26 February 2010

Present Market Outlook: The market anticipates. It looks six to nine months out. The fact that the financial system did not collapse was the reason for the rally off the lows. Earnings for this quarter have been good. The earning season is almost over, except for the retailers and so there is not much news on which to hang a hat. The pullback from mid-January to mid-February was about 10% which was also the pullback in July 2009. We think there may be a more significant pullback after May but think the odds of moving 10% higher from here are greater than going 10% lower.
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Today is a snow day in NYC. And so the big boys and girls may decide not to come out and play. Asian and European markets were mildly higher overnight and U.S. futes are predicting a flat opening. Gold is unchanged and oil has a $78 handle as the trading day begins.
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Looking in the rear view mirror Preliminary (the second of three reports, the better to trade- Advance, Second Estimate, and Final)  4th quarter GDP was a positive 5.9%. 5.6% was expected. Hooray. But unemployment remains over 10% so.....
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(WSJ) Deutsche Telekom AG said Thursday it reduced its net loss in the fourth quarter on lower charges and write-downs but gave a weaker outlook for 2010 compared with the prior year, citing current economic uncertainty. The net loss for the quarter ended Dec. 31 was €3 million ($4.1 million) compared with a net loss of €730 million in the prior year. Deutsche Telekom's fourth-quarter bottom line was hit by a €900 million impairment on its South and Eastern Europe operations, chiefly due to Hellenic Telecommunications Organization and restructuring charges. A year earlier, write downs and charges totaled €1.6 billion. Sales for the period rose 0.6% to €16.2 billion.

The company committed to return €3.4 billion a year to its shareholders and said it will reduce its cost base further.

Closely watched earnings before interest, taxes, depreciation and amortization, or Ebitda, adjusted for one-time items and restructuring, the company's preferred measure of operating performance, rose 8.6% to €5.07 billion. Both figures were boosted by the contribution of OTE, which was fully consolidated by Deutsche Telekom from February last year. Excluding the OTE consolidation and at constant currencies, full-year sales were down €2.2 billion or 3.5%. For 2010, Deutsche Telekom said it expects adjusted Ebitda of around €20 billion and free cash flow of €6.2 billion. In 2009 the company achieved its target for adjusted Ebitda of €20.67 billion and free cash flow of €6.97 billion.

Deutsche Telekom late Wednesday committed to pay back €3.4 billion a year to shareholders in the next three years, guaranteeing a dividend of 70 European cents a share and mulling additional share buy backs to achieve the pay-out target. The Bonn-based company intends to pay a dividend of 78 cents a share for 2009, steady with 2008. Deutsche Telekom's dividend policy is closely watched by investors as the company has the highest dividend yield among the DAX companies to make up for sluggish share price development, underscoring the defensive character of the stock. In the last 12 months, Deutsche Telekom shares gained just 3.4%, significantly underperforming a 44% rise in the DAX.

Deutsche Telekom said it generated savings of €5.9 billion since it launched a cost-cutting program in 2006 and wants to reduce its gross cost base by another €4.2 billion by 2012.

In the U.S., once the company's growth engine, fourth-quarter service revenue was $4.65 billion, down from $4.73 billion in the third quarter and $4.9 billion a year ago. Still, T-Mobile USA, its wholly owned subsidiary, gained 371,000 customers in the December quarter, mainly for pre-paid services, after losing 77,000 customers in the third quarter.
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From the National Association of Realtors: Existing-Home Sales Down in January

Existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 7.2 percent to a seasonally adjusted annual rate1 of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5 percent above the 4.53 million-unit level in January 2009.Total housing inventory at the end of January fell 0.5 percent to 3.27 million existing homes available for sale, which represents a 7.8-month supply at the current sales pace, up from a 7.2-month supply in December.
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We added shares of Boston Scientific to accounts at $7.80. The company is priced at twice revenues and excluding debt 1.2X revenues, when most health care stocks are priced at three times and more. We have traded BSX profitably over the past few years, most recently selling shares at $9 in January.
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Wage Freezes and Rate Increases

There are two stories on the front page of the Chicago Sun Times internet edition whose juxtaposition exemplify the times.

The first story is about a shortfall of revenue at the Chicago Public Schools. The Sun Times Editorial Board writes: Chicago Public Schools CEO Ron Huberman on Thursday painted the grimmest financial picture the Chicago schools have ever seen. The budget deficit could top $900 million, a hole so big that Huberman says he needs major concessions from teachers -- a move that could easily lead to a teachers' strike if the unions refuse to play ball. We're not alerting parents to cause a panic or to bash beleaguered teachers. We're alerting parents now, when there's still time, to try to resolve this crisis and avoid a strike. The best hope is for the Chicago teachers to accept a wage freeze.

The next article is about a rate increase for Commonwealth Edison: ComEd has tipped its hand. The electric utility plans to seek a rate increase this year on top of one it's due to receive this spring.

The company said it will ask the Illinois Commerce Commission for a rate hike in a few months. It declined to say how much it will seek. Spokesman Bennie Currie said the utility cut costs by $200 million in 2009 while still spending to upgrade its system. He said ComEd needs to be compensated for that work. The utility disclosed its plans at a Feb. 3 investor conference for its parent company, Exelon Corp. The ICC has given ComEd permission to implement a $70 million rate increase in April. The money will cover escalating costs from unpaid bills and is expected to cost the average residential customer about $1 per month. In September 2008, ComEd raised its rates by $270 million.

We aren’t holding our breath for a Sun Times editorial asking the ICC to freeze rates for CWE. By the by, CWE’s parent company Exelon reported earnings of $3 billion last year and free cash flow of $7 billion and its CEO John Rowe made $3 million in pay and exercised options granted to him over the years that netted him another $27 million.
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When government works (and how many $$$$ have been saved by illnesses prevented. It must be billions.): From LaCrosse Tribune

Something’s missing from the traditional flu season this winter — the flu. The La Crosse area has yet to have a seasonal flu case reported so far despite being well into the colder months that normally mark the peak period for the illness, health officials said.

“I can’t think of a time when the seasonal flu wasn’t here by January,” said Dick Matushek, Franciscan Skemp infection preventionist. “But I don’t think we can say the flu season is over.”

H1N1 illness seems to have disappeared as well, officials said, and some now think a predicted third wave of H1N1 is unlikely.

That might be due to 1 in 5 Americans already having had H1N1 and 70 million immunized against it, said Dr. Rajiv Naik, a Gundersen Lutheran pediatrician and vaccination expert.

“Time will tell what happened this season,” Naik said. “We still know H1N1 was a serious and significant illness, causing three times as many pediatric deaths as usual, but it wasn’t doomsday.”

In fact, the rise of H1N1 might account for the lack of seasonal flu, officials said.
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Europe closed up 1% and higher. Oil was up $1.50 at $79.70 and Gold gained $8 to $1120.
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Stocks closed to the upside The S&P 500 was up 3 points. Breadth was positive and volume was snowstorm light.
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25 February 2010

This morning the glass is half full as stocks look to open lower on a higher than expected Jobless claims number and snowstorm in NYC. Gold is under $1100 and Oil has a $78 handle. Asian and European markets were lower overnight. In the week ending Feb. 20, the advance figure for seasonally adjusted initial claims was 496,000, an increase of 22,000 from the previous week's revised figure of 474,000. The 4-week moving average was 473,750, an increase of 6,000 from the previous week's revised average of 467,750.
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In the never ending trading market that is modern capitalism Coca Cola is going to repurchase the North American bottler of Coke that it spun off in the last century.  Coca Cola’s CEO says the time has come to realize the synergies that obviously the CEO in the last century didn’t see. And its investment bankers say thank you.
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(WSJ) Deutsche Telekom on Thursday reported a narrower fourth-quarter loss and issued a cautious outlook for 2010. U.S. durable-goods orders rise 3%, fueled by aircraft deals. Weekly U.S. jobless claims rise -- sixth increase in 2010's first eight weeks.
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In the shoulda coulda market we were going to sell Palm at $9 on Monday. Instead we bought more shares at $8.50 on Tuesday. The market action was telling us that bad news was in the offing but we were smarter. Today Palm said sales of its new phones were punk and that they would miss quarterly and yearly numbers and we sold at $6.50. The markets still punish dumb decisions. The dumb decision was to buy Palm. It is an also ran but we bought for a trade on the hope of takeover talk. Hope is not an investment criterion. Fortunately we haven’t had many dumb mistakes recently, but this one hurt. Trade and learn.
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With the proceeds we bought Nokia (4% yield) which is largest smart phone seller in the world. We also sold BankAmerica and Walgreen for small trading profits
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Two hours into the trading day the major measures are 2% lower and breadth is 5/1 negative. We should have gone snow shoeing.
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Oil closed at $78.21 down $1.80 and Gold was $1105 up $8. (WSJ) Stocks fell across Europe amid rising concerns about Greece's fiscal woes and the British pound slid sharply as pessimism about the U.K.'s economic outlook mounted.
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When the Madoff scandal first broke we told a friend that the money stolen went to prop up the trading firm. It’s always fun to be right.

F.B.I. Arrests Former Madoff Aide http://dealbook.blogs.nytimes.com/2010/02/25/f-b-i-arrests-former-madoff-aide/#more-185103

February 25, 2010, 9:54 am 1:25 p.m. | Updated

A senior executive who worked for Bernard L. Madoff for more than 30 years was arrested Thursday on federal fraud and conspiracy charges, including claims that he helped Mr. Madoff survive a cash crisis that almost derailed the gigantic Ponzi scheme five years ago, The New York Times’s Diana B. Henriques reports.

The executive, Daniel Bonventre, 63, joined the Madoff firm in 1968 and was its director of operations, overseeing the back office record-keeping staff, since at least 1978.

In a criminal complaint filed Thursday in Federal District Court in Manhattan, Mr. Bonventre was accused of doctoring records to conceal for a decade that the firm was being propped up with money illegally siphoned from investor accounts and that money borrowed by the firm was illegally used to cover withdrawals when the Ponzi scheme faced a cash shortage beginning in late 2005.

The United States attorney in Manhattan, Preet Bharara, said the phony records “effectively hid the doomed state of an investment firm founded in fraud,” adding that his investigation into “this colossal deception” was continuing.

In a parallel case, the Securities and Exchange Commission filed a civil fraud complaint against Mr. Bonventre, accusing him of helping “manufacture plausible lies” that concealed the fraud from regulators and investors.

Andrew Frisch, a lawyer for Mr. Bonventre, had no immediate comment on his client’s arrest. Mr. Bonventre was scheduled to appear before Federal Magistrate Judge Theodore H. Katz in Manhattan federal court on Thursday afternoon to arrange bail.

The charges against Mr. Bonventre are the first to report that a nearly calamitous cash crisis, caused by a spate of investor withdrawals, threatened Mr. Madoff’s Ponzi scheme beginning in late 2005.

According to the S.E.C. complaint, Mr. Madoff preserved his fraud, in part, by borrowing bonds from an unidentified investor and using them as collateral for loans to his brokerage firm, which he used to cover redemptions from his corrupt investment advisory business.

Mr. Bonventre arranged the loans and created the false paper trail that concealed the bailout, according to the regulatory complaint.

The Ponzi scheme got so low on cash during this crisis that Mr. Madoff had to draw on his firm’s operating accounts to meet four separate investor redemption requests totaling nearly $262 million from Jan. 30 to April 13, 2006. Prosecutors say that Mr. Bonventre handled the ledger entries that concealed the illicit use of the funds.

Federal prosecutors have previously said in court that Mr. Madoff sometimes used cash from his Ponzi scheme to sustain his apparently legitimate brokerage firm, which handled securities trades for other Wall Street institutions and traded for its own proprietary accounts.

But the S.E.C. complaint against Mr. Bonventre provides additional details about that support, asserting that the firm — widely considered to be a successful wholesale trading house on Wall Street — “normally operated at a significant loss.”

According to the S.E.C., Mr. Madoff used more than $750 million of his investors’ money to “artificially improve the firm’s reported revenue and income” from at least 1998 until his arrest in December 2008. As operations director, Mr. Bonventre concocted the ledger entries and financial statements that concealed the illegal cash infusion, the regulatory complaint said.

Mr. Bonventre is also accused of personally profiting from the scheme through phony transactions in his own Madoff accounts that generated nearly $2 million in illegal gains, and of failing to accurately report his income on his federal tax filings.

Mr. Bonventre, who reported directly to Mr. Madoff, is the fifth person to be arrested in the fraud case since Mr. Madoff pleaded guilty last March.
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Analysis of Chico’s earnings report from www.minyanville.com

Last year, it appeared as if baby boomer-age women would be faced with a shortage of stylish retail options. Every retailer targeting older women was falling apart. Not only did its target market reign in spending at an unprecedented rate, but companies were missing major fashion trends and not offering attractive merchandise.

For the most part, that still stands as the case today. However, two companies -- Talbots (TLB) and Chico's (CHS) -- have demonstrated some success in their turnaround programs. An update from Chico's arrived yesterday in its fourth quarter and fiscal year-end results.

Sales increased 16.7% and comps increased 14.6%. Keep in mind, though, that that comps decreased 15.1% in 2008 and 8.1% in 2007. Total sales for the year fell just below those in fiscal 2007.

The quarterly gross margin expanded a whopping 1,000 basis points to 56%. Sounds impressive, but a little digging into the historical records shows that Chico's posted a 59% margin in 2006 and over 60% margins in the first half of the decade. Same story for its operating margin; it posted a 6% operating margin compared to last year, but its five-year average is over 11%.

Like its clientele, Chico's slowed down with age and will never return to its spunky growth days. But in comparison to its peers, Chico's may be the last brand standing. In addition to Talbots, Coldwater Creek (CWTR) and Ann Taylor (ANN) have achieved far less gross margin and no operating profit in the last 12 months.

Save for Coldwater Creek, all are expected to return to profitability next year, but Chico's has been the first to show signs of life. And with no debt and plentiful liquidity, it has the necessary balance-sheet strength to continue turning around. Like its peers, Chico's stock has had an enormous run over the past year, returning 220%. (At todays price it still sells at only half its 2007 price.) However, it was an anomaly caused by a correction from a mass sell-off due to internal problems combined with the financial crisis. Two years ago, I didn’t think Chico's stood a chance either.

The company's turnaround progress certainly warranted a higher stock price, but I’m concerned that too much optimism has been priced in. According to the historical price-to-sales ratio, Chico's still appears quite cheap. But on a forward P/E ratio basis, the stock seems expensive.

If the stock returns a more rationale 15% this year, a reasonable expectation given the stock’s risk, and it meets earnings expectations, Chico's will still sell at 18 times earnings -- an expensive price to pay for a recovering retailer facing years of slumped consumer spending.

Chico's deserves attention for its progress. At current prices though, any slipup could result in a sell-off; a sell-off I recommend watching for as an entry point. (We agree with the analysis but want to own the shares now with room to buy more lower.)
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Stocks closed lower on Thursday but well above their worst levels of the day. The S&P 500 after being down almost 2% at 1085 closed down 0.3% at 1103. Breadth was 5/4 negative at the close and volume was active.
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24 February 2010

The WSJ reports that U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover. Since banks were making so many bad loans in the years before the financial crisis less lending would seem to bus to be a good thing over the long run.
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(WSJ) Sales of new single-family homes in the U.S. sank 11% in January to a seasonally adjusted annual rate of 309,000. It was an unexpected tumble that sent sales to their lowest level since records began in 1963 and wiped out much of the progress made in the last year. Economists surveyed by Dow Jones Newswires had expected sales last month rose 3.8%. Sales in December fell 3.9%, revised from an originally reported 7.6% decline.
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(RTTNews) - Women's specialty retailer Chico's FAS, Inc. on Wednesday reported a net profit for the fourth quarter, which surpassed Street view, as compared with a loss in the corresponding period last year. The profit reflects higher net sales, improvement in comparable store sales and a significant decline in impairment and restructuring charges. Separately, Chico's declared its first quarterly dividend since it became a publicly traded company in March 1993.

For the fourth quarter, the Fort Myers, Florida-based company's net earnings were $17.51 million or $0.10 per share compared to a loss of $40.54 million or $0.23 per share in the prior-year period. The quarter's results included a non-cash impairment charge of about $1.3 million, resulting from an additional write down of a note receivable to current market value.

On an adjusted basis, net income was $18.83 million or $0.10 per share versus a loss of $24.85 million or $0.14 per share a year earlier.
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The Securities and Exchange Commission voted 3-2 Wednesday in favor of a final rule that will curb short selling for individual securities that decline at least 10% in a single day. http://sec.gov/news/speech/2010/spch022410mls-shortsales.htm

The rule change is a sham. It is the Index ETF’s that are moving markets and since the major index ETFs have corresponding futures components the disconnect is going to make trading screwy on volatile days. This rule change is like Obama’s health care bill, both are for show and will have few positive effects and may have unforeseen negative effects.
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(WSJ) European stocks ended a choppy session in the green, as investors took heart from Fed Chairman Ben Bernanke's reassurance that interest rates will remain low for an extended period.
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Oil closed at $80.08 and Gold was $1098.
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The major measures closed higher but were up a tad less than they were down yesterday. The S&P 500 gained almost 1% after losing a bit more than 1% on Tuesday. Breadth was 2/1 to the good and volume was light.
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Senate passed jobs bill with votes, 70 - 28, including support from six GOP hypocrites who voted for filibuster on Monday

http://www.americablog.com/

Monday night, the Senate broke a GOP filibuster of the $15 billion jobs bill with votes from Senators Bond (MO), Collins (ME), Voinovich (OH), Snowe (ME) and Scott Brown (MA). And, wow, the tea baggers aren't too happy with Brown because of his vote. And, Ben Nelson sided with the GOP, but we're used to that.

Today, the final passage of the jobs was secured by a vote of 70 - 28.

So, this means that a number of GOP Senators who voted to block a vote on the bill on Monday, ended up voting for the bill today. Once the roll call list is online, I'll post the list of the GOP hypocrites. These are the hypocrites who were willing to prevent the jobs bill from even getting a vote, but ended up supporting it: Alexander (TN), Cochran (MS), Inhofe (OK), Lemieux (FL), Murkowski (AK) and Wicker (MS). Senators Burr (NC) and Hatch (UT) didn't vote on Monday, but voted yes today.
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Matt Taibbi, always informative at http://trueslant.com/matttaibbi/

Dems Get Religion on Health Care Antitrust Exemption

MY health insurer here in California is Anthem Blue Cross. So far, my group policy hasn’t been affected by Anthem’s planned rate increase of as much as 39 percent for its customers with individual policies — but the trend worries me, as it should everyone. Rates are soaring all over the country. Insurers have been seeking to raise premiums 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon and a wallet-popping 56 percent in Michigan. How can insurers raise prices as much as they want without fear of losing customers?

Astonishingly, the health insurance industry is exempt from federal antitrust laws, which is why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go. But that protection could soon end: President Obama on Tuesday announced his support of a House bill that would repeal health insurers’ antitrust exemption, and Speaker Nancy Pelosi signaled that she would put it toward an immediate vote.

via Op-Ed Contributor – Bust the Health Care Trusts – NYTimes.com. http://www.nytimes.com/2010/02/24/opinion/24reich.html

This is how politics is supposed to work. Well, not really — in reality, you’d like to see your leaders actually lead, i.e. do the right thing first, before being forced into it by circumstance. But we’ll take the latter.

The sequence: Obama and the Dems got whipped in Massachusetts and it suddenly occurred to them that they might want to start doing things that would be popular outside their Rolodex of campaign contributors. A bailout tax was one early idea. They started searching the landscape for outrages they could get on the other side of and found a good one: Anthem Blue Cross in California raising rates by 39 percent.

Suddenly the Obama administration decided to come out against the antitrust exemption for the insurance industry. Like they only just noticed the problem.

The insurance antitrust exemption has been an outrage for over fifty years. The original bill formalizing the industry’s exemption from the Sherman Antitrust Act, the McCarran-Ferguson Act, was dreamed up by two Hollywood villains. Nevada Senator Pat McCarran was the inspiration for the “Senator Pat Geary” character in Godfather Part II (”Senator… my final offer is this: nothing” — that guy), while Homer Ferguson was the inspiration for the Lloyd Bridges character in Tucker who whored himself out for the auto makers to get Tucker’s new car struck from the market. These two gigantic assholes teamed up to help the insurance industry avoid the albatross of competitive pricing.

McCarran-Ferguson was supposed to be temporary. Franklin Roosevelt clearly thought so when he signed it into law in 1944, saying that after “a moratorium period,” the antitrust laws “will be applicable in full force and effect to the business of insurance.” The law was supposed to expire in 1947. It didn’t.

As a result, all the evil shit that made for such high drama in Kurt Eichenwald’s book The Informant – about a bunch of agricultural firms who get together to fix prices for an additive called Lysine — that’s actually legal in the insurance business.

This is why insurers (especially insurers with large market shares in small states) are easily able to gouge customers and deny coverage. There’s really no legal mechanism for preventing the firms from getting together and arranging price-fixing and other outrages. In a normal market customers would be able to get better coverage and cheaper rates from a competitor, but insurance is really more like a series of competition-free fiefdoms where the customers can’t go elsewhere for a better deal. State Farm even denied coverage to Trent freaking Lott after Katrina and got away with it because State Farm has Mississippi by the nads. It’s crazy.

This is, again, another reason Obamacare was such a joke from the start. The White House vision clearly called for “health care reform” without a repeal of McCarran-Ferguson. Which is technically almost impossible, but they tried it.

That didn’t work, naturally, so now they’re finally getting around to doing the obvious. They’ll fail — every attempt to repeal McCarran-Ferguson inevitably does, mysteriously — but at least they’re talking about it. But Jesus, why does this stuff take so long?
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23 February 2010

Markets were mostly higher while we were away. This morning stocks in the U.S. look to open a bit lower. Overseas markets were lower overnight while Oil is at $80and Gold at $1109 both prices being higher than a week ago.
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 The market anticipates. It looks six to nine months out. The fact that the financial system did not collapse was the reason for the rally off the lows. Earnings for this quarter have been good. The earning season is almost over, except for the retailers and so there is not much news on which to hang a hat. The pullback from mid-January to mid-February was exactly 10% which was also the pullback in July 2009. We think there may be a more significant pullback after May but think the odds of moving 10% higher from here are greater than going 10% lower.
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Floyd Norris writes at the NY Times: http://norris.blogs.nytimes.com/2010/02/22/horrid

It snowed this month in much of the United States. ... Both the household survey (which produces the unemployment rate) and the employer survey (which produces the job count) ask about workers in the week during which the 12th of the month fell [the week of the blizzards]. ... That means that a lot of people who had jobs may report they did not work during the week, and companies may say they had fewer people on the payroll than they would have cited a week earlier or later. If so, we may get a truly horrid job number.
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Nvidia sales were higher but earnings were as expected and the shares sold off last week. We added shares on the selloff. Dell announced lower margins but revenues were higher than and we take that as a good sign. Yesterday we added Huntington Bank shares as a speculative buy in many accounts.
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Palm was cut to underperform from buy at Bank of America Merrill Lynch which said the group's superior platform hasn't translated into sufficient carrier support and consumer demand. The broker also slashed Palm's price target to $10 from $20. Separately, Macquarie cut Palm to neutral from outperform -- and with a $10 price target -- citing weak sell-through checks at Verizon and ramping operational spending.
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(marketwatch) The first drop in a key German business gauge in 10 months and concerns over disappointing results and outlook from lenders Commerzbank and Raffeisen weighed on Europe stocks. Hong Kong stocks rose while Shanghai's fell during a mixed session in Asia.
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(Associated Press) Wall Street bonuses were up 17% to over $20 billion in 2009, the year taxpayers bailed out the financial sector after its meltdown, New York state Comptroller Thomas DiNapoli said Tuesday. Total compensation at the largest securities firms grew beyond that figure while profits could surpass what he calls an unprecedented $55 billion for 2009, Mr. DiNapoli said. That's nearly three times Wall Street's record increase, a rate of growth that is boosted in part by the record losses in 2008 of nearly $43 billion, the Democrat said.
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(cnn.com) Stocks swayed on both sides of uneven in the early going, but turned lower after the release of the Consumer Confidence index. The Conference Board said its index fell to 46.0 in February from 56.5 in January. Economists surveyed by Briefing.com thought it would fall to 55.
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We added Verizon and AT&T to accounts. The 6% plus yields are hard to ignore. We had sold some of each for cash a few weeks ago but decided to reenter for the April 1 dividend or a 10% move whichever comes first. We sold T-Bills in some accounts to fund the purchases. We also added to Palm, Goodyear and Alcoa in some accounts
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European markets slumped after weaker-than-expected economic news from Germany and the U.S. renewed fears about the fragility of the economic recovery. The euro lost ground against the dollar.
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Gold ended at $1104 was $79.02 down $1.29.
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Feb. 23 (Bloomberg) -- When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention.

Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a cover-up. Geithner countered that he had acted properly to avert the collapse of the financial system.

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There’s been no accountability.”

The document Issa made public cuts to the heart of the controversy over the September 2008 AIG rescue by identifying specific securities, known as collateralized-debt obligations, that had been insured with the company. The banks holding the credit-default swaps, a type of derivative, collected collateral as the insurer was downgraded and the CDOs tumbled in value.

The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.

The banks should have to explain how they managed to buy protection from AIG primarily on securities that fell so sharply in value, says Daniel Calacci, a former swaps trader and marketer who’s now a structured-finance consultant in Warren, New Jersey. In some cases, banks also owned mortgage lenders, and they should be challenged to explain whether they gained any insider knowledge about the quality of the loans bundled into the CDOs, he says.

 “It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman -- for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”

Goldman Sachs spokesman Michael DuVally declined to comment.

Schedule A also makes possible a more complete examination of why AIG collapsed. Joseph Cassano, the former president of the AIG Financial Products unit that sold the swaps, said on a December 2007 conference call that his firm pulled back from selling swaps on U.S. subprime residential CDOs in late 2005. The list shows that the $21.2 billion in CDOs minted after 2005, mostly based on prime and commercial mortgages, performed as badly as or worse than the earlier subprime vintages.

A lawyer for Cassano declined to comment.

As details of the cover-up emerge, so does anger at the perceived conflicts. Philip Angelides, chairman of the Financial Crisis Inquiry Commission, at a hearing held by his panel on Jan. 13, questioned how banks could underwrite poisonous securities and then bet against them. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,” he said.

Janet Tavakoli, founder of Tavakoli Structured Finance Inc., a Chicago-based consulting firm, says the New York Fed’s secrecy has helped hide who’s responsible for the worst of the disaster. “The suppression of the details in the list of counterparties was part of the cover-up,” she says.

To read the rest: http://www.bloomberg.com/apps/news?pid=20601109
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Major stock measures closed lower with the S&P 500 down 1%. Breadth was 2/1 negative and volume was moderate.
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22 February 2010

19 February 2010

12 February 2010

Birthday Thoughts

(WSJ) Retail sales last month increased 0.5%, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires had forecast a 0.3% increase. The report also showed December retail sales were adjusted upward, to a 0.1% decrease from a previously reported 0.3% decline. Excluding the car sector, which was flat in January, all other retail sales rose 0.6%, in line with expectations. Ex-auto sales in December fell 0.2%. The data were originally scheduled for Thursday release, but there was a rare delay because of a crippling storm that struck an already snowbound Washington.

China's central bank unexpectedly increased the amount of funds banks must set aside as reserves -- the second such move this year. The action follows data released a day earlier showing rapid lending, accelerating property prices and a mixed inflationary outlook. From Feb. 25 banks will be required to set aside an additional 0.5 percent of deposits as reserves, the People's Bank of China said on its Web site. After the hike major banks will be required to set aside 16.5% of deposits. Smaller banks are currently required to set aside 14% of deposits.

European stocks pulled back from early gains and are now mixed as the trading day in the U.S. begins after China's announcement and as data from Europe underlined worries about economic growth. Asian equity markets, which had already closed when China made its statement, ended mostly higher Friday, helped by gains for resource sector stocks.
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We are heading down to Northern Kentucky to visit the prince and princess for the week and to watch a couple of basketball games. We will return on Tuesday February 23.

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Is anyone surprised?

(Bloomberg) -- Former regulators hired by Toyota Motor Corp. helped end at least four U.S. investigations of unintended acceleration by company vehicles in the last decade, warding off possible recalls, court and government records show.

Christopher Tinto, vice president of regulatory affairs in Toyota’s Washington office, and Christopher Santucci, who works for Tinto, helped persuade the National Highway Traffic Safety Administration to end probes including those of 2002-2003 Toyota Camrys and Solaras, court documents show. Both men joined Toyota directly from NHTSA, Tinto in 1994 and Santucci in 2003.

While all automakers have employees who handle NHTSA issues, Toyota may be alone among the major companies in employing former agency staffers to do so. Spokesmen for General Motors Co., Ford Motor Co., Chrysler Group LLC and Honda Motor Co. all say their companies have no ex-NHTSA people who deal with the agency on defects.
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The DJIA is down 100 points out of the gate.
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Motorola said late Thursday that it plans to split itself up into two separate companies, which would put its mobile handset and cable set-top-box business into a new publicly-traded company. The split is due to be completed by the first quarter of next year. The company has announced similar plans before, only to call them off given the weakness of the mobile handset business until very recently.

We wonder if Motorola is offering the cell phone business for sale with this announcement. And we also wonder what this announcement says about the future profitability of its cell phone business.
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Occam’s razor

In a discussion yesterday we mentioned that the health care bill should have just been re-importation of drugs and expanding Medicare by buy in to folks 55 and over and 20 and under. The Clinton healthcare bill failed in the 1990s because it was too complex. The same goes for this year. Too bad the Obama folks never heard of Occam’s razor

(Wikipedia) Occam's razor (or Ockham's razor), entia non sunt multiplicanda praeter necessitatem, is the principle that "entities must not be multiplied beyond necessity" and the conclusion thereof, that the simplest explanation or strategy tends to be the best one. The principle is attributed to 14th-century English logician, theologian and Franciscan friar, William of Ockham. Occam's razor may be alternatively phrased as pluralitas non est ponenda sine necessitate ("plurality should not be posited without necessity")]. The principle is often expressed in Latin as the lex parsimoniae (translating to the law of parsimony, law of economy or law of succinctness). When competing hypotheses are equal in other respects, the principle recommends selection of the hypothesis that introduces the fewest assumptions and postulates the fewest entities while still sufficiently answering the question. It is in this sense that Occam's razor is usually understood. To quote Isaac Newton, "We are to admit no more causes of natural things than such as are both true and sufficient to explain their appearances. Therefore, to the same natural effects we must, so far as possible, assign the same causes."
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All markets are closed on Monday in observance of President’s Day. (Wikipedia) Washington's Birthday is a United States federal holiday celebrated on the third Monday of February. It is also commonly known as Presidents Day (sometimes spelled as Presidents' Day or President's Day). As Washington's Birthday or Presidents Day, it is also the official name of a concurrent state holiday celebrated on the same day in a number of states. Titled Washington's Birthday, the federal holiday was originally implemented by the United States Congress in 1880 for government offices in the District of Columbia (20 Stat. 277) and expanded in 1885 to include all federal offices (23 Stat. 516). As the first federal holiday to honor an American citizen, the holiday was celebrated on Washington's actual birthday, February 22. On January 1, 1971 the federal holiday was shifted to the third Monday in February by the Uniform Monday Holiday Act. A draft of the Uniform Holidays Bill of 1968 would have renamed the holiday to Presidents' Day to honor the birthdays of both Washington and Lincoln, but this proposal failed in committee and the bill as voted on and signed into law on June 28, 1968 kept the name Washington's Birthday.
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From http://www.calculatedriskblog.com/ : Euro area and EU27 GDP up by 0.1%

GDP increased by 0.1% in both the euro area1 (EA16) and the EU271 during the fourth quarter of 2009, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the third quarter of 2009, growth rates were +0.4% and +0.3% respectively. Germany's economy stalled (no change), and Latvia saw the biggest decline (-3.2%). And Greece's economy shrunk by 0.8%, possibly exacerbating the Greek debt crisis. Note: Europe numbers are quarter-to-quarter. In the U.S. the GDP is annualized.
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Nvidia

Roth Capital Partners upgraded Nvidia to Buy from Hold.

Though we have been concerned about the loss of the Intel (INTC) (rated at Hold) chipset business, we would be remiss if we did not consider the possibility of significantly higher corporate margins as non-personal-computer businesses grow, graphics-processing-unit (GPU) margins recover with the ramp up of Fermi, and the low-margin chipset business disappears. Our new target is $21, based on 19 times fiscal 2012 (calendar 2011) earnings per share of $1.10.

We purchased a few shares in aggressive accounts yesterday but weren’t’ able to get an ax into it before is jumped $1.
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Stocks in Europe ended lower, snapping a four-session run of gains, as weak economic data from the euro zone and more signs that China is trying to slow its economy weighed on shares.
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High speed rail, it’s time has come—For China- it’s called jobs, jobs, jobs. Of course China isn’t spending hundreds of billions of dollars a year on useless and wasteful wars.

http://www.calculatedriskblog.com/

From the NY Times: China’s Project to Build Fast Trains Is Spurring Growth http://www.nytimes.com/2010/02/13/business/global/13rail.html

The Chinese bullet train, which has the world’s fastest average speed, connects Guangzhou, the southern coastal manufacturing center, to Wuhan, deep in the interior. In a little more than three hours, it travels 664 miles ... Even more impressive, the Guangzhou to Wuhan train is just one of 42 high-speed lines recently opened or set to open by 2012 in China.

This is part of the stimulus package: Faced with mass layoffs at export factories [due to the global financial crisis], China ordered that the new rail system be completed by 2012 instead of 2020, throwing more than $100 billion in stimulus at the projects. Administrators mobilized armies of laborers — 110,000 just for the 820-mile route from Beijing to Shanghai, which will cut travel time there to 5 hours from 12 when it opens next year.
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Gold was down $2 at $1093 and Oil finished at $74.09 down $1.19.
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We added Alcoa and Goodyear back to accounts that own Verizon. Both are about 10% lower than when we sold in January. In a few accounts we sold Verizon to pay for the purchases.
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The sellout to the drug companies and Billy Tauzin by Obama:

http://www.huffingtonpost.com/paul-blumenthal/the-legacy-of-billy-tauzi
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The major measures were lower all day and after some big boy and girl games towards the close they rallied a bit but still closed down wiping out about half of yesterday’s gains. Breadth was negative and volume moderate.

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11 February 2010

(NYT) European leaders, facing a crucial test for the credibility of their common currency, said Thursday that they had reached an agreement aimed at persuading jittery bond market investors that Greece would not be allowed to default on its government debt.
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Jobless claims for last week were less than expected at 440,000. Markets around the world are mildly higher and Oil has a $75 handle while Gold is at $1090 as the trading day begins. The dollar is firm at $1.37.
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Fun essay by one of the best writers about Wall Street, Michael Lewis, the author of Liar’s Poker and many other books:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

6 more pages at
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/index.html
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European shares ended mostly lower Thursday after European leaders said they stand ready to support Greece's economy but provided few details.
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 (thestreet.com) Palm swayed in the warm market breezes Thursday as Citi lifted its sell rating and regulatory monitors offered a sunny forecast that called for the Pre to arrive at AT&T in May.

Palm was higher this morning on the upgrade but sold off later in the afternoon when the following article was published:

http://digitaldaily.allthingsd.com/20100211/latest-dell-acquisition-not-palm/?reflink=ATD_yahoo_ticker

Dell is certainly getting its money’s worth out of David Johnson, the mergers-and-acquisitions specialist it hired away from IBM in 2009. Last fall, the PC maker announced plans to buy information technology services outfit Perot Systems (PER) for about $3.9 billion. Now, just a few months later, it’s snapping up another company — and no, it’s not Palm.

Dell is acquiring Kace Networks, a systems management appliances venture with clients in government, education and health care. Terms of the deal were not disclosed.

For Dell, which is pushing harder than ever to expand its tech-services offerings, the deal seems a savvy one. Certainly, it dovetails nicely with the company’s acquisition of Perot and will serve it well peddling services to the small-to-mid-sized business market–something it clearly needs to do with profits in its core personal-computer business dwindling.

Another take on Palm: http://finance.yahoo.com/news/Citi-Cites-Technicals-in-Palm-indie-2419102526.html?x=0&.v=1

Despite "still challenged" fundamentals, Citigroup boosted Palm's rating on Thursday. Palm shares are ahead today after Citigroup analyst Jim Suva boosted the stock's rating to Hold from Sell. While the stock's fundamentals leave something to be desired, and no overtly bullish signals are coming from carriers Sprint and Verizon, Palm has some "potential short-term technical catalysts," which Suva says limit the stock's near-term downside. Among these catalysts are a rising short interest and increasing difficulty or cost to borrow shares, and consolidation of ownership among institutional investors. In the month leading to Wednesday's close, Palm was easily the worst performing component of the Personal Computer and Smartphone Stocks Index, falling by -21%. As a whole, the Index has been painted in red for the period, with the singular exception of Blackberry maker Research In Motion (RIMM).
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According to Bespoke Investment Group, newsletter writers haven't been this bearish in ages.

http://www.businessinsider.com/bullish-sentiment-plummets-to-levels-not-seen-since-march-09-2010-2

Bespoke: Although the S&P 500 is down less than 7.5% from its January high, bulls are heading for the hills.  According to Investors Intelligence, bullish sentiment among newsletter writers is currently at 34.1%, which is the lowest level since March 2009.  At the same time, bearish sentiment (26.1%) is the highest since November, while the percentage of newsletter writers in the correction camp has sky-rocketed all the way to 39.8%, which is a level that hasn't been seen since 1983.
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The euro closed at $1.36. With the Greece bailout the experts expected the dollar to fall.
Maybe tomorrow or when the details are released, or maybe not.
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The major stock measures were higher all day and closed on up over 1%. Breadth was 3/1 to the good and volume was moderate. Tonight and tomorrow are Triple Witching days.
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10 February 2010

Word of the Day for Wednesday, February 10, 2010: tarradiddle \tair-uh-DID-uhl\, noun; also taradiddle:

1.      A petty falsehood; a fib.

2.      2. Pretentious nonsense.

(WSJ) European shares rose strongly, boosted by hopes that a solution will soon be for Greece's financial woes, while steel giant ArcelorMittal declined after disappointing earnings news. Major Asian markets advanced, with resource and shipping stocks posting some of the biggest gains across the region.

Gold is up a few dollars and Oil has a $74 handle as the trading day begins.
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Dell was upgraded to buy from neutral by Bank of America Merrill Lynch on the computer maker's underperformance since November, which the broker attributed to skepticism around gross margins.

Dell earnings are coming next week and we are going to buy ahead of them at lower than we sold in January.
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Up 100 on the DJIA, down 100 on the DJIA and the big boys and girls are having fun, not so much for the rest of us. The DJIA is down 100 after an hour of trading.
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Investors’ Intelligence had 32% bulls, 26% bears and the rest correction.
In January the S&P was 10% higher and the bulls were over 50% with the bears under 20%.
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Stock prices rose in Europe and the euro eased against the dollar as policy makers continued to mull
a possible rescue for deficit-plagued Greece. Gold and Oil were lower.
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Walgreen is down 10% in the last two weeks and 20% from December after disappointing same store sales and we added shares to accounts.
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Stocks sashayed on Wednesday finally closing mildly
higher in moderate trading. Breadth was positive.

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9 February 2010

http://wonkette.com/

Stocks are going to open 1% higher as last nights late session sell programs are reversed on news that Greece may be saved. And we are all relieved. Asian and European markets were higher overnight and Gold is up a couple of dollars while Oil has a $72 handle as the trading day begins.
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(WSJ) Asian and European stocks were stronger, helped as news that European Central Bank President Jean-Claude Trichet was returning early from a meeting in Sydney raised hopes of an imminent rescue of Greece.

Asian markets ended mostly higher, with a rebound in commodity prices and Swiss banking major UBS's return to profit spurring late buying in Hong Kong.
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