this independent research at or can call 1-800-555-orly to request a copy of this research."

New Home Sales

The September number for new home sales, which should have been weak, unfortunately rose 2.7%.

Good is bad (up is bad?) here as the market needs to clear the glut of existing homes, not build new ones. The market continues to make it difficult to do anything constructive other than wait - there has been no whoosh-down capitulation, not enough despair, just an almost-daily pounding.

My Economic Predictions

I don't generally make economic predictions but lots of econostats come out this week. They are all backward-looking and useless for the purpose of actual investing, much like last weekend's weather. Let's review where I think each will shake out:

  • Today - new home sales - should be bad
  • Tuesday - consumer confidence - should be very bad
  • Wednesday - durable goods orders - should be very bad
  • Thursday - 3Q GDP - should be bad
  • Friday - personal income and spending - should be very bad

Other than that, it should be a fun week.

Dogs and Cats Sleeping Together

The Financial Times is reporting that Goldman Sachs and Citigroup had talks in the last month about getting together.

That would have been a shocker but instead is a reminder that anything can happen in this environment.

The downside momentum in oil is incredible.

CNBC's Squawk Box is on for an extra hour this morning and the hosts are using at least some of their extra time to try to keep guests from talking out of both sides of their mouths. It's a tough task.

So When Will Banks Give Loans?

So reads the title of Joe Nocera’s most recent article in the New York Times, maybe only the online version.

The article is based on information from an internal JP Morgan conference call. The implication is that despite the Feds having given billions to the banks in the form of preferred stock investments, the banks are in no hurry to lend again, and may not be lending for a long while. OK.

The idea that banks are never going to lend again is preposterous.

Banks, even those with adequate capital, are afraid to lend now. For any individual bank this situation has considerable inertia because nobody else is lending either. There will come a point, and it will not be announced in advance on CNBC, when Bank A makes a new, daring and very profitable loan. Bank B will notice. That is what they do. Bank B will then go out and find somebody to lend to.

Banks can’t grow profits without making new loans. Any well-capitalized bank in a decent environment will find someone to lend money to. We aren’t in a decent environment now but will be again.

In addition, the banks were forced to take those billions at a 5% interest rate. If they buy 10 year Treasuries with the money they would have a negative return, which wouldn’t play very well in the next shareholder meeting.

Sunday, October 26, 2008

Ben Stein Says It

My not quite favorite writer, Ben Stein, writes something in the New York Times that has been in the back of my mind in one form or another for a while now.

"When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again.

What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?"

Seriously. Whether you are a media talking head searching for a populist angle or a politician bottom feeding in the bad idea pool for votes, this was a terrible idea, and not based on any economic reality. I have not heard or read anyone who espoused this view admitting it now that the emperor has no clothes.

Saturday, October 25, 2008

AIG Has My Head Spinning

The U.S. government has taken control of, among other things, insurance giant AIG.

Said takeover is not going well by all accounts, but this Washington Post story yesterday has only questions - no answers.

The government agreed to lend AIG $85 billion dollars and take over 80% of the company. As an aside, if you agree to give away 80% of your company, throw out all of top management and have no choice in the matter, that is not a bailout. The Fed planned to use the $85 billion to untangle AIG's toxic balance sheet while at the same time selling off assets to get itself repaid.

The Fed has since bumped the $85 billion to $123 billion and has not done much on the asset sale front, as potential buyers smell a distressed seller.

That is the story as written by the Post, but is it the whole story?

As recently as 15 months ago, the common stock of AIG was worth $195 billion. The insurance operating company from what I hear is very strong. 80% of $195 billion, the taxpayers' stake, would be worth over $150 billion if now were then. There's no way it is that high but what is it? What is the value of the core AIG? Could someone please write that story?

Saturday Unemployment Joke

Unemployment is likely to go a lot higher in the next nine months, so I bring you the Saturday unemploytment joke.

Gynecologist's Assistant Opening

A young man goes into the Job Center in Kansas City, Kansas and sees a card advertising an opening for a Gynecologist's Assistant. Interested he goes to learn more. “Can you give me some more details about this?” he asks the clerk behind the desk.

The Job Center clerk sorts through his files and replies, "Oh yes, here it is: The job entails you getting the lady patients ready for the gynecologist. You have to help them out of their underwear, lie them down and carefully wash their genital regions. You then apply shaving foam and gently shave off all their pubic hair then rub in soothing oils so that they're ready for the gynecologist's examination. There's an annual salary of $65,000 and full benefits."

"Great, where do I apply?" saked the man.

"You have to go to Wichita, Kansas. That's about 120 miles from here."

"Is that where the job is?"

"No sir - that's where the end of the line is..."

Friday, October 24, 2008

Gee Willikers

“We are ready for any unforeseen event that may or may not occur.” Dan Quayle

I was writing the oil post below and hadn't fully realized that the market is going bat shit. Europe and Asia are getting gored. Currencies are flying and if I'm reading this right big money is hiding in Yen.

Oil is down another 6%.

Down is bad.

Oil is not Funny

CNBC is interviewing OPEC Ministers as they exit the meeting wherein they agreed to cut oil production by 1.5 million barrels per day.

It's funny how they try to keep up the charade that they control the price of oil. They control supply but not demand - and only for the physical product. The do not control supply or demand for the futures contract, as we saw in spades over the last year or so.

Thursday, October 23, 2008

This Sounds Legit

$225,000.00 WANTED

Ad ID: ********* Visits: 33
Location: ****** Date Listed: Oct-23-08
We need to Borrow $225,000.00 to start a business. We will pay back $275,000.00 in 18 months or less. For details call xoxoxo at (xxx)xxx-xxxxxx serious inquiries only.

You never know.

Headline Risk

Headline Risk is typically defined in investment circles as "The possibility a negative news story will be picked up by media outlets and cause a significant change in the value of an investment."

That's the headline risk I'm used to. There's another kind of Headline Risk - the risk that you will jump out of a window if you read the current headlines.

US foreclosure filings up 71 percent in 3Q

Goldman Sachs May Slash 3,200 Jobs as Credit Turmoil Worsens

U.S. Banks Still Aren't Lending
Despite the federal government's best efforts, banks are hoarding cash. It may be 2010 before the credit climate improves


Stay in the game. Down is bad. Cash is good.

How We Got Here Part 497

Stocks continue to get battered and indignation continues on many fronts: Main Street is pissed that they got screwed by Wall Street, homeowners are pissed that that banks are getting dollars but they can't get relief from the mortgage they can't afford, politicians are pissed that companies got us into this mess.

What you won't hear is talk about who created and enabled the environment in which this financial high wire act was taking place. It seems to me that it is more difficult to get a driver's license in New Jersey than it is to create a credit default swap. It's certainly more difficult than it was to get mortgage 5 years ago.

Jeremy Grantham, often bearish value investor at GMO, probably isn't too happy that someone sent his October letter to me, but someone did, and I love the following quote: "Why did our leaders encourage the deregulation, encourage the leveraging and risk-taking, and completely miss or dismiss the
growing signs of trouble?"
Citadel Chief Ken Griffin, who apparently is rarely quoted, was quoted as follows yesterday: "Amongst the hue and cry that we need more regulation ... we need to keep in mind that it is our regulated entities that failed us first and not the unregulated part of the I hope that our policymakers next year, when they try to ensure that what has happened recently never happens again, keep in mind that there is a balance between free markets and socialism, and that this country has achieved greatness by finding the right side of that balance to be on."

Wednesday, October 22, 2008

Superb Headline

Going Rate For Terrible Yahoo M&A Advice? $37 Million A Quarter

Henry Blodget writing about none other than Yahoo, tech's reigning King of Shareholder Value Destruction over here.


Apple is fine. The report last night was not a disaster as some feared.

The idea that they are a-cyclical, or immune to economic weakness is just not true. The stock traded up last night in part because gross margins were so strong. The guidance tells the real story in my opinion. Revenue for the December quarter is going to be below where estimates were yesterday. You can say that they are just being conservative again but they missed the high end revenue estimates for the September quarter.

This doesn't bode well for consumer electronics this Christmas.

No Head Scratching Allowed

For the next three months, you are not allowed to wake up, see the futures are down big and say to your significant other, "Hey, what's going on?"

Yes, oil prices keep coming down. Yes. Libor continues to come in signaling a healthier credit situation. Yes, the U.S. dollar is ripping vs. the Euro.

Earnings are bad and estimates for 2009 earnings are way too high. This is what happens in a recession. It takes a couple of quarters at least for weaker, or even negative, top-down revisions to work their way into company-specific estimates.

An NBC/WSJ poll found that 49% of voter think Obama will be better for the economy, vs. 22% for McCain. Let's hope so.

Tuesday, October 21, 2008

Sef Confidence Vindicated

I just got a call from a noted art expert.

My self confidence in my judgement of art - a topic about which I know nothing - has been vindicated.

The picture in the post below is not actually art, but MS Paint done by my little brother today.

Victory is mine.

Self Confidence

I'm not a huge art fan. We have lots of stuff on the walls of my house, but that's more a function of the fact that there are lots of walls that need to be decorated than anything else.
That being said, there are some pieces in my house that I really like. A few originals, drawings of my kids, one of my house and some other stuff, and some prints that are good, in my humble and non-professional opinion.
This picture on the left is crap. I'm no expert. I can just smell it.


If you are 1000% sure that Microsoft is not going to make a new bid for Yahoo, go ahead and short it at the open tomorrow.

Yahoo's quarter was bad. Well maybe the quarter was OK, but business is bad. The franchise is in trouble.

The announcement that they are going to lay off 10% of the staff has the stock trading up 7% in the aftermarket.

Do you Yahoo?

You Don't Know Either

Even though this market has been very very difficult for some time now, there is still no shortage of opinions on where stocks will or need to go in the short and intermediate term.

Lots of traditional chartists are of the opinion that we need to chop around the bottom and retest the lows a couple of times before making a sustained move higher, but they might say that not knowing anything more than the fact that stocks came down a lot in a hurry to multi-year lows.

The chart above looks to me as if there is room for a big rally that wouldn't necessarily change anything in the technical picture. If the market's job is to cause the most pain for the most people, a 30 - 50% rally right here and then a retest of the lows would make a lot of pros and amateurs look for an open window.

This is not a prediction. Just sayin'. As a matter of fact, I think earnings for the next 2 or 3 quarters are going to be terrible so I can't get there from here.

Monday, October 20, 2008

Bernanke Supports More Stimulus

At least he wasn't still talking about inflation this time.

I have not heard much regrading the effectiveness of the last round of checks that Uncle Sam sent out but I have a hunch it didn't do too much. You can go to any mid-range restaurant at lunch and see how badly the economy is hurting.

I we're going to do it, I recommend streamlining the process this go round.

Step 1. Borrow a bunch of money from China.
Step 2. Buy every household below some income level a flat screen TV.


Weird and Grim and Shaky Logic

New Jersey Gov. Corzine and New York Gov. Patterson are on Squawk Box right now, explaining the fallout of the Main Street and Wall Street weakness, especially as pertains to state tax revenues.

Corzine just said, and I'm paraphrasing, that not only is NJ not going to cut spending, but if there isn't another Fed stimulus package, NJ won't be able to make its own budget. I assume that he knows that the Fed would borrow the money used for another round of stimulus.

Come on people. Someone has to cut spending.

Monday News

Nothing much is gong on today.

Ericsson preannounced better results, Circuit City joins the auto makers in falling apart, Yahoo will be laying off lots of folks, chatter is everywhere about how bad the recession is going to be.

Even though this is a big week for earnings, we need a few quiet weeks to let the market settle down, especially since government steps to ease credit are not immediate. Libor is down again overnight, though.

If you are running a hedge fund and are down 20% YTD, what do you do now? Swing for the fences? Shut down? There are times when these guys operating in unison can be a very powerful thing.

Saturday, October 18, 2008

Lehman is About to Usher in Reg ND

The controversy around Lehman is not done.

Bloomberg and others are reporting that Dick Fuld and other Lehman executives are being investigated and likely are going to trial in the Biggest Bankruptcy Ever case.

At issue is the company's insistence until near the end that they were fine, the balance sheet was fine, liquidity was fine. The government, in effect, is calling bullshit.

In 2000, the geniuses in Washington brought Reg FD to the market:

On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.

Reg FD eliminated the nudge, wink and the question "How's the quarter going?" that worked so well for the buy side and the sell side in the 1990's (a good decade for me). Execs of publicly traded companies could say anything they believed to be true as long as they said it to everyone at the same time.

Now Fuld and company will likely go on trial about whether he believed what he said when he said it. He's screwed. He can't prove anything. Neither can the prosecutors in my opinion but Fuld makes a good bad guy. Just look at that picture. The balance sheet was a moving target til the very end and no jury is going to understand it.

Enter 2009. Execs effectively will need to be able to prove they believe something in order to say it. Why say anything? I wouldn't.

Welcome Reg ND. No Disclosure.

I'm Not Afraid of Liberals.

As a matter of fact, I've been married to one for 17 years.

I am afraid of them running the White House, Congress and Senate with solid majorities and an ability to steamroll anything they want through the legislative process.

In "A Liberal Supermajority", the Wall Street Journal lays it out better than I can.

If the current polls hold, Barack Obama will win the White House on
November 4 and Democrats will consolidate their Congressional majorities, probably with a filibuster-proof Senate or very close to it. Without the ability to filibuster, the Senate would become like the House, able to pass whatever the majority wants.

Though we doubt most Americans realize it, this would be one of the most profound political and ideological shifts in U.S. history.
Liberals would dominate the entire government in a way they haven't since 1965, or 1933. In other words, the election would mark the restoration of the activist government that fell out of public favor in the 1970s. If the U.S. really is entering a period of unchecked left-wing ascendancy...

Could McCain Win?

I thought this election was over. Could it be getting closer?

For a while I didn't think Obama could win because of his lack of experience and the fact that I don't think he really stands for anything except getting elected. Then the economy got so bad that my assumption was that U.S. voters were going to vote for change no matter what. September consumer confidence posted its biggest monthly decline ever. It's bad and everyone knows it. Now?

WASHINGTON (Reuters) - Democrat Barack Obama holds a 4-point lead over Republican John McCain, according to a Reuters/C-SPAN/Zogby poll released on Saturday.
Obama leads McCain by 48 to 44 percent among likely voters in the four-day tracking poll, which has a margin of error of 2.9 points Pollster John Zogby said that while Obama's overall lead had remained relatively stable between 2 and 6 points in the 12 days since the poll started, the latest figures showed a bump for McCain following Wednesday's final presidential debate. "Today was the first full sample post-debate and there's a clear indication that McCain is moving up," Zogby said.

Friday, October 17, 2008

Cramer By the Way

Has been on the Donnie Deutsche show on CNBC for the last LONG while and is doing a great job.

Thoughtful and intelligent.

I've written about him before. There are times when I'm not a fan of his. Tonight he's the man.

Happy Friday

Futures have recovered a lot since I woke up this morning but today is likely to be as much of a crap shoot as any other day this week.

On the positive side:

  1. Buy and hold folk will be emboldened by Warren Buffett's new stance on U.S. equities
  2. Libor came down again overnight

On the negative side:

  1. Today is a big options expiration day
  2. Who know how many struggling hedge funds still need to use any strength to raise cash to meet redemptions?


Google Google GOOG GOOG

Google reported a fantastic quarter last night, both in absolute terms and relative to other media companies and expectations given the numbing economic environment.

Take a look at the embarrassing formatting in the Buffett post below.

Every time I copy and paste a quote from an article, and some of the time when I inset a pic, it screws up the formatting and spacing of the rest of my post.

Google GOOG Google GOOG

Maybe someone at Google will email me and tell me how to fix it.

Buffett Getting Long

Warren Buffett takes the rare step of writing an op-ed piece for the New York Times in which he doesn't exactly call the bottom in U.S. stocks but says in no uncertain terms that he is buying them here.

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. "
It's funny that he chooses to do this now, in the same week that the ever-inflammatory Jim Cramer has been declaring buy-and-hold investing dead. So vociferously in fact that CNBC has been running it as an ad - a lot.
Who is going to be correct? Cramer's position certainly fits into where he has positioned his TV show. He wants average Joes to own individual equities, be properly diversified and yet do one hour per week of research on each stock they own. That is impossible for 99.9% of people out there. If you're trying it at home, you better watch his show.
Buffett is a high-profile guy who is beholden to nothing and no one and seems to work like he wants to. Most investors would continue to be well-served by taking his lead.

Thursday, October 16, 2008

Recessions and Inventory

Every recession brings with it too much inventory of some sort. In typical manufacturing-based economies, the inventory problem is finished goods at suppliers and in the channel that choke the system as demand falls off.

This time around, we have too many houses, too much bad debt, too much debt in general and too many race horses. That's right, horses.

In a Bloomberg article today, they highlight the struggles in the thoroughbred mating market:

``We are plagued by a vast oversupply,'' James Squires, a 65-year-old breeder, said in a telephone interview from his farm in Versailles, Kentucky. He managed to sell one of the seven yearlings he took to auctions this year. ``You can't give them away. We're going to have to ride them or eat them.''

Unfortunately, stocks are acting like we have too many hedge funds, and are going to have far fewer next year.

Bring Back the Old Ebay

Ebay reported September quarter earnings last night, which were bad. Ebay is not a small company any more. Its $14 billion of gross merchandise volume is larger than both Starbucks and Nortel's revenue. Business slowed down across the board in mid-August and the company will be laying off 10% of their workforce. They are unlikely to grow their way out of this problem.

Ebay's core markets seem to be saturated and now the struggle begins to balance growth or no growth with cash flow. The economy is slowing down in a hurry so it's not all Ebay's doing, but it's not going to get easier any time soon.

Down is bad.

Wednesday, October 15, 2008


I guess there was a time when I was young and foolish when I could imagine the idea of a 500 point move in the Dow Jones Industrial average being no big deal. I may have thought that for that to happen the Dow would have had to be at 30,000. When I got into the business, the Dow was at 2,800 or so.

If you owned stocks on Monday, good for you. If you bought stocks on Monday, proceed with caution. This mess is not cleaned up yet.

Bernanke is Speaking

And either nobody is listening or the equity market is where it needs to be until there is proof of resolution or at least improvement in the credit market.

I think it's the latter.

Google's Agenda

The customer is always corrent, except when you're Google.

I'm not at all sure what Google is up to or if the slant of this WSJ article is incorrect.

"Google Inc. and Yahoo Inc. are in talks with the Justice Department in an effort to head off an antitrust challenge to their proposed advertising agreement....
Major advertisers have raised objections to the Google-Yahoo deal, which would align the two largest players in Internet ads. Advertisers have told Justice Department officials that the partnership will limit competition, raise prices and reduce choices."

I'm no antitrust lawyer but it seems to me that the last sentence above is exactly the reason that antitrust laws are on the books. Google has an awesome search engine though, and a revenue stream that is absolutely invisible to 99% of mankind, so they're just going to get on with taking over the world.

A Couple of Things

LIBOR is gong lower. It's a very important number in that it's the rate at which bank voluntarily lend to each other. The rate has been so high of late (4.5%+) that it does little other than to remind investors that little or no lending is happening.

Pepsi was front and center yesterday, down 12% or so after reporting bad earnings. It's an example of why I'm not yet more bullish. With stocks having gone down over 20% last week, one might hope that the soft economy and weaker earnings are priced in. Maybe not according to Pepsi's stock.

On a brighter note, as becky Quick just pointed out, it is good that we can focus on earnings again instead of the macro panic.

Don't quit you day job.

Tuesday, October 14, 2008

Apple is Killing It

According to Apple at least.

Apple had an event today to roll out their new MacBook Pro, their 1st sub-$1000 laptop, a new super-terrific Nvidia graphics engine and a bunch of other Apple-esque innovation around the edges.

According to Apple execs, as quoted by some after-hours Wall Street research, the Mac now represents 17.6% of unit sales in the US (wow if it's that high). If you look at “revenue share”, because Apple “focuses on fully featured systems”, they actually have 31.3% (double wow etc.). Further, Apple has 39% unit share for notebooks in education, surpassing Dell.

If those numbers are anywhere near correct that's a huge move from the low single digit market share Apple had for much of the last couple of decades.

The Morning After

And no hangover yet. Yesterday was another jaw dropper. The S&P 500 is up 18% since Friday afternoon's lows.

Europe took decisive action over the weekend, the U.S. promised to follow suit and suddenly the prospect of global depression was off the table.

Now the U.S. is going to invest $250 billion in non-voting preferred shares of banks that it wants to survive. Let me stop right there because I have been screaming for quick action and this at least appears to be done.

This doesn't solve the problem about the illiquid debt securities but I expect progress there soon as well.

I wish I had a couple of billion dollars because I would start a new financial services firm with no baggage and a open-ended business plan. Wilbur Ross or Mark Cuban or Tom Weisel were probably doing it yesterday afternoon. There are new, gaping holes in the risk-taking portion of the financial services sector that are going to be filled - or else our economy is screwed long term. A huge component of our economy's ability to generate wealth has been that we have had a superior mechanism for getting money into the hands of people with good ideas. Those ideas then have the possibility of becoming the next Cisco or Google or Amgen. There are fewer financial large firms in that space now, and the ones who are still there have some other very real issues to deal with.

Monday, October 13, 2008

Silly Season

I don't have this 100% nailed down as to specifics but most of the things I've read today indicate that Obama (for sure) has joined McCain (not so sure about this part) in indicating part of their economic master plans would be to eliminate tax penalties on early IRA and 401(k) plans through the end of 2009. EDIT: This is not part of McCain's plan.

American don't save very much. Period.

We as a country have done a very bad job transitioning from the defined benefit era to the defined contribution era. This new opportunity to mortgage the future of those who have been saving is such a bad idea.

While I'm at it, let me point out that a 2nd stimulus package, as being proposed by Congress right now, is a bad idea at any time let alone right now. We have issues that demand long term solutions, not tax rebate checks that we can't/shouldn't afford anyway.

Be Careful Out There

The futures are signalling a big up open for U.S. stocks as weekend moves by European governments to shore up banks are being cheered by investors.

My view is that this market is so unhealthy that a V-bottom is very unlikely. I personally want to see proof that the credit markets are working before getting more constructive on equities.

UBS just ran an ad on CNBC reminding investors that they are the #1 player in the global derivatives market. Right now I'm not sure that's such a good thing.

Sunday, October 12, 2008

This Is Also Funny

That is all.


$12.29/share. Solid.
Down almost 2/3 from where it could have sold the company. As far as I know not a single member of management or the Board has left or been booted.
Greedy/incompetent company management is very much in vogue to write about. Incompetent Boards are less fun to write about because they generally fly under the raider. They shouldn't.
Every major ass-backward decision made by CEOs is approved at some level by the Board. It's one of the reasons that it's so difficult to fire a CEO for cause and take his stock away. The Board has approved of all the decisions, or at least knew what was going on. I'd like to see the Yahoo Board fire itself.

Tough Act To Follow

What happens after the worst week ever?

The International Monetary Fund and G7 Finance leaders are meeting this weekend to see whether they can get their act together.

"Pressure mounted at the weekend on the world’s leading economies to spell out the specific “urgent and exceptional” steps they have promised to take to stabilise financial markets before they open on Monday.
It came as the International Monetary Fund “strongly endorsed” the group of seven leading economies’ action plan to prevent any more important banks failing, unfreeze money markets, recapitalise banks, restore confidence of depositors and reopen markets in securitised assets."
At least the Wall Street/Main Street rhetoric is finished. Everybody is in this boat and it is sinking.
A hero or a hooligan?
Well, that parts never clear.
Pride or shame, its all the same.
Whos innocent or whos to blame?
Politics or just a game?
Well in the end they knew his name.

Saturday, October 11, 2008

If You See Warren Buffett

Please ask him to call me. I'm a little confused.

Morgan Stanley trades like it's in trouble despite their protestations. The stock lost 59% of its value this week.

Bloomberg today writes, quoting rating service Egan Jones, that Morgan Stanley needs $60 billion in a hurry. If Morgan just went from being OK to needing $60 billion in a week, could Goldman Sachs be far behind? That's obviously a rhetorical question because anything that anyone seems to know today could be off the table tomorrow. We need a fast forward button.

Blackberry Storm

Don't look now but RIMM appears to have invented an iPhone.

I just saw an ad on VH1. They'll be rolling it out through Verizon.

Repost Alert

I was trolling through "My Pictures" and couldn't think of a reason not to repost this since this election is done like dinner.

The Time Is Now

Has anybody noticed that our credit markets need a little help?

When I got home last night Paulson was on TV adding to the litany of stuff he hasn't done yet the idea of the Feds buying preferred stock of troubled financials directly "as soon as possible".

Now would be a good time to do something. The only thing that had actually been done quickly to date was the stupid ban on short selling, which created a whole new set of imbalances.

The whole idea that we finally freed up $700 billion to move clunky debt out of the system then, as markets crashed worldwide, said that we'd get around to doing it in a few weeks because we have a significant need for oversight etc. is a joke.

Friday, October 10, 2008

So Bad It's Boring

Morgan Stanley and Capital Group developed and maintain the MSCI World Indexes - equity indexes for every country and every region globally. The indexes are a wonderful tool allowing Portfolio Managers to construct an easy-to-beat currency-adjusted global benchmark so that they can get paid a big bonus at the end of the year.

I was looking through the global regional (Far East, EAFE, North America...) indexes this morning and they are all down between 35% and 48%. All 31 regions, any way you slice it. Down by at least 1/3.

I was wondering what is going to change to allow a region to dramatically outperform and then it struck me. Austria, Russia, Indonesia and Iceland have all closed their equity markets. Brilliant. Today is going to be a good day for them at least. Unless they all shut down we should get somewhere.

On a related note, all regions are also down on a 3-year basis. The best region over the last 3 years for equity investors? Asia Ex-Japan at -2.7%/yr. Go China etc.

The worst? North America at -8.1%/yr. Non-leadership. A lot of the under performance can be attributed to the woeful swoon in the dollar but I'm not going to do that math right now. My point is that once global credit market gets their footing, I would expect our markets to outperform most over a sustained period.

OK everybody, get back under your desks.

Thursday, October 9, 2008

Slow Motion Crash

That's what we've been seeing over the last month or so.

It kind of makes sense. Most crashes occur from levels where valuation is stretched. Not so this time based on prevailing estimates. Most crashes occur when investors are for the most part feeling good about owning stocks. Not the case at any time in recent memory. Most crashes happen quickly. This one has taken forever and isn't over yet.

The S&P 500 has lost 1/4 of its value and all of its mojo in the last month as every day that ends in the letter "y" investors find out that some element of the fundamental landscape is in worse shape than they thought, especially in regard to balance sheets.

It's strange to not have an opinion about how much worse this could get. I'm there.

Politics + Emergency Financial Measures

= Disaster

A lot of gestures have been made by governments including our own (or more accurately yours, since I'm Canadian). All of the actual implementation of these approved actions are still weeks away.

There still appears to me to be no understanding of the open swap interest or financials' balance sheet in general, by Congress, the SEC or most anyone else. There also seems to be no sense of urgency. If your house was on fire would you have a family meeting?

It Could Be Worse

Actually, maybe it couldn't.

Man the lifeboats.

Valuation This Time Around

The following quote comes from research firm Trim Tabs. I am quoting it not because it is so good that I want to steal it, but rather that it's perfectly illustrative of an argument I have with bears more often than I'd like.

"As for the earnings on which Wall Street lavishes so much attention, Standard & Poor’s projects S&P 500 reported earnings will be $59 per share in 2009. To get to a forward P/E multiple of 12--a generous multiple amid the worst financial crisis in about eighty years--the S&P 500 needs to drop to about 700."

The bear argument in this case is that not only do stocks go down in bear markets because earnings estimates are reduced, but also because the multiple that investors will pay for these earnings goes down. In fact if one is looking at trailing or current year earnings, and there is effectively no chance of a company going out of business, I believe the multiple could go up at the trough of a bear market all other things being equal, as investors trust that earnings (or cash flow or dividends) will increase to a more normal level at some point in the future.

The market is smart enough to distinguish between bear market earnings declines and a permanent reduction in the value of an enterprise or at the very least will figure it out along the way. I'm nor sure whether earnings estimates are still a lot too high for financial firms. Whether they are or aren't, unless many more major banks fail, I wouldn't look for much more valuation-related downside.

Wednesday, October 8, 2008

Another Salvo

Hey now. A semi-global totally-coordinated rate cut.

The futures have turned slightly positive which like yesterday is indicative of nothing. That being said, a shot covering rally wouldn't hurt. Anything that doesn't damage investor confidence further would help.

Whoever started the Morgan Stanley rumor yesterday should get some serious scrutiny.

Nothing Good

“When sorrow comes, they come not single spies, but in battalions” Hamlet, Act iv, Sc.5
Well, oil is down again.

Is it Friday yet?

BofA, Oneofthefewbanksthatwillnotfail, barely got its $10 Billion equity offering done last night.
Asian market got crushed overnight and Europe is taking a beating as we speak.

Iceland the country is almost out of business.

Aluminum giant Alcoa reported a terrible quarter.

Mutual funds and edge funds alike are reportedly seeing huge outflows. I have been in environment where you spend most of your day deciding what to sell. It's not fun.

My gut is that usually after declines like these, there is more talk of valuation, such as, "I'm not sure when the bottom is but stocks are very cheap here." Maybe that means we're closer to the investor disgust phase and therefore the bottom, but it's tough to say.
At least the election is over.

Tuesday, October 7, 2008

AIG - In a Hole, Still Digging

Fox News has a splendid feel-bad story about some of AIG's post-bailout hi jinx. If you believe as I do that it wasn't a bailout but a government takeover, it doesn't matter. Keep reading.

The committee on Oversight and Government Reform held a hearing on Tuesday at 10:00 a.m. Eastern time. to address and examine downfall of AIG...
One of the items discussed was AIG’s expenditure of $440,000 for a corporate retreat at the St. Regis Monarch Beach resort in Los Angeles, Calif. These funds were spent on Sept. 22, a week after the Federal Reserve extended an $85 billion emergency loan to AIG...
According to the receipt from the St. Regis, the eight-day company retreat was a lavish one -- $139,000 was spent on hotel rooms, while even more money -- $147,301 -- was spent on banquets. Another $23,380 was spent on undisclosed spa treatments and another $6,939 was spent on golf. A full $9,980 was spent on room service and food and cocktails at the hotel lounge.
Somebody will continue to have some explaining to do, including the U.S. government which kind of owns AIG now.

Down Is Bad

The gestures by governments everywhere to stabilize credit markets are just that for now, especially from the vantage point of an equity investor.

This morning's move was quite a head fake.

The debate tonight is not likely to cast any light on anything.


Crashes Don't Happen on Tuesday

Well. The Dow is below 10,000 and Europe is falling apart. If you are not a bank and have some stinky news for the market, this week is a good time to get it out.

  • AMD is getting out of the manufacturing business in a further sign that Intel has won the war of Good Enough
  • Ebay is laying off workers and revving up the acquisition mill in an attempt to get profit growth moving again
  • Software giant SAP lower revenue outlook
  • Netflix lowers subscriber forecast

BofA is a bank obviously and last night they reported a very peculiar quarter. The company, which has been anointed by Government officials as OneOfTheBanksThatWillSurvive. reported 3rd quarter earnings early, missed estimates, cut the dividend in half and announced a plan to sell $10 Billion of fresh equity. This one won't go unnoticed.

Monday, October 6, 2008

Palin Debate Redux

I was out of town for the debate so didn't comment in here. While Palin fared better than I feared she might, and Biden is better at policy than I realized, Daily Kos over here puts the Palin side of the contest in flowchart form.


Holy crap.

The whole intellectual crowd who like to argue that it's different this time are getting a harsh reminder today that it isn't. European governments are scrambling to right their financial ship three weeks after the U.S. began the same exercise.

The dollar is rallying not because things are rosy here, but because everybody else sucks too. At least oil is back below $90.

The Fed should go ahead and lower the funds rate so banks can not lend to each other at a lower rate. It should be interesting to see where LIBOR goes this week.

Consumer electronics giant Sharp is cutting numbers hard this morning. Kind of what a global recession looks like. Don't panic and have a nice day.

Thursday, October 2, 2008


I want to be Warren Buffett when I grow up. His GE investment looks like another sweet deal. Long live the King.

I would not be surprised to see the House screw this credit thing up again but my fingers are crossed. Half of them don't understand what they're voting on so muted expectations make sense.

I'm heading to Canada for the weekend. Cheers.

Wednesday, October 1, 2008

Quote of the Day

On CNBC Congressman Defazio from Oregon just said, "Let's use the low cost/no cost approach and see if we get there" referring to this credit crisis.

Might I suggest that we also hold hands and sing, throw some pepper over our shoulder and buy fancy crystals? Or we could just ignore it.

What's the worst thing that could happen?

Do we really want to find out?

SEC is Trying Sooooo Hard

The SEC and FASB banded together and modified or suspended what was perhaps the thorniest part of the mark to market rules.

"Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.
The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill."
The phrase "if no market exists" is going to cause all kinds of problems with OTC securities, and leaves all kinds of wiggle room. I'm in favor of a lot of heavy lifting to get the credit market moving again but this element is going to be very difficult to oversee.
The concept "if assets are being sold only at fire-sale prices" is part of the problem with the back and forth this week. If Firm A sells a portfolio of loans at 6 cents on the dollar, is that the market price? If the Federal government pays 30 cents on the dollar for a similar portfolio that some dude at Pimco valued at 65 cents on the dollar, are the Feds paying above market or below?
I'm confident that there is a price that the Fed can pay where the taxpayer makes money and the banks are happy to sell.