Tuesday, September 16, 2008

Bloomberg: Federal Reserve Considering "Loan Package" to AIG (AIG)

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Ever feel like you are standing in front of a leaky dam? A damn with 30,40,50 leaks? And you realize you only have 10 fingers? Welcome to the Jungle. My gosh, I keep using words unprecedented, and historic ... every day is a soap opera now.
  • The Federal Reserve is considering extending a ``loan package'' to American International Group Inc., the insurer facing a cash shortage, according to a person familiar with the negotiations.
  • The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are ``cautiously optimistic,'' said the person, who declined to be identified because negotiations are confidential.
  • The person gave no timetable for reaching an agreement or estimate on how much money New York-based AIG would need. New York Fed spokesman Andrew Williams declined to comment and AIG spokesman Nicholas Ashooh didn't immediately return a call seeking comment. Treasury spokeswoman Jennifer Zuccarelli had no immediate comment.
  • AIG is searching for capital to stave off a collapse after its credit ratings were cut late yesterday. AIG's fight to stay afloat is the latest tremor to shake the global financial industry, less than a day after Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection and Merrill Lynch & Co. sold itself to Bank of America Corp.
  • Goldman Sachs Group Inc. and JPMorgan Chase & Co. were working with AIG to determine how much the insurer needs, said two people familiar with the talks yesterday. Goldman has helped the Fed appreciate the effects that an AIG collapse would have on financial institutions, the first person said.
Shaking head in amazement at this era

Bookkeeping: Buying Constellation Energy (CEG) for a Trade Only

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There is a massive dislocation happening in Constellation Energy (CEG) right now. This is a 5 year low and down 40%+ as I type this. I'm labeling this "when hedge funds attack"

The company has a $6.1 Billion credit facility from a consortium of banks, of which $150M is from Lehman. That would be under 2.5% exposure to Lehman on the debt side. That appears to be enough to drive the stock down 60% and have it halted at 2 PM. This is the legacy of no uptick rule, computer dominated trading dominance, and unrelenting selling pressure. This is no different than financials - buy a bunch of credit default swaps, while shorting the stock - point everyone to the huge jump in credit default cost and say "game over" and everyone jumps in with you in the "shoot first, ask questions never" market. Now it can be done in any industry it appears - even boring utilities - as long as you know someone needs to liquidate a position. Just another day in the office for the hedgies. Lehman owned a 5.4% stake in the company and hedgies knowing they have to liquidate it can target at will. What a joke this market has become... I can only imagine what the poor workers and 401k holders of company stock must be going through right now - stocks are just playthings nowadays.
  • Constellation, Baltimore’s corporate cornerstone, saw its stock plummet as much as 63 percent despite its move to quell fears that its financial ties to Lehman Brothers would not have a negative impact on the company. Constellation revealed in an SEC filing Monday that it has $6.13 billion in a credit facility from a consortium of banks, with $150 million of that total coming from Lehman Brothers Bank. The company said the Lehman bankruptcy would have no material impact on its operations
  • In a Securities & Exchange filing dated Monday, Constellation Energy Group said it did not see a "material effect" from Lehman exposure. Constellation Commodities is a counterparty with two Lehman Brothers subsidiaries that deal in commodities transactions. The obligations of Lehman Commodity Services and Eagle Energy are guaranteed by Lehman, and the Lehman bankruptcy filing gives Constellation Commodities the right to terminate the transactions, according to the filing.
For a trade only I am buying a 3.1% stake in the upper $28s. We'll sell hopefully in the $40s or $50s.

Long Constellation Energy in fund and personal account


Bookkeeping: Cutting Alliance Data Systems (ADS) in Half

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Wow. I am completely flabbergasted that even stocks undertaking a massive share repurchase program, in completely boring business lines that have nothing to do with commodities or financials, cannot hold a bid. I thought Alliance Data Systems (ADS) would be a port in the storm. [Aug 29: Starting New Position: Alliance Data Systems]

Well we have to stick to our guns - we see a chart where the stock broke key support and regardless of fundamentals or backdrop we have to begin to cut back to avoid risking major damage if this is part of a new trend down. We're cutting our ADS exposure in half from 1.8% to 0.9% of the portfolio, here at $60. We'll re-enter if the stock gets back above $62. Unbelievable - even buying back 30% of your shares does not provide you the benefit of the doubt. Just last week I was so happy in the performance - the stock never wavered. So much for that. Well there is a gap back there at $52 so maybe that's the future. So $52 or $62 - whichever comes first is where we'll buy.

EDIT: Actually that looks like a double top just north of $66 which is might be very ominous. I'm cutting back to 0.1% stake until further notice. Here is another easy short entry - short at $60, stop out at $62, cover at $52. Go long at $52? Hmmm... we'll check back in the days to come. On a fundamental basis it makes little sense - but what has?

Long Alliance Data Systems in fund; no personal position

Bookkeeping: New Position #2 - AeroVironment (AVAV)

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Second new position is AeroVironment (AVAV) which is a name I have been watching for about a month. This company benefits from one of America's growth industries - war. (not a political statement - just the facts)

AeroVironment, Inc. engages in the design, development, and production of unmanned aircraft systems and energy technologies for various industries and governmental agencies. The company offers small unmanned aircraft systems (UAS) that provide intelligence, surveillance, and reconnaissance, including tracking, combat assessment, and geographic data to the small tactical unit or individual war fighter.

They also have a clean energy group - our buddy over at Marketfolly wrote a nice piece in June (which I frankly glossed over) but when it crossed my screens I took a second look. Now if we were talking 120 days ago we'd be interested in this name for the clean energy angle since crude oil is clearly going to $200; nowadays we like it for the defense angle as crude oil is clearly going to $30. (notice the overreaction in both directions? human fear v greed) The fact is when energy comes into favor you can have a company with its hand in both cookie jars. So it's interesting from that perspective, but the foundation of the company are the unmanned drones which is 80%+ of revenue - 15% is from their "efficient energy" technologies.

Here is a link to their company overview presentation from July 08.

Let's look at the chart - another solid year to date performance running from $24s to the mid $35s. When it crossed my radar it was in the $30-$31 range. While I was watching the company reported earnings last Tuesday evening (remember that was the huge down day following Bailout Monday) so the stock was in the mid $29s - it opened the next morning in the mid $33s and then jumped to mid $35s. So instead of chasing it there we waited. This is a market where almost all gains are given back, and many in short order. So by remaining patient we got the pullback today to the 50 day moving average of mid $31s. We bought just above that. Again our favorite type of chart, but one you need to be careful of because a break of support could lead to bad things. A close below $31 would have us cutting back out of respect for the danger in this market.


Here is a link to the full report of last earnings for the non HAL9000 types. AP summary here.
  • Shares of AeroVironment Inc. surged Wednesday after the maker of unmanned aircraft systems reported strong fiscal first-quarter earnings and several analysts raised their price targets and earnings estimates on the California company.
  • Shares jumped $4.49, or 15.3 percent, to $33.88 in midday trading. Earlier in the session the stock traded at $35.63, its highest point since going public in January 2007.
  • For the three months ended Aug. 2, profit rose to $4.8 million, or 22 cents per share, from $3.8 million, or 18 cents per share, in the year-earlier period. Analysts polled by Thomson Reuters expected, on average, 18 cents per share.
  • The Monrovia, Calif.-based company said continued progress in its liquid hydrogen-powered unmanned aircraft business lifted revenue by 9 percent to $53.6 million from $49.2 million.
  • Both SunTrust Robinson Humphrey analyst Chris Donaghey and Stifel Nicolaus analyst Troy J. Lahr raised their fiscal 2009 earnings per share estimate to $1.20 from $1.18. Friedman, Billings, Ramsey analyst Patrick McCarthy raised his profit estimate to $1.16 per share from $1.13.
  • Donaghey raised his price target to $36 from $32, Friedman, Billings, Ramsey's McCarthy reiterated his $37 price target and Goldman Sachs analyst Richard Safran increased his price target to $27 from $25.
One thing I liked in the earnings report was the continued growth in backlog
  • As of August 2, 2008, funded backlog (unfilled firm orders for which funding is currently appropriated to us under a customer contract) was $108.9 million compared to $82.0 million as of April 30, 2008.
Conservative Guidance
  • For fiscal year 2009 the company maintains its guidance of revenue growth of between 20% and 25% over fiscal year 2008, with an operating income margin of between 12% and 14%.
The company has a non typical year end of April, so it's 2008 year ends April 09; based on current estimates it has a forward PE of 28. Since I have global growth stocks with forward P/Es of 5-7 that no one wants to own, I guess we have to pay near 30 for the current market favorites.

There is a lot of competition in this space from defense contractors but AeroVironment is a specialist instead of a generalist (i.e. they focus on this unmanned aircraft segment) and as an example just from the "ooh ahh" perspective is this piece from Motley Fool.
Perhaps the most startling news contained in AV's release this week concerned its recent DARPA-award to develop a "hover/perch and stare" UAV. This miniature airplane can fly to a target location, land there, and keep an eye on things from a perched position. When it's done, it can take off from its perch and fly back to base. (my comment: whoa - cool)

As you may recall, AV only announced its win on this contract three weeks ago. Now CEO Tim Conver tells us: "we are developing and have now demonstrated a new aircraft based on our one-pound Wasp that can perform vertical take-off and landing, hobbler, perch and steer machines in a very stealthy manner" [emphasis added].
Ok, I don't buy stocks on sex appeal but having a drone that can act like a bird is pretty darn sweet. ;) To top if off, Investors Business Daily has a piece on the defense industry with a focus on AeroVironment last Friday
  • AeroVironment showed investors once again last week how some military contractors are in a growth mode. The company -- which makes unmanned aircraft for the U.S. Army, among others -- saw shares jump 18% to 34.73 on Sept. 10, a day after reporting impressive first-quarter results.
  • Earnings per share for the quarter that ended Aug. 8 climbed 22% from the year-ago period to 22 cents, well over analysts' forecasts of 18 cents per share. Revenue shot up 9% to $53.6 million, topping estimates by 7%. Its funded backlog of orders climbed 33% to $108.9 million from the previous quarter.
  • It's one of the key stocks in IBD's military electronics group, which as of Friday ranked No. 3 out of 197 industry clusters. (hello - growth industry) Many of the stocks in the group focus on cutting-edge military systems that help improve military intelligence and surveillance. The products include thermal-imaging gear for spotting combatants, unmanned planes equipped with high-powered cameras, and technology that helps gather wireless communications from enemies.
  • With the war in Iraq showing more signs of success, some might think military contractors are heading for the bunker. Hardly. The U.S. military is preparing for a future beyond Iraq, and it's tapping a myriad of companies to do it.
  • AeroVironment has made its name building airplanes small enough to carry into battle and launch by hand. Despite its size, the plane also comes with enough camera and communications equipment to let a soldier see what the enemy is doing behind a ridge or in the next valley.
  • The companies tend to keep their contracts if the military likes their performance, even if a rival bids lower, Lewis says. Once a contractor has proven itself, it will try to win contracts for more advanced or larger orders.
  • "The U.S. has the largest defense budget in the world." (growth industry) The U.S. defense budget has been on the upswing during the Afghanistan and Iraq wars. The Congressional Budget Office reports the military budget has grown from $364 billion in fiscal 2001 to $622 billion in 2007. (did I mention growth industry?)
  • AeroVironment is trying to up the ante with what it calls the "Switchable," which can not only provide pictures to soldiers, but identify targets and fly into them, Kamikaze-style.
We started this position with a 1.3% stake in the upper $31s.

Long AeroVironment in fund; no personal position

Bookkeeping: New Position #1 - Luminex (LMNX)

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I'm starting 2 new positions - these have both been found over the past 4-8 weeks as I've been looking for stocks strong on technicals. Then I've been parsing that group into stocks that (a) have strong fundamentals (b) are not in the tug of war between financials and commodities and (c) are too small for hedge funds to own too much and thus won't be too exposed to the "forced selling" effect as HAL9000 is forced to puke up positions. I have a list of about 15-20 ranked in order of interest, and 2 of them fell to a key support level this morning so I began starter positions in each.

First is Luminex (LMNX) who continues our trend into healthcare stocks. (website here) Luminex is like a baby Illumina which was one of our big winners that we recently exited as the chart weakened. Corporate fact sheet here. At today's prices it is worth exactly $1 Billion in market cap.

Luminex Corporation develops, manufactures, and sells proprietary biological testing technologies and products for applications in the life sciences industry. It offers xMAP technology, an open architecture and multiplexing technology, which allows simultaneous analysis of up to 100 bioassays. The company's technology is used in various segments of the life sciences industry, which includes the fields of drug discovery and development, clinical diagnostics, genetic analysis, bio-defense, protein analysis, and biomedical research.

So, similar to Illumina it's an assay and consumables type of company [Dec 20: Nice Write up on Illumina] but a much smaller company in terms of profitability and size. While fundamentals matter little in this market, we'll focus on the chart. Luminex has had a great year, running from $16 to as high as upper $26s year to date. I've been waiting for a pullback, but it is frankly higher than where I first started watching it as it has had a relentless run despite the market turmoil. Finally the past 5 sessions did it begin to pullback. The 50 day moving average is $23.75 and stock fell to $24 both yesterday and this morning. This is my favorite type of chart to buy - strong stock on pullback, but it is also a dangerous chart because either we (a) bounce or (b) breakdown. You never know in advance. So a break into the lower $23s would be a signal to cut back (or out) but we anticipate a bounce from this setup.

For the old fashioned types who still think fundamentals matter here is the last earnings report and a summary
  • The Austin, Texas, company said it lost $959,000, or 3 cents per share, in the second quarter. A year ago, Luminex took a loss of $12.1 million, or 34 cents per share. Revenue jumped 39 percent, to $24.3 million from $17.5 million, as the technology business became profitable and the assay group took a smaller loss.
  • Luminex also backed its full-year revenue forecast of $95 million to $105 million.
  • Analysts had expected a deficit of 3 cents per share on $23.4 million in revenue, according to Thomson Financial. They forecast $99.5 million in revenue for 2008.
  • Revenue for the technology group climbed to $20.3 million from $13.6 million. Assay revenue increased to $4.1 million from just under $4 million.
  • System shipments of 203 resulting in cumulative shipments to date of 5,402, up 19.4 percent from a year ago; representing the seventh consecutive quarter of system shipments of 200 or more
  • In a client note, Thomas Weisel analyst Peter Lawson raised his revenue estimate and predicted a smaller full-year loss for Luminex because of the improvement in sales and margins. He now expects a loss of 4 cents per share on $100.3 million in revenue, up from a loss of 8 cents per share and $98.5 million in sales. Lawson also boosted his price target to $23.50 per share from $21.
2009 should be the first year Luminex turned profitable. Gross margins are a solid 68% as of last quarter. Again I really like this models - you sell the equipment and then have a reoccuring stream of revenue from the consumables - we have this in Intuitive Surgical (ISRG) or China Medical (CMED) as companies who have similar "razor" and "blade" models.

We began Luminex as a 1.7% stake in the mid $24s range.

Long Luminex in fund, no personal position

Market Reverses ....

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Call me a cynic but I bet it was leaked to the "people in the know" (i.e. Goldman Sachs) that a government bailout of AIG is coming ;)

I've lightened up on short exposure across the board.

This is the problem with this market - it has nothing to do with fundamentals - just bailouts, government actions, secret meetings, and which people "in the know" will be told about this before the rest of us know.

We did retest that S&P 1170 as mentioned this morning, here is the bounce. From here it can go either way. The risk is too high either way. Since I cannot watch this every moment I'm going to move the short exposure in large part to cash and then wait for the bailout news... ;)

I bought 2 new positions of names I've been watching for quite a while which I'll write out later in the day.

EDIT 11:40 AM: And here we go, more of our tax dollars at work
  • With a private sector solution looking increasingly unlikely, the government is once again considering providing American International Group with some sort of financial support, according to investment banking sources involved in the meeting.
  • The New York Federal Reserve is currently meeting to discuss the fate of the troubled insurance giant, these people say. Sources close to the situation said a private sector solution to AIG's situation is definitively dead.
  • "It's in our national interest that AIG survive," said Maurice "Hank" Greenberg, a former AIG chairman and a major investor in the insurer. He told CNBC there could be "systemic risks" if AIG's trading partners try to get out of their contracts.
We "promise" this is the last time that your tax dollars will be used to prop up the system. Trust us. I know we said that a week ago. But we mean it this time. Yep.

Monsanto (MON) Raises Guidance (Again)

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While the chart is relatively poor, all things considered Monsanto (MON) has held up relatively well compared to its peers in the "commodity" space. I continue to be a bull on the long term market for potash fertilizer and seeds and once the hedge funds are done blowing themselves up we are going to have quite the rally in this group. In fact, while I usually lighten up ahead of earnings, due to the pole axed nature of this group I will actually have quite high exposure going into earnings as I expect a positive news flow and unlike the past 5-6 quarters this group is now hated as opposed to love. That strikes a chord with my contrary eyes.

To that end, Monsanto (MON) raises guidance today. This is another in a series of raises over the past 2 years. The companies in this sector continue to be cash flow monsters. Cash is king, in the end - and it allows you to buyback stock to protect against short sellers. Monsanto north of $114 would strike me as a very positive development; I've stayed away from this name due to valuation but I'd be a buyer on that sort of breakout now that we've culled the portfolio of so many names. Or I'd be interested on a drop to about $90. It's still not "cheap" but if it won't get much "cheaper" in this environment of delevering and angst about all things commodities, it appears it will never get "cheap" - it is a relatively unique company.
  • Monsanto Company (NYSE: MON - News) raised its fiscal year 2008 ongoing earnings per share (EPS) guidance to a range of $3.58 to $3.60, and revised its reported EPS guidance to a range of $3.49 to $3.51, compared with its previously announced EPS guidance of $3.37 on an ongoing basis, and $3.63 on an as reported basis The change in ongoing earnings reflected higher-than-expected sales and gross profit in the company's seeds and traits business and its Roundup® and other glyphosate- based herbicide business.
  • The change in as reported guidance for the year now reflects the effect of income from discontinued operations, the Solutia settlement and in process research and development from the De Ruiter acquisition. The ongoing EPS represents approximately 80 percent growth over last year's ongoing EPS of $1.99, and last year's reported EPS of $1.79 had even greater growth.
  • Monsanto now expects its seeds and genomics segment will generate above $3.8 billion in gross profit for its 2008 fiscal year, up from the earlier expectation of $3.7 billion, representing a growth rate of more than 25 percent compared with 2007 gross profit. The increased expectation for segment gross profit reflects higher than expected sales from the company's corn, soybean and vegetable platforms. Crews will indicate that Monsanto's Roundup® and other glyphosate-based herbicides business is on track to be above $1.9 billion of gross profit for the 2008 fiscal year, ahead of the previous forecast.

  • "The fundamentals of agriculture and our businesses are strong and getting stronger," Crews said. "We continue to see strong adoption of our branded seed products, growing use of our trait technologies globally and remain focused on introducing new game-changing technologies for farmers that can increase yields and improve their productivity. We are committed to delivering innovative tools that can deliver value to farmers."

  • Crews will also note that for the 2008 fiscal year, the company's corn business should exceed $2 billion in gross-profit generation for the first time. For 2009, Crews will reiterate that Monsanto expects the corn business to grow by 25-30 percent, propelling the company's expanding seeds-and-traits opportunity.

  • During Crews's presentation, he will also announce that Monsanto's guidance for free cash for fiscal year 2008 is now at approximately $750 million, compared with previous guidance of $550 million. Higher collections from accounts receivable and customer prepayments contributed to the increase in free cash flow.


No position


3 Years Lost

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People buying the S&P 500 have now officially lost just under 3 years of gains. The last time we were at 1170 was the lows of October 2005. If this level breaks, the next support is April 2005 at 1140. If that breaks October 2004 comes into play at 1100 or so.

As you can see, October is not a very good month. Nor is September historically :) As we said with S&P 1215 yesterday we should see a "bounce" off the 1170 level at least on the first try as this is historical support. What the market does after the reflective bounce is of more importance.

We won't be catching the bottom since we are not buying anything, but we want to see a full fledged panic much like we saw yesterday with stock after stock dropping 10-15%. And very high volume. This can create an "exhaustion" type of bottom. It will be interesting to see if there is any "solution" to AIG (AIG) which could also turn this market, at least for a short time. But unfortunately the financial issues are simply un"fixable" by conventional means - aside from time, time, and more time - and more capital (which no one has) - there is no easy solution for their problems. This was true 1 month ago, 3 months ago, 6 months ago but sometimes the market lives in denial. Now it has moved from "hope" to fear.

Again in the end (the ultimate solultion) I expect the federal government to 'create' capital out of thin air (printing press) as things degrade. That is terrible for the dollar but the dollar bulls have not figured it out yet. They have already begun buying mortgage securities outright, something unthinkable (except for a few bloggers who said this would be the end game) a year ago.

Awful Reaction to Goldman Sachs (GS)

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As always it's never the news, but the reaction to the news which is what matters. Goldman Sachs (GS) had "ok" earnings - poor for them, but great compared to anything their peers have put out - but the stock is down double digits in premarket. To make money at all in this environment is a victory but the market is in fear mode - not logic mode.
  • Goldman Sachs Group Inc (NYSE:GS - News) said third-quarter earnings plunged 70 percent as one of the market's worst slumps ever sapped revenue in almost every business while fueling investment and credit losses.
  • The largest U.S. investment bank reported net income of $845 million, or $1.81 a share, for the quarter ended August 29, down from $2.85 billion, or $6.13 a share, a year earlier. Net revenue fell by half to $6.04 billion from $12.3 billion. The earnings beat analysts' sharply reduced expectations of $1.75 a share, but revenue fell short of the consensus forecast of $6.3 billion, according to Reuters Estimates.
  • As expected, Goldman Sachs' investment banking revenue dropped 40 percent amid a dearth of deal activity. Fixed-income trading revenue plummeted by two-thirds, reflecting weak credit and mortgage trading results, while equities trading revenue fell by half.

  • The quarter also included $1.1 billion of losses on financing for junk rated companies, residential mortgages and commercial mortgages. "This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations," Lloyd Blankfein, Goldman's chief executive, said in a statement.

  • Moreover, Goldman, the most aggressive investment bank in betting its own money, recorded a net loss of $453 million from principal investments. (this is why we sold the stock - we were worried about this - Goldman usually always makes money from their own trading as they have a lot of "advantages" of information) Asset management revenue fell 6 percent, reflecting lower fees, falling market prices and a $7 billion net outflow of assets. (scary to see net outflows out of even Goldman)

  • "This is a heroic effort," said Mike Holland, chairman of investment firm Holland & Co in New York. "I think we have probably not seen a more challenging environment than the one that we are going through right now."

Even more concerning is the jump in credit default swaps which a week ago no one even considered as an afterthought for a firm like Goldman.
  • The cost of insuring the debt of Goldman Sachs (GS) and Morgan Stanley (MS) against default rose on Tuesday after the bankruptcy of Lehman Brothers (LEH) fanned worries about the health of other investment banks. Five-year credit default swaps on Goldman jumped by 165 basis points to about 500 basis points, while Morgan Stanley 5-year CDS jumped by 275 basis points to 750 basis points, according to data from Phoenix Partners Group.
In basic English credit swaps are basically "insurance" if you will against the equity - as there is more fear about the stock the insurance rates go up. Now, people are speculating that shorts are driving up the price for default swaps to "create" an atmosphere of fear, which in turn drives down the stock price (which they can short), which drives up the value 0f default swaps and its a feedback loop. Could be - but with the SEC asleep at the wheel we'll never know. Or if we do it will be 10 years from now. The speculation now is that the 2 remaining independent investment banks will now need to attach themselves to a commercial bank so they have a ready source of funds. Their old model relied on them raising funds from borrowing in the open market but with the fears out there - the push is now to have a ready source of funds from deposits - basically what Merrill Lynch (MER) gets with Bank of America (BAC). The initial reads are that Goldman Sachs will buy a bank, and Morgan Stanley will need to be acquired by a bank. We are running out of banks that could acquire investment banks - maybe a Wells Fargo (WFC) or a foreign bank. But this all goes back to the basic model of financials - unlike widget companies these are companies that rely on the faith and trust of investors and customers. Since they are levered, if every client came and asked for their money at once, they would not have it - that is the basic business model. Which works 99.9% of the time. But this is the other 0.1% of the time.

Now the scary thing is when we last saw Morgan Stanley (MS) earnings they were very poor and outside of gains made from selling off one of their units overseas would of gone from very poor to horrible. So that worries me for tomorrow, when they report.

We owned both Morgan and Goldman but thankfully sold both - the stock performance is frightening and in this market the shorts see a lot of red meat - what can be a $40 stock price today can be $10 in just a few days. Markets are about emotions - fear and greed. We are in fear mode and prices have nothing to do with fundamentals in some cases so it's best to just step aside and let the fear play out.

No positions

Monday, September 15, 2008

Roubini with a Series of Videos on Yahoo Tech Ticker

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We've been big fans of Nouriel Roubini [Aug 20: Nouriel Roubini: "Told you So"] and shared most of his thoughts along the way - so we've been in the small crowd that has been proven correct. You can find them here [Jul 14: Reviewing December 2007's Roadmap & Views] Although being correct from an economic standpoint has been a lot easier than a stock picking standpoint, as the market participants ping pong from denial to reality and then back to denial (each denial stage we usually take a big hit). Honestly if we could trade futures on my economic calls we'd be up 30-40% the past few months ;) Unfortunately we have to deal with the actual market. To be blunt, what has me worried are our economic views have been nearly dead on the past year plus as "famous" pundits lived in denial; so if my calls for continued degradation are as accurate as my older calls - I just have a hard time having much faith in this market. Outside of the "hope phases".

Here are a series of videos from Yahoo Tech Ticker shot today. Each clip is of the 3-5 minute variety - it is very important to understand the impliations of all that is changing by the day, hour, or minute.

#1 Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Such concerns are justified, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

In addition, the recent spike in number of banks on the FDIC's "troubled list" is only through June, meaning even that inflated number understates the problem.

The intent here isn't to add to people's anxieties, but Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms



#2 Big Risk: Surging Debt Makes U.S. More Dependent on China, Russia, Gulf States

The demise of Lehman Brothers, Merrill Lynch, and Bear Stearns this year has investors contemplating the long-term outlook for other once-venerable institutions, including Dow members Citigroup, AIG and Bank of America.

But there's an even bigger financial institution with greater debt and an increasing level of bad loans on its books: The U.S. government.

Given the actions already taken, from the Housing Bill to the nationalization of Fannie Mae and Freddie Mac, the U.S. deficit could double to $800 billion in two years, says Nouriel Roubini, of NYU's Stern School and RGE Monitor. (Even worse, the official government deficit figures exclude the costs of the wars in Iraq and Afghanistan, as well as the unfunded liabilities of Social Security and Medicare.)

The big risk is that foreign holders of Treasuries will no longer accept low interest rates to help fund U.S. debt spending, says Roubini, noting countries like China, Russia and oil-producing nations in the Middle East have becoming increasingly important holders of Treasuries. Should they demand higher rates to hold U.S. debt or, worse, dump their holdings, it could have profound ramifications on the U.S. economy and the value of the dollar.

Roubini further notes the Federal Reserve has put its balance sheet -- and independence -- at risk via its intimate involvement in thus-far failed attempts to stem the crisis.

It's tempting to dismiss the notion of a "run" on the U.S. government as unthinkable and some bears have been warning for years, even decades, about such a worst-case scenario. But after the events of this weekend, much less the past six months, it's clear that (almost) anything is possible and no scenario too "outrageous" to seriously contemplate



#3 Feds Right to Let Lehman Fail, But It's a 'Dangerous, Risky' Path, Roubini Says

After the nationalization of Fannie and Freddie last week and the government's role in JPMorgan's purchase of Bear Stearns in March, the notion of America as "bailout nation" has taken hold. This weekend, Treasury Secretary Hank Paulson sought to put an end to that way of thinking by declining to backstop a deal for Lehman Brothers.

The government was right to not intervene and bailout another distressed financial institution, says Nouriel Roubini, of NYU's Stern School and RGE Monitor.

But the government has already started down a "dangerous and risky" policy road, which resumed this weekend as the Federal Reserve announced "enhancements" to existing liquidity facilities that were created in response to the ongoing crisis.

The announced changes include:

  • Broadening of the types of securities Wall Street firms can use as collateral when borrowing from the Fed to include lower-grade debt securities and equities.
  • Stepped up schedule of so-called TSLF auctions to a weekly vs. bi-weekly basis.
  • Removal of restrictions on how much commercial banks can lend to their brokerage units.

This final point means that banks are using Federally insured deposits to support their brokerage units, which puts even greater risk on the Fed and (potentially) the FDIC, Roubini says.

Also joining Henry and me is NY Post Wall Street reporter Mark DeCambre, who notes the Fed and Treasury are faced with a tremendous number of simultaneous crises for which there is no magic bullet.



#4 Crisis on Wall Street: Roubini Predicts Another 20 Percent Stock Drop, Sale of Goldman, Morgan

After failing to find a buyer this weekend, Lehman Brothers filed for the largest bankruptcy in U.S. history while Merrill Lynch agreed to be acquired by Bank of America for $50 billion. Such extraordinary events set the stage for a wild Monday on Wall Street, and most likely beyond.

These incredible, once unthinkable developments have caught a lot of people off guard, but not Nouriel Roubini, of NYU's Stern School and RGE Monitor, whose alarming predictions about the housing market and finanical system have been coming to pass with alarming frequqency.

This morning, Roubini forecast another 20% drop in stock prices, and reiterated a prior view that there will be no major independent broker/dealers standing before this crisis ends. In other words, Goldman Sachs and Morgan Stanley should be seeking suitors today, or face a similar fate as Lehman later.


Looks like Panic Selling - S&P 1200 here we are

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We are now back to the depths of the July carnage - S&P 1200. If this does not hold, it would be very worrisome. Again, you can bet "they" will defend it like they did successfully on the first few tries this morning at 1215.

I said earlier that if Merrill (MER) goes it will be interesting to see what they do to Morgan Stanley (MS)... well right now it's not pretty. Even Goldman Sachs (GS) is being destroyed. Those are the 2 last independent investment banks. Both report in next 2 days and along with the Federal Reserve meeting - anything can happen. We could be up 3% or down 3% tomorrow. The action continues to be dangerous as I've been saying week after week.

Goldman Sachs (GS) is before the bell tomorrow so something positive there, along with hopes for a Fed rate cut could turn this market on a dime. Or not. Such binary action - quite amazing.

Morgan Stanley and Goldman Sachs were both down around 14-16% before "rallying out of thin air" to only be down 7-11% -- hmm, how curious ;) Again I would not be surprised to see a number from Goldman that "they" can use as an excuse to rally this market up 3% tomorrow. It happened just a week ago - up 3% on Fannie/Freddie bailout, and then lost it all the very next day. Curious forces are at work behind the scenes.

We do indeed live in interesting times.

EDIT @ 4:10 PM : that was a very weak defense. We had one bounce there @ 3:30 PM right at 1200 and then just a tailspin into the close. That bodes very ill. If not for Goldman possibly providing some knee jerk bounce tomorrow I'd be extremely negative. We'll see what they have up their multiple sleeves. p.s. could someone tell me why financial stocks rallied from July 15th forward? Also can one pundit who showed up a week ago today telling us the bottom was in due to bailout of Fannie/Freddie please show his face and say "oops"? Just one?

Here is today's action

p.s.s. we've had a rough time of it of late as we've been high in cash levels, hedged in areas the market is running up on "thesis" instead of fact, and our long positions have not been treated very well in this market of "buy financials because the worst is behind us" and "buy consumer discretionary because everything will be fine in 6 months - but only in the USA as the rest of the world crumbles - so sell global growth stocks". So we lost some money today but I'm confidant compared to most funds readers might own we outperformed just about any equity fund out there. Small victories I suppose.

Now the danger is tomorrow could be a complete reversal of today, as this market has no memory from day to day, and the market could be up 3% and we look like a laggard again. Or it could be down another 3%. Who knows. VIX crossed over 30 at least (volatility index) - over 30 has usually signaled fear is high and we are close to an intermediate bottom.

SEC Finally to Get Around to Addressing Naked Short Selling?

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Well it's taken catastrophe and carnage across Wall Street but maybe, just maybe the SEC plans on doing it's job. There appear to be plans to strengthen action against naked short selling - sadly there are already regulations against this on the books but they appear to be so loose and very few respect it. There are entire lists of stocks on each exchange filled with stocks that are targets of this ploy, but nothing is done about it. We'll see if there is any teeth to this new plan - but without regulation rules are meaningless.

Again, short selling is fine, dandy and fair. Naked short selling is supposed to be against the rules, but on Wall Street the rules are bent often. Only when it appears to bring down the system do "regulators" wake up.
  • U.S. securities regulators plan to take action on abusive short selling of stock before the end of the week, a source briefed on the matter said on Monday.
  • The Securities and Exchange Commission will likely adopt proposals to strengthen its short-selling rule, including one that deems it fraudulent for customers to deceive broker-dealers about their intention or ability to deliver securities in time for settlement.
  • The SEC will also move forward with a plan that would shorten the time in which traders must buy back stock if they fail to deliver a security by the settlement date.
  • A "naked" short sale occurs when an investor sells stock that has not yet been borrowed. Broker-dealers will sometimes accidentally fail to deliver stock to investors who have arranged to borrow it. If this is done intentionally, it is illegal. (it's amazing how many "accidents" happen on a daily basis over millions of shares)
WSJ take
  • Securities and Exchange Commission Christopher Cox assured Wall Street chiefs amid a series of frantic weekend meetings over the fate of Lehman Brother Holdings Inc. that the SEC would institute protections soon, this person said.
  • The SEC is expected to move up the timeline for finalizing two rules as soon as this week, up from late September. The rules, which require the approval of the SEC commission would stiffen requirements on certain players involved in short-sales and make it illegal for a trader to mislead his broker about locating stock to short and then failing to deliver it within three business days, this person said.
  • The idea behind the rules is to rein in traders who borrow stock to short and then are late or never return it. Market participants say that can have a cascading effect on a company's stock.
  • Many traders want the SEC to institute a rule that allows traders to short only on an uptick in the stock's price. The SEC removed that rule recently and traders blame it for recent volatility and record levels of shorting.
Again, if you are just a no name small cap stock who is being relentlessly naked short sold in this market - we don't care. But if you are a financial, you have the ear of every government official in D.C. - when you are targeted the same way.... then it matters. But even then, only after much of the damage has been done. The government at it's normal finest.

Doug Kass: Under-Regulated, Overcompensated

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Here is a take from Doug Kass which is free over at TheStreet.com so I'm reprinting it. (Kass being noted hedge fund manager, short oriented in most cases) Long time readers of the blog will see Kass has has used a bevy of terms/themes we've used over the past year....
  1. "heads I win, tails I win system" especially in executive management
  2. "performance all based on 1 year time frames instead of over longer periods of time
  3. "the free market will regulate itself - not"
  4. we are now just working through the financial dislocations - after that will come the real effects on the "main street" economy - i.e. the stock market has been mostly dealing with the financials issues and denying the credit contraction and recession upon us.
I did not see one CNBC pundit come on and say "I was wrong. I woefully underestimated the scope of this. I'm sorry." Nope. They are sticking to their game plan - "yet another wonderful buying opportunity - good times ahead". There appears to be no shame on financial TV.

I continue to forecast very difficult times for the foreseeable future. At some point the problems in the real economy will take the baton from the problems of the financial economy. But in America they are so intertwined it is hard to separate them - without credit, and loads of it, much of the US system is incredibly impaired. We live on credit.

*********************** Kass below

At the core of financial system's current breakdown is the fact that there remains too little, not too much, financial industry regulation. Too many regulations serve little or no purpose (similar to the pages of silly and lengthy disclosures in Wall Street research reports that few read and even fewer rely on). Regulatory enforcement is arbitrary and, at times, unpredictable -- a system that values form over substance.

Over the past decade Wall Street's compensation was no longer calculated on multiple years of contribution/performance but rather became a short-term (meritocracy) calculation based on a one-year profit and loss statement. The extraordinary compensation at hedge funds, private equity, and in the investment and commercial banks became a "heads I win, tails I win" proposition as a star system emerged that was based on contributions calculated within reduced time frames rather than an assessment of the value-added contributions over lengthy periods of time (subject to high water marks and claw backs).

Importantly, supporting my view of a "heads I win, tails I win" structure, outsized annual compensations were typically not retained but rather were allowed to exit Wall Street every year -- in part, helping to explain the appreciation in home prices between 1995 and 2005 on the East and West Coasts.

A general lack of regulatory scrutiny and enforcement, the absence of risk controls and a continuum of reckless management decisions at the world's leading financial institutions (banks, brokers, hedge funds, private equity, etc.) have combined to create a Black Swan event, which has resulted in a credit market gone amok and a shadow banking system often under the radar of regulators.

Stated simply, allowing investment banks to be levered over 30-1, private equity deals to be levered at 20-1 and hedge funds to be levered over 5-1 is, as a friend mentioned to me over the weekend, "the financial equivalent of playing Russian roulette with five of the six chambers of a loaded gun."

Laissez faire policy has failed. And since the markets have grossly failed to impose the type of discipline that was necessary to protect the system from the accumulated buildup in credit (and the current contraction), regulators will now step in. Unfortunately, it is now too late as once again the regulators will prove to be reactive, not proactive.

For now, the rescue packages will dominate the day.

But for tomorrow, the effect of a credit market running amok will be felt hard by the real economy.

I have long written that the impact of deleveraging was the equivalent of a broad monetary tightening, and with the Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks)/American International Group (AIG Quote - Cramer on AIG - Stock Picks) news over the weekend, the extent of the economic damage to the real economy, though still unknown, will be widely felt.

Memo to investment strategists/economists and their economic and corporate profit forecasts: Get real.

Memo to investors/traders: Continue to err on the side of conservatism.


Wilbur Ross: Possibly a Thousand Banks to Go

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I'm watching this regional bank rally with a lot of head scratching. As if they are not exposed to commercial loans, mortgages, and general economic malaise? They are impervious to the forces affecting the rest of the system? Wilbur Ross says possibly 1000 banks to go. I don't have a number in my head, but it is a far darker picture than the government is "assuring" us. Remember, they did not even have IndyMac Bank (one of the largest bank failures in history) on their "troubled bank" list, the quarter before it went under. [Aug 26: FDIC Troubled Bank List] They don't have Washington Mutual (WM) which looks destined to be delivered to JPMorgan (JPM) in a "arm twisting" by government on their troubled bank list. So whose to believe anything coming out of these same folks who told us "subprime is contained" in spring 2007. I don't know whether they have been ignorant or deceitful over the past 18 months; and frankly I don't know which scares me more.

Myself, I'm sticking with billionaires and insiders. Still no massive insider buying at these "bargain" prices by banking executives and no signs of Buffet swooping it to take advantage of the "bargains". Sure the stocks can be run up, but the stock market has a mind of its own.

Again, I expect "emergency fund requests" for the FDIC (federal deposit insurance) as the situation devolves.

******************

In an exclusive interview with CNBC.com, Wilbur Ross, chairman and CEO of WL Ross & Co., says he sees possibly as many as a thousand bank closures in the coming months. And this will create opportunities for investors.

"I do think a lot of the regional ones will (close), just as they did in the last savings and loan crisis in the 1990s," Ross said.

Ross says he will be looking to pick up smaller distressed institutions. "There will be opportunities, but we will need federal assistance in them, because what we're mainly looking for is stable sources of deposits, not so much the loan portfolio."

Ross feels that there will be too many people willing to provide capital to the large financials, which makes them less of a bargain than smaller banks.


Quite a Reversal in China - Central Bank Cuts Interest Rates

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Very interesting reversal overnight in Asia. After fighting inflation and trying to slow runaway growth for years, the central bank of China cut rates for the first time in 6 years. This should be a net positive for the "global growth" stocks - but not today. If oil could fall to $80 or so, perhaps Europe will join in and then when the US cuts rates we can have an "easy money" world again.... wait, wasn't that the nexis of this current fractured bubble? Nevermind that - we can deal with the problems this will cause in 2014. For now we cheer rate cuts (CNBC cheerleaders already talking about 50 basis point cut "needed") :)
  • China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dimmed the outlook for economic growth.
  • The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point.
  • The slowest inflation in 14 months has given China room to cut borrowing costs and protect jobs in the world's fourth- largest economy.
  • ``Policy makers see the probability of a recession in the U.S. is higher now, so the outlook for Chinese exports has deteriorated,'' said Darius Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. ``This is the beginning of an easing cycle in China.''
  • Inflation cooled to 4.9 percent in August, export growth slowed and industrial production expanded by the least in six years, according to data released last week. China's economy expanded 10.1 percent in the three months to June 30 from a year earlier, the fourth straight quarter of slower growth.
  • The property market could be headed for a ``meltdown'' as home prices and sales decline, Morgan Stanley said Sept. 12.
  • China's policy makers have already loosened loan quotas -- restrictions on how much banks can lend -- and raised export-tax rebates for garments and textiles to help exporters and small businesses.
Remember, China is a 30+ year bull market - which will have serious pullbacks along the way. This is one of them, but if you have a 10 year horizon valuations are now getting interesting - as opposed to the mania we saw last fall. It will be interesting to see if India joins in over the coming months.

What's Holding Up Today

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One of my favorite screens to run is to see what is holding up during bad tapes - I'm a relative strength guy at heart, so strong stocks in a bad market are always interesting to me because it shows either new buying or a steadfast investor base. Below are the list of today's winners - using our normal weekly criteria, and a market cap of $1.25 Billion or higher. Here are 54 stocks up 2% or more - most are plays on falling oil (airlines/transport stocks), some regional financials (strange), and retail (remember, the consumer is back at $3.79 gas)

(as an aside remember there are 2 key areas the PPT will be protecting: S&P 1215 which was the closing low on July 15th and S&P 1200 which was the intraday low/psychological support as a "big round number" - if we close below 1200 we have to get more bearish - but until then we assume every drop will be followed by bounces. 1215 has been defended very well by the power that be.)

Symbol Company Name % Price Change Today
MER Merrill Lynch & Co Inc 25.8
AMR AMR Corp 8.8
UAUA UAL Corp 8.4
CAL Continental Airlines Inc 7.4
GHL Greenhill & Co Inc 6.7
PNRA Panera Bread Co 6.3
LDG Longs Drug Stores Corp 5.9
AMLN Amylin Pharmaceuticals Inc 5.0
ODFL Old Dominion Freight Line Inc 4.6
BLK Blackrock Inc 4.6
ACE ACE Ltd 4.4
REGN Regeneron Pharmaceuticals Inc 4.4
EXPD Expeditors International of Washington 4.1
FAF First American Corp 4.0
KNX Knight Transportation Inc 3.9
FFH Fairfax Financial Holdings Ltd 3.8
ORLY O'Reilly Automotive Inc 3.8
LSTR Landstar System Inc 3.8
ITG Investment Technology Group Inc 3.7
WERN Werner Enterprises Inc 3.6
RNR RenaissanceRe Holdings Ltd 3.5
JBHT JB Hunt Transport Services Inc 3.4
NATI National Instruments Corp (Texas) 3.4
BX Blackstone Group LP 3.4
ZION Zions Bancorp 3.2
RE Everest Re Group Ltd 3.0
JEF Jefferies Group Inc 3.0
STZ Constellation Brands Inc 3.0
COLM Columbia Sportswear Co 2.9
CB Chubb Corp 2.8
WU Western Union Co 2.7
TRV Travelers Companies Inc 2.7
LIHR Lihir Gold Sponsored ADR 2.7
SIGI Selective Insurance Group Inc 2.7
NWA Northwest Airlines Corp 2.6
CPRT Copart Inc 2.6
FNF Fidelity National Financial Inc 2.5
ASBC Associated Banc-Corp 2.5
BKE Buckle Inc 2.5
AEM Agnico-Eagle Mines Ltd 2.4
COH Coach Inc 2.4
VR Validus Holdings Ltd 2.3
DECK Deckers Outdoor Corp 2.3
CCL Carnival Corp 2.3
NYB New York Community Bancorp Inc 2.3
HTLD Heartland Express Inc 2.3
CREE Cree Inc 2.2
AHL Aspen Insurance Holdings Ltd 2.2
PTP Platinum Underwriters Holdings Ltd 2.1
WABC Westamerica Bancorp 2.1
MRH Montpelier Re Holdings Ltd 2.1
NTY NBTY Inc 2.0
DLTR Dollar Tree Inc 2.0
NFLX Netflix Inc 2.0

Bookkeeping: Adding to Blackrock (BLK) on Merrill Lynch (MER) Buyout

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One of my fears with Blackrock (BLK) was once shorts jumped on the Merrill Lynch bandwagon to make it the next Lehman, it would be forced to sell it's stake in Blackrock. This speculation caused a lot of damage to Blackrock earlier in the year [Jul 17: Blackrock Earnings Excellent as Usual; Merrill Won't Be Selling]

Now it might seem strange to buy one of the few stocks "up" in a bad open, but since my timeline is longer than 48 hours (most people buying the damaged stocks will "flip" them out in a few hours and are just daytraders at this point), I think this is now a huge positive and Blackrock can continue it's business of being a dominant financial. I would not be surprised to see the government giving it much of Lehman's balance sheet to liquidate as it has been doing with Bear Stearns.

I'm upping the stake from 0.6% to 1.2%

Long Blackrock in fund; no personal position


Foster Wheeler CEO on Mad Money

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Is is too bad the CEO is retiring - everytime I hear him talk it inspires a lot of confidence - much like Blackrock's Fink or Potash's Doyle. Full story here. It is truly sad to watch this stock get pole axed while not one thing has changed for the business. HAL9000 hates Foster Wheeler (FWLT)

********************

Infrastructure giant Foster Wheeler in 2006 reported record earnings. The next year the company doubled that. Now, two quarters into 2008, earnings are up another 35%. But still, the stock has been cut in half.

Apparently, Wall Street’s afraid that falling energy prices have either prompted project cancellations or are holding back new business. That’s why Foster Wheeler [FWLT 40.37 -1.95 (-4.61%) ] CEO Ray Milchovich today announced a $750 million buyback, an amount equal to about one-eighth of the company’s total capitalization right now. As a result, the stock rose $4.02 in Friday trading, or 10.5%.

Milchovich called the move “prudent” given that FWLT, despite having virtually no corporate debt and $1.3 billion cash at the end of the second quarter (this is company with a $6 billion market cap), is being treated like it was a financial stock. At one point this week, FLWT was trading at just 6.5 times earnings.

That’s beyond cheap for a firm that’s experiencing no project delays or cancellations despite falling energy prices. Foster Wheeler builds infrastructure for energy, chemicals, pharmaceuticals and power companies, and the CEO said that business is going strong. If anything, Milchovich said, the only issue is the Foster Wheeler doesn’t have all the capacity it needs to meet the market demand.

Besides, Foster Wheeler’s business is most successful in parts of the world where energy is most abundant. The company does well in Australia, parts of Asia and the Middle East. And these countries have pre-sold the energy they’re producing, Milchovich said, “so it’s impractical for these projects to be cancelled.”

Still, there are doubters who believe that, while Foster Wheeler isn’t experiencing cancellations, the declining energy prices are preventing the company from booking new projects. But Milchovich denied this was the case, saying that business orders start at a proposal stage. So there are a few months between first offer and contract. And the CEO has seen no “material change” whatsoever in either the proposals or the eventual orders.

“Our long-term outlook is very, very, very robust,” Milchovich said. “And if it weren’t, we wouldn’t have announced the buyback program this morning.”

Foster Wheeler is just one of the many commodity-related stocks that Cramer has said is being hurt by hedge funds. Funds desperate to raise cash for client redemptions are dumping millions of shares at a time into the open market, bringing down FWLT even further. But this new buyback now gives these hedge funds “a place to go,” Cramer said, saving the stock from more damage.

Cramer thinks Foster Wheeler goes higher.

Historic Times

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What can I say - we are simply living through times that books will be written about in the future. My jaw was on the floor during 3 hours of Sunday night CNBC as announcement after announcement came through the the wire.

The Plunge Protection Team is working overtime to hold S&P 1200. We will hear how amazing it is the market can absorb all this bad news and not take a big loss. Let me tell you - in a week's span we've had
  1. Fannie, Freddie bailout
  2. Lehman bankruptcy
  3. Forced marriage of Merrill and Bank of America
  4. AIG crumbling
  5. A series of initiates by the Federal Reserve over and above everything they've done in the past
And the stock market is flat from where it was before all this happened.

I'm not rooting for shorts, but this is truly not a free market. How the market can be "flat" in all this is hilarious. I truly would not be surprised if the market is up by tomorrow or in a few days as your tax dollars go hard to work buying S&P futures by the bushel behind the scenes. If you are not familiar with the Plunge Protection Team and their "workings" I recommend reading this [Jul 14: Our Gospel is Spreading - Jim Cramer References "The Hand"]

I cannot even begin to go through all the "changes" made in the system Sunday night. I will tell you the most alarming is the change in collateral that the Federal Reserve is now exchanging for Treasuries. Back in the early spring during the last round of dislocations the Federal Reserve said we'd widen what we accept from "AAA rated safe" type of product to credit card debt, auto debt, student debt, etc - AND they lengthened the time they'd exchange this with the banks - up to 84 days (in the "old days" it used to be an overnight loan). They said it's just a temporary measure, until credit markets improve. I said "yeh right". Now we've gotten to the point they will accept EQUITIES (stocks!!!) in exchange for US Treasuries. So what happens if stocks plummet in those 84 days? Are you kidding me? We now are letting banks offload their stock holdings into the balance sheet of America?? This was one of multiple jaw dropping moments.
  • The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s plans for bankruptcy.
  • The Fed will now accept equities in the Primary Dealer Credit Facility, its program for lending cash directly to securities firms, in addition to investment-grade debt. Collateral for the Term Securities Lending Facility, which auctions loans of Treasuries, will now include all investment- grade debt securities.
  • The Fed also granted an exemption on a rule that limits banks' transactions with their brokerage subsidiaries, a move that provides securities dealers with another source of funding if they need it for market making this week
I keep using the word historic. It keeps becoming even more surreal.

[Jul 30: Federal Reserve Continues its Historic Actions]
[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]
[Mar 16: Fed Races to Rescue Bear Stearns]

Sunday, September 14, 2008

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 6

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Year 2, Week 6 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash (1 position [SHV] + cash): 34.9% (vs 24.3% last week)
39 long bias: 47.5% (vs 65.7% last week)
7 short bias: 17.6% (vs 10.0% last week)

46 positions (vs 63 last week)
Additions: MFA Mortgage Investments (MFA)
Removals: Illumina (ILMN), Gafisa (GFA), Baidu.com (BIDU), Millicom International Cellular (MICC), Perfect World (PWRD), Sohu.com (SOHU), iPath DJ Livestock ETN (COW), Cleveland Cliffs (CLF), Atwood Oceanics (ATW), Apple (AAPL), Research in Motion (RIMM), China Medical (CMED), Energy Conversion Devices (ENER), Cummins Engine (CMI), Flowserve (FLS), Ultrashort Technology (REW), Ultrshort Consumer Services (SCC), DB Agriculture Double Long (DAG)

Top 10 positions = 25.2% of fund (vs 27.3% last week)
38 of the 46 positions are at least 1% of the fund's overall holdings (70%)

Major changes and weekly thoughts
Sign of the times, both CNBC and FOX Business have special 8 PM Sunday night live editions - free market capitalism works 7 days a week in the new era. Impossible to gauge anything in this market where outside forces mean more than fundamentals so there is not much to say. Now we are hearing stories that instead of Lehman, Bank of America (BAC) is in to save Merrill Lynch (MER) because people know that's the next place the shorts will show up - so a "preemptive move" to draw a line in the sand seems to be the plan to keep the financial system intact.

For the fund, we shrank shrank shrank. And then shrank some more. In past weeks we cut back to high levels of cash but kept a lot of positions at the bottom of the portfolio but this week we cut the vast majority of those out (many were at 0.1% allocations). Just a tough market to make consistent money on the long side, and the days many of these stocks go down the losses are far greater than days they go up. Further, in this "one stock is the same as others" in the same sector, owning multiple names and deciphering the differences between each seems to not be a worthy cause at this time. The market looks to me as something very dangerous right now as there still appears to be mountains of denial, and people are looking for the government to bail them out instead of assessing companies on fundamentals. We can't short individual names although we've named names - so in the current situation cash or broad based ETF shorts (which reverse every 48 hours it seems, as opposed to some individual names which are down consistently) are the only alternatives.

Again, hard to give any sort of forecast or thoughts since everything seems to news driven and so reactionary. Worldwide futures look terrible but hey, that could reverse 180 degrees by Monday morning, or if not Monday we'll completely reverse Monday's huge fall with a huge rally Tuesday for some made up rationale.

I don't know about your local market but I'm wondering how the "consumer is coming back" trade works when gasoline is (temporarily) back up to $4.19+. Maybe he will take a few weeks off before his buying splurge of the past 6 weeks (when gas was $3.69-$3.89) returns. Now if you excuse me, I have to go watch the best drama on TV - the U.S. government and financial markets aka Dancing with the Bureaucrats.

The larger weekly changes (chronologically) to the fund below:
  1. Monday, homebuilder Lennar (LEN) jumped to $16, we cut the stake from 1.7% to 0.1%, near $15 confidant that this market with no memory, and only catering to daytraders would punish the name soon enough and we could get the stock back lower. Sure enough the traders abandonded the trade to move to something else to play for 4-5 hours and the stock went into freefall - we were able to buy back the shares we sold near $13 within 24 hours. And that pretty much sums up the stock market these days.
  2. We reduced EZCORP (EZPW) as the stock spiked up on news of a new acquisition, and locked in some gains.
  3. We continued the liquidation of smaller positions that we started Friday of the previous week - we sold Illumina (ILMN), Gafisa (GFA), Millicom International Cellular (MICC), Baidu.com (BIDU), and Perfect World (PWRD) - I continue to like these names but the charts have been showing poor performance. We'll consider buying some of these back either on sustained strength or a washout type of panic bottom. Some of these seem oversold and could have some bounces at least but are below all technical levels so would be considered shorts on their bounces.
  4. Tuesday, we closed 3 more positions - Sohu.com (SOHU), Cleveland Cliffs (CLF), and iPath DJ Livestock (COW) - the latter 2 being commodity stocks which at this point we can get the exact same return by holding other instruments since the market is treating them all as one stock.
  5. One stock doing well for us has been retailer Buckle (BKE) - it's had a 20% run in 2 weeks so we locked in those gains - unfortunately it was only a 1.6% stake so not a huge effect on the fund. We reduced it to 0.6%.
  6. We closed Atwood Oceanics (ATW) - again nothing company specific but they might as well rename the company Atwood Crude Oil, Atwood Iron, or Atwood Fertilizer.
  7. Wednesday we continued the pattern - 5 more names out the door: Apple (AAPL), Research in Motion (RIMM), China Medical (CMED), Energy Conversion Devices (ENER), Cummins Engine (CMI). The former 2 are really acting poorly even on up days for the market which I continue to find very troubling as they are the "tech leaders" - I can only assume some liquidations are being forced upon these positions. I suspected in the blog entry that ENER could bounce, but we partook in the bounce with our other solar exposure.
  8. We saw a dramatic 2 day drop in Sequenom (SQNM) - at this point I just assume everything is a hedge fund seeing redemptions or being forced to reduce leverage. The stock dropped below the 50 day moving average on heavy volume which worried me, so I cut it by 2/3rds. Later in the week the stock bounced back to close above the 50 day - so this one could go either way now on a technical basis. I bought back a bit later in the week a bit higher than where I sold out - but have this one on a short leash.
  9. We restarted a position in MFA Mortgage Investments (MFA) after a huge bounce post Fannie/Freddie bailout, and then a retracement to fill the gap in the chart. This is just a play on the spread between money borrowed and the yield on instruements. Those instruments just went from implicitly guaranteed by the US government, to explicitly.
  10. Thursday, we closed Flowserve (FLS) - I wish they'd announce a buyback because right now they might as well be Jacobs Engineering Group (JEC), Fluor (FLR), or Cummins Engine (CMI) - the market treats them all as one.
  11. We closed 2 Ultrashorts as 9 was too many to manage in this market where you have to trade in and out of positions every 48 hours or else they completely reverse on you and take away the previous 48 hour gains. Ultrashort Consumer Services (SCC) we had doubts from the beginning since its top 2 holdings are some of our favorite stocks, Walmart (WMT) & McDonalds (MCD), and Ultrashort Technology (REW) is more or less an overlap with the general market - when the fall, so does REW by just about the same amount. So it's not really value added.
  12. Friday, same thesis as the trend of the week - closed DB Agriculture Double Long (DAG)
  13. There was weakness to close the week in retail, which was the strength in the early part of the week. This is part of the 24-48-72 hour rotations - consumers were frowned upon after a "reality check" report of consumer spending was announced. However, memories are short and just like job loss reports are forgotten by the following Monday, this report will be forgotten and the consumer wil "be back" by sometime next week, driving these stocks up. After which they will be driven down a few days after. After which they will be driven up as the consumer comes back. Anyhow we added back to some Buffalo Wild Wings (BWLD) as one of our proxies for the "consumer" after a big down day Friday.
  14. Commodities/global growth rallied for nearly 2 days, which is a "long term" move, in the current market - so I took some off the table across the board late Friday.
The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows


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