Thursday, October 30, 2008

At Least Our Pensions Are Safe, Right?

The markets wound higher on bad news ---- Oh, I don't know why, but huge jumps in government spending saved the GDP number and that somehow rallied stocks.

Again most of the market moves occurred in the last 15 minutes. It feels like were heading toward 0% interest which is going to really squeeze banks further, but more on that another day.

Pension funds have been hit hard by the buy and hold strategy. While the impact on current retirees is likely to be limited and pensions themselves are likely to survive intact, the impact on corporate earnings might be substantial.

Pension fund gap hits $100bn

US companies will need to inject more than $100bn into their pension funds to cover market losses, putting them in a cash squeeze at a time when it is difficult to raise money.

The cash payment, estimated by several pension industry executives, would be spread over this financial year and next year.

Companies' pension fund losses - running at an estimated 20 per cent in the year to date - also are expected to alter earnings this year, partly because of accounting changes.

The 700 largest corporate plans were more than 100 per cent funded at the end of last year, but as of last week that had fallen to about 83 per cent, according to estimates by Mercer, a pension consultant.

"Earnings will be impacted significantly. The 2008 year-end balance sheet will reflect that."

The one caveat is that since pension fund accounting is fairly complex, many firms can avoid the hit to earnings by simply changing some assumptions in their formulas. The most common change is to change the assumed annual return on investments (this was a common move in 2000-2002). To really understand the impact on earnings we're going to have to dig deep into the 100+ page annual reports next April - what a joy!

GDP Update...

The markets are screaming ahead again today because the economy contracted at a slower pace than expected..... Yes-- down is now up and left is now right.

The economy shrank in the third quarter and the only thing that kept the number from being a complete disaster were massive increases in Federal and State spending.

If people figure this out, the markets could sell-off, but that would require some actual intellectual vigor on the part of investors - don't expect it.

I've got a fairly scary post (just in time for Halloween) to put up later on pension losses. Expect a pension bailout....

Wednesday, October 29, 2008

Well, that went exactly as planned...

So the Fed cut rates by 50 basis points and money poured back into the economy, mortgage bankers once again could afford bottles of Dom to give to their Real Estate Agent friends and every soccer mom treated herself to a new Louis Vuitton bag for being such a trooper during this difficult time.

Sarcasm, pass it on.....

The markets were happy that things held throughout the day, but did you see that close? The market dropped about 360 points in 12 minutes!!! I'll repeat that healthy markets don't act like this.

Tomorrow's GDP number will dominate the headlines. The consensus seems to be that GDP fell 0.5%. This would fulfill half of the requirement for determining when we are "officially in a recession". I don't have a good read on this number, but it will definitely determine the initial moves in the market tomorrow.

I'm starting to hear anecdotal evidence that credit card companies are lowering limits. If anyone gets one of these dear John letters from your bank (lowering your credit limit) shoot me an email - grindstonefinancial at

Hey, it's been a couple of days, shouldn't we be passing another $600 billion bailout?

This latest bailout making the rounds is being sold as help to homeowners. However, it is really a bailout to those that bought the bad mortgages. Another plan that sticks it to the frugal, and those that didn't stretch too far to buy a house they couldn't afford.

"US regulators are working on a new federal program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures, a source familiar with the discussions told Reuters on Wednesday.

The plan, being hammered out by the Federal Deposit Insurance Corp and the U.S. Treasury, could provide guarantees for up to 3 million at-risk mortgages, said the source, who spoke on condition of anonymity because the program is still being discussed.

The plan would provide federal guarantees to entice lenders to ease the terms of troubled mortgages—something that lenders have been reluctant to do on a large scale so far. The expected cost to the government would be a fraction of the value of the guarantees, as the intent of the program is to prevent defaults on home loans.

The problem here is that if and when people default in 2009 as unemployment skyrockets, guess who pays for the default -- Mr. and Mrs. Taxpayer again.

This just delays the inevitable and spends more of our money in the process. If we really want throw away our money, couldn't we at least get something for it? Clean energy, new transportation systems, city infrastructure, buy up all of these crappy McMansions and bulldoze them, etc, etc....

From the file of "Can that be true?" - The UK Daily Mail reported that Copper Door Handles can effectively kill 95% of supergerms.

Making door handles, taps and light switches from copper could help the country beat superbugs, scientists say.

A study found that copper fittings rapidly killed bugs on hospital wards, succeeding where other infection control measures failed.

In the trial at Selly Oak hospital, in Birmingham, copper taps, toilet seats and push plates on doors all but eliminated common bugs.

It is thought the metal 'suffocates' germs, preventing them breathing. It may also stop them from feeding and destroy their DNA.

Lab tests show that the metal kills off the deadly MRSA and C difficile superbugs.
It also kills other dangerous germs, including the flu virus and the E coli food poisoning bug.

Although the number of cases of MRSA and C difficile is falling, the two bugs still claim thousands of lives a year.

My mother will be at Lowe's later today special ordering copper faucets :)


A Little Perspective

There was a balanced piece in the NY Times today debating whether or not stocks are really "cheap" at current prices. If you buy into the fact that the last 20 years has been a bubble of unprecedented proportions, where the explosion of cheap credit fostered a false economic reality, then perhaps you can see a period of time where stocks retreat even further.
No one can predict short-term swings (we're probably about 1 1/2 from another wild ride) but the long-term trends are a little easier to identify.
Some of the country’s most famous investors, including Warren Buffett and John Bogle, have started to make the case that it’s time to dive back into the stock market.
But there is another argument that deserves more attention than it has gotten so far. It is based on numbers and history, and it has at least as much claim on reason as the bullish argument does.
It goes something like this: Stocks are truly cheap only relative to their values over the last 20 years, a period that will go down as one of the great bubbles in history. If you take a longer view, you see that the ratio of stock prices to corporate earnings is only slightly below its long-term average. And in past economic crises — during the 1930s and 1970s — stocks fell well below their long-run average before they turned around.
To make matters worse, corporate earnings have now started to plunge, too. Assuming that they keep dropping, stocks would also need to fall to keep the price-earnings ratio at its current level.
The 10-year price-to-earnings ratio tells an incredibly consistent story over the last century. It has averaged about 16 over that time. There have been long periods when it stayed above 16 and even shot above 20, like the 1920s, 1960s and recent years. As recently as last October, when other measures suggested the market was reasonably valued, the Graham-Dodd version of the ratio was a disturbing 27. But periods in which the ratio has jumped above 20 have always been followed by steep declines and at least a decade of poor returns.
By 1932, the ratio had fallen to 6. In 1982, it was only 7. Then, of course, the market began to self-correct in the other direction, and stocks took off.
After Tuesday’s big rally, the ratio was just a shade below 16, or almost equal to its long-run average. This is a little difficult to swallow, I realize. Stocks are down 40 percent since last October, and every experience from the last 25 years suggests they now have to bounce back.
But that’s precisely the problem. Since the 1980s, stocks have always bounced back from a loss, usually reaching a high in relatively short order. As a result, the market became enormously overvalued.

How attractive are the alternatives? Savings accounts and money market funds will struggle to keep pace with inflation. Bonds may, as well.
Stocks, on the other hand, are paying an average dividend of about 3 percent, which is better than the interest on many savings accounts, and stocks are also almost certain to rise over the next couple of decades.
I would just point out that dividend payouts are almost certain to be sliced in the coming year so that 3% yield will probably fall.

Tuesday, October 28, 2008

Calmly Step Away From The Ledge.....

Oh, just another 11% run in the market today. Nothing to see here - move along.

1) What caused that melt-up? Well, it could be short covering, some people buying in front of a fed rate cut (knucklehead traders still dream about the days when Easy Al cut rates and stocks soared), or window dressing to make mutual funds look better before month end. The best theory I saw though was in reference to pensions that are required to maintain targeted portfolios.

Let's say a pension fund targets 60% bonds and 40% stocks. The value of their bonds have soared over the past month, while their equity stakes have plummeted and their assets might be 65% bonds, 35% stocks right now. Despite what the markets are telling them, these funds have to keep their ratios in line, so they are forced to sell appreciated bonds and buy stocks. This is a pretty good theory. I can't confirm it, but it is logical.

So where is it going? Who knows, we avoided the old intraday lows and crossed 9,000, but this market has been quick to sell the news, so we could sell off hard after Ben B cuts rates again.

However, look at this table of the 11 biggest percentage gains in the stock market. Notice anything?

The Dow Jones Industrial Average Top 11 Biggest % Daily GAINS of all time:
1. March 15, 1933 … 15.34%
2. Oct. 6, 1931 ….. 14.87%
3. Oct. 30, 1929 …. 12.34%
4. Sept. 21, 1932 … 11.36%
5. Oct. 13, 2008 …. 11.08%
6. Oct. 28, 2008 …. 10.88%
7. Oct. 21, 1987 …. 10.15%
8. Aug. 3, 1932 …. 9.52%
9. Feb. 11, 1932 …. 9.47%
10.Nov. 14, 1929 …. 9.36%
11.Dec. 18, 1931 …. 9.35%

8 of the 11 moves were in the midst of the Great D.
1 after the 87 crash.
2 in the last two weeks. Interesting to say the least.

2) As Economy Slows, Lenders Begin to Curb Credit Cards

"First came the mortgage crisis. Now comes the credit card crisis.

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. "


Stocks were flat, bad news was everywhere and then stocks rocket out of nowhere to go up 10-11%? I guess no one wanted to miss a gain when the fed cuts rates (again this is a moron's trade - rates are impacting borrowing right now), but this is a staggering move.

Despite this jump we're basically where we were 5 days ago.

Futures Continue To Be a Fool's Game...

The futures were pointing to a 400 point jump on the open, but stocks have settled down since then (currently up 120). Europe and Asia swung up 5-10% on the strength of a short-selling ban in Japan and a German short-squeeze on Volkswagon (the consensus is VW is in trouble but because so many people are short, any rush to cover is causing massive swings in the stock).

US Consumer confidence plummets...

"A key measure of consumer confidence fell to an all-time low in October as the financial crisis weighed on American household budgets.

The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index plummeted to 38 in October from an upwardly revised reading of 61.4 in September.

Last month's decline brings the index to its lowest level since its inception in 1967.
Economists were expecting the index to have declined to 52, according to a survey by"

I tell people not to focus on the little swings in monthly data but look out for data that is an outlier. This report is clearly an outlier. Consumer confidence plummeted nearly 30%, that's a real problem.

Monday, October 27, 2008

Chuckle of the Day!


Is the Age of Prosperity really over?

I won't go into the details, but for various reasons the WSJ has lost much of its clout as of late as the paper of record in the financial world. Today, however, they hit one out of the park with a great guest opinion piece by Arthur Laffer.

Mr. Laffer is a former Reagan staffer so you've got to cut through a good deal of supply-side bs to get to the meat of the story, but it has several themes which are interesting. I applied a fairly heavy hand to the edit button (cutting out much of the political nonsense he spouts), but the economic discourse is valuable.

"When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy.

These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity."


Final note on yesterday's action - at 8,175 we've set another closing low and that will be the talk among the tarot card rea..., I mean chart readers.

The end of the month might be strange because mutual funds will probably do more window dressing than usual. Mutual funds usually only report their holdings quarterly to investors, so for 89 days in a quarter a mutual fund could be daytrading penny stocks but on 10/31 they can go out and buy GE, Microsoft, Google, and JP Morgan to have some pretty names to put in their brochures and regulatory filings. These stocks are "window dressing". Any stocks that have been severe underperformers, in the news or just plain dogs might be sold hard this week, while the outperformers should see higher demand.


Bailout Update....

This has been an overriding concern of mine. We're buying into banks but there is no guarantee they are going to start lending. This is a long piece, but it's worth reading.

So When Will Banks Give Loans?
“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”
It was Oct. 17, just four days after
JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and
Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf.

There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.

Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.

Markets Look Weak Until They Turn Around...

Global markets sold off again overnight (some of the Asian markets are getting hit by 10-12% every day -- it makes our little 3% dips look cute by comparison).

If I hear anything interesting today I'll post observations during the day.

Update! Wow, that was a strange end to the day. The markets were buoyed by some silly stats on new home sales (they revised down the August numbers and suddenly the September numbers looked better). It speaks to the trader mentality of the market - people can't be bothered by looking at the details and they rush to react to every headline.

The markets tanked 200 points in the last 10 minutes and that was a little unsettling. There were rumors of a hedge fund getting a margin call from Merrill Lynch, but I haven't heard anything beyond rumors.

Sunday, October 26, 2008

Well, It Could Have Been Worse...

Friday started out on shaky ground and looked like it might finally see the markets breakdown to new levels, but buyers keep rushing in to buy the dips and prevented a rout. The action in the markets is very difficult to gauge right now, but I'll say that this volatility is likely to stay with us for the near future. Investors are being displaced by traders and hedge fund managers looking to make their year in Q4.

Let me explain: Assume you are a hedge fund manager and you are down 20% this year. If you run a $500 million fund, you get $10 million upfront as a fee (that mostly covers costs) and 20% of the profits you make. If you're fund is down, your income is going to be $0 this year (down from $15 to $20 million last year). Many, many of the relatively new funds have the feel of a gambler that is down to their last $100 and they're putting it all on #14 at the roulette table.

They hope that by successfully trading these wild swings that they can somehow swing a profit by the end of the year and still generate the profitability that they are accustomed to (it should be noted that many of the best and most established hedge funds did very well this year and are not caught in this game of catch-up). This environment makes it extremely hard for investors to gauge the value of stocks.

Apparently, we're going to buying big banks, small banks, insurance companies and maybe some car companies.

The U.S. Treasury is considering taking stakes in insurers, as it prepares a new round of capital injections to target regional banks and other financial companies, a person briefed on the plan said.

A final decision hasn't been made on whether insurers will be included in the government's purchases of preferred equity, said the person, who spoke on the condition of anonymity. The Treasury, which had planned to announce investments in about 20 banks, reversed course and will let firms disclose their own share sales in coming days, the person said.

An initial $125 billion out of $700 billion approved by Congress was allocated last week to buy shares of nine of the largest U.S. banks and another $125 billion was set aside for smaller lenders. Investments in insurance companies would widen the scope of Secretary Henry Paulson's Troubled Asset Relief Program as the credit crisis deepens."

As talks between General Motors Corp. and long-time rival Chrysler LLC continued over the weekend, a harsh reality has emerged: Without a merger and possibly an assist from the federal government, two of Detroit's Big Three auto makers could run out of cash within a year.

Though GM and Chrysler dismiss the notion, analysts and investors have begun to question whether one of the companies -- locked out of the credit markets and burning cash rapidly -- might have to seek bankruptcy protection.

The Wall Street Journal had a piece this weekend covering the difficulty forecasting future stock prices in a falling earnings environment. I agree, conceptually, with the argument that some stocks are starting to look cheap at these depressed levels, but if earnings continue to disappoint there is substantial risk of multiple compression (ie, people will pay less for stocks given the uncertainty of earnings).

"Yet consensus estimates peg 2009 aggregate operating earnings for companies in the Standard & Poor's 500-stock index at about $94 a share, according to Thomson Reuters. That figure assumes earnings growth both this year and next.

If those estimates panned out, the S&P on Friday would have traded at what looks like a bargain multiple of about 9.3 times forward earnings.

Bears are well below the consensus in their answer. Barry Ritholtz, director of research at Fusion IQ, for example, says he reckons that 2009 earnings could drop to about $50 a share. In that case, even a multiple of 14 times would bring the S&P to about 750 -- nearly 15% below current levels."

I've read more people using a $50 to $60 number for earnings next year. Assuming people might pay 8 to 10 times earnings in 2009, there is a 20-30% chance that if all the cards in our global house of cards continue to fall, that the Dow could trade between 4,500 and 6,000 in the next year. So while it's good to try an nibble at prices that look good, it is healthy to have some skepticism, in case the worst case scenario plays out.

Asian markets have swung wildly already today, but there is some buzz about further rate cuts in Korea (and expected rate cuts in the US) that is helping markets right now.

Hey, it's not all gloom and doom....

1) Gas prices are plummeting. This will help the US consumer marginally, but the long-term trend in oil is still higher and unfortunately $2.00 gas is going to defer much of the revolutionary thinking that $4.00 gas had spurred. Enjoy it while you can, because when hedge funds get done liquidating their commodity positions, oil, copper, aluminum, etc are all going higher.

2) Thankfully Walmart will be able to keep us happy for $3.

$3 Wal-Mart wines hold their own in our taste test

With more than two dozen comments about Wal-Mart's Oak Leaf Vineyards wines on The Dallas Morning News Eats blog, most of them positive, we knew we had to put them to the test. Could a $2.97 bottle of wine really taste better than swamp water? And would it "fool" experienced wine drinkers?

As it turns out, the wines are better than you might think. The chardonnay won a gold medal at both the 2008 San Francisco Chronicle Wine Competition (chardonnays under $14.99) and the 2008 Florida State International Wine Competition. The Oak Leaf merlot and cabernet sauvignon earned bronze medals in the San Francisco contest.

Just in time for the holidays, we put Oak Leaf wines to the test with Dallas wine drinkers. We assembled a tasting panel in the upper sanctum of Adelmo's that included friends and regular customers of the restaurateur with a range of tasting expertise, from casual drinker to a former wine-and-spirits store owner.

The four wines were bagged and numbered before the tasters arrived. The score sheets asked tasters to rate the wines on a scale of 1 to 10, to circle the price at which the wine would be a bargain and to add comments.

"None of these are American," declared former Monticello Liquors owner Danny Chen just before their identities were unveiled. "The two reds were French." He liked the first and third wines, he said. (I take such delight in wine snobs being proven wrong).

"I liked the second one," said his wife, Celeste Chen. "I'd buy it right now. Do you have a case?"
Then we unmasked the Oak Leaf Vineyards wines.

The panel was surprised and amazed to learn of the $3 price point. "That's a helluva deal," said Mr. Banchetti."

** Has anyone seen these wines locally? If so, let me know in the comments.....


Friday, October 24, 2008

Look Out Below!

The markets globally are selling off hard and our futures are limit down (they stop trading the futures when they exceed a certain percentage decline). Economic concerns continue to rule the day, but I will say this....people continue to want to buy the bottom.

So despite all of the gloom and doom out there, there are a ton of investors looking to buy the market right now. I'm still convinced that this is the wrong decision, but the market is ruled by traders, not investors. I'm not going to be surprised at all if today is one of those 1,000 point swing days.

Note that the first circuit breaker doesn't kick in until the Dow is down 1,100 points.

Wednesday, October 22, 2008

It's Still the Economy, Stupid

Wow, that was a pretty ugly day in the markets. I listened to the chatter among the technicians all day and they were worried about the Dow's inability to hold above 8,700. There were very prominent bears (people that are negative on stocks) that shifted to being bullish (positive on stocks) over the last couple of weeks based on the charts. However, the charts are starting to point toward a double dip and many of the trend chasers got cold feet today. Although, the markets have traded lower on an intraday basis, this is the lowest we've closed and that will get a lot of attention.

As I said for some time, earnings for the third quarter have been ugly and the outlook for the fourth quarter is worse. There is a pretty simple formula that says if you take the price of the S&P 500 (roughly 900) and divide it by the earnings of those stocks, you get a p/e multiple for the market. In great times, this P/E number can be as high as 15 if things are booming, if you have a great deal of confidence in earnings and earnings are growing. Six weeks ago, the S&P 500 companies were estimated to earn $95 next year. Today I heard a revised estimate for the S&P 500 earnings for next year of $60!!

How could that be? Well, it seems like the US firms are being hit by a triple whammy of a dramatically weaker US economy, a weaker Global economy and a stronger US dollar. The US dollar strength is a bit of an aberration, but weak economies are not going to improve despite all of the bailouts.

If the $60 earnings number is correct, then despite the collapse of stock prices this year the market is still trading at 15 times 2009 earnings (implying things are great, you have great confidence in the numbers and earnings are growing). Unfortunately, when you have limited confidence in earnings, the economy is entering a recession and earnings are shrinking, that earnings multiplier can fall as low 7-10. This means in a worst case scenario the value of the S&P could be as low as 420 to 600 (down another 30-50% from here). I only assign a 25% probability to this scenario but that is up from about a 5% chance a month ago.

I remain convinced that this is not going to be a little blip of a recession, this is more likely to feel like 1973 or 1981, which were much more painful experiences.
Other Interesting Stories on the wires....

Calpers Looks to Shore Up their Fund

The California Public Employees' Retirement System, known as Calpers, said its assets have declined by more than 20%, or at least $48 billion, from the end of June through Oct. 10. (How in the world can a pension lose 20% of their assets in 3 Months?)

Unless returns improve, Calpers is poised to impose an estimated increase in employer contributions of 2% to 4% of payroll starting in July 2010 for about two-thirds of its state-employer members, and in July 2011 for the remaining third. Any decision will be made after Calpers knows its returns for the fiscal year. So to make up for their investing mistakes, Calpers is going to increase employer contributions. Since the "employers" are public entities like city employees, teachers, etc., guess who gets to foot that bill? Taxpayers in California.

**************************************************************************** profit soars but outlook and stock down


Tuesday, October 21, 2008

Walmart Bureau for Economic Research

Here's some tasty data from Walmart's US CEO delivered today in a speech in California. When you're looking for real-time data points on the health of the US consumer, I'd trust Walmart's data over the Feds every day (I had the pleasure of reviewing some of Walmart's data mining tools back in the late-90's. It was truly the holy grail of real-time retail information).

Wal-Mart Stores Inc's U.S. customers, increasingly worried about their own financial security, are waiting until they get their paychecks to buy even the most basic necessities, the retailer's U.S. division head said on Tuesday.

Key points:

* Wal-Mart for the first time is seeing a paycheck-related spike in sales of baby formula, suggesting consumers are rushing to buy such necessities as soon as they have the cash.

* the percentage of sales from the days surrounding pay periods has risen 250 basis points.

* Credit used as a form of payment at Wal-Mart is falling and that the decline is expected to reach into the double digits this year.

* Many consumers have "maxed out. Credit card limits don't allow them to use credit."

All is well....Pay no attention to the man behind the curtain....


What should we make of the Apple numbers?

Apple beat their expectations for the quarter on continued strength of the iPhone. The stock fell $6 during the day and is now back up $12 afterhours (afterhours trading is whacky, I'll reserve judgement until tomorrow's close).

Apple has benefited from the weak US dollar for much of the last 2 years. That period appears to be over for the near-term, so they will be increasingly reliant on the US consumer. I think that is reflected in their forward guidance that was far below original estimates of various analysts. It should be a pretty good tug of war on this stock tomorrow.


Thank Goodness Pricewaterhousecoopers and Ernst & Young will be watching our money....

Treasury hires PricewaterhouseCoopers, Ernst & Young to help with bailout plan

WASHINGTON (Thomson Financial) - The accounting firms of PricewaterhouseCoopers and Ernst & Young have been hired by the Treasury Department to help the government implement the $700 billion Wall Street bailout program.

Treasury said today it signed blanket contracts last week that will allow both firms to perform tasks on an as-needed basis related to the implementation of the bailout program. Both contracts last through September 2011.

Hmmm, where have I heard those company names recently?

Tough Questions for AIG's Auditors (Pricewaterhousecoopers)

PricewaterhouseCoopers was Freddie Mac’s auditor

Lehman Brothers was audited by the New York office of Ernst & Young. On Jan. 28, 2008, the firm gave a clean bill of health to Lehman for the year to Nov. 30, 2007.

To be fair, there are only about 4 big accounting firms any more and whoever they picked to work with the TARP was going to be tainted by one of the collapses. Again, anyone with two seconds and an Internet connection might think that it is worthwhile to check to see if PWC and E&Y had worked for any of the collapsed firms.

Monday, October 20, 2008

Where Have We Seen This Story Before?

Again, the markets exploded on some sense that ANOTHER stimulus check might somehow save the economy. The number one lesson of the markets is don't fight the trend. The trend feels like it wants to take the markets higher right now, so hitch a ride on this puppy while it lasts. The amount of bulls out there is a little staggering right now, sentiment is very positive right now. I remain convinced we're in the midst of a tradeable rally (up 17% from the lows already) that might have another 8-12% left in it.

Keep your politicians away from any decisions that require an associates degree in accounting.

"The Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering an accounting rule that could have hurt the banks' finances.

The program, announced last week, is intended to encourage banks to lend again by having the government take equity stakes in the institutions so they can rebuild their capital levels. But in its rush to get the program under way, the administration overlooked a key detail involving the potential issuance of stock, people familiar with the matter said.

Under the initial plans, participating banks will sell the government a certain amount of preferred stock. But they are also required to issue warrants, which give the government the right to purchase a bank's common stock at a certain price. However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on their balance sheets. That could force the banks to record a loss and thus impair their capital levels -- the very opposite of what the government is aiming to accomplish.
(What the Deuce? Can't we just fake this?)

The Securities and Exchange Commission and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity" under generally accepted accounting principles, people familiar with the matter said. (Sweet! Rose-colored glasses for everyone!)

I'm more convinced than ever that the current recession is likely to be the deepest in memory. The pain will be widespread and unrelenting. As a good friend in the software business remarked this week "This is going to make the dotcom crash look like a walk in the park". I'm hearing more comments like this from people in the field and that's my concern. Credit markets might be thawing, but that doesn't undo the damage to our economy which remains locked down.

Note this list of headlines on a night after the Dow rallied 400 points:

American Express Co earnings fell more than 20 percent as it set aside more money to cover growing losses in its credit card business.
Merrill to cut 500 trading jobs
Wall Street braced for new cuts, weak outlook at Yahoo
Texas Instruments outlook misses


And You Get a Check! And You Get a Check!! And You Get a Check!!

The markets perked up on the idea that were going to throw away more money, I mean authorize another stimulus payment of some sort.

This is getting out of hand. Unfortunately, our leaders lack any real ability to see beyond November 4th, so they are bending over backwards to borrow money from China to put in your pockets by Christmas so you can buy Chinese exports for the kiddies.

There is a great chart at another blog that visually highlights the growing debt of our nation.

First a couple of definitions.

National Debt and the Budget Deficit - There is a lot of confusion on these terms. The national debt is the sum total of our obligations, while the deficit is the amount by which the government spends more than it takes in in a given year. If in one year the government takes in $100 in taxes, but spends $110, we have a $10 Budget Deficit. To fund that gap, the US Government borrows from individuals and foreign governments. If we have a $10 deficit for 5 straight years we would have $50 National Debt.

National GDP - The sum of all of the goods and services produced in the US.

The national debt has oscillated between 25% and 60% of GDP for most of the past 90 years with one exception (when we finally exited the Great Depression and GDP growth hadn't accelerated yet). As of Friday 10/16/08, our national debt has exploded to $10.33 Trillion with current GDP in the 13.8 trillion range (possibly slipping if the economy doesn't reverse course) giving us a debt to GDP ratio of 75%.

The implications of this are far reaching. Let's slice away some zero's and assume that the US is now Joe the Plumber that makes $138,000, but because of his gambling habit and love of old muscle cars, he has amassed a $103,000 in credit card debt. Do you think the banks are going to continue to loan to Joe at a nice low 3% rate or do you think that they might see him as potential deadbeat so they will increase his interest rate to 27.9%. Of course, his rate is going higher. This is the position that US finds itself in. I'm afraid that very soon we are going to be in a position where servicing our debt is going to be an unmanageable prospect.

"According to the Government Accountability Office, if spending on government retirement programs remains on its current course and revenues grow at their historical averages, interest on the debt could skyrocket from its current 9 percent to almost 30 percent of the budget by 2040."

Yet, at this moment when we need fiscal restraint more than ever, we're talking of issuing another stimulus check.

Here's another thing to consider - unlike corporations that have to account for unfunded liabilities on their balance sheet, the Federal Government has chosen to simply ignore the massive social security, medicare, and veteran's benefits that have been promised.

The Institute for Truth in Accounting estimates that the nation's true debt reached the $57 trillion mark; more than $187,000 for each American (or a cool $750,000 for a family of four).

The Institute's true debt calculation includes the country's public debt, the liabilities owed to federal employees and veterans for retirement benefits, and the promises that have been made to seniors for Social Security and Medicare benefits.

Between the cold in NNY and the perilous outlook for my daughters' financial future they've got me shopping for condos in Hyderabad.

Saturday, October 18, 2008

Clear Evidence that Our Leaders Don't Use "The Google" *

I'll get to the bulk of the weekend news, but the choir of "we just need to restore confidence" was so deafening last week, I thought I'd point out another famous use of that phrase.

Treasury Secretary Hank Paulson said "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," on Tuesday.

Then Sen. Obama stressed "the importance of restoring confidence — in America, our economy and ourselves. Confidence is the most valuable and fragile currency we have.

Well, anyone with "the Google" could take two minutes and pull up the following famous quote from Herbert Hoover from the fall of 1929 after the crash but before the Great Depression had really set in - "Any lack of confidence in the economic future and the basic strength of business in the United States is simply foolish. Our national capacity for hard work and intelligent cooperation is ample guaranty of the future of the United States."

I don't doubt the American capacity for hard work (well actually, maybe I do - how many of you are reading this right now on company time?), but there have been frequent periods of disconnect between stock prices and American innovation and hard work.

* The reference to "the Google" is tied to a CNBC interview with President Bush where he said "Occasionally. One of the things I’ve used on the Google is to pull up maps." Greatest quote EVER!


Back to the news of the day....

This story out of the UK is getting a lot of play globally and surprisingly little coverage here.

Wall St. Banks in $70 billion Staff Payout

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

A couple of points -

1) Paying out huge bonuses right now is not justifiable. If these employees believe in the value of their firms and the value that they provide to you and I (now equity holders in many of these firms) give them options as their bonus. We The People, just wrote a check for $250 billion to these firms and they're going to spend $70 billion on performance bonuses? That's unacceptable and frankly, it makes the US companies look like they are not taking the global economic issues seriously.

2) The vilifying of Wall Street has begun. CNN had a special tonight ripping the Wall Street fat cats. The guys that really, really got paid made their cash via equity participation. So it's wrong to say that Dick Fuld was paid $400 million. He was granted stock and options that became valuable as the firm he ran made more money. CNBC loves to refer to NY as the "Financial Capital of the World". I can tell you right now if we go through another series of perp walks and lengthy grand juries, the new Financial Capital of the World will be Shanghai, Mumbai, Dubai, or London.

3) The pay scale on Wall Street has never been normal. It was not uncommon on Wall Street for people to receive 70% or more of their annual compensation in the form of the year-end bonus. Clearly, the pay numbers sound obscene to the average American and they should, but it is a function of the global investment system that has been created. The more money that was to be invested, the more fees that could be generated and with virtually no overhead, the only place to put that money was in the pockets of their employees.

Full disclosure - I worked for Lehman Brothers and knew many of the senior executives, so assume that my rant is somewhat biased

Other news:

ING to get $13 billion from the Dutch government (Who knew the Dutch had $13 billion?)

A merger of General Motors and Chrysler would land a heavy economic blow on Michigan, a state already battered by waves of home foreclosures and the loss of tens of thousands of auto-industry jobs over the last few years.GM is negotiating a potential deal with Chrysler's majority owner, Cerberus Capital Management LP, hoping it can reap billions of dollars in cost savings by shutting down overlapping operations. Analysts estimate more than half of Chrysler's 66,000 employees would lose their jobs in a merger.

Merging GM and Chrysler is like taking two rocks and tying them together and hoping they will float together.

Yahoo Inc is expected to outline plans to cut expenses, which would include future job cuts, when it reports its quarterly earnings on Tuesday, a source familiar with the situation said on Sunday. The Internet company will discuss the scale and timing of the future layoffs, but specific details on the exact jobs to be eliminated will not be disclosed, the source said.
Yahoo was not immediately available to comment.

The Wall Street Journal reported that the future layoffs will exceed the 1,000 jobs Yahoo previously said it would eliminate. Some Yahoo managers have also been asked to identify operating budget cuts of around 15 percent.

I've heard job cut numbers in the 3,500 range, but those are just rumored numbers right now. If you plan on being around for 100 years, these times of economic uncertainty are when you put the pedal to the metal and push to gain market share. If you are working to keep investors happy for the next quarter, you cut jobs. In general, this is a bad, short-sighted move.
But wait you say, Microsoft might buy Yahoo, right?? See previous two rock metaphor :)

For all of you that are directionally challenged -

Thursday, October 16, 2008

Oil's Crashing so Stocks Rallied?

Yesterday as the market suffered it's worst percentage loss since 1987 the consistent theme on most of the financial websites read something like this....

"Energy stocks were clobbered today as Oil retreated to $74". Since energy represents a huge portion of the Dow, the markets were off almost 8%.

Without the slightest bit of irony, today's rally in stocks was attributed to:

"Falling oil prices bolster stocks". Huh? Did I just step through a wormhole (shout out to all S. Hawking fans)?

Guess what, no one seems to know what is causing the crashes and rallies right now. There remains some substantial hedge fund and mutual fund selling. Hedge funds, endowments and pension funds that invested in hedge funds all played in the oil markets as oil shot over $100. Many of the positions are getting blown out now.

So oil is down 52% from it's July highs -- where is it going from here? OPEC is threatening production cuts, but they are not going to be able to cut production as fast as the world is cutting consumption. Oil's natural price given the state of the economy last year was around $65/bbl. I'd say the natural price today should be somewhere around $50, but when prices collapse like they are right now, they usually overshoot on the downside. There's a 50% chance that we break $50/bbl in the next 6 mths.

Unfortunately, that means that all of the scrambling to fix our energy crisis will be put out to pasture because everyone will forget about the crisis when gas is $2.35 a gallon.

One of my least favorite talking heads on CNBC loves to rave about the $100 billion stimulus that consumers have received from lower gas prices. Gas could be $0.23/gallon, but if you don't have a job or you've lost 35% in your 401k, you are not going to feel like blowing $999 on a new flat screen this year.

The credit economy is broken and we are going to need to finally live within our means for the first time in a generation.

Well here's a shocker to everyone but the regular readers of the blog.

Banks Are Likely to Hold Tight to Bailout Money

The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion."

If only Congress read Grindstone Financial maybe we could have saved a couple of hundred billion. Also, note that line at the beginning - credit cards and commercial loans are going to be the next big shoes to drop on the banks.

Cheers! Tomorrow is option expiration. Crazy things normally happen on option expiration and so tomorrow could be really wild.

Drop Some Knowledge at the Watercooler...

Impress your friends with a discussion of the Baltic Dry Index. Talk about the Dow and the Nasdaq is so, last week. If you want to really get someones attention point them to the BDI - the Baltic Dry Index is according to Wikipedia:

an index covering dry bulk shipping rates and represents an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

In essence, when this index moves higher it is an indication of strong global growth and when it falls it points to a weaker global economy. As a point of reference, the blue line represents the Baltic Dry Index. It's down 85% THIS YEAR!

Also, I've been mentioning this for some time but the charts are starting to back me up. All of the Federal money spent bailing out the financial industry is pushing up rates on the 10 yr note. This is having a pretty dramatic effect on mortgage rates which are now sitting at/or near 5 year highs in New York State. You can assume that every 1% rise in interest rates, knocks roughly 10% off the value of your home. The rising mortgage rates are going to further depress the housing market and likely offset any improvement in the financial system derived from the various bailouts.
Finally, the markets rallied sharply on rumors that Microsoft might look at buying Yahoo again.
A) Of course they would. Yahoo has fallen from $30 to $12.
B) It doesn't fix Microsoft. This isn't as bad as Sears and Kmart merging, or Netscape/AOL, but it's in the ballpark. Two weak businesses never can beat a strong business.
C) Why did this rally the market? I have no clue. Maybe somebody thinks this will create another Merger and Acquisition binge? They are tired of selling? ???

We're Skating On Some Thin Ice

The Dow's down another 160pts (though it's been down 240) and we're now below the previous lowest close this month. We did dip down briefly to around 8,000 last friday. If we don't bounce off this level we could shoot right back down to that 8,000 level pretty quickly.

Separately, I think it's pretty telling that Sheila Blair, the FDIC Chair, is out bashing the bailout plan. "Federal Deposit Insurance Corp. Chairman Sheila Bair on Wednesday criticized the federal government for failing to take more aggressive steps to prevent Americans from losing their homes, highlighting a rift between her and other senior U.S. officials over terms of the $700 billion rescue package..

The government plan will help stabilize financial markets but it doesn't do enough to address home foreclosures, the root of the crisis, she said in an interview with The Wall Street Journal.

"Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level, I don't understand it," she said. "It's been a frustration for me."

I'll have some more thoughts on housing later, but suffice to say that none of the plans put in place today address the fact that homes are overvalued and the debts tied to those homes are in trouble (especially if unemployment goes up 50% or more next year as some predict).

Wednesday, October 15, 2008

What if the Market Crashed and No One Noticed?

Holy Crash, Batman!

Wow, today was the single biggest percentage drop in the market since 1987 and no one other than the sock puppets on CNBC seemed to notice.
Down 8% on the Dow and Nasdaq and 9% on the S&P. The Nasdaq is down about 17% since YESTERDAY morning.
The stunning fact to me is that this isn't the lead story tonight on any of the major websites. Yesterday, I wrote about the violent swing in the market that wasn't going to get picked up by the major media outlets.
The technicians bought what they thought was the bottom on Friday and now that we're spiralling downward quickly, they can't unload positions quickly enough. This market is dangerous for even the most skilled professionals. I'm getting the sense that even the best investors are starting to get scared of this market.
It's more of the same right now - Hedge Fund and Mutual Fund liquidation, earnings deterioration, foreign currency and credit markets are frozen.
I wish I was wrong on this issue, but it looks like more of the same (until the markets go up another 1,000 points).

Housing, Retail Sales, Etc...

Today's Wall Street Journal hits on a number of key points that I've been repeating for the past three weeks.

"The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.

The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.

At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. "If the financial system doesn't get working again, then the economic downturn is going to be much worse, and that means the housing market will be a lot worse than it otherwise would be," says Frederic Mishkin, a Columbia University economist who stepped down as a Federal Reserve Board governor in August.

Over time, the government's rescue effort could make it easier for borrowers in high-cost markets such as California, New York and Boston to get a mortgage by reducing rates for jumbo loans, those too big for government backing. Rates on fixed-rate jumbo loans currently average 7.91%, according to HSH Associates, more than a full percentage point above rates on conforming loans eligible for government backing, which jumped nearly a third of a percentage point Tuesday to 6.6%."

As I noted two weeks ago:

What Does The Bailout Mean To US Consumers?
1. Mortgage rates - If you're shopping for a mortgage, the bailout might make a loan more available -- but higher interest rates might make it less affordable. "The prospect of an additional $700 billion in Treasury issuance is suggestive of higher Treasury yields and consequently higher mortgage rates," McBride said. I couldn't agree more. It is very important to watch the 10 yr note this week, it climbed much of last week and mortgage rates moved up back over 6% on talk of a bailout.

Mortgage rates have jumped to 6.6% this week as a result of rising yields on the 10 year note. What does this mean to the average person? Well all other things being equal this means that if you were going to buy a house today, you could afford to pay 6% less than you could just two weeks ago. As rates go up, house prices should continue to go down and the cycle continues to feed upon itself.

As discussed last night, retail sales were terrible in September and I expect more of the same for the balance of the year. Stocks have been weak so far today on this news.

Tuesday, October 14, 2008

Enough With The Markets - Let's Keep Some $$$ in Your Pocket

It's pretty hard to find ways to put more money in your pockets in these tough economic times, so the best way to improve your bottom line is to keep more of your hard earned dollars in your pocket.

One of the best ways to start that process is with a consistent budgeting process. There are a multitude of good budgeting tools, but there's a nice free tool from quicken that's now free and online. You have to be a bit of an online user to realize the benefits but if you merge your online bank info with your online bills, you can begin to see where your money is going. It's important to see the portion of your budget that is going to discretionary spending. The first step in reigning in spending is understanding where your money is going.

Also, if you want to really tighten your belt follow the tips of this frugal consumer that eliminated $14,000 of credit card debt in 20 months.

Pay Cash For Everything - "I cut up every single card except one for emergencies. I actually put my remaining credit card in a big plastic cup full of water and stuck it in the freezer. That way, I'd really have to work at it to get that card."

Cut out the B/S (Bad Spending) -

Cancel Cable TV - Have you looked at your Time Warner bill lately?

Cancel Land line phone - Try not to use your land line for a week, see if you can live without it.

Go to slower DSL - That would be hard for some, but if you're just online occasionally it's an option.

Personal Care - manicures, hair, etc., this is huge budget drain.

Gym Membership - There is a wealth of good workouts you can do at home (or here's a novel idea, go for a run, it's free).

Brown Bag it - It's hard to brown bag when everyone else buys, but you're not in Jr. High anymore - get over it.

Give Up Starbucks - It's coffee. Your corner deli probably makes a better cup for 1/10th the cost.


In a Strange Way a 600 point Intraday Swing Seems Calm...

The markets looked poised to continue the global market rally at the open, but slowly faded throughout the day as profits were taken as we neared the 9,800 pt mark on the Dow. The Dow actually swung 660 points from its high to its low during the session, but because it finished down just 77 points there will be little discussion of the markets in this news cycle (note however, that the NASDAQ was off 3.5% for the day and finished down more than 6% from it's intraday high).

Boy, where have I heard this theory before.....

"Notwithstanding the government and Treasury's actions focusing on financials, the general economic environment has deteriorated quite a bit in the last five or six weeks,'' said Jonathan Armitage, head of U.S. large-cap equities at the American unit of Schroders, the U.K. manager of $259 billion. ``You're just seeing different parts of the equity market reacting to that.''

To that point, did you notice that two of the big earnings misses today were Domino's Pizza and Pepsi?


Who else remembers the Noid? Avoid the Noid! Anyway, I'd guess Domino's shareholders are a little Annoyed right now.

Domino's Pizza Inc posted a weaker-than-expected quarterly profit due to a sharp drop in U.S. sales, the biggest independent U.S. pizza chain said on Tuesday, and its shares fell as much as 19 percent.


PepsiCo Inc., the world's largest snack maker, said it will cut 3,300 jobs after profit declined more than analysts estimated and the company lowered its forecast for the rest of the year. The shares dropped the most in almost 26 years in New York trading.

I think it's pretty telling that people are cutting back on chips, Pepsi, and bad take-out pizza. I think it's clear that we need a stimulus payment directed to consumers that will increase their junk food purchases (clearly that's sarcasm - the way Congress is spending I wouldn't put it past them).

We get PPI and Retail Sales Data tomorrow. It should be interesting (PPI could be lower than expected b/c of falling energy costs, but Retail Sales could be stunningly bad, we'll see which headline gets more play).


Monday, October 13, 2008

I'm Almost Speechless...

That was a stunning end of the day rally. The markets were trading within about 100 points of where they opened in the morning until the final hour when the program trades and trend chasers start pushing the panic button. While the headline numbers are simply eye-popping (up 11% on the Dow and 17% since the Friday afternoon lows) and the global rally looks to continue (the Nikkei is up another 12% as I write) there were some unbelievable moves in many individual stocks.

The US Treasury continues to leak out details of their revised bank bailout, that is morphing into a quasi-nationalization of the banking industry.

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms.

``We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. ``The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.''

A couple of quick points:

- if you are a healthy institution, you probably aren't going to be in need of capital.

- by the time the Government gets around to implementing their program, stocks which are already 20% higher than they were on Friday, might be back near their previous overvalued levels. So, the taxpayer is likely to overpay for equity in "healthy" banks (I'm not sure who is in charge of defining healthy - but I hope it is someone other than the 35yr old former Technology Banker from Goldman Sachs).

My final point on today's stunning rally - 5 of the largest point gains in the HISTORY of the DOW JONES INDUSTRIAL AVERAGE have now occurred in 2008! Does it feel like you've had 5 of the biggest one day rallies in history this year?

Also, note that while today's rally was clearly historic (ranking number 4 on the list of greatest one day percentage gains), 8 of the other 10 greatest percentage gain days occurred in the three years FOLLOWING the great crash of 1929 as the market ultimately fell 80% over three years and it took another 20 years to surpass the price levels seen in the 1920's.


Update: $25 billion for Citibank, Wells Fargo, JP Morgan and Bank of America. The quick and the dirty - capital injection is good for the banks and it may or may not increase lending (I think not). I'm most concerned with the investments in Citibank, Wells Fargo, and Bank of America - these are far from "healthy" financial firms. Note that US Bancorp, widely regarded as the healthiest bank in the US is not on the list. Finally, it would have been nice if we'd bought our Morgan Stanley stock before it went up 87% TODAY!!

"The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Treasury Secretary Henry M. Paulson Jr. outlined the plan on Monday to nine of the nation’s leading bankers at an afternoon meeting, officials said, in which he essentially told the participants that they would have to accept government investment for the good of the American financial system. This capital injection plan will use a huge chunk of the money authorized for Troubled Assets Relief Program.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

The capital injections are not voluntary, with Mr. Paulson making it clear this was a one-time offer that everyone at the meeting should accept. "
Wall Street Rejoices!

Columbus Clearly was a Bull

With a 700 point intraday rally the markets have gained over 13% since mid-day Friday. That would be a good year on Wall Street, instead we've swung 13% in just over 1 day of trading. The speed with which the market snapped back on no fundamental news is disconcerting.

Things to consider - the market today is operating in a vacuum because the bond market is closed today and the understanding of how weak the economy really is are just starting to leak out. One analyst today projected that a couple of hundred billion dollars worth of tech spending is on hold because of the weakening global economy. Earnings for 2009 and 2010 are going to be much, much lower than current forecast and that means stock prices will eventually be much lower than they are today.

I've said for sometime that the market is getting whipsawed by hedge funds and technicians. The technicians think the market is going on a straight shot from here to 10,000-10,300. At the current pace that is just another good day on Wall Street. Be prepared for another serious bought of selling if this market gets back near that 10,000 level.


Get Out Your Rally Monkeys....

The futures are still pointing to an explosive rally at the start of the day. A couple of quick observations:

1) This rally seems to be based on the European plan, as the US has not made any material changes in it's bailout plan. We may make some changes to our bailout, but as it stands right now, the US plan is still inferior to the European plan.

2) The magazine indicator - There is an old investing philosophy that says when a trend gets picked up by mainstream media it's usually a top or bottom of a market. For example, consider this Time Magazine cover from June 2005.

Given the manic swings in the market recently I don't think the magazine indicator is as valuable as it was a couple of years ago. Today, I'm using the CNBC indicator. EVERY Money Manager on CNBC is calling a bottom and claims that this is the time to buy stocks. In general, that's not a good sign - you want to be on the opposite side of these guys most of the time. I think today is going to be a very weird trading day because of the partial holiday. A lot of smart money is going to use any big rally to reload their short positions (I was market neutral until Friday when I went long. I'll probably go short again if we go up 5-10% in the next couple of days).
The key question is - How has the economic backdrop improved from Friday morning?

Sunday, October 12, 2008

Weekend Roundup

As I write the US futures are pointing to a higher open (however, if we've learned anything this week, we know that the futures can swing wildly) on news that the EU will be taking equity stakes in European banks and injecting more cash into the banking system.

So the big question is -- Will it work? Well, not to sound too political, but I think the answer is a definite maybe.

1) Banks are likely to resume interbank dealing because the European governments will be stepping in to guarantee those loans.

2) European banks are more likely to survive as a result of the direct injection of capital.

However, I'm not convinced that the banks will feel compelled to suddenly start lending again. First a little primer on how banks work: A bank takes your $1 that you deposit and lends it out 10-30 times to borrowers. The banks assets are those loans and they have to keep their capital ratios inline either by lower their loans outstanding or increasing capital.

While I think the banks are publicly saying that a plan like the EU plan will improve their capital ratios and enhance their ability to lend, I think that the reality is that the banks are still concerned about a huge portion of their asset base. The banks are likely to remain unwilling to extend new credit until they feel comfortable that their assets are going to stabilize.

In a stunning turn of events, it seems that the US policymakers have reversed course on the $700 billion bailout according to this article.

"Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.

The Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance."

The NY Times posed some tough questions in an article over the weekend in - "A Power That Might Not Stay So Super".

"At the heart of the troubles, both short term and long term, is debt. Debt helped create the housing bubble and has now left almost one of every six homeowners with a mortgage larger than the value of their home. Debt built up, and then laid low, modern Wall Street, where firms borrowed $30 for every $1 they owned. And in the coming years, debt will constrain the United States government, as it copes with the combined deficits created by the Bush administration’s policies, the ever-more expensive financial rescue and the biggest item of all, Medicare for the baby boomers.

In essence, households, banks and the government have already spent some of their future earnings. The current crisis marks the point at which the bills begin to get paid. Whereas Britain lumbered under the weight of imperial overreach, as the historian Niall Ferguson has written, the United States will be shackled primarily by its financial overreach.

This is not the first time in recent history that the economic position of the United States has appeared precarious. At various points between the mid-1970s and early 1990s, Europe and Japan each looked like the next great power. Neither turned out to be.

Japan suffered through its own burst bubble and spent years denying the depth of its problems. Europe proved unable to create engines of growth that could match the software, biotechnology or entertainment industries in the United States.

Taken to its extreme, the American preference for a faster, riskier capitalism led directly to the current crisis. But that preference also helps explain why America is weathering the crisis at least as well as other countries."


Friday, October 10, 2008

Laugh of the Day!

Quick update...

I'm not sure it will hold, but the buzz is that there is going to be another major fed/treasury plan announced over the weekend (like the English plan) and that is sharply rallying stocks. Just a rumor, but that's what has brought it back from 500 down to 100 down.

What a crazy day!

The Question You Have to Ask Yourself, Punk, Is Do You Feel Lucky? Well Do You?

Only about 90 minutes of trading left and we're still sitting around the -400 point level. Like someone said "Down 400 is new Down 100".

This might get ugly into the close, if people that bought the bounce this morning sell aggressively into the close. Fear is surprisingly pervasive and the fear that something major (positive or negative) could come out over the weekend makes holding stocks a difficult proposition.

Expect the Fed and Treasury to talk up a plan like the one England instituted this weekend. In essence we'd be propping up the capital bases of the banks and guaranteeing interbank lending. Again, that's a quick fix but it will improve credit market liquidity. The problem is that even the good banks with fresh capital will face another leg down when the good assets start to go bad.

I hate to draw parallels with the market in 1929-32 because so many things are different today, but if you go back and look at the bottoming process that occurred, those that bought the first dips were not rewarded for their aggression.

Cheers! Treat yourself to an adult beverage tonight if you can still afford it.