Tuesday, April 28, 2009

Nuts and Bolts

Should past performance be a reliable prediction of the future, then the stock market will rally tomorrow. That has been the case on each of my last three blog entries. The observations I make in this blog are not a condemnation of the market; nor are they a warped death wish to those who have benefited from manipulating they system for personal gain. The original intention of this blog then was to trace the historical trends that are becoming more and more significant, and draw conclusions to how those actions will impact us economically.

The Spanish Influenza of 1918 had a devastating impact on the United States in general, and an even further far-reaching impact on the rest of the world. It is estimated that the Spanish Flu killed anywhere between 20-100 million people world wide. For those of you who appreciate statistics, the Spanish Flu killed more people than WWI or even the Bubonic Plague. The Swine Flu (which will be renamed to a more politically correct title by authorities)should not be as devastating as the Spanish Flu. While there have been fatalities in Mexico, there have yet to be any reported deaths outside the United States. Chances are that health agencies are much more advanced today than they were 90 years ago. It is my sincere hope and prayer that few people die from this disease.

Fear plays a significant role in the psyche of financial markets. As a rule of thumb, I never believe things are as good or as bad as they seem. Most, if not all who have followed the financial markets over the past six weeks will note that there really was no "good" news even though the market rallied. Now, fear from the flu seems to have shifted momentum. Should the strain of flu that is killing people in Mexico prove to be a different strain than the one found in the United States, the, there will be a deeper an longer panic.

A squeamish consumer is exactly what the market does not want. With consumer confidence numbers coming in at a five month high, and a general slowing in price declines of homes, some analysts give pause for hope (1). While I will agree that President Obama brings a sense of optimism that was not seen in the Bush White House, a recession or depression cannot be ended by decree. That wishing a problem away rarely makes the problem disappear. Once banks start lifting the moratorium on foreclosures there will be another leg down... Maybe a better gauge is that baseball attendance is down nearly 7% from last year (2). I too believe that this is the kind of indicator that gives us a better pulse on the American consumer. Even plush organizations like the New York Yankees are reducing the price of tickets in their stadium. (3) Should you doubt these statistics, then I only ask you to watch some of the obnoxious car advertisements which practically beg someone to buy a car.

Nassim Taleb author of Ten Ways to Black Swan Proof the World begs governments and market makers alike to consider the most basic question as to why institutions were ever allowed to become too big to fail. More importantly, Taleb agrees with most people on Main Street as who begged the question as to why bank executives who helped destroy their banks, are still running those banks. It falls along the same guy who crashed a bus being given another bus to drive...with little to no consequences. Anywhere else, you get fired.


Oil appears to be heading toward $40.00 should it hit, I will consider long positions. I do believe oil explorers should be on almost everyone's short list.

After USX dismal numbers, and little hope of a quick recovery for automotives. TM, who has shown some upside to the impending doom of GM and Chrysler, deserves reconsideration as a put. OTM 40s in January may come back to life.

Whether it is travel related or simply another consumer discretionary decision, I believe the casino industry will take another hit. Consider WYNN when it crosses the $40.00 mark. It is destined to test the $20.00 mark.

1. http://bloomberg.com/apps/news?pid=20601068&sid=ajMQSmgKP7AY&refer=home
2. http://www.silive.com/sports/index.ssf/2009/04/baseball_attendance_down_nearl.html
3. http://www.nj.com/yankees/index.ssf/2009/04/new_york_yankees_reduce_ticket.html

Monday, April 20, 2009

"Know" News is Good News???

Just a few observations with today's market. Bank of America reported estimates that were three times over estimates... clearly an amazing feat. Today's story is not so much what was reported, but it is what was not reported. Analysts were more concerned about loss provisions that are being set aside in commercial and residential loans. It appears loss provisions are nearly doubling in anticipation of a tidal wave of future losses. Not that the government won't throw another lifeline to a company that is too big to fail. But more along the lines that BAC cannot begin to repay TARP funds which in essence means they are going to stay under government control. Specifically, this could add momentum to Ken Lewis' tenure as BAC CEO.

COF, one of my favorite short plays from 2008 lost 1/3 of its value today. Unsecured debt from a company that specialized in finding the right card for everybody is now coming back to haunt them. I would like to remind readers that BAC also has a tremendous amount of exposure to credit card debt. Some people are concerned about the stress test. I believe that most banks will pass this test, but the story beneath test results will rule the day once figures are released. While one "expert" was calling a perfect day to buy, I am a bit more apprehensive. For sure, CRE is on the chopping block. The question is, who else? Casinos in spite of LVS loan arrangements appear to be a healthy play here. Consider puts on WYNN 1/25s or OTM puts on MCRI at 2.50.

Tuesday, April 14, 2009

All that Glitters is Not Goldman...

The old adage is "All that Glitters is not gold." However, it appears that all that glitters is not
Goldman Sachs. After a one-day sprint that sent the stock up over $130.00, today the stock drifted back to 117.00+. For some, it is just a bit of dollar cost averaging in a retirement account, for others it is a pinch in a financial sector which in many ways, could do no wrong. This isn't to make light of phenomenal earnings reported the day before its new stock offer. But it is only a closer look that the over-optimistic nature of those figures who manipulate the market for personal gain. Here are a couple of facts to consider:

1. Goldman is still attempting to raise capital to "repay" a portion of TARP funds.
2. Warren Buffet had a vested interest in seeing his warrants hit an ITM strike price over 114.00 and undoubtedly he sold. (See Image)
3. A large portion of revenue GS reported can be attributed to AIG's payout on losses. (Government subsidized).
4. An easing in FASB accounting standards undoubtedly played a role in these numbers.
5. Questions are currently being raised as to where/how future GS earnings will be attributed to...
6. What is the true value of GS now that shares are diluted?

These are some of the questions that we may continue to pose to the Wall Street elite this week. Rest assured, while BAC is scheduled to report this week, at the bare minimum event he most upbeat analysts are questioning basic earnings of this lovely, if not the entire sector. One thing is for certain. If the inquiry into BAC's TARP access proves to be a scandal, or BAC shows the need to raise additional capital, Ken Lewis is GONE!!!

Saturday, April 11, 2009

Happy Easter...and Passover... A Few Insights from Bloggers... Showdown with Banks and Regulators...

First and foremost, I would like to wish readers a blessed Easter and Passover. While we are confronted with a world that does not always make sense to us, we should remember our faith. At the end of the day, it is our faith that will pull us through.

A Few Insights from Bloggers...

FiddlerOnTheRoof said...
For the sake of this country, and the sake of the world, I sincerely hope that this recession will not end this year, and that an ensuing depression occurs. There is evidence to suggest that this will happen: http://counterpunch.com/whitney04102009.html
I am not hoping for this due to a desire to see people, families, and the world over suffer. Rather, it's because of the precise reasons cited here: a return to normal too soon will result in a sloshing back into the hum-drum of everyday, placated, greedy existence. Those who laughed then must weep long and hard. Lessons are learned over time, upon reflection, remorse, and a desire to change their lives for the better. America has learned that it has been at the mercy of mortgage brokers, hedge fund managers, and global financiers for at least a decade, driving up home prices, bringing stocks to soaring heights only to crash them. Americans are justly outraged. But, if given the chance, and knowing what we know, would we choose to live in the world of knowledge, or return to the 2007 level of gluttony? My guess is that people would go right back. Because we have not seen enough hardship. Because we have not recognized our own culpability. And because we have ceased to be an America that stands for justice. The harder we fall, the stronger we rise.
There is no recovery without rebirth.

Pam said...
FiddlerOnTheRoof, I hope what you state is not true. I hope people have started to come to their senses about what is most important in life. That owning the best and the most "objects" you can is not what makes you happy or successful. I left my job of 17 years in the fall of 2006 because I came to the realization that all the money I was bringing into the household was going out for Child Care, foolish "things" and expensive convenience foods (because neither me or my husband had the energy or was too stressed at the end of our work days to prepare home cooked meals). Nothing was really being saved for a rainy day. When I quit, it was scary at first. We went outside and took long walks, which really help ease the stress. We took it one day at a time and now we are the happiest we have been in years, we have great fun together. My husband is my hero. I am here for my him when he comes home, instead of both of us stressed and staring at the wall, I can now hear what he has to say about his day and I support him 100%. The children don't want me to go back to work. We all appreciate so much more now and to have a little extra something here and there is indeed a real treat. It's great. As long as we can still pay for the basics needed, I may just stay unemployed and let someone, who has to support their family with the basics, have a job.

Hi Pam,
Your story inspires me. I hope I'm wrong too (if I'm being a little too hyperbolic, it's only for a dramatic flair). I truly believe that your example is precisely the one this country needs, and the message we need to hear repeatedly: how living with less makes us better people, better in our relationships, and ultimately, better Americans.
The only emotion stronger than my fear of our return to the narcissism of the past is the hope that we are a nation of caring, loving, and self-sacrificing individuals. I wish everyone's family the best who have learned to live better, and I read on a daily basis the kinds of struggles working Americans are going through, such as health care costs: http://online.wsj.com/article/SB123620847691933901.html
Or people whose standards of living has altered drastically: http://www.nytimes.com/2009/03/01/us/01survival.html?pagewanted=1&_r=1&emc=eta1
And many more like them.
America has been moved from one big sensational story to the next, anywhere from 9/11 to Hurricane Katrina. The longer we have to respond and reflect on how we arrived here, the firmer the footsteps that we take will be when we move toward a better country and a better world.
So, once again, I am humbled by your story and stories like yours. Thank you.

While it appears to more of a family squabble than a showdown, the New York Times is reporting a tenuous week ahead for financial markets. I expect:
1. A response to failed stress tests to be kept quiet... while successful stress tests to be leaked...
2. GS stock sale... I believe GS will benefit from a renewed interest in its stock sale to raise more funds.
3. FASB relaxed standards has simply moved the Dooms Day Ticker back a bit further for the financials.

As far as a showdown goes, you can read the article and be the judge...


Monday, April 6, 2009

We're Out of Mayo...

Not that he is the most credible source, however it appears that bank analyst Mike Mayo still has some market clout. After an announcement that he believes that bank sector problems are far from over. This tid-bit of information was enough to have a 150 sell-off in Dow Futures. (1) My concern here is that Mayo only told the public what many had already surmised. The financial crisis is not over; and we could well only be in the middle of a game that lasts extra innings... This bit of information could help spoil the fun and games of this rally... After all, earnings determine value... I think.

Alas, Dick Bove immediately announced that Bank of America was/is/and continues to be a buy! If Mayo is a source that may have "some" credibility issues, Bove has no credibility. Bove was recommending Bank of America last year when it was in the 20s. "Thanks again Dick."

If an analysts comments can set the market on ear, then it can only mean that there is a heightened sense of nervousness in the air. I will readily admit that the rally to the upside has been absolutely phenomenal. But, any time Fox Business starts playing "Don't Stop Believing" before market close, the story is already told. A hope and a prayer... And this whole time I thought it was the job of media to report the news, not make the news.

1. http://finance.yahoo.com/news/Banking-Sector-Debt-Problems-cnbc-14858355.html?sec=topStories&pos=7&asset=TBD&ccode=TBD

Saturday, April 4, 2009

A House Built on Sand or Stone?

In the Bible, Jesus told a parable of two men. One built his house on sand, and the other built his house on stone. When the rains came, the house that was built on sand collapsed with a mighty crash. However the house built on stone endured the test of time and weathered the storm.

This parable reminds me of the current economic conditions inside the United States and abroad. Consider the following actions that the U.S. government has taken to prop-up the economy:

1. FASB-Have eased requirements on the mark to market accounting rules. Banks are once again allowed to estimate the value of assets. Even the assets that have no apparent value. This accounting change (by an organization as Boom and Doom characterized as ultra-conservative)suggests that additional pressure may have been applied to give banks more "breathing room."

2. A spirit of cooperation of G20 leaders, who by in large want massive regulations on the entire financial industry in general, and financials in particular. Note that the United States has resisted the scrutiny that many Europeans apply to their institutions. It is not that greed is not present in European banks, it is more of a concern of systemic risk that financials can cause in the global market.

3. IMF will release 403 tons of gold to the open market. While this decision is "raise" capital for the IMF and distribute funds to the poorest countries in the world, understand that the release of such a large amount of gold on the world market will in fact, drive the price of gold down. This could be an opportunity to short several gold producers like Newmont Mining, or Anglo Ashanti.

4. Under promising, and over-delivering. Results on the Economic Calendar have at best been neutral to negative. However, the neutral to negative numbers have been cause for rally. For instance, yesterday's unemployment report was bad, but the report shed 80,000 less jobs than forecast. Please note that the previous months unemployment numbers had a massive revision upward to 8.5%. In my humble opinion, unemployment in closer to 9.2%.

5. We are reminded that the role of media is to report the news. Report the facts, analyze the story, and pursue various angles of the players in each story. However, media sources including CNBC continue to make the news. Just ask Cramer the depression that never was, is over. Time to get back in to the market.

6. Leaks from the White House banking meeting and internal memos where Bank of America, and other companies are ready to start repaying the government TARP funds, so these institutions can get off the path to regulation. It would also suggest that a miraculous turn around has taken place, in an economic environment which by in large has been less than friendly to business.

7. Government manipulation in some type of uptick rule. This move will continue to allow a run to the upside, while putting pressure on short positions. Note that short rules were applied on two separate occasions last summer, but did not have the desired long-term effects keeping the market inflated.

In closing, I leave readers with several parting thoughts. Is this recovery built on sand or stone? Can we buy into this market's upside, the hype, the movement in stocks, and the era of good feeling that is being created on various media sources? We can deny that events which have created the current financial mess, no longer exist. Secondly, we can use logic and reason to suggest that the fix is in, and jump on the band wagon until the market hits 14,000 again. Last, we can assume that this market will re-test the lows sooner than later understanding that a market which moves up quickly, can in fact move down quickly as well. As for miracles, I will leave those to Jesus.