Wagoner Fired? Why Not the Rest of Them?

Who is steering this ship anyway?

I have no love loss for many of the auto executives who have helped push, if not directly cause the demise of their companies. For Rich Wagoner it was a curtain call. New direction, new thinking, new guy whatever.

Of course the unofficial response is that the banking sector is much more sensitive to our economy. Funny though, how the people who helped cause this debacle in finance are still at the helm. Although there is a major push from a BAC stock holder to throw Ken Lewis out on his right ear.

I am curious how many Squawk Box personalities and snake oil salesmen called bottom again. Remember folks, all of them have a vested interest in keeping your money in the market. At the end of the day, no one will look out for your investments like you!!!

Headlines already boast of an Asian rebound... We'll see!!!

Main Street v. Wall Street, Economic Calendar, Stock Watch

Main Street v. Wall Street

It has been said that perception equals reality. If that is the case, then D.C. politicians and Wall Street may have to hire the best marketing firms on 5th Avenue to sell the latest round of government spending. The U.S. Government is facing increased pressure from constituents. The bailout culture is not sitting well with many Americans. In particular, ordinary citizens are starting to question some of the basic tenants of democracy... and the pecking order of what is important, and what is not! As the Obama Budget comes into debate, and an eventual vote Congress is facing considerable scrutiny. The the Obama administration, the budget means that they will be able to hold the anger of Main Street off with lots of pork barrel projects. However, there is a deeper theme that is echoing in living rooms, break rooms, and unemployment lines throughout America. Country singer John Rich will get a lot of mileage out of this song. Be certain, it will also create fervor on the common man's level.

"Cause in the real world they're shutting Detroit down
While the boss man takes his bonus pay and jets out of town/
And DC’s bailing out the bankers as the farmers auction ground
Yeah while they’re living it up on Wall Street in that New York City town
Here in the real world there shuttin’ Detroit down.
They’re shuttin’ Detroit down.” (1)

The Week Ahead
The market has rallied 20% from its bottom. Gold has taken a beating, oil continues to fluctuate with a continual crawl to the upside. While financials have rallied, I am extremely suspicious that this move is a breather for a market that had sold off too quickly. I do expect the lows to be tested once again. The G20 meeting should lay an interesting background with a BRIC nations showing continued concern over the lack of stimulus from EU, and a sprawling debt from the United States. While much of the conversations that will transpire during the meeting will be kept low-key, rest assured there is a heightened state of anxiety throughout the world.

This week has an economic calendar that is simply loaded with information including Non-Farm payroll and Unemployment numbers that will hit late in the week.

March 31 Consumer Confidence
March 31 Regional Manufacturing Updates (Chicago CPI)
April 01 Auto Sales/Truck Sales
April 02 Initial Job Claims
April 02 Factory Orders
April 03 Average Work Week and Hourly Work Week Survey
April 03 Non-Farm Payrolls
April 03 Unemployment Report

According to one source, there are seven states which are already experiencing double digit unemployment. Up until two months ago, I had heard of people not having jobs, but I did not know of anyone who was unemployed. Now, I have met a half-dozen people who do not have jobs. One person has been looking for a job in food production for one year, and he can't land anything. We should note that there are eight other states who have reached the 9%+ category for unemployment as well.
Michigan registered the nation’s worst rate, with 12 percent of its labor force out of work as of February 2009.

Michigan (12 percent)
South Carolina (11 percent)
Oregon (10.8 percent)
North Carolina (10.7 percent)
California (10.5 percent)
Rhode Island (10.5 percent)
Nevada (10.1 percent)

Stock Watch
RYL continues to drift higher. Unless there is a massive sell-off I will be taking a loss on that one. I still believe it was the fundamentally right decision to make, and may even serve as a leap play should the stock still drift to the upside.

CNK is back on the board. This stock along with several others bubbled up fover the past week or so, in a mis-information euphoria that has not been witnessed since H.G. Wells did his radio broadcast for War of the Worlds.

I will continue looking for additional puts on TM, and look for entry points on SPG, VNO, WYNN, and maybe even load up on more MLHR since it is getting so "expensive" again!

EFU currrency play will be hot this week. The EU will have considerable pressure placed on finance ministers to lower rates...and spend... ut oh!


Sources Cited
1. John Rich, Their Shutting Detroit Down
2. http://biz.yahoo.com/c/ec/200914.html
3. Bureau of Labor Statistics

Beggars Can be Choosers!!! The Real Meat-Eaters...Stocks

Several years ago, I heard a story. Hunters were giving deer meet to homeless people as a good will gesture around the holidays. The thought was that everyone would appreciate a warm meal and a bit of protein. Food is food right? As it turns out, some of the homeless people refused to eat deer meat citing that they could not Bambi... Conventional wisdom suggests that if you are hungry enough, you will eat anything.

I bring up this story because it is a classic example of beggars being choosers. It is an eerily similar story to the plan to purchase toxic assets from banks. The U.S. government, along with private equity investors are seeking to purchase toxic assets from banks. This plan is designed to clear the banks of their toxic assets once and for all so the United States can start to work out of the current financial abyss. After all, the banks have toxic assets that are eating up balance sheets.

In a recent interview with Market Watch chief editor, he suggests that many bank are unwilling to part with their toxic assets unless they are paid market value. According to banks, and their mark to market accounting formulas, the "toxic assets" are worth more than the what the government, or private equity partnerships are wiling to pay for them. In essence, if the banks let these toxic assets go for anything less than the estimated value, there will be a black hole on their that could well swallow up the nearest planet.

Therefore, further discussion of Geithner's plan was practically dead. The euphoria we witnessed on Wall Street Monday was nothing more than half-witted jubilation. The truth is that the trillion dollars that was pledged to purchase the toxic assets will not cover the losses that banks currently have on their books anyway. And the banks want something else(namely more money) for paper that has little to no value. In other words, the homeless are turning their backs on the food that is on the table, because they prefer something else.

The Real Meat Eaters
One must admire the banks for their persistence if not their out-right arrogance on the the latest proposal to purchase toxic assets. I give the banks 50/50 odds that their assets will sell at if not extremely close to the value to the original purchase value. If that is done, then the bad bank plan will cost taxpayers closer to 4 trillion dollars. That will be the day to own gold and silver.

A second plan suggests that changes in current accounting rules (the same things that were used for Enron) allow toxic assets to be held in investment vehicles that are off the regular books. As is Enron, the losses can be shifted from vehicle to vehicle. All that banks really need are enough liquidity to keep them floating. This is where the original TARP funds come into play. Although, one could make a strong argument that AIG bailouts have been nothing more than a supplement to big banks as well.

The last and possibly most disturbing aspect of this financial shell game was floated by fellow blogger Ax at bigbigbet. According to several stories, the government and hedge funds are never intended to make any money from the toxic assets. The hedge funds will pay close to top dollar with 93.3% government (as in taxpayer money). Once the toxic assets are digested and teh toxic portion disposed of, the valuable part of the assets will be sold bank to the banks.

One thing is for certain. Even though Chris Dodd and Barney Frank have egg all over their faces in these deals... both are still calling shots. Maybe it is just not time to pull the plug on these birds yet. But if things go south, rest-assured both of these characters are looking more like fall guys.

Stocks
The market has never sen a turn-around like this before undera new President except for November of 1929... While I do believe Obama brings a high degree of intelligence and charisma to the office, I am certain that if he is caught off guard by numbers... or if trading partners demand a move to a new reserve currency, his rosy relationship with the media can turn.

FAZ is at a 52 week low and is worth consideration.

Passing the Buck

Harry Truman's Desk at the White House Read "The Buck Stops Here!"

In the age of finger pointing, bailouts, and scandalous-corruption... I wonder if anyone in Washington is wiling to put one of these signs on their desk?

Passing the Buck
As the public screamed about AIG bonuses totaling somewhere in the area of $165 million dollars, it appears as though the media took their eye off the ball. The real story should have been half-witted attempt to recover those funds. Treasury Secretary Tim Geithner demanded that Treasury will deduct $165 million from the BILLIONS of dollars already given to AIG. I am not so sure what the true embarrassment is... discovering that AIG (and other Wall Street firms who received TARP funds) was able to pay bonuses to employees of bankrupt companies, or the fact that Christopher Dodd was able to put the language in a bill and slip in through Congress almost entirely un-noticed!!! If Geithner is successful in "recovering" the AIG bonus money, it will equal .1% of the taxpayer funds that were already distributed. A classic example of government waste and incompetence.

For the record, every time AIG receives an additional cash injection from Treasury, chances are those monies are given to another financial institution. For instance, the credit default swaps (cds for short) were financial instruments insured by AIG. The the big banks are collecting on the obligation side of this transaction. So far, the bailout of AIG has been passed along to such institutions as:
Goldman Sachs 12.9 billion
Societe Generale 11.9 billion*
Deutsche Bank 11.8 billion*
Barclays 8.5 billion*
Merrill Lynch 6.8 billion**
Bank of America 5.2 billion
UBS 5.0 billion*
BNP Paribas 4.9 billion*
HSBC 3.5 billion*
Dresdner Bank 2.6 billion*
*Please note that the * notes foreign banks.
**Refers to a bank that is no longer in existence.
It is hard to believe that one financial institution could have leveraged themselves to the hilt. The fact of the matter is that counter-parties should ave been well-aware of the over-leveraged risk that AIG had assumed. Furthermore, the bailout of AIG really means that the United States is bailing our foreign banks and economies. Note that all settlements were made in full, and not at an amended rate (which is is customary in dealing with bankrupt companies). I wonder where this buck will stop?

The Market at a Glance
According to the Cleveland Plain Dealer, there are relatively few investments which have actually earned money over the last year. Based on $1000.00 dollars invested in a one year period, there are several companies that seemed to have handled the financial meltdown remarkably well.

A Few to the Good
Amgen is up over 21% year to date.
Bristol-Myers is up 1%
Wyeth up 4%
TFS Financial up 2.3%
McDonald's nearly even

Meltdowns include:
Fannie Mae where a 1000.00 investment is now worth 20.77
Royal Bank of Scotland 56.95
Tween Brands 72.03
Fifth Third 95.46
I am sure that I have missed more than a few losers (like AIG 28.43) Bear Stern 0... Merrill Lynch... and LEH... which do not exist.

Even if inflation were to take off, and reflate the stock market (And I do believe this is an earnest goal of Fed and Treasury)... Many companies on Wall Street are down for the count...

U.S. Financial Health, Stock Highlights

It was once said, and rightly so that "He who holds gold and silver makes the rules." And for many of those who gold and silver, they carry it in their upper hand for business dealings. Debtors to be sure are at the mercy of lenders more so now, than in almost any time in history. Not because there is debt... more because debtors are over-leveraged to creditors. Likewise, creditors could well be over-leveraged to those who have borrowed too much. (1) It truly is an unhealthy combination in this case. But I bring up this point because the the U.S. government has gone to great lengths to help accommodate the lending... not regulate it... The issue then becomes more touchy as the Federal Reserve Chairman Ben Bernanke dropped a $1.2 trillion dollar bomb last week, that will soak up T-bills without an auction. This could only mean that both Treasury and Fed are concerned about the dis-interest of other governments (namely China, Russia, and Saudi Arabia) in soaking up additional U.S. debt. The Fed move is nothing less than a hail Mary pass into the end zone at this point. Should the trend of shunning U.S. treasuries continue, there will be grave consequences. And the ramifications of no buyers for U.S. debt is ground shattering:

1. The U.S. dollar will be replaced as the world's reserve currency. This will effect the value of everyone and anyone who is holding dollar based assets... From homes to equities...

2. The U.S. will not wield the traditional influence we have become accustomed to in world affairs. And the world will continue to drift into a more isolationist pattern, while governments seek to "test" the new world order. i.e. Iran, Pakistan, North Korea, and China just to name a few.

3. According to one Reuters report, there will be additional resentment toward the United States seen as a long-time exporter of debt, and now inflation. (2)

Anyone who doubts this premise could be part of the Cramer Camp who tauted the positives of inflation. As Cramer stood in his kiddie pool with pants rolled up in a sea of dollars he suggested that stocks will inflate along with dollar based assets. I would like to remind anyone who watches Cramer that he is nothing more than entertainment. Even a six year old girl pointed toward him and laughed saying "That guy is funny." I believe Cramer is short-sighted at the bare minimum, and to the other extreme a buffoon. Inflation is a two-edged sword. And I am suggesting that Cramer is missing a more fundamental paradigm shift that should pull another 20% out of the stock market...maybe more.

Retail and Commercial Real Estate
If you are a Darwinist, then you will see Natural Selection in many aspects of the economy. In the most basic level, most of us would enjoy a flattened playing field where domestic businesses would either compete and win, merge to crate a new synergy, or fail.

With a state like Ohio hitting a 9.4% unemployment rate, there is a resounding message that is sent... It is time to place bets on those who will whether the storm, and those who will not make it in retail. Take a company like DBRN for instance. They are exploring new ways to do business. And even offering members of Weight Watchers "special deals" to visit their store. Currently off their low of 7.94 in November, an 11.35 price tag could well be too much.

REG specializes in commercial real estate property which includes anchor stores like grocery or even large box stores. That being said, we can only imagine the devastating effect the recession (or whatever they are calling it these days) is having on such an operation. The all-time high at 87.10 in July of 2007 has been punished to a current price of 24.93. And the chart looks UGLY!!! (Please see the hyper link)

CSTR has a nice gimmick with the coin-counting mechanisms that are commonly found in grocery stores. I believe the Coinstar charges somewhere in the area of 10% to count coins. Sure, there are a lot of people counting coins these days. But I also believe that human nature will be to leave the middle man out of the equation and deal directly with a bank. Unfortunately, many of the people dealing with change are in long-term financial pinches. I guess if you wanted to add extra minutes to a phone card, buy retail gift certificates, or something of that nature, Coinstar is the thing for you. But, I see this as a company that will be squeezed in this economy. Here is what a couple of people have said about their Coinstar experience. Click here.

Sources Cited
1. http://www.leveragedfinancenews.com/blog/carol_clouse/189922-1.html
2. http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318

Intrinsic Investing Part III, School One, School Two, Cooked Goose, Yahoo News

Intrinsic Investing Part III

With the 9% rally in financial markets last week, we are left in two competing schools of thought.

School One: Suggests that stocks are incredibly beaten down, and are all on sale right now. That there are many companies that have a much higher intrinsic value than the current price dictates. That given a recovery... any type of recovery... these stocks could easily double or triple in value, especially if their earnings beat lowered analyst expectations. Additional liquidity will revive the consumer, banks will return to old lending practices, and credit markets are thawed. Moreover, Treasury Secretary Geithner's "Bad Bank" will simply wipe out all the toxic assets on bank balance sheets. We are on the road to recovery... Now is the time to buy!!!
Case in point would be the statements of Vadmir Pandit and Ken Lewis last week. Both CEO's hinted that their companies are returning to profitability. According to Pandit and his internally leaked memo, their first two months of 2009 have been profitable. Ken Lewis echoed similar views. Taken at face value, it appears as though these CEO's see opportunity.

School Two: In simple accounting terms, the assets must out-weigh the liabilities. This suggests that earnings and asset values determine a company's true worth. For a company to have value, it must have positive earnings on a consistent basis. Sure, there are times when the company may re-structure. Or, a company may just have a bad year or two. This differs from a company which has based its business model on unsustainable if not completely false premises, or simply made extremely poor investment decisions. See LEH, BSC, WM, or MER. In many cases, we (as in the investment community) have been led astray if not out-right lied to by analysts and company representatives alike. The question is, are they telling the truth this time?

The Goose is Cooked
As for me and my investment portfolio, I have made more positive than negative plays betting against companies if not their CEO's. The credibility factor is in play, and will continue to stay in play. While the easing of accounting rules... a moritorium on foreclosures... and initial signs that credit is thawing, I tend to error on caution. In many cases, companies have been allowed to create their own realities, and report these realities as fact. The difference between how things are, and how you wish them to be allows rationization. And rationalization means excusing actions and behaviors, or simply justifying a false interpretation of reality. That is the type of thinking that has led us to TYCO, MCI, and ENRON just to name a few. (For more information, please see the Theory of Cognitive Dissonance )

People like Bernie Madoff created their own reality... and many of the investors willingly believed the "too good to be true results." We know about Madoff. Are there others like Madoff? Until standardized accounting regulations are made and enforced by the powers that be, who can you trust? We are reminded that in many respects, Wall Street has caused its own goose to be cooked!!!

From Yahoo News:

FIVE SIGNS THE MARKET HAS YET TO FIND A BOTTOM:

CHRONIC CREDIT WOES

The banks may not be dead, but they're still sick. So are those giant, complicated credit markets. JPMorgan analyst Thomas J. Lee noted that the markets for securities backed by residential and commercial mortgages have recently deteriorated to their worst levels since Lehman Brothers' bankruptcy.

The market needs a plan for these "toxic assets" -- either by selling them to private investors, or allowing banks to mark them differently. A failure by the government to deliver such a plan sparked a sell-off last month, and if investors don't get one soon, the market could be in for another tumble. Analysts aren't ruling out a Dow drop to 5,000, or an S&P decline to 500.

"We don't believe that the bear market's over yet," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. Toxic assets "either need to come off the banks' balance sheets, or they need to improve on the banks' balance sheets."

ECONOMIC DROPS ARE JAGGED

Economies, like stock markets, don't decline in a straight line. The recent spate of better-than-expected retail sales data could be merely a short-term blip.

Sandeep Dahiya, a finance professor at Georgetown University's McDonough School of Business, said he wants to see three months of sustained increases in the Conference Board's consumer confidence index. It is currently at the lowest levels since the gauge started in the 1960s.

"Until that happens, I'm not willing to say this thing is behind us," he said.

SHORTS: NOT SWEET

A big chunk of last week's rally was driven by what's known as "short-covering" -- when investors buy stocks simply to offset short trades, in which an investor borrows a stock then sells it right away, hoping to buy the same shares back later at a lower price, thus profiting from the decline.

It's difficult to differentiate between short-covering and regular buying, but floor traders last week estimated that between 50 percent and 60 percent of Tuesday's 379-point jump in the Dow was due to short-covering. And a rally driven by short-covering can disappear quickly when a scary headline hits the wires.

FEAR OF THE UNKNOWN

The market fears something wildly unexpected could happen. The Sept. 11, 2001 terrorist attacks threw a wrench in the market's recovery following the bursting of the technology bubble. And an unintended consequence of addressing the Great Depression with protectionism in the 1930s was global trade war, which hampered the U.S. market's recovery.

THE BERNIE MADOFF FACTOR

Even if you didn't invest in Bernard Madoff's fund, you might still be an indirect victim. Trust in the markets took a major hit after his $65 billion Ponzi scheme was revealed last December. It took another blow when R. Allen Stanford's $8 billion scheme came out in February. Without trust, the stock market can't rise for long.

Back to Square One...

Back to Square One...
Interesting that Citi CEO Vikram Pandit would go on the record yesterday with an announcement that his company has had two profitable months in 2009. Interesting indeed. I find it interesting for the simple fact that Citi has still not revealed the amount, or extent to which toxic assets have fouled the balance sheet. While some speculators saw this news as an opportunity to pile money into the market, it appears that this news should be chewed well, and swallowed slowly. Truth be told, Citi was one of the first banks to respond to a moratorium on foreclosures, not to mention the reset of alt-A and ARM loans. I write this not so much to frighten investors, but more or less to offer an opinion that was widely disregarded on any of the major networks.

That being said, Neel Kashkari seems to have a decent pulse on the financial situation inside the United States. In his COngressional testimony, Kaskari said that "Forcing banks to lend was a bad idea... and that the over-extension of credit was the root cause of the current financial crisis." Soon there-after, Treasury Secretary Geithner and President Obama called on a world-wide stimulus package to create jobs and promote spending. They too have realized that the extension of credit alone will not solve any crisis in the United States.

CONSIDERATIONS
FLSR, and any of the oil companies or an all in one play of SCO
NOC, DE, and TM also look as though a protracted recession (or whatever the experts are calling it these days) could suffer. NOC is particular may suffer with defense spending cuts and an already negative EPS.
MSFT cash rich, and idea poor... maybe just maybe they will look to better themselves in a discounted financial market with a key acquisition.