Tuesday, September 30, 2008

Roubini on the Bailout - Thumbs Down

Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, Paraguay - the United States of Subprime now joins you. Nouriel Roubini scoffs at this version of a bailout with some nice statistics; I'll defer to him since I'm not a historian but if Roubini says no, I say no! :)
  • Is Purchasing $700 Billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is rather a disgrace and rip off benefitting only the shareholders and unsecured creditors of banks.
  • Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system.
  • Such recapitalization – via the use of public resources – can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities.
  • A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets.
  • Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. (But in the United States of Goldman Sachs we are told executives won't partake if you hurt their compensation or give away equity! ok ok we'll bend on giving away equity because that only hurts the corporation and not the CEO's personal wealth)
  • But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).
  • In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico). (but it enriched the Dept of Treasuries friends the most! Wait, that's just in the U.S.)
  • Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. (hmm, why am I getting flashbacks to 2003) This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy. (Hammer, don't hurt 'em)
  • So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.
  • Indeed, the plan also does not address the need to recapitalize those financial institutions that are badly undercapitalized: this could have been achieved by using some of the $700 billion to inject public funds in ways other and more effective than a purchase of toxic assets: via public injections of preferred shares into these firms; via required matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; via suspension of dividends payments; via a conversion of some of the unsecured debt into equity (a debt for equity swap). All these actions would have implied a much lower fiscal costs for the government as they would have forced the shareholders and creditors of the banks to contribute to the recapitalization of the banks. (I think this comes next but after our current Treasury Secretary of the United States of Goldman Sachs "retires" after Jan 1 - gotta help his brothers out first)
Conclusion Nouriel i.e. how do you really feel?
  • Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. (shocker) And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.
Other than that, he found the plan to be wholesome, fair, and excellent. As I said, expect the government to be coming with hands out (or taking action in their own hands without asking US voters) in the next iteration of the mother of all bailouts v2.0

He does bring up a great point. Where were all the counterpoints and varying views during that 2 day dog and pony show i.e. Congressional hearings?

If you are interested in the Swedish plan, the NYTimes had a solid article here. Just keep in mind we've chosen the Jamaican plan instead ;)

[Sep 15: Nouriel Roubini with a Series of Videos on Yahoo Tech Ticker]
[Aug 20: Nouriel Roubini: "Told you So"]
[Mar 13: Scary Stat of the Day: Roubini Calling for $1 Trillion - $3 Trillion in Losses]

Market Madness

It looks like I need to pull out my "This is Madness" Clip again from yesterday.

I remember remarking sometime in 2006 or early 2007 that the market was so lacking of volatility. There was some historic streak where the S&P 500 never gained or dropped 2%+ for some inordinate amount of time - it was something like a year and a half I believe off of memory.

Then we started getting 2% moves all the time by mid 2007 and we thought it was nuts. Then the 3% moves began. Now in the past 3-4 weeks I think we've had approaching 8-9 days of 4%+ moves. 4%!

The market is clueless, without direction, and under the spell of Washington - this sort of movement is simply mad.

Would it surprise you if the market was up for the week? Why not? I mean down 8.9% on Monday for the S&P 500 (which I had not realized was the WORST day for the S&P since Black Monday 1987) and up 5.whatever today... heck that just means we need to pull a +4% the rest of the week and "magic" - Monday never happened. Quite pathetic. Last week we were down 8%ish on Monday and Tuesday and finished near flat!

Again, this place is now a casino of the highest order - it always has been, but now it's like a casino injected hourly with steroids and HGH. (Jose Canseco was there during the injections, he swears) Investors have been rendered "old fashioned" (you use fundamentals? hahaha) for months on end, and dice throwers rule. Now we await every day/week/month to see what the house (government) does to change the rules at the casino. Layer on top of that the quant computers [Cramer - Quants and their Machines] and the Ritalin impaired hedge fund traders from some larger funds rushing in and out of positions 20x a day and this is what we are left with. I can only imagine how many individual investors simply throw their hands up and give up on this circus. Congrats if you are a daytrader because I'm sure this is the time of dreams - for the other 99.9% of us, this is just a joke. You need to be 100% cash by 4 PM in this environment. Every position is a 50/50 probability. No advantage for thinking. Just "motion".

BB&T (BBT) CEO Slams Bailout

Well, this sort of truth telling (even if the bailout "is" necessary) puts BB&T (BBT) up at the top of the list of larger regional banks to buy for the "financials are back" sector rotation along with Wells and PNC Financial. Nice! Bank on bank hate is interesting to read ;) Obviously everyone is talking "their book" so you must read everyone's viewpoint with multiple grains of salt.
  • A significant and immediate tax credit for financial institutions to purchase homes would be a more effective solution for the financial crisis than the proposed $700 billion federal bailout, said BB&T CEO John Allison. The federal government should also buy homes, and not securities backed by mortgages, he wrote in a Sept. 23 letter to the U.S. Congress. (I said this would be one of the end games last year)
  • “This is a housing value crisis,” Allison wrote. “It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds.”
  • In his letter, Allison questions how the government will pay the proper price for distressed real estate assets. Overpaying will harm taxpayers, while underpaying will hurt real estate markets (and banks). (this is a point we've made in the blog)
Now for the kicker
  • He adds the primary beneficiaries of the proposed rescue are Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS). The U.S. Treasury, he says, is “totally dominated by Wall Street investment bankers,” and “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries.” (oooohhh the truth, it hurts!)
  • Allison also said it is “inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.” (Bingo - we broke the vase, let us figure out how we can best benefit from rebuilding said vase)
  • BB&T is a $136 billion banking company with 1,500 branches. Although the company (NYSE:BBT) has been hurt by the slowing real estate markets, it continues to turn a profit. It posted second-quarter net income of $428 million, or 78 cents per diluted share. It made $458 million, or 83 cents per share, in the second quarter of 2007.
  • Allison is scheduled to retire at the end of the year. (bummer)
Here are some other points I found from his letter to Congress - interesting reading even if I don't agree 100%.

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

  1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
  2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
  3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
  4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
  5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
  6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
  7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
  8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.
  9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
  10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
  11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
  12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
  13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
  14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

No position

Birmingham News: Regions Financial (RF) "Guilt by Association"

Hard to take any CEO for face value considering Wachovia (WB) CEO was on Mad Money two weeks ago saying "it's all good" - and then yesterday was brokered in an emergency deal at $2 a share... but...
  • Birmingham-based Regions Financial Corp.'s stock plummeted 41 percent on Monday, but CEO Dowd Ritter expressed confidence in the strength of his company's Main Street business amid turmoil on Wall Street. "You hear all this Wall Street, Main Street talk. We really are a Main Street bank," Ritter said, adding that the bank services consumers and small businesses across its 16-state footprint. "We're not tied up with massive multibillion-dollar agreements there on Wall Street."
  • Ritter noted that while other banks are writing off billions every quarter, Regions has so far made about a half-billion in profit this year. "There's a pretty simple reason," he said. "We always have taken a very conservative approach to our business. At times, we may not be doing what is in vogue, but that plain vanilla banking plays very well in times like this."
  • Ritter said Regions is well-capitalized by regulatory standards, as evidenced by its recent takeover of the failed Georgia-based Integrity Bank last month, at the request of the Federal Deposit Insurance Corp. (yes that's why I bought the stock - only to lose 40% in 1 day, but back up 25% today - what a casino) "We are a safe harbor, if you will, for deposits," he said.
  • He also noted that Regions is not burdened with exotic securities and risky mortgages that have prompted the demise of other institutions. Regions has few subprime mortgages in its entire portfolio, he said. "All that said, it doesn't matter whether we're lucky or smart, we've avoided the real troubled areas that are plaguing many in this industry," he said.
  • Industry watchers acknowledged the growing concern about Regions' health, adding that the Wachovia news likely dragged down the bank's stock on Monday. "Regions keeps telling us they don't have these same problems, and only Regions and the FDIC know for sure," said Andreas Rauterkus, associate finance professor at the University of Alabama at Birmingham's business school. "You are guilty by association these days in the financial industry, so you never know." (unless you are Wells Fargo or JP Morgan)
  • Ritter said that on Friday, the bank had one of its largest deposit growth days in his career, as people brought over their money from other banks amid worry about the health of those institutions. "What people generally want to know and should be concerned about is: Is their bank strong; is it profitable, and is their business going to be safe? At Regions, the answer is absolutely yes," he said.
I'm sticking with what I have left of Regions although I am unclear how much longer my stomach will be sticking with it. As best as I can tell it's profitable, has a "relatively clean" book but none of the respect going to some of the larger players. But in reality with banks it's about trust these days - nothing else. I would like to see it back over $11 for technical reasons.

Long Regions Financial in fund and personal account

Analyst Keep Trying to Defend Mosaic (MOS)

I did a very shoddy back of envelope analysis yesterday on Mosaic (MOS) in terms of cash flow and the ability to completely but back all its shares ...

Only 68 more points down for Mosaic before it gets to zero. I think down from 6x earnings to 5, do we hear 4? Looking at their balance sheet last quarter they had $2 Billion in cash/equivalents versus $1.6B in debt - so net $400M. Their cash flow was $1 Billion in 1 quarter alone. With realized prices higher this past quarter than the previous they should generate even more than the $1 B in cash last quarter. This will allow them to reduce their debt significantly and be somewhere around $1.5B cash net of debt. And add at least $1B every quarter after for quite a long time. With a $30B market cap starting in 2009 they should be able to generate $5B in cash a year which in theory means they can buy back 1/6th of the company every year, and by 2015 be private ;)

...see unlike some companies losing 50% of value in 1 quarter, others actually have tremendous stories and huge cash flow - even if fertilizer prices drop 25% from here the cash flow will be immense. It has not mattered as hedge funds who are levered seem to sell at any price due to redemptions but if this continues either buyouts will happen or the companies will declare huge dividends and/or take themselves private. At some point valuation does matter again - there are real businesses out there - these are not just stock symbols for hedge funds to trade in manic nature. It looks like an analyst agrees with me today (or is an avid blog reader) ;) I keep saying some of these valuations are absurd, but the stocks just keep going down - it is truly amazing. I am now wondering if these companies will soon begin to trade lower then their cash on hand.
  • Shares of Mosaic Co., the world's largest phosphate producer, jumped Tuesday, a day after a sharp selloff that left analysts relatively upbeat on the company's share price. The stock has lost about half its value since mid June.
  • On Tuesday, analysts cited Plymouth, Minn.-based company's attractive valuation. Soleil Securities analyst Mark Gulley estimates that Mosaic generates a robust free cash flow yield of about 16 percent. Free cash flow, or operating cash flow minus capital expenditures, measures a company's ability to generate cash and reward owners. It also is more difficult to manipulate than net income.
  • Gulley also said that with shares trading at three times the company's earnings before income, taxes, depreciation and amortization, a buyout of the company could be paid for in three years.
  • Citi Investment Research analyst Brian Yu reiterated his "Buy" rating on the shares and his "positive long-term position on the North American fertilizer market."
I don't have a copy of the report but I am wondering if the statement above means, if a company bought Mosaic, the cash flow would literally pay for the entire bill in 3 years? Not sure. Either way, in this new environment cash is king so despite the relentless selling, we want companies that generate cash like mad - which the fertilizer companies will at this price of their products, or 20-40% lower. Again potash (the nutrient) has not budged one iota (yes the other two nutrients show some signs of weakening as some readers have pointed out - but not dropping 50-60% like the stock price). Again it is all relative. Much like people are running away from global growth stocks since their growth rates are falling from 60% year over year to potentially 20-30% year over year - that's still not all bad. Especially when they are running into stocks shrinking 15% a year, hoping to once again grow 10% a year.

But that's logic, and we don't use that around here anymore. I will look forward to tomorrow's earnings report and have hopes the company will take steps to defend its stock. Obviously the chart is a disaster and people will be shorting once its rebounds to a resistance level (and true to form we'll have to sell assuming the worst once we hit those levels - since the worst has come to fruition over and over since July 1)

Long Mosaic in fund and personal account

EZCORP (EZPW) is on Fire Lately

Who benefits in a society lacking credit? Pawn shops.

You wouldn't know there is any market turmoil by looking at EZCORP's chart... too bad I don't have much of it left in the portfolio. Nice run the past few days. It stood out like a sore thumb by actually being up yesterday in the carnage.

[Sep 8: EZCORP Acquires 11 Pawn Shops in Nevada]
[Aug 11: EZCORP Down 8% on Termination of Value Financial Deal]
[Jul 24: Cash America (CSH) and EZCORP (EZPW) Both Report Today - Starting Small Stake in EZCORP]
[Jul 10: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]
[Jul 7: Missed Opportunity in Cash America]

Long EZCORP in fund; no personal position

I Missed Wells Fargo (WFC) Again

I need to learn to put a limit order in for Wells Fargo (WFC) - I was watching it yesterday to buy and it held up almost the entire day - then in the last 15,20,30 minutes it was pole axed 10% but was not around to see it. Today, of course it is right back up 9%. An upgrade today - remember folks, perception is reality. Wells is not immune from the credit crisis and has bad loans but is "perceived" to be a good player so money will flow to this name, no matter what the reality is. As long as big money is fleeing into the name, the realities on the ground mean little - it's all about money flow.
  • Robert W. Baird & Co. analyst David George on Tuesday upgraded shares of Wells Fargo & Co. to "Neutral" from "Underperform," citing the San Francisco-based bank's strong balance sheet. Though Wells Fargo is not completely sheltered from credit risks, George said, the bank will likely benefit from a "flight to quality," given its strong credit ratings, healthy capital position and willingness to lend in a difficult environment.
  • "We believe the challenges in the credit markets and weak capital positions of competitors will continue to result in significant new business opportunities for Wells Fargo, and think the company will come out of the current credit cycle with an improved customer and employee base," George wrote in a note to clients.
If things continue to degrade in the credit markets, which I believe they will over time as housing prices "do not rebound" and the mother of all bailouts is found to be inadequate the U.S. will potentially turn to the nuclear option. Literally having the Federal Reserve (via FDIC) force feed capital into a chosen group of banks to expand their balance sheets exponentially - this will mean the "state" is choosing "winners and losers" (the old USSR has nothing on us!) but as we know, in desperate times, capitalism and free markets mean very little. I believe Wells Fargo will be one of those chosen for this ultimate solution. Lost in the fuss about this mother of all bailouts bill is a new provision for the Federal Reserve.
  • Even before the House stunned the world on Monday by rejecting the Bush administration’s bailout bill, the Fed was already resorting to the oldest action in its book: printing money. With money markets around the world seizing in fear, the Fed on Monday announced that it would provide an extra $150 billion through an emergency lending program for banks, and an additional $330 billion through so-called swap lines with foreign central banks to help money markets from Europe to Asia.
  • It was an extraordinary display of financial power, and it reflected acute new anxiety at the Fed and central banks around the world that the crisis of confidence in American financial markets had metastasized to money markets everywhere.
  • That was on top of the $230 billion the Fed borrowed last week so it could finance its previous efforts to prop up the American International Group and other institutions. But these are only the latest in a long series of jaw-dropping departures from normal policy that the Fed has undertaken this year as it seeks to inject vast amounts of capital into the financial system. And they are unlikely to be the last.
  • Even if Congress refuses to pass the bailout measure, there is more money where that came from. The Treasury Department has already created a series of “supplemental” Treasury securities to finance the Fed’s activities, and there is no limit to how many more it can issue and sell.
  • The central bank can expand its reserves at will, because it controls the money supply and can create more to buy things like Treasury securities and mortgage-backed securities. “We have a lot of money to play with,” said Kenneth Rogoff, an international economist at Harvard. “As long as foreigners have a lot of confidence in our ability to solve our problems, we can borrow the $1 trillion to $2 trillion we need to solve it.” But Mr. Rogoff cautioned that the real limitation for American policy makers is whether they can maintain the government’s long-term credibility. “The real constraint is not a bookkeeping one,” he said. “It is a sense of faith on the part of foreigners that the U.S. government will repay its debt. Our most precious asset is that credibility.” (I do believe sometime 20 years out the US will default on its debt and put us firmly in banana republic status - or are we there already? - 11 Trillion and counting on our debt load and we really have not even begun to scratch the surface on the Medicare issue. That's a problem for next decade and we won't address it until its a raging fire (i.e. "too late") as you can see with both our energy policy and our "credit" policy or our levee policy or our rebuilding bridges policy or name it and we don't do it until its broken policy)
  • "These are desperate times, and you're going to pull out some desperate measures," said Richard Yamarone, chief economist at Argus Research. "They're going to try to stretch every imaginable solution and initiative they have to right this sinking ship. But I don't know what they have left. They've already exceeded anything I believed that they could do."
Speaking of the "bottoming of the housing market" they keep insisting is right around the corner - not so much. And it won't be around the corner for a long time - affordability remains issue #1, [What Should Median Home Prices be Today?] and thrown on top of that is lack of credit availability and tighter standards, on TOP of the foreclosures waves - we have a long way to go. The measures are in fact, getting worse, not "bottoming" or moderating. The latest Case-Schiller data out this morning....
  • House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.
  • The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.
  • Compared with a year earlier, all 20 areas showed a decrease in prices in July, led by a 30 percent drop in Las Vegas and a 29 percent decline in Phoenix. ``While some cities did show some marginal improvement over last month's data, there is still very little evidence of any particular region experiencing an absolute turnaround,'' David Blitzer, chairman of the index committee at S&P, said in a statement.
  • Other reports show price declines continue. The National Association of Realtors said Sept. 24 that the median price of an existing home fell 9.5 percent in August from a year earlier, compared with an 8 percent drop in July. The following day, the Commerce Department said the median price of new homes fell 6.2 percent in August from a year earlier, following a 4.6 percent drop the prior month.
I think we will see new acts of desperation in the months to come. But from what I'm reading and hearing creating money, picking "winning banks", and flooding them with freshly printed US pesos sounds like the end game. This should be a bonanza for the "chosen" banks.

No position

Bookkeeping: Closing Fluor (FLR)

I am closing the last of Fluor (FLR), one of my favorite companies period, today. This stock has dropped 50% in just over a quarter on the "global slowdown" trade. Since I don't see the global economy recovering anytime soon, and it does not seem to matter how many times these global engineering companies reiterate business is fine and announce contract after contract, they get sold off. [Aug 12: Fluor to Hedge Fund Computers: The World Does not End at $110 Oil. Or $80. Or $50] It goes back to the main complaint I've had for months - fundamentals simply don't matter anymore and I simply cannot invest rationally in a market where facts mean nothing. While many of its customers are rich foreign governments (who have surpluses) and oil rich entities overseas, some portion of their customers still rely on the credit market which I suppose is the main risk I see here. But just about every risk known to man is now being priced into these stocks. Unbelievably the stock traded as low as $46 yesterday, so with the stock back up to $52 I am going to exit. I see upside to $60 but then the chart says it is a short again so it's not worth those $8 in this market. As I've said before this whole global/commodity trade might as well be one stock - they are all treated the same regardless of independent fundamentals. Until that changes I find this sector uninvestable. All you can do is trade these stocks, and there is no need to own 15 when really 1-2 will do. Frankly it is quite disheartening to watch a natural gas stock treated no different from a global engineering stock. Or that no amount of good news can push a stock up [Aug 11: Global Infrastructure Night in Earnings] [May 16: Fluor as a Wind Play? $1.8 Billion Says Yes] [Jul 9: Fluor vs Perini - a Rising Tide does not lift all Boats] [Feb 28: Fluor with Great Report and Boosts Guidance]

I am closing the 0.8% position in Fluor just north of $52. I have owned this one twice, and restarted the position in February 2008 in the (split adjusted) $77s. Thankfully we sold quite a bit in the (split adjusted) $80s and $90s, so we still left with a profit of $800. Fluor is a company that is a central figure in the modernization of the Asian world, along with thirst for energy in the Western world. I plan to own it again once the market begins to recognize the world will not end, and not every country is in as bad of shape as the U.S. Not that valuation matters but the company now trades at under 15x 2008 estimates for the best of breed operator in this space.

No position

Monday, September 29, 2008

Go Figure

EDIT 4:30 PM: Ouch. How the heck could I be calling for all these bad things since day 1 in the blog, and the one day everyone else wakes up to it, have a 3% short exposure. The market is cruel (and unusual). Now we have to turn from 18 hours of CNBC coverage to 24 hours straight - and watch Asia implode overnight. Great. I'm still going to watch Prison Break and CNBC cannot stop me. Ok, I'll watch both... from the cold linoleum floor. p.s. the fund beat the S&P500 by 3%+ today... yet lost 5.7%. Now that's a rough day.

Since January 2008 I have never had my short exposure lower than 10%... most of the past 3 months I've had it in the 22-27% range. The one day I lift the short exposure, the market decides to go down 6%. This is the irony of life :)

Down 6.6% on the S&P 500 as I type this, we now are reaching the next support level... once a support is broken (1165-1170) the market falls immediately to the next (1135)

For those interested, if this level breaks, next is 1100 which takes us back to fall 2004. Then it looks to be 1055/1060 level from summer 2004.

Below that you don't want to know... 2003 was a year the market basically went straight up, which means it created very little support levels. There is a little something there around the 960s, and then below that is decade lows, below 800.

Whistle while you work... 2008 is starting to look a lot like 2002. For those of you around in 2002, you know that was a a most unkind period. If you were not around please read on [Jan 18: Bear Market? This is Nothing Kids!]

Wow - just saw Congress did not pass the bill?? No wonder the market just fell off the cliff. So this is what it is to live history. I'd much rather read about it, than live it! Yikes. I still think this thing passes as there will be deal making and arm twisting (look, please vote yes and we'll vote yes on your next earmark) It appears there was so much voter outrage and people want to look like they are on the side of the voters. And too many went that way on the first count. I still predict they'll arm twist 11 votes and get this passed. Dare they mock the market gods?? When (if) that happens let's see how the market reacts.

Ah... just analyzing stocks on their fundamentals is so quaint a notion. Can't wait for 2011 when it comes back in vogue ;)

The current Emergency Economic Stabilization Act vote tally comes at 207 for the plan, 226 against, with one vote remaining. A total of 218 votes were needed to pass the vote. House members can still change their vote, and as a result the number of yes votes did tick a few points higher.

Democrats voted 141 for, 94 against. Republicans voted 66 for, 132 against.

This is Madness. Even Constellation Energy (CEG) which has a $26.50 buyout offer from Warren B is falling to mid teens? This sums up the past year.

Bookkeeping: Buying more James River Coal (JRCC) and Mosaic (MOS)

Apparently we are going to return to the stone ages... or at least pre 1840s (or whenever coal became "cool")

Or more realistically hedge funds across America are blowing up and blowing out stock at any price. Mosaic has now given back a year of gains. At some point these fertilizer companies are going to take themselves private and/or a Rio Tinto or Vale would be smart to pick them up.

We continue to layer in - I can't believe 1 week ago I closed 2 coal positions and sold out 99% of JRCC at $36. How quickly things change. Again JRCC is not our favorite but we decided to simply consolidate the "coal" position into 1 stock

JRCC we bought in the $20s
MOS in the $68s

Only 68 more points down for Mosaic before it gets to zero. I think down from 6x earnings to 5, do we hear 4? Looking at their balance sheet last quarter they had $2 Billion in cash/equivalents versus $1.6B in debt - so net $400M. Their cash flow was $1 Billion in 1 quarter alone. With realized prices higher this past quarter than the previous they should generate even more than the $1 B in cash last quarter. This will allow them to reduce their debt significantly and be somewhere around $1.5B cash net of debt. And add at least $1B every quarter after for quite a long time. With a $30B market cap starting in 2009 they should be able to generate $5B in cash a year which in theory means they can buy back 1/6th of the company every year, and by 2015 be private ;)

Added a bit to Potash (POT) as well since I know CEO Doyle is buying back shares and there is one entity worldwide with cash in a creditless world - governments.

The only thing worse than masses of humanity peeved at losing 30,40,50,60% of their investing net worth, is a hungry populace who has lost 30,40,50,60% of their investing net worth. Potash prices have simply not budged one iota in the past 4 months - oh well, darn the logic.

JRCC up to a 3.9% stake
MOS up to a 3.6% stake
POT up to a 2.0% stake

Tomorrow when they are all down 10-20% we'll add another batch. Or I could buy some of these bulletproof (too big to fail) banks at 18-21x earnings I suppose

Long all names mentioned in fund and personal account

Bookkeeping: Can't Afford to get "Wachovia'd" - Cutting some Regions Financial (RF)

Well, the FDIC showed confidence in Regions Financial (RF) but the market is in panic mode for many mid and small sized banks. Only the largest appear to be good enough for the socialistic government to protect so without the umbrella of the government protection it appears its sell, sell, sell.

To whit...
Capital Corp (CCOW) -65%
Sovereign Bancorp (SOV) -47%
National City (NCC) -47% (we said this one should of been folded this weekend by the FDIC last Friday)
Fifth Third (FITB) -35%

The latter two are Ohio based, Midwest banks - and let me tell you the economy here is a lot worse than wherever you are.

Not out of panic but just for the fact an emotional market can do very bad things, I have cut part of the Regions Financial position through the morning - it is now down 30% for the day falling to the $9.90s. This was not an "investment" but a trade. Unfortunately that trade has downside to $8 (or heck $0 I suppose in this market) It could be down another 50% tomorrow on nothing other than fear. Can't take that chance with a 5% type of position.

I took 1000 shares out at $11.42 and 750 shares out at $10.99, so half the position dropped. 1750 shares left.

Still have half the position on; if it breaks below $7 we just have to hit the eject button since that will mean a crisis of confidence.

Long Regions Financial in fund; no personal position

Interested in Joy Global (JOYG) Under $42 But...

I am interested in Joy Global (JOYG) here as it breaches below $42, which is now lower than it was before it announced its massive share buyback program. [Sep 11: Joy Global to Buyback 1/5th of Shares this Year; 2/5ths by 2011]. However, the problem with a lack of credit is just about all major sales purchases of any major product, the world over, is based on financing. Without financing, we have no global economy. We have no big ticket purchases such as huge mining equipment. Etc. Hence, we remain on a precipice to see if the banks will stop hoarding cash or not. The one problem with this bailout other than being too small in size to address the problem is, there is no guarantee that the cash we give them won't just sit on their balance sheet to protect themselves. Instead of the true intent - to be lent out. You would think this would be a moment where the banks of countries who actually have savers can swoop in and take the place of American (and some European) institutions on the global stage but we are not seeing that yet as everyone sits on their hands. It is quite an amazing moment in history.
  • As the world's mining equipment makers meet here for their quadrennial trade show this week, they should be in a celebratory mood given the booming business they have done since they last got together. Instead, a mood of uncertainty prevails at MINExpo, with one question hanging over the event like fog: how much of a toll will the global financial crisis take on their sales?
  • There are signs that the global credit crisis and historic changes on Wall Street are affecting the industry's sales financing model, which relies on securitization of customer loans.
  • On Saturday, Sergio Marchionne, chief executive of Italian industrial company Fiat, said the credit crisis had brought the financing business at Fiat's construction and farm equipment units to "an absolute standstill." He predicted there would be a "phenomenal repricing of risk" that would not spare anyone in the equipment industry. (this would be a disaster for the Caterpillars, Deere's, CNH Global's etc)
  • The four years since the manufacturers last met have been wildly profitable. With prices of copper, nickel, iron ore and other metals rising with consumption and infrastructure investment in developing countries, mining companies worldwide stepped up orders for such equipment as gigantic shovels, drills and excavators. Two-year waits for some equipment became common as companies like Caterpillar Inc (CAT) and Komatsu Ltd dealt with the spike in demand and a shortage of some supplies, like huge tires and large metal castings.
  • "Is this a correction or the end of the bull market?" Nicholas Brooks, head of research and investment strategy at ETF Securities, asked last week. "This is the key question." It is also the key question at companies like Bucyrus International (BUCY), Joy Global (JOYG) and Terex (TEX), which make draglines and mining trucks, some the size of small office buildings, on display at the show
  • In July, Jim Owens, Caterpillar's chief executive, said commodity prices could fall "significantly ... I'm talking 30 percent-ish and still be at levels that would be attractive to drive investment in the mining and oil and gas industries because there has been such a prolonged period of underinvestment." Speaking in Beijing a month later, Owens said: "Caterpillar has so many orders for heavy mining and power generation equipment that it is sold out of most items through 2010." (that's fine and dandy but....no financing = no orders at least in the Western world - some in the East still have cash I suppose)
  • But even if that business holds up, a potential trouble area for the companies is the coal industry, which was until recently a bright spot for equipment manufacturers. The big story has been China, which used to be a coal exporter but is now an importer as it builds about two new coal-fired power plants a month.
  • Analysts believed China's planned power generation expansion alone would increase global coal demand by nearly 4 percent per year through 2011. That doubled the Central Appalachian spot coal price in the last year and caused U.S. coal exports to rise 42 percent in the first quarter, along with production increases in the United States and Canada. But as private companies have scrambled to get into the Chinese utility market, margins have contracted. In a recent note, JP Morgan's Ann Duignan estimated that 80 percent of the country's power producing industry was losing money, suggesting companies may have overestimated demand.
Good times. Every investing decision now is such a complex matrix and until we see if banks begin to lend we simply cannot make a decision.

No position

Barron's: The Pain of Deleveraging

I saw this link to a very good Barron's story over at Marketfolly blog and wanted to bring it over here. The gentleman being interviewed pretty much word for word agrees with much of what we've been bringing forth. Now, I cannot be in Barron's every week, so I can understand why they interviewed him instead of me ;)


The Pain of Deleveraging Will Be Deep and Wide

Felix Zulauf, Founder, Zulauf Asset Management

AN INTERVIEW WITH FELIX ZULAUF: A bleak long-term view on stocks

AS THE CREDIT CRISIS INTENSIFIED LAST WEEK, radically altering the Wall Street landscape and the government's role in stabilizing the financial system, Barron's sought out Switzerland-based Felix Zulauf for a global macro perspective. A longtime member of Barron's

Roundtable, the founder of Zulauf Asset Management is now equity-averse -- he prefers gold and government bonds -- but further out, sees untapped growth potential in emerging-markets.

Gary Spector

Barron's: It's been an unprecedented time in the financial markets, with Lehman filing for bankruptcy protection, Merrill Lynch being bought by Bank of America and AIG getting rescued by the U.S. government. What's the fallout going to be?

Zulauf: The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system -- that is, the global credit system dominated by the investment-bank giants that have been the major creators of credit in the last cycle -- turns down, the fallout is going to be terrible.

Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I've been fearful of this.

So far, what we're seeing is the pain in the financial system. Later on, we'll see the echo effect of the pain in the real economy. I can't understand economists talking about no recession or mild recession. This is the worst financial crisis since the 1930s. It's different than the '30s, but is the worst since then, and the consequences will be very, very painful for virtually everybody in our economies.

So it's a global downturn?

That's right. It started out in the U.S., but it is a global event, led by the [excessive lending practices that grew up in the] housing boom in the U.S. But we also had housing booms in some of the European countries, and in some of the emerging countries. People are already talking about a glut of unsold homes in China.

How will these countries fight this severe downturn?

Governments, particularly those in the industrialized economies, will use fiscal stimuli to prop up the system and prevent them from collapsing. Usually, those stimuli are a little too small to really have a lasting impact, which is usually spent after two to three quarters. So we could have a pop in the market in '09 and the economy into 2010, and then it disappears again; then there is the next fiscal program, and so on. That can go on for a long time.

By issuing more debt, all of these governments are trying to stimulate deteriorating economies. But what do you see as some of the other consequences of all that additional debt?

Government debt is going to rise dramatically over the next five to 10 years. Government debt is at 300% of [gross domestic product] in most industrialized countries, if you calculate correctly. That can increase to 400% and 500%, but at some point the government-bond market will not take this without any consequences. That will lead to rising long-term interest rates. But because the economy is not on solid footing yet, short-term rates will stay low for a long time. So you will have a very steep yield curve for many, many years, and this is bearish for bonds since their prices keep falling.

What's your take on the inflation outlook?

Most governments and central bankers are still concerned about the inflation rate. I think for cyclical reasons that inflation will probably drop sharply into '09, partly due to lower commodity prices. But what's more important thereafter is that there will be a secular rise of the inflation rate, because governments and central bankers will be forced to reflate these economies in a big, big way, and this will be bad for nominal assets, whose value decreases because of less purchasing power. But it will be good for real assets at some point of time in the future. For example, companies can adjust by raising their prices and growing their incomes.

What does all of this deleveraging, in which firms try to get various forms of debt off their balance sheet, mean for those involved?

When the deleveraging starts due to declining asset prices, there is no one there to reverse it. I cannot see the private sector stopping this and turning it around. It has to be the government, together with the central banks, and they are starting to do that.

What's your assessment of the steps Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson have taken to stem these problems?

It's a challenging job. Bernanke and his team and Treasury are doing the utmost, but doing the utmost means they're always one step behind. So far, it seems that the Fed is constrained by not being able to expand its balance sheet. It has replaced a lot of Treasury paper with other paper of lower quality, and the level of Treasury paper on the Fed's balance sheet has now reached such a low point that it cannot expand more without really monetizing debt.

You can't stop this [downturn] or turn it around without going to monetization, a step the central bank hesitates to take. But eventually the developments will force the Fed to do it.

What's your reaction to Friday's announcement that Paulson is crafting a plan for the federal government to buy illiquid assets from various financial firms?

Treasury, together with the Fed, is taking a big step forward to keep the system from melting down. It will work, but it has to be at least $1 trillion in size and the Fed has to help by cutting rates. The idea is good; now the Treasury has to make it solid and the Fed has to lend its support. This is probably the beginning of a medium-term bottom. Usually a good bottom, even medium term, doesn't stand on one leg. In the coming three or four weeks, the low will be tested, but from there we have a chance for a good medium-term rally.

Could you elaborate?

What the Fed has to do is buy paper in the asset market, including Treasuries and corporate bonds, and create new money in the financial system -- because the deflationary process created by the deleveraging is at work. Deflationary power is growing dramatically, and the Fed has to replace the dollars that have disappeared into a black hole. The private credit system cannot do that anymore. The Fed and government are really the lenders of last resort.

From your vantage point, what do you see happening to the Eurozone's economy?

Short term, it will probably get a little bit worse in Europe, because we have a different policy mix than in the U.S. Your central bank has cut rates. They've been aware of the problem. The fiscal situation is expansive already, whereas in Europe we have tightening fiscal policy, and we have still a restrictive central bank that's looking at holding the value of the euro. So Europe could get hurt a little more than the U.S. in the short term, but I think it will do better over the medium term.

Why is that?

First of all, Europe can finance itself, meaning it's not dependent on outside money. It runs a slight current-account surplus and, net-net, it is not indebted to the rest of the world. The U.S. is indebted to the rest of the world; that's a major difference. Also, Eurozone households [collectively] run a financial surplus, while U.S. households have deficits. So when you look at the large European economies such as those in Germany or France, the consumer is in much better shape and the banks are probably in a little bit better shape than in the U.S., although some internationally active banks and investment banks are like their U.S. competitors.

What about emerging-market economies?

Even emerging economies are getting hurt. We have seen how real-estate prices in some emerging economies, from the Baltic States to some Asian countries, are coming down. But these countries have a better situation from a very, very long-term point of view because of demographics. They are much younger nations. They are much lower in their standard of living, they are going up the ladder, and they are competitive.

Another thing to consider is that current-account and trade deficits will shrink. So what used to be a big stimulus for emerging economies will be curtailed and it will hurt those economies in the short run much more than the markets assume.

What do you see ahead for the U.S. economy and elsewhere?

The U.S. economy goes flat for several years, and from time to time there probably will be major fiscal programs, each one bigger than the previous one, to help the economy. Europe will be similar; its potential growth is relatively low, with a stagnating population.

The emerging economies have much higher potential growth rates. They are going through a down-cycle, but they will come up again in the next cycle and have higher growth rates. But it is going to be a very tough 2009, a global recession. Whoever gets elected president in November will come through with a fiscal program. Monetary policy is really ineffective in this situation. When you have a balance-sheet recession and everybody is deleveraging, monetary policy cannot do the trick. It doesn't work because there is no one willing to leverage up their own balance sheet.

Around these parts there has been a lot of focus on Merrill, Lehman and AIG, not to mention Fannie Mae and Freddie Mac, which the U.S. government bailed out recently. What does the future hold for financial firms globally?

Bankers have to learn that banking is an industry like any other industry. The financial sector has grown dramatically over recent decades, and I think it has grown to a level that is too big in proportion to total GDP.

Global financial-sector debt has gone up fivefold in the last 25 years relative to GDP. So what you now see is a reversal back to the mean. That means that the financial sector as a profit generator, as an employer and as a provider of services will shrink over many years -- back to a level that is more normal than in recent years. The financial-services industry has been treated extremely well for a long time and people made a lot of money and created careers, etc. But it is going to be much, much tougher in the next 10 years globally.

Do you see any industries that look promising at the macro level?

First, we go through a down-cycle, and it will affect virtually every industry. After that down-cycle is over, particularly in the emerging economies that have higher growth potential, it will turn up again. It could again be infrastructure-related assets or commodity-related assets that will perform very well. If I'm right in this scenario, what will happen is we will create a stimulus to grow in the future. And those who grow the best in a world of stimuli will be those that have the highest growth potential, namely the emerging economies. And then we will see rising bond yields. They will go in cycles, of course, and they will not shoot up straight. But they will go up.

What investments look interesting to you?

In this environment, those who do not lose win. For the average guy, I'd say go into the most defensive position. I'm not really interested in any longs in equities. I'm holding a lot of government bonds on the long side. I suggest that American investors stick to shorter-term Treasuries with maturities of up to two years.

Any other suggestions for equity holdings?

If you have extra money left and want to be more aggressive, you can play the markets short-term. There are going to be a lot of runs up and down in a declining market.

This is all sounds very bleak, Felix.

I'm not interested in any longs in equities. If you are an optimist by nature and if you want to be long, the one area that you should look at is daily necessities, notably consumer staples. Companies like Procter & Gamble [ticker: PG], General Mills [GIS] and maybe Johnson & Johnson [JNJ]. Those are the defensive names. But I have absolutely no interest in investing on the long side in anything that is cyclical in nature, because this cycle could last longer on the downside and go deeper than most investors assume.

Thanks very much.

About that Bailout Rally....

not so much on the bailout rally...

Regionals Financial (RF) is being killed - why not. Danger is now any medium sized bank they can panic sell and it can be down 40% as people avoid risk in all banks not named JPMorgan, Bank of American or ....Wells Fargo (WFC) - which on the other hand is up 2% - the stock that can't be brought down. Not a good situation. I am still boggled where Citigroup (C) is getting the money to take $42 Billion worth of writeoffs when their balance sheet is mangled. Something just doesn't smell right in that situation.

The good news is thus far we have held the previous support of 1165-1170 on the S&P 500 which coincides with October 2005 lows.

The bad news is its not even 11 AM.

Apple (AAPL) obliterated to the tune of 15%+ on multiple downgrades and that's the "people's stocks" so another strike to confidence.

Not a good day. It could be worse - I could of followed Cramer's pound the table buy of Wachovia (WB)...

Sunday, September 28, 2008

Citigroup (C) & Wells Fargo (WFC) Bidding for Wachovia (WB)

Two questions/comments - I was wondering why Wells Fargo was so strong Friday and where is Citigroup getting the money for this when they themselves are a huge risk? Hmmm....

Before you read this article, if you do not know what an option ARM loan is you need to read this [Aug 13: Option ARMs - Who Thought Up These Time Bombs?] Then after you read that, consider Wachovia has $122B of this type of mortgage on its balance sheet. And consider, by the time it is said and done, my belief is 70-80% of these option ARMs (the most toxic of all mortgages) will be "walk aways" and hence dead money. Which means there is no income stream and its just an empty piece of paper. Then consider this is the type of mortgage that the government will be sopping up and putting onto our national balance sheet while talking the talk that "hey if we hold these long enough we could make money on the deal!". No, option ARMs are going to be for the vast majority - dead. If home prices don't rise their usefulness is deemed nil.

This is one bank, granted the 4th largest in the nation, and on one balance sheet $122B of that $700B could be used. For ONE TYPE of MORTGAGE. This is why I think $700B is just a fraction of what is really needed and after an initial happy period we are going to be gulping again. But if you are Wells Fargo and you buy Wachovia optionARM-less, handing the risk off to you and me (taxpayers) you are one smart cookie. Don't hate the player, hate the game.

Again I keep asking what happens if one of the big 3 gets in trouble anytime in the next decade? Citigroup, Bank of America - Countrywide - Merrill Lynch, or JPMorgan - Washington Mutual - Bear Stearns. They obviously cannot be allowed to fail... what happens then? Much like we've found the answer to "easy money" policies of Alan Greenspan to be ... well a lot more easy money; so have we decided that the answer to "too big to fail" is.... well create even larger entities. Do you see how we never learn from past mistakes? Or in times of desperation there are no good solutions?
  • Federal regulators on Sunday night were pressing for the sale of yet another troubled bank — this time, the Wachovia Corporation — in a move that would concentrate power within the nation’s banking industry in the hands of a few giant lenders.
  • Wachovia, the nation’s fourth-largest bank, was negotiating to sell itself to Wells Fargo or Citigroup. Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer. (oh really? well there are 2 ways to skin that cat - instead of direct loan guarantees ala Bear Stearns, why not just a direct sale of toxic loans to US government - it's now not only AN option, but THE option - so what exactly is the government "resisting"?)
  • A sale to either Wells Fargo or Citigroup would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and whichever bank acquired Wachovia. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors. (unintended consequences - less competitors, less choices) While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts.
  • Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department who, took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker. At 8:15 am. on Saturday, Citigroup and Wells took their first peek at Wachovia’s books. (Robert K Steel - another Goldman man who in the span of 4 months will receive an enormous payout - while the stock will most likely drop 70-80-90% on his watch) Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial backstop, according to people briefed and involved with the process.
  • People involved in the talks said Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday. (or $16 that it was earlier in the week)
Eyeing Wells Fargo

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 8

Year 2, Week 8 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): 44.8% (vs 38.5% last week)
32 long bias: 51.4% (vs 49.8% last week)
7 short bias: 3.8% (vs 11.7% last week)

39 positions (vs 45 last week)
Additions: Regions Financial (RF)
Removals: Amazon.com (AMZN), Walter Industries (WLT), Massey Energy (MEE), Constellation Energy (CEG), Big Lots (BIG), BJ's Wholesale Club (BJ), Millipore (MIL)

Top 10 positions = 30.4% of fund (vs 23.2% last week)
24 of the 39 positions are at least 1% of the fund's overall holdings (61%)

Major changes and weekly thoughts
If you've been reading along I don't have much to add to this market. It is unlike any many have experienced and unfortunately I do not see that changing soon. We have the mother of all bailouts coming and everyone will be watching the credit markets to see if this soothes the nerves - it is all about confidence. My gut tells me the problem is so much larger than even $700B so after an initial "happy" period this will become clear to the market and this will set the path for another leg down. When the timing of this is, is beyond me. I hope I am wrong in this prediction for obvious reasons as it would cause a lot of further pain.

As for individual stocks, it is really dart throwing out there... very little has to do with fundamentals so hence our basis for investing is useless in this market and has been for a long time. Despite what I've been forced to do here, I much prefer to build core positions and trade around the edges, as opposed to the wholesale trading in and out that has become necessary the past few months. In the first part of this bear market there were at least a few groups that were immune and doing sustained runs - now there is very little of this nature. So what works today, you can assume will be sold off in 3-5 days, and vice versa. It is a troubling time for investors. To that end I rarely carry positions with 5-6-7% type of stakes like I used to, nor do I have a major exposure in the top 10 positions as I used to. The risk of a stock blowing up and dropping 40% in hours is too great.

I've adopted a high cash position and basically exposure to healthcare and darting in and out of the market in the more volatile sectors to try to create some gains in a market that is cruel and unusual. The week end cash position and short position are actually understating the defensive measures we are in - I was nearing the maximum cash outlays Marketocracy.com will allow (35% cash and 25% in any 1 position) mid week as we were >55% in cash or cash equivalents (SVH). I had a much larger short position most of the week but began lifting that midweek as I did not want to be standing in front of any "hey the government is here to save us again". This is very repetative as we've had the same rally going back over a year - when the Fed first cut rates we actually raced to all time highs as "the government is here to save us" (I know, I know the Federal Reserve is an "independent entity" free from a political nature and not really the government - yeh right), then when they bailed out Bear Stearns in March we had 7 weeks of happiness as the government was here to save us, then when they took over Freddie and Fannie we had a full 24 hours of "celebration" as we were again saved, and so on and so forth. I was not optimistic in any of those "saves" and I'm not optimistic here, but that doesn't mean the market cannot rally on misguided hope. It's put on some serious short smashing rallies during the past 14 months, which eventually it gave up as "reality" eventually trumped "hope". But if you stand in front of hope you can take major losses so that's all we are trying to avoid - timing is everything - even for shorts. The tough part of this market is we've been really outperforming the market on down days but getting completely crunched on the huge rallies within this bear market as we have sector short ETFs as opposed to being able to short individual names. Hard to make any sustained upward movement in the overall portfolio without perfect market timing which no one can do.

I am hoping for a rally to S&P 1250 at which point I can see an easy place to get aggressive again on the short side. Complicating matters are earnings season beginning - and as I outlined this week - the same message I've been pressing all year - there is no "2nd half 2008 recovery" and earnings expectations do not reflect this. So I see a lot of danger from that front ahead as 4th quarter estimates need to be ratched down, big time. Ironically some of the stocks with the greatest earnings stability are the ones being hurt the most right now. Hence, there is no place to run or hide in this market - so no reason to put a lot of capital at risk. We do have a relatively large "long financial" exposure to start the week - only for a trade on bailout happiness. And we bought some commodities late in the week as they were destroyed (again) - most have now given back an entire year of gains even though many have earnings 50-100% higher than a year ago. The bears will say that was the top of the cycle, and earnings are going back to where they were 2-3 years ago. Perhaps, but I don't believe it to be true for all commodities - potash prices in fact are completely flat the past 4 months while the stocks have been destroyed. But that is talking a fine tooth needle in a market that using sledgehammers. This only reinforces the fact that this is not a market that serves our style of finding good growth prospects - we have many stocks now trading at single digit multiples for 30-50%+ growth. It does not matter - they just keep going down.

The larger weekly changes (chronologically) to the fund below:
  1. Monday: we had put a "trade" only on Amazon.com (AMZN) in the post bailout rumor rally last week, in case the market continued its run up, but on Monday the stock broke support so we quickly sold the stock for a small loss in the $78s. By the end of the week the stock had fallen another 10%+ as Research in Motion (RIMM) put a bad taste around most technology stocks.
  2. As James River Coal (JRCC) spikes to $36 we took off almost our entire position and dropped it to a 0.1% stake. There is no investing in this market, only trading - by the end of the week JRCC had dropped to the $24s - otherwise known as a 33% drop between Monday and Friday. This is an example of what I would consider a "great trade" yet we still took a hit on this position this week since we began buying back 1 day too early.
  3. Speaking of, we closed Massey Energy (MEE) and Walter Industries (WLT) in that spike Monday. As stated we cut out all other coal positions since they all trade in unison and you could see that Friday when they all were hit to the tune of 7-10% losses. Hence we are just focusing on 1 name in the sector and "trading" it... that's all this market offers at this time. This turned out to be a good trade as well as Monday was the highlight of the week for this group. I still like this group for the long run - but fundamentals mean little so we are going to respect that and avoid further carnage.
  4. We closed the trade of Constellation Energy (CEG) for a small loss; I was hoping for a better buyout price for this wounded animal, but management decided to take Buffet's offer to protect itself from the death spiral of credit agency downgrades and short attacks. This has been a lethal combination for other companies.
  5. Speaking to the nature of a market with no memory or logic, Lennar (LEN) sold off on its earnings to the tune of nearly 10%, but the next day rallied nearly 20%. Logic I tell you. I took profits on Lennar on that near 20% move Wednesday.
  6. Sequenom (SQNM) had very positive data to report for its next stage of results from the Down Syndrome's test, and the stock (which reacted quite mildly really in afterhours) took off like a rocket the next morning. After the stock was up 25% Wednesday morning we took 1/3rd off the table just under $26.
  7. Wednesday I started Alabama based Regions Financial (RF) as a "bailout" trade - this is a smaller regional bank with a high beta (volatility) so a good trading vehicle - however I should of bought Wells Fargo (WFC) as well which I assume right now is among the most highly sought after stock in the institutional world judging by how strong the chart is. I did add more Friday as the market panicked on "no they're fighting again and maybe there won't be a bailout after all" trade down in the morning.
  8. I began rebuilding the James River Coal I sold Monday near $36 in the $27/$28 range not 48 hours later - a market with no memory. But I started slowly saying I'd get more aggressive in the $24 range. Which we got Friday, so I added more there.
  9. Thursday, I cut some of my consumer exposure with sales of Big Lots (BIG) and BJ's Wholesale Club (BJ). Basically I am adopting the same strategy as the rest of the portfolio. Everything is a trade now, not an investment so it's better to have fewer positions in each "sector" - when that sector is in favor - you can sell it down - then 48-96 hours when its out of favor you buy it back. Keep repeating and hopefully you can make a few bucks. This strategy is too time consuming to do with 5-6 names in a sector so I've been consolidating. Again, these stocks simply do not trade on individual merits anymore - its just a big sector allocation trade every day, and has been for months on end.
  10. I have added a lot of healthcare stocks the past 2 months, so I decided to cull the herd a bit - the weakest chart is Millipore (MIL) so I closed that position. Simple as that, it broke multiple support areas so until it gets back above those - it is a short on a rally, not a buy.
  11. I started rebuilding Mosaic (MOS) ahead of this week's earnings. Aha, 1 day too early and in this market that means you lose 10% in a jiffy. But I'm an incremental buyer so we only went up to a 2.6% stake Thursday, and then up to 3.4% Friday. I also added to Potash (POT) and CF Industries (CF) Friday taking them up from 0.1% stakes as they are nearing an oversold condition. Again, no investing here - just trading. When they bounce to near resistance I am going to avoid the Kool Aid of "people love commodities again" and just sell them, and wait for the next demolishment. It is tiring but the only way to make a buck off these stocks. One day this will change. Who knows when.
  12. Last, I cut more Sequenom (SQNM) to lock in profit Friday - if it blows past $29 I'll pay up to get these shares back as this will be a new breakout (which we rarely see in this type of market), and bought some exposure in other healthcare stocks. I have such little long exposure that if the market rallies (on hope) I partake very little - but I trust so little the only space I really want exposure is healthcare. I also bought some Buckle (BKE) on the pullback - again I've cut back consumer exposure earlier in the week, so with fewer names I can build the remaining names into larger position.
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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