Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
Toll free phone numbers:
31 March 2008
Today is the end of the worst
quarter for the markets in s long time. Asia closed lower
with China down
3% and India
down 4%. European bourse indexes are about 1% lower at . Gold is up $5 and Oil has a $105 handle. Treasuries
Paul Krugmanís take on the
current Treasury rescue plan gives an analysis of the plan with which we agree.
And here is Jim Cramerís take on
the Treasury action:
Is there some reason why you never read that
the Fed has done a bad job here? Do you ever read that the Fed
encouraged the kind of mortgages that made this problem? Think about that as
Treasury Secretary Paulson gives the Fed more power, in a deal that most likely
will be rejected anyway by the people in Congress -- admittedly Democrats. Futile and wrong.† We
keep hearing that individuals were stupid and can't be bailed out or that the
lenders were rapacious. All of that was true. But doesn't the government
deserve some blame given that the President wanted everyone to own a house and
the Fed specifically backed the kinds of mortgages that are wrecking the
financial world? The new thing to blame is the leverage in the system, but need I remind
people the leverage involved buying these mortgages en masse. Again, the focus
is on how stupid these buyers were -- they were! -- but so what if the Fed hadn't
encouraged these kinds of mortgages repeatedly we would not be looking at the
wrecking of BearStearns and
the obvious capital destruction in the Citigroups, Washington Mutuals
and the Wachovias, or the Gang of Four insurers. I focus on all of this
because what is the difference of this plan promoted by the Treasury -- which
will be defeated by the Democrats, particularly the ones who have protected the
commodities exchanges from the Securities and Exchange Commission -- if
it would not and does not address this crisis. Giving more power to the Fed is frightening to me because it doesn't
want it and it doesn't deserve to have it. Need I remind people that the Fed
had ample opportunity to get ahead of this issue by quickly cutting rates to
refinance before things got out of control. Need I remind people that the Fed
has had the ability to outright purchase mortgage bonds not humiliate
institutions by making them lend them to the Fed in return to cash? And it is a
humiliation. There would have been no stigma to outright buying them. *****
When it rains:
Lehman Bros has gone to court in Tokyo
in an effort to recover $350 million it says it was bilked out of through an
elaborate scheme in which employees of a big Japanese trading company allegedly
used forged documents and an imposter to raise cash.
Auction Rate securities (ARS) are
an esoteric investment that were sold to investors as cash substitutes but have
turned into roach motels. UBS is going to price ARS at substantially below 100
cents on the dollar on customer statements. There currently is no trading market
for most ARS now since the brokers and banks that sold them to investors and
used to be willing to by them back at 100 cents on the dollar have now said, ďSorry, we only do that when we wonít lose
money on them.Ē
The reality is that like mortgages
the ARS are worth more than what they will eventually begin trading at. In
fact they are worth par in the perfect market.
But the debt markets, except for Treasuries,
are experiencing a disconnect similar
to the disconnect that occurred
during the Crash of 1987. Except that the 1987 Crash disconnect only lasted about
three week while the debt disconnect has
been occurring for three months and is only growing greater. Eventually the
collapse will crescendo and then the debt markets will begin the move back to
normal. †Hopefully we and the markets
will survive the disconnect.
We are selling FITB
for a loss this morning on the mini-rally in the markets. We just donít
have the chutzpa to own the stock. We thought we did. We bought the shares
because FITB declared its regular dividend (which we will receive) and we took
that as a sign that while they had the normal problems they were doing well on
the CDO front. That may still be true but after repurchasing the shares we were
too uncomfortable with the unknowns. We are going to stick with the SPDR banks
trusts and JP Morgan for now if we want bank exposure. Our quick exits from
bank stocks after† purchases in the last year
has saved us a lot of money in the long run but it has also cost us in the
short run. We are trying to catch the bottom and that is always difficult and has
With the funds we are buying Schering Plough at $14.50. SGP is down $5 per share from
Fridayís close on news that the AmericanCollege of Cardiologists panel
recommended avoiding its Vytorin drug and recommended using much cheaper
generic versions. SGPís share of Vytorin sales (Merck owns half the drug) is about
$2.5 billion out of Scheringís annualy$13 billion in revenues. The loss of
sales significant but the company has lost $6 billion in market value this morning
and $24 billion in market value since the FDA questioned the study that SGP and
Merck held back from releasing.
Schering has a newly acquired
drug pipeline and since today is quarter end and many of the big boys and girls
are rushing to the exits to get their SGP positions off the books.
From the brokers: now they tell
us after the share price is down from $30 to $15. Since the analysts changed
their recommendations before the markets opened the analysts get to show that
they recommended sale at $19.50 instead of $15.50. Of course in the real world
if you follow their recommendations you would only net $14.50.
downgraded at Cowen 8:35 AM EDT SGP was
downgraded to Neutral, Cowen said. Investors should move to the sidelines,
until visibility improves for Vytorin.
downgraded at Lehman 8:34 AM EDT SGP was downgraded from Overweight to Equal-weight, Lehman Brothers
said. $20 price target. New data will have a further negative impact on Vytorin
Schering-Plough downgraded at Goldman Sachs 7:44 AM EDT Goldman said
it is downgrading SGP to Neutral from Buy based on reactions to Enhance data
presented over the weekend. Professional commentary that accompanied the data
suggested limiting the use of Vytorin until further trials are conducted. See
major uncertainty surrounding franchise, as well as a more prolonged decline
for U.S. cholesterol business (through 2012). Price target cut to $23
We know that Friday we stated that our karma is bad with
drug stocks. But we are treating this purchase not as buying a drug stock but
as buying a blue chip company at discount sales prices.
European bourse indexes closed
mixed to slightly higher on Monday. Brazil was higher and Mexico gained 3%.
Oil was down $3.99 at $101.77.
Gold lost $15 to $915. Treasuries were better with the two-year at 1.61% and
the ten-year at 3.54%. The euro closed at $1.58 and the yen at 99 to the
The DJIA gained 45 points to
close at 12262. The S&P 500 was up 8 points sat 1323. The NAZZ was up 18 points
Breadth was 3/2 positive and
volume was light.
There were a combined 185 lows
and 50 new highs.
The bears won the first quarter
of the year.
28 March 2008
With only one more day of trading
after today the big boys and girls will be positioning their portfolios for the
end of the first quarter. This is not a quarter we will miss. It did provide
the opportunity to re-position the portfolios and given all that has occurred
we are positive on the changes we made and the holdings we now have. The point
of sitting and watching market movements all day long is to take advantage of
the opportunities presented. We think we have.
The markets are in a backing and
filling period. The Fed has signaled by its actions that it will enter the
markets when turmoil arises and that give us some small confidence that in time
the effects of the idiotic decisions made by the folks who brought us SIVs,
CDOs, and the sub prime mess will be diminished. (Although we read this morning
that BankAmerica is going to pay the chief financial officer of
Countrywide-which BAC is acquiring in a rescue operation- $28 million to stay
and run the company.)
There is obviously a slow down in
the economy. How long it lasts is the question. Folks are still going to work
and many companies with overseas business are dong fine. The pendulum is
swinging back and eventually it will cure the excesses and begin its inexorable
swing back to a positive economy. Until then we will look for opportunities and
work hard to survive the mis-pricing that severe corrections bring.
Asian markets were higher
overnight with China
up 4% and India,
Hong Kong and Japan
up 2%. European bourse indexes are mostly lower at midday and U.S. futures
indicate a small higher opening.
Gold is off $4 and Oil has a $107
handle. Treasuries are flat.
Personal Income was up 0.5 % in
February and Personal Spending was up an anemic 0.1%.
J.C. Penney warned this morning.
The WSJ lead was the following: J C
Penney cut its fiscal first-quarter outlook, saying quarterly sales through
Easter have come in "well below expectations." Its shares traded
sharply lower in premarket trading.
The warning is the latest bit of bad news for retailers, and signals
that consumers continue to ratchet back nonessential spending amid the current
Since retail stocks are selling
at one half to one quarter of their 52 week highs and in some cases on ten year
lows suggest that the markets are aware of the fact that retailing is in the
Timing is everything.
From the WSJ:
Two years ago, James Cayne of Bear Stearns
Cos. became the first Wall Street chief executive to own stock and options in
his own company worth $1 billion. These days, that stake is worth less than
$100 million. On Tuesday, the 74-year-old executive -- now chairman of Bear
Stearns's board -- took that money and ran. Together with his wife, Patricia
Cayne, Mr. Cayne sold 5.7 million Bear Stearns shares at a price of $10.84
apiece, according to regulatory filings -- creating just $61.3 million in paper profit.
Only on Wall Street and in the
offices of the folks who pay themselves millions for just showing up to work would $61 million be modified by the word just.
Unlike Angelo Mozillo at
Countrywide, and the folks at Enron, et al, Cayne believed in his company and
didnít sell any stock till now. That was his mistake but also to his credit. But
he is the Peter Principle
personified. He thought he could play cards like his mentor Ace Greenberg and
all would be well. He was wrong. OíNeil at Merrill and Prince at Citi are also
good examples of the Peter Principle at work. And why arenít the NYT and Forbes
writing more stories of Sandy Weillís brilliance?
We sold AMGN
for a scratch to a minor profit and BMY
for a scratch to 40 pennies loss and with the proceeds we are raising cash plus
adding a bit more AMD and TLAB and CHS to accounts as they approach their 52 week lows and the levels
at which we sold in January. These three stocks are down a combined $1.50 today
offsetting the loss on the BMY. This is an aggressive move but we think it will
work out well for us.
For some reason we just canít own
drug stocks. We try to own them but the karma never feels right.
Jim Cramer finds religion:
The Merrill (bear) raid is a work of
art. Lots of put-buying -- 18,000 puts, April vintage -- and then solid common
stock beatdowns once the puts are on. It is so easy.
Yet I keep getting pushed back from short-sellers about how it is the
fundies of Merrill that justifies this.
These shorts are missing the point: You can panic people into selling
and then you can panic Merrill customers into bolting and then you can SHUT
Is that fair?
Now, if you had an uptick rule, you could slow things down and find
buyers and not force a stock down and cause a panic.
Shorts are saying that longs can get long and then spread positives.
They are being silly. We all know that the lack of the uptick rule has
changed the game and the ETF slip slope caused this (giving the SEC the
go-ahead to believe there is no problem).
The big joke here is that the uptick rule was thought through for
years, worked for years, and now it is gone just in time to allow stock
beatdowns in the bear market of 2008. The lack of the rule doesn't cause the
decline, it just accelerates it, and right now, that is enough to break things.
European bourse indexes ended fractionally
lower across the continent. Mexico
and Brazil were
also lower. Treasuries gained with the two-year at 1.67% and the ten-year at
3.46%. Gold lost $20 to $930 and Oil was down $2.19 at $105.40.
The DJIA lost 85 points to end at
12215. The S&P 500 dropped 10 points at 1315 and the NAZZ gave up 20 points
Breadth was 2/1 negative and volume
There were 50 new lows and 15 new
highs on the NYSE and 110 new lows and 25 new highs on the NAZZ.
The bears held their own today.
27 March 2008
Asian markets were lower
overnight. European markets are higher at midday and U.S. stocks are
going to open higher. Treasuries are off a bit and Gold is down $3 while Gold
has a $105 handle.
Traders didnít like the Oracle
numbers last night and the share price was down 8% in after hours trading. That
has placed a damper on the NAZZ as big OTC tech stocks are weaker in the early
going this morning.
Last year the SEC removed the uptick
rule on short sales. Prior to and after the removal of the uptick rule
we wrote many times that that rule was important for an orderly market and to
prevent bear raids. The street was so unmoved by removal of the rule
that the SEC actually shortened the time period for the rule to go into effect.
Now the elimination of the up tick rule is being blamed for the bear raids on
Bear Stearns a few weeks ago and today the bear raid on Lehman Bros. Hello,
what was expected? We said then and say now that folks who ignored the
potential calamity from removal of the rule were and are fools. Of course the
blood on Wall Street right now from the foolish decisions of regulators and
politicians and the folks who run Wall Street is evidence that the leaders of
capitalism were even greater fools.
We donít remember Jim Cramer or
others following our lead in lamenting the passing of the uptick rule and what
it would mean to markets but now the reality of what elimination of the rule
means is hitting investors in the wallet.
This is Cramer this morning:
Let's play whack-a-mole with the defenseless Lehman.
The put-buying, the short-selling to knock it down is causing the usual panic,
made worse by margin-selling in the name as the velocity of the stock's decline
is causing margin clerks to demand more margin in the spot.
The stock is helpless. If Dick
Fuld couldn't quell the rumors after that excellent quarter, he sure can't do
it now. The short-sellers, who do not need upticks, have loaded themselves up
with puts and are now blasting it down with impunity. They are having a field
day, and it must be quite fun to do. I know I am not going to defend it. I went
out two weeks ago and said, "Your money is fine if you are at Lehman and
you don't need to wire it out," which is what caused the run on Bear
Stearns. The result is an endless campaign to discredit me even as I did
not like Bear's stock and made it clear that the bonds were signaling that the
common could be worthless. This kind of thing compels people in the media to
suggest that people should pull their money out AND to say that Lehman common
is worthless. There is nothing that comes with being wrong on that, and nothing
but glory if you are right.
Meanwhile, the put-buying in
the Financial Sector SPDR (XLF) coupled with
the Lehman shorting is keeping that stock from lifting its head. Lehman
may be buying back stock, but they can't be there in the last half hour, so I
suspect the bear attack will hit very hard in the last half hour. The bears are
back to printing moneyÖ The SEC bought into the whole
laissez-faire thing, has brought about a remarkable transformation where the
bears can crush the bulls and wreck the very companies that laissez-faire was
meant to advance. Call it late-stage capitalism, where shorts without upticks
do indeed collapse American business. *****
Congress folks and Senators who
happily voted to let banks enter the investment banking business 10 years ago
are now after the SEC and the Fed and Treasury Department for preventing a
Crash two Mondays ago when they prevented Bear Stearns from filing bankruptcy.
The reality is that the BSC shareholders and employees are losing billions of
dollars and in many cases their livelihood. The SEC rescued the U.S. financial
system, not Bear Stearns.
There may be some justice in Bear
Stearns foundering because they were a major beneficiary of the CDO, SIV, and
Mortgage boom. They created the problem from which they profited mightily and
which eventually led to their demise, the pendulum swinging.
The Fed and Treasury did the
right thing. And now pension plans around the country are suing to reverse the
Fedís actions with Bear Stearns. The myopic plan trustees are grandstanding and
ignoring the fact that the losses of their 2% positions in Bear Stearns shares
that their foundations held were minimal compared to the losses the rest of
their portfolios would have suffered had the Fedís rescue plan not been effected
over that long weekend.
client thought that we were too subtle yesterday in making the point that the
Model Portfolio has doubled over the last nine years (8% annualized)
while the S&P 500 has gained about 2% a year with dividends included.
Past performance is not an indicator of future performance.
The Chicago Mercantile Exchange
increased margin requirements on commodity trading. The rule makers must be
short. The futures markets are fixed because the folks who make the rules also
trade the markets. And folks in those markets can trade on inside information
without breaking the law. Ainít capitalism great?
Oil gained $1.28 to $107.28. Gold
closed unchanged. Treasuries were lower at the close of business with the
two-year at 1.72% and the ten-year at 3.54%.
European bourse indexes closed
higher as did Mexico while Brazil was down 1%. The yen was 99 to the dollar and
the euro was $1.57.
The DJIA lost 120 pints to 12302.
The S&P 500 dropped 15 points to 1325 and the NAZZ was down 45 points to
Breadth was 2/1 negative and
volume was moderate.
There were 30 new lows and 25 new
highs on the NYSE and 98 new lows and 45 new highs on the NAZZ.
bears are back for the second day.
26 March 2008
Asian markets were mixed to lower
small overnight as are European bourse indexes at .
are indicating a down opening this morning. Gold has a bid and is up $12 and
Oil has a $102 handle as the trading day commences.
Durable Goods orders were down 1.7% and ex transportation they were
down 2.6% in February.
With the rally in the last week
the Investors Intelligence numbers
are now 36% bulls up from 31% last week and 41% bears down from 44%.
Wednesday that it would split itself into two publicly traded companies as it
struggles to boost its stock price and faces pressure from activist investor
Carl C. Icahn.
Motorola said in a statement that
it would separate its flagging cell phone unit from its broadband and mobility
operations, which encompasses the servicing of wireless networks and the
building of television set-top boxes. Motorola shareholders would receive stock
in both companies.
Tata Motors will buy luxury brands Jaguar and
Land Rover from Ford for about $2.3 billion in cash, the companies said on
Wednesday. The transfer of ownership to Tata Motors is expected to close by the
end of the next quarter, subject to regulatory approvals, they said. Ford would
contribute up to about $600 million to Jaguar/Land Rover pension plans. Tata
top bus and truck maker and its third-largest car maker, has been in talks with
Ford since it was chosen as the front-runner to buy British-based Jaguar and
Land Rover a few days into 2008.
Helen Meisler is a technical guru
at realmoney.com who we like. She has this to say this morning:
Was it just nine months ago that Blackstone
went public in a much-ballyhooed IPO? Does that mean that it was less than a
year ago that the market was still so enamored with buyouts and deals and
takeovers? You might recall that everything had a takeover premium in it. You
surely couldn't be short this or that, because you ran the risk of a deal being
done overnight. And now we
have deal after deal collapsing in front of our very eyes. And the same folks
who insisted there was no private-equity bubble now insist
the bottom of the market is in!
All rallies start with short-covering. That is stating the obvious. But
after the short-covering we need to see buying -- real buying -- come in. Real
buying means volume increasing, not decreasing as it has been the past two
days. Real buying means new highs expanding, not contracting as they have the
past few days. (Yes, even the NAZZ with its big up move yesterday had
fewer new highs than the day before.)
The same way we look for positive divergences on the downside when
we're looking for a low, we pay attention to negative divergences on the upside
when looking for a high.
When I discuss that the window for the rally is open for three to six weeks, that is what I'm looking at. The initial two weeks
are typically when we see that big rise in the Oscillator. We then typically
get some sort of pullback or correction, followed by another rally. If that
rally finds the Oscillator (and other indicators as well) making higher highs,
then we know the rally has staying power; if it makes a lower high, we start to
put up caution flags.
I expect the market to reach a maximum overbought reading next week,
which conveniently turns out to be just after the end of the quarter and the
beginning of the new quarter. A correction from that point would then set us up
for yet another rally in mid- to late April. And it is that secondary rally
where we will be on the lookout for divergences, such as a lower high in the
For now, we haven't even had the first correction, so the same theme
we've had for two weeks now is still in place: We continue to have a rally
window open. *****
There was a 48% increase in
mortgage applications this past week which suggests that refinancing is kicking
into high gear as interest rates come down.
Oppenheimer analyst Meredith Whitney,
who has been consistently bearish on Citigroup for months, including an early
and accurate call that Citi would have to cut its dividend, has considerably
widened her loss estimate for the company. Whereas previously she had been
expecting a loss of 28 cents a share in the first quarter, she now believes
Citi will lose $1.15, citing the possibility of big write downs on leveraged loans and collateralized debt obligations. She's also calling
for a full-year loss of 15 cents, compared with her previous estimate that Citi
would earn 75 cents.
And to add injury to the insult
Citi announced today Citigroup will pay Enron Creditors Recovery $1.66 billion
to settle the MegaClaims lawsuit related to Enron's bankruptcy.
Citi, which denies any
wrongdoing, will waive up to $4 billion in indemnification claims and $249.4
million in other claims. The settlement will also release $1.7 billion of cash
held in a disputed claims reserve. The lawsuit was filed by Enron in 2003
against 11 banks. The Citigroup Inc. settlement brings it to a close.
We sold Broadcom
for $2.50 per share profit and Ericsson
for $1 plus. *****
We took a $2 profit on some Amgen we bought last week while maintaining our investment position
and bought an equal amount of Sony
with the proceeds.
Upon further review we decided to sell our yesterday
purchase of NCC at $11.40 for a
scratch after the shares popped $1 from this morningís $10.30 price on takeover
speculation. It is a junk bank and any takeover will be a take under. Our
overnight sleep dreams suggested not owning the stock. With the funds we added
to our Saks holdings as the share
price dropped to $12.95 this morning. Insiders own 35% of the company and there
have been rumors of European interest for the last year.
From todayís WSJ:
Over the past 200 years, the
stock market's steady upward march occasionally has been disrupted for long
stretches, most recently during the Great Depression and the inflation-plagued
1970s. The current market turmoil suggests that we may be in another lost
The stock market is trading right
where it was nine years ago. Stocks, long touted as the best investment for the
long term, have been one of the worst investments over the nine-year period,
trounced even by lowly Treasury bonds.
The Standard &
Poor's 500-stock index, the basis for about half of the $1 trillion invested in
U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends
and inflation are factored into returns, the S&P 500 has risen
an average of just 1.3% a year over the past 10 years, well below the
historical norm, according to Morningstar Inc. For the past nine years, The S&P 500 has
fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In
light of the current wobbly market, some economists and market analysts worry
that the era of disappointing returns may not be over.
Since April of 1999
the Model Portfolio is up 100%. *****
European markets closed mildly
and Brazil were
lower. The euro was $1.58 and the yen 99 to the dollar. Treasuries were firm
with the two-year at 1.79% and the ten-year at 3.49%.
Oil gained $5 to $106 and gold
was up $15 to $950.
The DJIA closed down 110 points
to 12422. The S&P 500 dropped 12 points to 1342 and the NAZZ lost 16 to 2325.
Breadth was 3/2 negative and
volume was moderate.
New highs were 25 and new lows 26
on the NYSE and there were 90 new lows and 40 new highs on the NAZZ.
The bears are back for today at least.
25 March 2008
Asian markets moved higher
overnight in a catch up play with India
and Hong Kong each up over 6%. European bourses are playing
the same game and many are up over 3% at .
are mildly higher but look to be the subject of profit taking, at least in the
Gold is up $20 and Oil has a $99 handle.
Treasuries have a bid as the trading day begins.
The Federal Reserve Bank of New
York has selected Blackcock Financial, which manages
over $1.4 trillion in bonds to manage Bear Stearns $30 billion portfolio
"under guidelines established by the New York Fed to minimize disruption
to financial markets and maximize recovery value," the central bank said.
The following table shows the historical price change according to the S&P/Case-Shiller home price indices. Cities are ranked by largest monthly gain.
NOTE: The S&P/Case-Shiller (R) Home Price Indices are constructed from data on sales of individual properties. With this method, changes in the index are derived only from actual changes in selling prices of individual properties.
The media is making a big deal of
the percentage price drops in home sales. But these prices represent actual
sales and so the table gives an indication of the prices at which sales are
closing. There are transactions occurring at these prices and so while the percentage
drops are large the facts that sales are occurring and may be growing are
Most European bourse indexes
closed over 3% higher.
We added Fifth Third
at $23.30 and National City at $11.30
to accounts. Hold on. We also bought Blackstone
Group at $15.75 in our large/aggressive accounts.
Gold ended up $18 at $936, Oil
closed at $101.55 up 72 pennies. Treasuries were better with the two-year at
1.76% and the ten-year t 3.51%.
was up over 1% and Brazil
over 2%.† The euro was $1.55 and the
dollar equaled 100 yen.
The DJIA lost 22 points to close
at 12530. The S&P 500 rose 3 points to 1352 and the NAZZ jumped 15 to 2541.
Breadth was 3/2 positive and
volume was moderate.
Combined new lows contracted to 105
and combined new highs were 65.
Todayís consolidation was a win for the bulls. *****
24 March 2008
Asian markets were mixed
overnight with China
down 4% and India
up 2%. European markets are closed for Easter and U.S.
markets are indicating a higher opening. Gold is up $4 at $924 and Oil has a
$100 handle. Treasuries are weaker.
Thursdayís markets regained most
of Wednesdayís loss and with this morningís rumors of JP Morgan raising its bid for Bear
Stearns to $10 the major measures are going to celebrate spring with a
spring of their own.
Existing home sales were up 3% in
February. And JP Morgan confirmed that it had raised its bid for Bear Stearns
As the markets began to move higher we bought Whole Foods, EMC and Dell in accounts.
We wish we had a bank or two but we donít know which to own and will forego the
seemingly easy money to also avoid the sleepless nights.
As of last week the amount of
shares shorted on the NYSE (sold but not owned with the hopes that the shares
would trade lower in price) was 50% greater that the amount of shares short at
this time last year at this time and represents ten days of volume.
We are adding more Alcatel
Lucent to accounts. It trades at one half revenues and has no net debt.
Treasuries gave ground today with
the two-year closing at 1.80% and the ten-year at 3.50%. Oil was off $1.66 to
$100.20. Gold dropped $2 to $918. Mexico
and Brazil were
both up over 2%. The euro was $1.54 and there were 99 yen to the dollar.
The DJIA gained 185 points to
close at 12550. The S&P 500 rose 20 points to 1350 and the NAZZ jumped 68
points to 2325.
Breadth was 4/1positive on the
NYSE and 3/1 to the good on the NAZZ and volume was light both places.
There were a combined 150 new
lows and 90 new highs.
The bulls won the day.
19 March 2008
We are heading to Chicago for business on
Thursday and Friday. Stocks are closed on Friday. Our next post will be Monday March 24.
Stocks are going to open a bit
lower today as European stocks are lower at .
Asian stocks ended higher and Oil is off a couple of dollars. Treasuries are
better in the early going and Gold is down $20.
Deutsche Telekom warned and the shares are 10%
lower. Timing is everything. We bought a few more shares in our larger accounts. *****
Ericsson is down on a warning that its cell
phone business is punk. We owned the shires in the $20s late last year and we
are buying shares in accounts at $17.25.
Sony Ericsson on Wednesday warned that falling growth in the
market for mid- and high-range handsets would have a negative impact on its
sales and profits in the first quarter. The joint venture between Sweden's LM Ericsson and Japan's Sony Corp. said shortages
in certain components for mid-priced phones also were expected to affect sales
growth in the period. The company is due to release its earnings for the first
quarter on April 23, and said it expects to report around 22 million shipped
phones -- leading to lower net sales compared with the same quarter a year
earlier. Pretax profit was expected to be between 150 million euros and 200
million euros ($235 million and $315 million), down
from 362 million euros in the quarter a year ago because of higher research and
development costs. The company added, however, that it still expects its gross
margin for the three-month period to stay relatively stable compared with the
same period in 2007.
We are adding shares of Broadcom to larger accounts at $17.60. *****
Investors Intelligence had 30% bulls 45% bears in its
latest go around.
Gold is now off $45. The size of
the move suggests a large bet gone astray.
GE has moved 10% in the last two
weeks since we bought it and we sold at $36.50 for a $3 per share and more
Never do I want to hear again from my conservative friends about how
brilliant capitalists are, how much they deserve their seven-figure salaries
and how government should keep its hands off the private economy.
The Wall Street titans have turned into a bunch of welfare clients.
They are desperate to be bailed out by government from their own incompetence,
and from the deregulatory regime for which they lobbied so hard. They have lost
"confidence" in each other, you see, because none of these oh-so-wise
captains of the universe have any idea what kinds of devalued securities sit in
one another's portfolios.
So they have stopped investing. The biggest, most respected investment
firms threaten to come crashing down. You can't have that. It's just fine to
make it harder for the average Joe to file for bankruptcy, as did that wretched
bankruptcy bill passed by Congress in 2005 at the request of the credit card
industry. But the big guys are "too big to fail," because they could
bring us all down with them.
Enter the federal government, the institution to which the wealthy are
not supposed to pay capital gains or inheritance taxes. Good God, you don't
expect these people to trade in their BMWs for Saturns, do you? *****
Itís fun to take profits and sad to take losses but the
discipline involves doing both. And so we sold Ford today and removed it from our screen. We are going to
concentrate on GM which is cheaper and
the stronger (relative term) of the two. *****
The dollar rallied a bit today
and closed at $1.56 to the euro and 99.5 yen.
Gold ended down $65 at $940 and Oil dropped $6 to $103. CNBC is saying
that there are rumors that brokers are requiring hedge funds to lower their
leverage and that is the reason for the selling.
Treasuries were better.
European bourse indexes closed
lower by 1% and Brazil
was down 3% with Mexico
Three month T Bills are at their
lowest yields in 50 years.
Some folks never learn that leverage will get you.
According to reports on
Bloomberg, "JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management (the folks
who lost $5 billion plus in 1998 and caused a huge market sell off) chief John
Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year
through March 14, according to two people with knowledge of the matter."
We go up and we go down.
The DJIA closed down 295 points
at 12100. The S&P 500 lost 32 points to 1298 and the NAZZ dropped 60 points
Breadth was 2/1 negative and
volume was over 5 billion on the NYSE but still moderate on the NAZZ at 2.4 billion.
There were a combined 260 new
lows and 70 new highs.
The bears are still alive and prowling. *****
18 March 2008
Another test of 1270 yesterday
looks to have been successful as the stock futures have the S&P 500 over
1300 as the trading day begins. Asian markets were higher overnight except China
which was down another 3.9%. European bourse indexes are higher by 2% and more
at . Gold which sold off with
other commodities yesterday afternoon is up $4 to $1007. We neglected to
mention the late afternoon sell off in last nightís post. Oil is up at $107.50
and Treasuries are giving ground this morning.
The question of the day is whether
the Fed cuts 50 bps or a full 1 point. The
street wants 1 point and less than that will be a disappointment.
February PPI was 0.3% and core was 0.5%. Year over year PPI was
6.4% and core was 2.4%. Those numbers are higher than the Fed would like but
the Bear Stearns fiasco is center stage right now.
Goldman Sachs and Lehman
both announced better than expected earnings.
Those numbers are much less than last
year and the better than may just be
a function of the size of the write-offs.
February Housing starts were down 0.65 in February and building permits were down 7%.
We bought Amgen
at $41.50. It is down $2 in a strong up market. The FDA may withdraw approval
of the use of Epogen for anemia. Our bet is that there is enough money floating
around that the approval will be resumed. The shares are on a five year low.
We also added Symantec
to accounts and another tranche of Micron
under $6. *****
The Fed cut the Fed funds rate by 75 bps to 2.25%. *****
European bourse indexes closed 3%
higher in most countries across the continent. Mexico
and Brazil were
up over 1%. The euro was $1.57 and the yen 99.
Oil closed at $108.30 and Gold
was $990 down $12. Treasuries gave ground since the world has postponed ending
for at least today and the two-year was 1.60% with the ten-year at 3.46%.
The DJIA gained 420 points to
close at 12390. The S&P 500 rose 54 points to 1330 which suggests a longer
rally than the two day wonders we have been having and the NAZZ jumped 92 to
Breadth was 7/1 positive on the NYSE
and 3/1 to the good on the NAZZ. Volume exceeded 5 billion again today on the
NYSE but was only 2.4 billion on the NAZZ. Over 90% of the volume today was up
Combined new lows contracted
sharply to 300 and combined new highs were 50.
The bulls won the day. *****
17 March 2008
Happy St Patís Day and if we hadnít
had a drink since 1995 we would be sorely tempted to join the Irish folks today
for a stiff one.
The Ides of March are surely upon
us and while we wonít suffer Caesarís fate, Bear Stearns did. JP Morgan
is taking BSC under for $2 per share in JPM stock. There are some major
shareholders that may not agree with the price but we think the deal gets done.
The price is basically a means to avoid bankruptcy which would cost more than the
total price of $250 million. And there are contingencies that could add $5
billion to the cost.
Overseas markets have tanked with
India down 6%, Hong
Kong 5%, Japan
4% and China
3%. European bourse indexes are all down over 2% and U.S.
futures are indicating a 2% lower opening in the U.S.
Gold is up $20 at $1023 and Oil is
$110 in early NYC trading while of course Treasuries have a bid.
The Fed meets tomorrow.
Obviously, today is gong to be volatile.
The S&P 500 is through the January low and it must hold here or a free fall
as in 1987 could occur. While in the long run such a free fall would be helpful
and get the pain over quickly we doubt the markets are interested in relieving
The Fed is assuming $30 billion in Bear Stearns most illiquid assets.
The main problem with the Bear Stearns bid for the rest of the
investment bank stocks is that no one wants to buy a stock at $30 that is worth
$2 the next day as occurred with BSC.
the S&P 500 is back above the important 1270 support level and the major
measures are trying to push back to even. Initial breadth was 17/1 negative and
the only green on our screen was JP
Morgan. Now we have a few more issues green in honor of the day.
We added Deutsche Telecom
to accounts. DT through their T-Mobile wireless
subsidiary is a potential acquirer of Sprintala the JPM takeover of Bear Stearns.
The shares yield 4% and with the strong euro, if the technical wireless components
can be made to fit such an acquisition would make sense.
We also added Verizon
at a 5% yield to some smaller accounts and also added some shares to our large accounts.
We are hoping that AT&T drops to the $33 level so we can pick up some of
those shares also. *****
Three hours into the session at the S&P 500 is back down to its lows
for the day at 1260.
The following was written by Doug
Kass at realmoney.com. He has been bearish for a while but now is neutral to positive.
* Stocks have declined by 20% within a six-month
period for the fourth time in a quarter of a century (1990, 1998, 2000). In the 12-month period following the 1990 and 1998
corrections, stocks rallied by 34% and 39%, respectively. The 2000 correction,
however, begot a full-fledged Bear Market.
* As I have noted previously, unlike previous bear
markets, equities were not the subject of speculation at the top; commodities,
residential and non-residential real estate, and private equity were.
* If corporate profits avoid a major slide in 2008,
stocks are inexpensive relative to short- and long-term interest rates. Indeed,
with a seeming bubble in the
bond market, a broad reallocation of assets out of fixed income and
into equities seems possible.
*† With the
speed and momentum of the credit crisis intensifying coupled with a continued
weakening in economic activity (especially of a job kind), the negativity
bubble now appears so inflated that it could be ready to pop. For example, the
equity-only put/call reached an all-time high on Friday, the Investors Intelligence (of market
letters) survey showed bears rising to levels not seen in six years and
demonstrated one of the sharpest weekly increases (to 43.6%) in years, the AAII survey (of individual investors)
came in at the largest level of bears (at 59%) in nearly 20 years, and the
consensus survey of futures traders were (only 23% bullish) at the lowest
levels seen in over five years. These instances display a negative sentiment
extreme rarely seen -- even at bear market lows. *****
When you donít like the forecast change the forecaster:
March 17, 2008
Abby Joseph Cohen, the most bullish investment strategist on
Wall Street this year, will stop making
Standard & Poor's 500 Index forecasts for Goldman Sachs Group Inc.
She was succeeded in the role by David Kostin,
Goldman's U.S. investment strategist, spokesman Ed Canaday said in a telephone
interview. Kostin today predicted the S&P 500
may fall 10 percent to 1,160 before rebounding to 1,380 by year's end. Cohen,
as chief investment strategist, last predicted the benchmark for American
equities would end 2008 at 1,675, representing a 32 percent rally from its
The 56-year-old Cohen now has the title ``senior investment strategist''
and contributor to the portfolio strategy team, according to Canaday. Her
prediction for the S&P 500 this year was the highest among 14 Wall Street
forecasters followed by Bloomberg.
For historic comparison:
October 8, 1998
(the bottom trading day of the Long Term Capital Crisis) From Jim Cramerís book
Confessions of a Street Addict.
Goldman Sachs's Abby Joseph Cohen spoke too. As if I hadn't learned my lesson
yet, when Rich, my Goldman broker, buzzed me to say that Abby was coming on the
squawk box (the P.A.) at Goldman, my heart paced rapidly and a grin broke
through my indelible frown. Ah-hah, I said to Jeff, whom I had barely
acknowledged that morning because he too had believed my thesis that we could
be in for some lift, "Abby's going to put a stop to this decline right
now, stop it in its tracks."
What a clown you can look like in this business, within seconds! My
smile turned to anger and I mashed my phone into the side of my personal
computer when Rich said, "It's not good, Jim."
Cohen had stayed bullish throughout the painful summer, not wavering
for an instant from her Supertanker America thesis that our nation would pull the rest
of the world through this financial crisis. Every time she spoke, she turned
around the futures, or broke the nasty selling waves, as she explained why
panicking were wrong and we were in a rip-roaring bull market. She was my
bullish soul-mate, someone who made me feel comfortable holding onto the horns
while others fled for the Kodiak dens. Unlike Acampora, Cohen is no technician.
Her work is based on the future earnings power of the market as a whole. As
long as she stuck by her theory that corporate profits would be bountiful, she
would stay bullish.
On this particular morning, when I was in need of Abby's most bullish
of Supertanker America calls, she made an adjustment to her corporate earnings view. An adjustment down.
She took her S&P projections for the following year down a tad, just enough
to cause another landslide. In a market that had come to see this frumpy
curly-haired nerd as a double-hulled supertanker herself, this change jolted
those whom Cohen had steered through choppy waters before. It seemed like a
warning that the biggest ship of all, the U.S. market, was just as vulnerable to the
financial storm as any leaky rowboat. No supertanker, just a Cunard liner
headed for an iceberg.
Cries of "Cohen's getting
off" echoed through trading desks worldwide. No matter that she didn't
predict a decline in equities, just a decline in earnings, the move seemed like
a prelude to the most important bull-to-bear switch this market had seen since
once perma-bull Elaine Garzarelli yelled crash from
her Lehman perch on the eve of 1987's one-day decline of 508 points. You had to
get in ahead of a guru switch, not after it. While the futures couldn't trade
lower, I heard brokers tell me that they had merchandise for sale off Cohen's
call that was 5 and 6 points below where stocks traded before last night's
bell. In another frame of mind I would have noticed that you get that kind of
capitulation only at important moments in stock history. This time I just
cursed myself that I would soon have to join the sellers because we had to wire
out $106 million to my departing partners. I was formulating a way to capitulate
with dignity, something that is akin to trying to arrange the egg on your face
so it looks less scrambled and more sunny-side-up.
If anyone didn't yet recognize the sinking fortunes of financial
companies, Citigroup picked this day to announce a staggering loss, even worse
than had been anticipated during a previous intra-quarter profit warning. The
newly created institution fessed up that it had a Long-Term Capital-like global
arbitrage unit that had racked up $300 million in losses previously known to
the top brass. The Street buzzed that the isolated collapse of Long-Term
Capital must not have been as isolated as we thought. Who else had to take a
charge? If Sandy Weill took a charge, someone else had to be hurting, hurting
far more than Sandy. He's good! Who else had to fess up about
this leveraged lunacy? We had been battling with the financials for months on
end. Fortunately my wife had us short Citigroup just the day before, as a hedge
to all the other banks and savings and loans we owned. Unfortunately, it was
only 50,000 shares short. Not much protection there when you are long about 15
million shares of less-well-run financial concerns. *****
We are trading positions in Sony, Amgen, Harley Davidson and DuPont in a very few accounts. *****
Oil closed at $105.50 down $4.50
and Gold was up $33 at $1033. Treasuries were strong with the two-year at 1.32%
and the ten-year at 3.30%.
European bourse indexes closed
down 3% and more across the continent and Mexico
was down 2% and Brazil
The yen closed at 97 to the
dollar and the euro was $1.57.
From Diane Swonk, chief economist
at Mesirow Financial:
By taking exceptional measures last night, the Federal Reserve is
trying to prevent further panic in the market. The rapid collapse of Bear
Stearns was a shock, but the Fed has reacted promptly, and with correct and
Last evening the Fed moved to become the lender of last resort to its
primary dealers as well as banks, lowering the discount rate from 3-1/2% to
3-1/4% and extending its lending period from 30 to 90 days. This change took
effect this morning and another 1% fed funds target rate cut is expected at
Call it luck of the Irish, but the Fed is finally on top of its game.
These rate cuts will not only help ease the buyout of Bear Sterns, but should
prevent further panic and any additional investment bank runs. The Fed is
accepting a variety of collateral at its discount window, which includes
mortgage-backed securities. The idea is to restore the market for asset-backed
securities and prevent another panic of the type that Bear Sterns had to endure
To further exacerbate the problem, the financial press is dominated by
traders rather than true reporters. They don't understand what the Fed is doing
in these extraordinary times. The conference call last night was very clear.
The Fed has become lender of last resort in the fullest sense of its
definition. Moreover, it is now offering time to heal by extending the length
of loans, which seems to be missed all together.
Going forward, we will see further intervention by other central banks
and the U.K. is also stepping up to the plate. The
European Central Bank has finally received a wage deal through their
communication with the Fed. A coordinated move would be the best choice today.
They may have no choice by tomorrow.
Bottom line: The Fed is finally stepping up to the plate and doing the
right thing. Bernanke's expertise on the Great Depression is finally paying
We are selling the
JP Morgan at $40.80. The shares are up $4 today and if this is the end of the financial
crisis the other stocks we own will do well. If it is not then we think we will
have a chance to repurchase the shares lower. *****
The DJIA closed up 25 points at
11972. The S&P 500 lost 12 points to 1276 closing above the important
1270-75 level. The NAZZ dropped 35 points to 2178.
Breadth was 3/1 negative at the
close and volume was active at 5.7 billion shares on the NYSE but light at 2.4 billion
on the NAZZ.
There were a combined 1160 new
lows and a combined 60 new highs. The new lows number may be enough to
represent capitulation. We donít think we want the 2000 new lows number of
The bulls won the day even the though the measures were mostly
14 March 2008
The Ides of March are upon us.
What, us worry? Stocks are going to open higher this morning on a tame CPI
number that all the talking heads are pooh poohing. Since it is only a number
to trade off and its only real importance is to keep the social security adjustments
low by under reporting inflation we donít have a dog in the hunt.
Yes we are filled with metaphors
this morning since the snow is finally melting and the sun is shining and the
robins and red wing blackbirds are back in the land of milk and honey.
Asian markets were mostly lower
which was up 2.5%. European bourse indexes are mixed small. Oil has a $110
handle and Gold is at $998. Treasuries are softer again this morning.
Microsoft had a meeting yesterday with Yahoo officials to explain how it would accomplish the merger. That
is considered a positive sign by those who want the merger to occur.
At 8:15am there was a press release
that JP Morgan, backstopped and guaranteed
by the Fed, will be providing a 28 day credit line to Bear Stearns. †And so the rumors
about a liquidity crisis at BSC were true. Or the rumors became their own
reality. It is that kind of market. †BSC
initially popped up $9 but now is trading lower as folks realize that BSC as in
danger of going under.
The fact that the Fed is working
in concert with JP Morgan confirms
our belief that JPM will emerge as Themajor money center bank when this
current crisis is over. We would guess that they may wind up owning Bear at a
very attractive price.
The major stock measures moved
higher on this news but we would surmise that the trading day will be filled
with some wide swings as the rumors ebb and flow. In the end though it is good
that this news is the crisis is in the open and that the Fed has taken steps to
The DJIA gave up all its pre-market
gains of almost 1% upon the opening and moved about 40 points lower but then recovered.
Traders are trying to decide whether this is the end or only a temporary fix to
the credit crisis at Bear Stearns. The markets hate uncertainty. When the
problem is known it can be dealt with. We would guess that traders will take
the Bear Stearns problem as know now and move on to the next rumor.
The pre-opening up trading in the
futures was not a good sign. There is still much work to be done on the panic
side of the equation but the Fed action and the JPM intervention is a good
sign. The bears wonít like it but then the deck is always stacked against the
bears and shorts and they ignore that fact to their peril.
the DJIA was down 300 points. Folks are selling to place their money in money
funds and ride out the crisis in the large brokerage stocks. That is panic
action because all the large money funds hold broker paper in their portfolios
and if the brokers go under so do the money funds. This is the panic selling
that will clear the air. If the large brokers go under it doesnít matter where
you have your money. The Fed will be forced to act to save the financial system.
We donít think it is that drastic.
Someone has to pay the piper for
the excesses of the last few years. Bears
Stearns has been elected.
An hour into the trading session
the talking heads on CNBC are in a panic. We take that as a positive sign. And
then to add to the discord CNBC asks traders to come on and give their opinions.
These traders talk their book. That is,
if they are short the markets the traders are all doom and gloom. And if they
are long the markets the traders always find a ray of sunshine. In effect the pabulum
that CNBC and the other cable networks offer is as valuable as their comments
on politics and Hollywood. They are offering shows to sell advertising.
When the DJIA was down 300 points
Talbotís was up 40 pennies. TLB is
now up $1. It has been the only up stock on our screen today. TLB has traded
triple its average daily volume during this period. We have never understood
why the Japanese firm that owns 50% of TLB doesnít buy it back. That is especially
true with the yen at a thirteen year high against the dollar.
We are raising a bit of cash just
in case there is a further sell off on Monday. The S&P 500 is down
20% on the year and a closing break of
1270 today would set up a Crash scenario for next week which could lead to a
quick 20% down several days. While that is not pleasant to contemplate it
would wash out the selling. It is much preferable to a steady drip down that
lasts all year as in 1974.
We soldMSFT in all accounts for a negative scratch.† MSFT is at an attractive price but it is
probably dead money until the Yahoo merger sees the light of day or falls by
the wayside. We took a 50 pennies loss
onPfizer since ewe think there
will be other issues that offer more upside. And we sold the shares of Intel and Cisco that we added to our large
accounts yesterday for a scratch.
We are trading JP Morgan in our very large accounts having
bought it in the initial 300 pit collapse. We think the long term implications
of the BSC are very positive for JPM. We picked up a few shares of Micron in
our large accounts.
Bush is speaking at the Economic Club
of New York two hours into the trading session. He is not inspiring.
We had a losing by
35 pennies trade in National City in our large/aggressive accounts. After we had purchased it
in the sell off this morning we saw a report that NCC was being shopped by Goldman
Sachs. We sold first and are not asking questions. Itís that kind of market.
financier Joseph Lewis owns 9.6% of Bear Stearns. He has nearly 2
million more shares. In September 2007, Mr. Lewis had become the single-biggest
investor in Bear Stearns, acquiring shares soon after two Bear hedge funds
collapsed because of bad bets on securities backed by mortgages. He spent some
$860 million to buy 7% of the company when the stock was trading at more than
$100 a share. He owns at least 70,000 puts (the right to sell 700,000 shares to
the counter party at a set price which in a way limits his loss) on BSC stock.
We learned today that the
counterparty on BSC puts is Bear Stearns. That means that if Bear Stearns is bankrupt
the puts are worthless.
Oil closed at 110.55. Gold
finished at $1001 up $8. Treasuries gained on the flight to quality. European bourse
indexes closed lower by 1% across the continent. Brazil was off 1% and Mexico 1%.
The yen closed at 99.16 to the
dollar. The euro was $1.56.
The S&P 500 tested its low
today and closed above. Monday will be the real test.
The DJIA lost 195 points to 11951.
The S&P 500 dropped 27 points to 1288 and the NAZZ surrendered 50 points to
Breadth was 5/1 negative at the
bell and volume was active on the NYSE but moderate on the NAZZ.
There were 500 combined new lows and
80 combined new highs.
And the bears won the day and the week and the year to now. And
the Ides of March will be behind us on Maonday andSt Patrickís
day will be here.
13 March 2008
$994 on Gold and $110 on Oil and
the dollar is falling at euro is $1.56. And the dollar dropped below $1 to 100
yen for the first time in 13 years. The pendulum swings.
Stocks are going to open lower
this morning. No one said it would be easy.
Asian markets were down big-time
with Hong Kong down 4% and Japan
down 3% and European bourses are also down 1% to over 2%. Treasuries have a
The immediate cause of the
turmoil in the markets is that Carlyle
Capital is in default and lenders are going to seize $16.6 billion in
assets. As you remember Carlyle is the private equity firm of which Poppy Bush
is a $3 million per year partner. The subsidiary that went broke represents the
loss of income to Carlyle. They risked very little principal. The talking heads
on CNBC said the assets are illiquid and are giving that as the reason for the
bankruptcy- which is not the case.
Leverage is the reason that Carlyle is going under the same as was the case
with Long Term Capital in 1998. But panics are panics for a reason and lack of
liquidity is usually the cause. This event will have to play out but has only
psychological meaning to the markets. The banks that are repossessing the
collateral will eventually make money on the turmoil. The collateral are AAA
(real AAA) GNMA and FNMA bonds.
Jobless claims were 353,000 for
the latest reporting period. And Retail Sales were down 0.6% in February.
Retail Inventories were up 0.8%. The markets didnít like those numbers.
GM is trading under $20 and we
bought shares at $19.75. To pay for this we sold The Gap for a plus scratch at $19.84. We like The Gap but we donít
want to put anymore $$$ in stocks at this time in case we are incorrect about a
bottom forming. GM is much more volatile up and down and we like the
upside/downside risk/reward from these levels.
We also added more Intel,
Cisco, Ford and American Eagle to our
larger/aggressive accounts and traded Fannie
(plus $1.50 per share) and Wells Fargo
(plus $.50) in those accounts.
Our view is that the stocks markets are working though all
the uncertainties and slowing economy talk. The S&P 500 keeps bouncing at
down 20% from its highs. Today is the third time in two months and the second
time this week it is at that level.
If the S&P does pierce the downside then we do think
there will be a quick and painful 10% to 15% drop.
The stocks we are buying have value and have 50% and more
upside from our purchase price once the markets can work through the turmoil.
Investing is about measuring risk/reward. We have been doing that for 40 plus
years and we have confidence in the stocks we own. The markets are not under
our control. There is panic in the media and among hedge funds that are
overleveraged. It is times like the present that offer opportunity for
substantial gain. The major measures are not lower because besides the banks
and other stocks that have tanked the market measures are composed of oil and
agriculture related stocks plus the old standbys of Coke and Altria, McDonalds
et al. These latter are stocks are making new highs or are only off about 5%
from their highs. But there has been real carnage in certain areas. The
question is whether the oils and other stocks that havenít broken down have to
before the markets can stabilize. Time will tell. *****
We are using the rally from the initial sell off this
morning to sell the SPDR Regional Bank Trust
for a $1 plus gain the SPDR Major Bank
Trust for a plus scratch. These two items have the least %age gain
potential of the shares we own and they employ a lot of cash. In the last two
days we have put a bit of cash to work and we want to replenish our coffers.
The guru we follow says that it was very important for the
S&P 500 to recapture the 1300 on the first rally after being down over 25
points in the early going. If the S&P 500 can close above 1320 the guru
thinks it could be momentous (his word not ours). *****
Gold touched $1000 and ended at
$994 up $14. Oil gained 30 pennies to $110.15. Treasuries were soft with the
two-year at 1.61% and the ten-year at 3.57%. The euro was $1.55 and the Yen was
102 to the dollar.
European bourse close 1% lower
but Mexico and Brazil
Art Cashin on CNBC said that in
"the past 15 years have seen a bit less than two dozen days of +3% or
more, and all came in the bear market decline that followed the dot-com
In terms of the S&P 500 this
is not accurate. Since January 1991, we have had 33 3%+ days on the S&P
500, including Tuesday's rally.
Prior to Tuesday's 3.7% rally, 17
of those previous instances occurred between March 2000 and August 2002. These
are the bear market rallies that we should fear could be repeated in 2008. But
the remaining 16 instances occurred in 1991, 1997, 1998 (after Long Term
Capital), October 2002, or early 2003.
In other words, given a look at
market history, the jury is still out (as if we didn't already know that!).
That said, I wouldn't want to have a large short
position here. Since 1991, the average price return of the S&P 500 in the
60 trading days AFTER a 3%+ rally has been +3.54%. And the S&P 500's price
return after 60 trading days was POSITIVE in 21 of 32 prior instances following
after a 3%+ up move.
The DJIA held its gains in the last
hour after being 250 points lower in the first hour of trading.
The DJIA closed up 35 points at
12145. The S&P 500 gained 7 points to 1315 and the NAZZ rose 20 points to
Breadth was 5/4 positive at the
bell after being 5/1 negative in the first hour. Volume was moderate.
There were a combined 490 new
lows and 85 new highs.
The bulls lucked one out. *****
12 March 2008
Asian markets were small higher
overnight as are European bourse indexes at .
Gold at $977 and Oil at just under $109 are treading a bit higher. Treasuries
are flat as the trading day in NYC begins with stock futures looking to be flat
at the opening.
A bit of a pullback in the early
going would be healthy given yesterdays bounce of major support.
The Fedís attempt to rescue the
economy has been declared DOA by Bloomberg reporters: The dollar approached its all-time low against the euro on speculation
the Federal Reserve's plan to provide funds to banks won't be enough to break
the gridlock in money-market lending and stem credit losses.
``Read the need for such new measures as being a symptom of what ails
the world and not a panacea for its problems,'' said David
Simmonds, the London-based
global head of currency research at Royal Bank of Scotland Plc, the world's
fourth- biggest foreign-exchange trader. ``Stay short dollars.'' *****
That was quick since the rescue
plan hasnít even begun.
American Eagle maintained its
first-quarter earnings guidance on Wednesday, after reporting that profit
declined in the fourth quarter. American Eagle continues to expect earnings
between 25 and 27 cents per share, compared with 35 cents in the first quarter
Talbotís report wasnít pretty but then that is why it is at $8 down
from $30. The two most important parts to us are highlighted. Same store sales
increased in January and they are biting the bullet and closing stores.
For the fourth quarter, Talbotís
booked a loss of $171.4 million, or $3.23 per share, compared with earnings of
$17,000, or breakeven per share, in the prior year.
The fourth-quarter loss included
a preliminary charge of about $2.71 per share to write down intangible assets
at J. Jill, which was acquired in May 2006. Quarterly results for fiscal 2006
include acquisition-related and financing costs totaling about 15 cents per
Excluding those one-time items, Talbotís
booked a fourth-quarter loss of 22 cents per share, compared with profit of 15
cents per share in the prior year. Quarterly sales dropped 8 percent to $587.4
million from $638 million in fiscal 2006.
Quarterly same-store sales fell 6
percent due to weak performance in November and December. Same-store sales in
January increased in the low single digits.
"2007 was a difficult year
for Talbotís," said President and Chief Executive Trudy F. Sullivan in a
statement. "However, we feel very good about the progress we have made,
and believe we are well-positioned to succeed in 2008. Despite the challenges
of a weak economic environment, we identified and implemented a number of key
initiatives to drive improved short- and long-term performance."
In January, Talbotís said it
will close its 78 children's and men's apparel stores to focus on
its core middle-aged female customer, a move that will affect 800 employees.
For the full fiscal year, Talbotís
booked a loss of $188.8 million, or $3.56 per share, compared with earnings of
$31.6 million, or 59 cents per share, in the prior-year period.
Excluding one-time charges,
full-year loss totaled 13 cents per share, compared with profit of $1.05 in the
prior year. Fiscal 2007 sales rose 3 percent to $2.29 billion, compared with
$2.23 billion in fiscal year 2006. Full-year same-store sales declined 5.5
Several gurus that we follow are
saying that a 90% up day (volume) yesterday following so closely after a 90%
down day suggests up to a two month rally. We would like that. Actually that
would coincide with the sell in May and
go away mantra that we take seriously.
We are going to repurchase a few of the lower priced tech
stocks that we abandoned in January. These shares will complement the much higher
quality shares we now own. We are not going overboard and we are purchasing
within earshot of the prices at which we sold.
We boughtAMD, Micron, Tellabs and Alcatel Lucent.
We sold the GE we bought Monday into the abyss. That sale gets the potion in
line with our other positions and establishes a lower cost price. *****
We tradedFannie and Freddie for a day trade profit in our larger/aggressive accounts
and sold Tiffany for a two day
profit. We addedTimberland and LIZ to those same
We purchasedSchering Plough for accounts to go with the BMY and PFE. The drugs
have been ignored in the two day pop and we are guessing that latecomers will take
a look. SGP is down from $35 and at $19.80 closer to its five year low of $15 when
all was bleak. *****
We sold Citi
for a plus scratch and switched the money to United Foods.
European bourse indexes closed 1%
and more higher across the continent. The euro ended at $1.55, Oil was up $1.10
to $109.92 after trading above $110. Do we hear $200? and Gold gained $7 to $983.
Treasuries were firm with the two-year at 1.59% and the ten-year at 3.45%. Brazil
and Mexico were
The major measures vacillated all
day before moving lower it the last hour of treading. Digestion for a few days
of the large move of yesterday is healthy.
The DJIA closed down 50 points at
12110. The S&P 500 gave back 12 points to close at 1308 and the NAZZ was
down 12 points at 2243.
Breadth was 3/2 negative at the
bell and volume ws moderate.
There was a combined total of 300
new lows which is half of yesterdayís number and new highs gained a bit to 85.
The bears are back in the picture.
11 March 2008
This morning the Fed added $200
more billions in liquidity and the foreign central banks also moved to added
billions in liquidity to the mortgage markets. And as a result stocks are going
to open 2% higher as shorts rush to cover.
We donít know whether Uncle Ben
is a stock technician but given that the S&P 500 closed right on major
support last night at 1273 and is now up 40 points to actual resistance at 1310
he couldnít have picked a more fortuitous time to act.
And so catastrophe for bulls is
averted for a while but of course the problems are only delayed not cured. But
this action does provide more time for time to work its magic as we said
Texas Instruments reported inline earnings last night but warned
going foreword and was trading lower this morning until the Fed made its move
and short covering raised all ships.
J Crew announces earnings after the markets close today and Talbotís and American Eagle Outfitters announce earnings tomorrow morning before
the markets opened. Both of them have earned already.
The Federal Reserve plans to lend
up to $200 billion of Treasury securities in exchange for debt including
private mortgage-backed securities that have slumped in value as homeowners
defaulted on their payments.
The Fed set up a new tool, the
Term Securities Lending Facility, to lend Treasuries to primary dealers for
28-day periods, through weekly auctions. The Fed also said in a statement in Washington
that it's increasing the amount of dollars available to European central banks
through swap lines.
Today's steps are the latest in
Chairman Ben Bernankeís effort to alleviate increasing strains in financial
markets that are curtailing credit available to homeowners and companies. The
Fed last week said it will make up to $200 billion available to banks through
other tools to help boost liquidity.
The auctions of Treasuries, which
will begin March 27, may be secured by collateral including agency and private
residential mortgage-backed securities, the Fed said. The central bank ``will
consult with primary dealers on technical design features'' of the new tool.
The Federal Open Market Committee
authorized increasing currency swap lines with the European Central Bank and
Swiss National Bank to $30 billion and $6 billion, respectively, increasing the
ECB's line by $10 billion and the Swiss line by $2 billion. The Fed extended
the swaps through Sept. 30.
The FOMC's next regular meeting
is scheduled for March 18.
By the by, Oil is $109 in the
early gong and Gold was $982 up $14 before the Fed announcement and is up $8
after it. Short Treasuries have dropped in price and are up about 25 bps in yield.
March 12, 2003 marked the beginning of the
2003 to October 2007 bullish phase of the market. in
the last five months the S&P 500 was down 19% from its October 9, 2007 high.
On the opening this morning we sold Blackstone at $15.70
for a plus scratch. Yesterday morning it was $13.79 and we so we are happy to
escape and move on.
On the first hour pullback we re-purchased Verizon at
$34.50 and added a few shares of Ford
to accounts and also initiated a position in Citi. We think the Fed action was aimed at banks like Citi. We have
room to buy more.
After two hours of trading Bear
Stearns turned lower after being $8 higher this morning and it is now down $5
at $57. That movement in BSC affected the markets which are obviously very
jumpy and The DJIA has quickly surrendered 100 points.
How do you turn $1 billion into $500 million ?
March 5, 2008: Citic Securities,
China's biggest brokerage, is pushing to renegotiate an agreement made in
October to buy a stake in Bear Stearns after the Wall Street firm's shares
plunged by more than a third. Citic, which originally agreed to pay $1 billion
for a 6 per cent stake in Bear Stearns, is now demanding about 8 per cent of
the American bank on the basis that the payment represents a larger share of
the group because of the stock's 35 per cent decline since the deal was announced.
How do you lose $500 million in one month ?
February 13, 2008: Bear Stearns shareholder Barrow Hanley
Mewhinney & Strauss filed with the U.S. Securities and Exchange Commission
to disclose a 9.95 percent passive stake in the bank. The investment adviser
said the stake gives it ownership over about 11.5 million shares, sole voting
power over about 2 million shares and shared voting power over about 9.5
In 1990 Drexel Burnham went under to pay the price to the market gods for its
excesses. Maybe Bear Stearns will be
the sacrifice this time around.
Tony Crecenzi of realmoney.com by
way of a comment on minyanville.com by Todd Harrison said that $200 billion in
agencies ($139 billion) and mortgage backed securities ($60 billion) is almost
the exact amount of securities held by all primary dealers as of February 27. Coincidence?
Eagle Outfitters came crashing to the ground last week, despite updating
fourth-quarter EPS guidance to 66 cents, a penny ahead of management's old
guidance and the Street estimate. Evidently, reporting a negative 4% February
comp and guiding first-quarter 2008 earnings down to a range between 25 cents
per share and 27 cents per share vs. the Street's 35 cents per share wasn't
well-received in a horrendously bad market. Similar to all retailers -- from Wal-Mart
on the low end to Polo Ralph Lauren on the high end -- American Eagle traffic is slowing, and the management is also
grappling with company-specific issues in its women's assortment. Aggressive
markdowns are likely to cut 200 basis points out of gross margins and naturally
will "deleverage" the usual fixed costs. The stock is trading at less
than 10 times the 2008 EPS, though, so perhaps a value is starting to emerge. On
the call, analysts will focus on efforts to revive the women's segment, which
comped negative 8% last month. Men's comped 5% in positive territory, so
clearly, the company is doing something right in men's that needs to translate
to women's. Notably, knits should represent a great opportunity to improve,
since it constitutes nearly 33% of overall sales. Early feedback from analysts
is that the spring assortment is looking better. New concepts will also attract
attention tomorrow morning. The core American Eagle concept is nearly tapped
out, and growth should stop in three years, so new concepts will need to pick
up the slack. Aerie is starting very strong and can provide one-third of new
footage growth. Investors will also want early evidence on the viability of the
77 kids concept announced in January. Most importantly, analysts will want to
see some resolution on the future of Martin + Osa (a two-year-old brand
focusing on the 28- to 40-year-old shopper), which is off to a rocky start and
is dragging down EPS by 16 cents 17 cents a year.
As we said above, earnings for
AEO will be released before the bell on March 12.
European bourse indexes closed
mostly 1% and more higher as did Mexico
The final hour today is going to be the tell for the next week. Stocks need to hold and improve their
gains in the final hour for the bulls to keep their strength. *****
the major measures are pushing to new highs for the day with the DJIA up over 300
points and the S&P 500 back near 1310 resistance. For this move to be
occurring with over an hour in the session may suggest that shorts are receiving
margin calls that have to be met by
It also means that the bulls are
going to have to work doubly hard in the final hour to prevent a pull back. Volume
on the NYSE is 3.7 billion. The NAZZ is not seeing the volume action with only
1.7 billion shares traded.
Oil ended at $108.75 up 82 pennies
and Gold was $972. Treasuries were weaker on the Fed move with the two-year at
1.74% up from 1.52% yesterday. The ten-year went out at 3.60%. The euro closed
at $1.53 down from $1.54 before the Fed move.
On a positive note for the bulls
the major measures closed on their highs with the S&P 500 ending at 1320 decisively
above 1310 resistance (now support).
The DJIA closed up 415 points at
12155. The S&P 500 gained 44 points to 1320 and the NAZZ closed up 85 points
Breadth was 4/1 positive on the NYSE
and 3/1 to the good on the NAZZ. Volume was heavy on the NYSE at 5 billion but
light on the NAZZ at 2.4 billion.
There were a combined 450 new
lows and 65 new highs.
The bulls won the day.
10 March 2008
The gurus are awaiting the next
Fed rate cut to save the stock markets. Until then the flailing will continue. After
the next cut the markets will probably continue flailing until time works its
magic. With the massive media need to gain viewers to justify the rates charged
for advertising the new meddling media mantra is negativity.
The jobless number on Friday was
a loss of 63,000 jobs in an economy of 150 million plus jobs. As we have commented
before the number is meaningless but the psychology of the number is everything.
In fact the previous two months numbers were adjusted downward by 50,000 jobs
and we would guess that the February number that riled the markets will also be
adjusted several months hence.
Markets at junctures like this
are 95% psychology and our job is to deal with the psychology but also to keep perspective.
Just as 1987 turned to 1988 and 1990-91 became 1992 and 1998 became 1999 and
the 2000 to 2003 collapse ended so too will this. We will survive it. We donít
think that the U.S.
is the Holy Roman Empire- at least not at this juncture
in history. Markets need corrections and panic to wring the excesses. In 2000
the excesses of the internet boom needed correction. In 2007 the excesses of
the housing boom needed correction. That is what is occurring.
For a bottom we would think that
the commodity, ag and solar stocks have to break more
than they have. These momentum names are down 10% but the rest of the various
categories like tech and retail etc. are down 40% and more and the momentum names
should also collapse before the final bottom is in. that may take time but it
doesnít mean that the already depressed value stocks we own need to correct another
40% with the momentum names.
The present sell off is not
occurring in the context of a bubble in the stock market. The bubble was in the
real estate market and certainly real estate related stocks have already crashed.
The 2000 to 2003 drop occurred to cure excesses in the stock market. What
excesses there were in stocks have mostly been eliminated.
We are in a bearish market but even
bear markets have rallies and there is so much gloom in the media and market participants
that a rally is in the cards.
Asian markets were lower
overnight with Japan
and China down
2% and Malaysia
down 10%. European bourse indexes are small lower at and Gold is flat with Oil sporting a $104 handle. Treasuries
have a bid.
Blackstone reported less that earnings and revenues and it trading lower
this morning. Texas Instruments reports
after the bell and its report will govern tech stocks tomorrow.
Vince Farrell Jr. writing on
realmoney.com had an interesting commentary on a Citi
conference call on the global credit markets:
Citibank had an excellent conference call last Friday on the
"State of the Global Credit Markets." The topic is daunting, and I
actually listened to it twice (I replayed it), and still don't pretend to
understand it all. But let me summarize what I heard.
The ultimate losses in the credit market will be less than the
mark-to-market losses and the headlines that blare at us every day would lead
us to believe. They think that we are 80%-90% of the way through the morass;
the biggest issue now is liquidity and not inherent credit quality. (Yeah, but
liquidity trumps all!)
Concerns regarding the blight spreading to other consumer-related
segments like auto and credit card securitizations are overblown. These markets
are much smaller and much less securitized. They note the big problems in the
mortgage/sub prime areas are in the "securitizations of the
securitizations." The speaker actually said that!
He explained that asset-backed securities (ABS) are one level of
securitizations, and they are then gathered and resecuritized into a
collateralized debt obligation (CDO); that extra layer of leverage is the issue
and where the bulk of the defaults are surfacing.
I think I can put it into English. A sub prime mortgage is issued. A
bunch of sub prime mortgages are gathered together to create a sub prime bond.
A bunch of bonds are the gathered to create a CDO. This last layer of
resecuritization doesn't exist in the auto and credit card asset-backed
securities, but it is in this second tier of leverage that the problems lie.
Their conclusion is that future write downs will be smaller and more of
an earnings event than a capital event that requires big write-offs.
I hope so. What is needed is for the market to stabilize so buyers and
sellers of the ABS's, CDO's or the whatevers can figure out the clearing price
and what these things are really worth. As I have said, I think the Federal
Reserve's moves to provide liquidity directly via the term auction, where
these collateralized things can be pledged for loans, will go a long way in helping.
I can't help but wonder about the genius rocket scientists who dreamt
this stuff up. Securitization of debt obligations has helped fuel our economy.
But securitizing the securitzations strikes me as financial engineering that
made a bunch of money for investment bankers who already cashed their bonus
checks and can complain about the markets out in the Hamptons. *****
The intraday low on or about Jan.
23 was 1270 on the S&P 500 and about 11,600 on the DJIA. At today the S&P 500 is at 1282 and the
DJIA is at 11,833.
The equity of CBS
in priced at 17 times earnings and 1 times revenues. The yield on the shares is 4.5% and we bought in accounts at $21.80. We
also added Tiffany to some large accounts
and GM also as both make new 52 week lows. *****
The markets are lower on rumors
that Bear Stearns is going under. The Fed will arrange takeover if the rumors
are true. And if they are true we would think the major measures should be down
10% not Ĺ of 1%. When rumors begin rallies follow.
Google is down another $10 today
to $425 and some of the momentum stocks are lower with First Solar at $188 down
$10 and Mosaic in the fertilizer stocks off $6 to $98. Both and others in this
category still remain much overvalued.
European bourse indexes ended 1%
and more lower on Monday.
Gold ended at $972 down $2, Oil
was $107.89 up $2.84 and Treasuries gained with the two-year at 1.45% and the
ten-year at 3.46%. The euro closed at $1.53, so there will be no European trips
The DJIA lost 153 points to close
at 11740. The S&P 500 dropped 20 points to 1273 (1275 was/is the line in
the sand) and the NAZZ was down 44 points to 2170.
Breadth was 4/1 negative and
volume was moderate.
There were a total of more than 820
new lows. That is not enough for a meaningful bottom.
The bears continue their winning streak.
7 March 2008
The gloom and doom
in the media reminds of a story the Old Stockbroker
used to tell. Back in 1942 when the Germans under Rommell were marching through
North Africa and it looked like they were going to defeat the Allies, one of
the Old Stockbrokeríspartners walked into the Old Stockbrokerís office and said he was
selling out his clients and the Old Stockbroker
should do the same. ďThe Germans are going to over run Africa and invade the U. S.,Ē the partner said. The Old Stockbroker asked the panicked man a simple
question, ďWhat good will the dollars realized from the sale of stock do for us
if the Germans win?Ē *****
Stocks are going to test the January
low and probably probe lower this morning as the Employment Report showed a net loss of 63,000 jobs and the January
and December numbers were also revised downward by 10,000 and 40,000 jobs
Asian markets were lower by 2% to
4% overnight and European bourses are lower by over 1%. Gold is up $1 and Oil has
a $104 handle. Treasuries, as you would expect, have a bid.
Panic is in the air and even the
usually ebullient taking heads on CNBC are glum.
Fed member Fisher said in Europe
overnight that the markets should not expect and inter-market Fed rate cut. The
Fed did announce this morning that it is in consultations with its European
counterparts about the market situation and the Fed also announced a $100
billion thirty day credit facility for banks and primary dealers that will allow
them to place mortgage paper with the Fed in return for cash.
MontgomeryCounty in Alabama
has refused to meet a $200 million margin call. It seems the County has over $4
billion in credit default swaps on its books. It only has about $3 billion in
debt so in effect it has been playing the market with a billion dollars. Nice.
How many other idiot counties are out there? We hope the golf games and NYC
plays were worth it for the county treasurer although we would guess that he
would give them all back to not have entered into those swaps.
AMBAC sold $1.5 billion of stocks
and convertible equity last night at $1 below the closing price. The markets
donít seem to be impressed but then the markets are becoming rational.
In the first half hour of trading the DJIA dropped 150 points
and then rallied back to even. The S&P 500 neared its January 22 intraday
trading low and then rallied.
Last night at we awoke wondering why we were being
heroes. We decided we didnít want to be. We just want to own some good stocks
at good prices with a lot of cash on the side. If we are correct we will make
our money on this trade on the JPM and KRE and KBE. All three of those rallied
$10 off the January lows from the prices at which we bought them yesterday. And
so on that initial bounce we sold our XLF for an unhappy 75 penny per share
loss. We also sold FNM and SMH and WB for scratches and AIG for a dollar a share
loss. Our guess is that there will be another retest of the January 22 lows
today and Monday. *****
An hour and one half into the session as the rally fades
we are going to sell the XLK for a 25
pennies loss and look to buy a few stocks yielding over 4% during this pullback.
We want to have money in the market but on our terms. All bottoming processes
are tumultuous and if this is another temporary bottom we have to go by the
feel of the stocks we own when we own them. That is the way it has always
worked of us. If we own them and they go lower and we want to buy more then we
know they are worth holding through the pain.
On the second pullback we bought Pfizer at $21.37, Saks at $13.02 and Xcel Energy
the Midwest utility at $19.65 for our larger accounts.
Both PFE and Xcel Energy yield over 4% and so we will own or trade for more
than the dividend yield. That is, if the shares gain $1 from our cost price we
will sell since the gain will equal the full year dividend yield. If we receive
a quarterly dividend in between the more the better.
Saks has been the subject of
takeover rumors at double the current price for the last year. With the euro at
twice its level of a few years ago and insiders owning 35% of the outstanding shares
maybe at some point the Europeans rumored to be interested will bite.
In the autumn 2007 The Independent, a newspaper based in London,
published a report on its web site that said "rumors re-emerged that
Icelandic Investment group Baugur was set to bid for Saks
Fifth Avenue, with an offer worth between $26 and
$30 a share imminent."Baugur, which owns some British retailers, had
disclosed it held an 8 percent stake in Saks in a July U.S.
Securities and Exchange Commission filing. That offer never materialized but
with the shares on a five year low there are worth the risk. Just the other day
an analyst lowered her opinion saying that the rich would stop shopping. BankAmerica
Securities analyst Dana E. Cohen, who previously downgraded jewelry retailer
Tiffany & Co. and auction house Sotheby's to "Neutral" due to the
slowdown in the luxury sector, said it was time to downgrade Saks as well, her
last "Buy" rated luxury company. "With luxury slowing, we think
it is becoming increasingly difficult for Saks Inc. to buck the trend affecting
retail," Cohen wrote.
We donít agree. In the latest earnings
report was released last week Saks reported that fourth-quarter profit almost
doubled, helped by solid sales, cost controls and one-time gains. But its chief
executive warned of challenging economic times ahead.
The first hour rally stopped at
1310 which is now resistance after being support as the closing price on January
22. A lot of the trading that is occurring is technical. We doubt that many
investors are involved. In the third hour of the trading session the major
measures are moving back to test their lows made in the first hour.
Cisco and Microsoft have
been higher all day except for the last fifteen minutes at when the DJIA hit down over 200 points. We sold the
SPDR Tech this morning in part because we decided we would rather own CSCO,
INTC, and MSFT at 15 times improving earnings than all the high P/E techs in which
we have no interest. And so we are adding CSCO and INTC to accounts that
already have position in Intel which
includes some smaller accounts that didnít own XLK.
A 50% re-tracement of the high in
the DJIA is 10500. We are there.
Bill Gross was on CNBC a few minutes
ago suggesting that the Fed needs to begin buying mortgages. We have been saying
that to anyone who would listen for a few weeks. We think that will eventually occur
when Uncle Ben finally panics which we think he will. He has been an academician
all his life but now he is intimately involved with the markets and our guess
is that sooner or later he will realize that reality trumps theory. Of occurs
we hope sooner but if not then later will do.
By the way Gross confirmed that
Pimco had purchased several hundred million dollars of Thornberg mortgages. But he did not confirm the rumor of billions.
We now are 40% to 50% invested in stocks we can own and add
to. It wasnít easy and we are tired but we like the long term outlook for what
we own. All the stocks are 50% or more off their highs and while he short term is anyoneís guess we can own these with
financial and retail stocks and even many tech stocks are down crash amounts
and more. That doesnít mean they canít go lower but it does mean they are at
own able levels for the longer term at least. *****
Oil closed the day at $105.15 down
30 pennies after trading with a $106 handle earlier in the day. Gold closed at
$973 down $4. Treasuries were better with the two-year at 1.50% and the ten-year
European bourse indexes closed 2%
and more lower on the day as did Mexico
Traders and pundits are making a big
deal of the fact that Carlyle Group
let their Carlyle leveraged GNMA closed end fund that they sold to Europeans go
under. We donít think it is. With 30 to 1 leverage we do think it is absurd for
talking heads to say that the fellow who ran the fund was a seasoned manager.
Maybe he was seasoned over the last ten years when nothing went wrong and rates
have been low but we are willing to bet he wasnít around in 1982 or even
probably the early 1990s when canít occur
events in the credit markets did occur.
Carlyle was trying to make some money on the edges from fees on the $500
million raised and they could care less about the small fry European investors
who bought the fund. And the folks who lent them money and are repossessing the
collateral are going to come out OK also since their pricing of the collateral
is under a stress situation and when the smoke finally clears they will get
their money back.
The DJIA closed down 145 points
to 11894. The S&P 500 lost 11 points to 1293 and the NAZZ dropped 8 points
Breadth was 2/1 negative after
being 5/1 negative in the early going and volume finally was active on the NYSE
but still moderate on the NAZZ.
Combined new lows totaled 800 on
the day so there is a ways to go to exceed the 2000 new lows of January 22. We
think the markets will rally and not exceed that figure.
The bears won the day and the
week and are in control.
6 March 2008
Stocks are going to open modestly
lower as Thornberg Mortgage, which makes jumbo loans, has not met some margin
calls and that news has placed the mortgage markets in more turmoil than they
were. There are reports that Pimco, the largest bond manger in the world, bought
$27 billion of mortgages on 70 cents on the dollar. Pimco has confirmed that it
has purchased some AAA commercial CDOs at 250 bps over Treasuries. Panic
provides good buying opportunities. Also Carlyle Capital which is a subsidiary
of the LBO firm Carlyle Group of Bush and Saudi fame has defaulted on $27
billion of mortgages 99% of which were government guaranteed mortgages but were
collateralized by only $700 million of equity. That is a 30 to one leverage which
means that a 4% drop in price or bid wipes out the equity.
Asian markets were higher
overnight and European bourses are mixed small at .
Gold is up at $990 and Oil ticked at $105 again this morning. As would be
expected Treasuries have a bid.
Wal-Mart reported a 2.8% rise in
same store sales for February excluding gasoline. Of course there was an extra
day and food prices are up a chunk over last year and grocery is a growing part
of Wal-Mart business. They sell organic food from China
which is certainly a non sequiter.
We are intrigued by the fact that Pimco is buying mortgages.
They have avoided them like the plague for the last many years.
The Bushies in Washington are opposed to a government bailout
and that was reiterated this morning when an unnamed Treasury official,
probably Hank Paulson, said there would be no governments take over of Fannie
But we do think that the Fed is working behind the scenes
and that the margin calls on Thornberg may be the straw that gets them to act.
The announcement yesterday by AMBAC that it was going to do a stocks/rights
offering to raise $1.5 billion with no underwriting backstop was greeted by disbelief
that it would get done and that is why the markets gave back all their gains.
Coupled with Thornbergís problems and the Carlyle mess lead
us to believe that Pimco stepping up was not an accident. Bill Gross who makes
the major decisions at Pimco is too controlled a guy to be making decisions in a
vacuum. And so it is our guestimate that the Fed is offering some kind of backstop
arrangement. †We also think Buffet is not
yet participating because of his Democratic Party leanings and also because he
smells blood in the water but doesnít want or need to be the first shark on the
For every 30/1 leveraged hedge fund idiot there are five
hedge funds mangers who have the cash and buying power to step up and buy mortgages
at 70 cents on the dollar if they think the Fed is around to make sure they
wonít look like fools. Hank Paulsonís contacts from his Goldman Sachs days in
the good ole boys and some girls club reinforces our belief in the behind the
With that in mind and with financials hitting the lows
they made on the January 22 blow off we are buying the bank and financial SPDRS
(KBE, KRE, XLF) plus JP Morgan on its 4 year low, AIG and Wachovia on their ten year lows.
We added the SPDR Tech and the Semi-Conductor HLDRsTrust
(SMH) and GE and BMY that we have been trading.
American Eagle is down $3.50 on disappointing same store sales. AEO is a very good
company and we bought shares as it touched its 52 week low at less than 10
Finally The Gap
was down a dollar this morning on lower same store sales. We like their
new spring clothes and the street is buying the stocks and so we added a position.
We know we said we had taken the stocks off our screens but it is back because
they have a nice spring wardrobe, they are closing underperforming stores and
we think that the turnaround may be coming. Of course spring is coming too, and
it will get here first.
All of these purchases are good values and we are
comfortable owning at these prices. Of course if we get a good trade from them
with no resolution of the mortgage miasma we will probably take it. We expect
to get a good trading opportunity.
Coldwater announced worse that expected sales and forward outlook
and is off 30% from where we sold a few days ago. We are going to let it go for
Today is a day when all the news
is bad. Since last August there have been periods when traders seemed to ignore
the financial industry turmoil only to be brought back to the turmoil when an
event occurred that needed to be addressed. With Thornberg and Carlyle and
Fannies and Freddie and AMBAC all in the news this week the markets and traders
are revisiting the half empty cup. The crescendo, one way or another or maybe
both ways, may occur tomorrow morning when the Employment report totally
occupies the ADD minds of traders for a couple of hours, at least.
And so you ask why we didnít wait
till then to make our purchases. That is a good question but if the turmoil of January
22 is any guide the dislocation that occurs makes knowing that purchases are being
accomplished difficult. If there is a whoosh down we would guess that any
recovery is going to close higher than todayís level at which we are making
We bought more Blackstone
in our large/aggressive accounts. BX is a potential purchaser of cheap mortgage
debt since they have reported that they own none. Also we bought Fannie in those account at $22 for a
Gold ended the day down $12 at
$977. Oil traded in a five dollar range finally settling at $105.40. Treasuries
were strong with the two-year at 1.53% and the ten-year at 3.62%.
European bourse indexes closed
over 1% lower as did Mexico
The DJIA lost 220 points to finish
The S&P 500 closed below the
1310 January closing low down 30 points on the day at 1304. Tomorrow should
tell us whether this is the test of that low orÖ.
The NAZZ dropped 52 points to
Breadth was 8/1 negative on the
NYSE and 5/1 negative on the NAZZ most of the day and volume was moderate.
Threw were 280 new lows on the
NYSE and 30new lows on the NAZZ.
The bears are back in control.
5 March 2008
Asian amrekts were mixed small
overnight and European bourse indexes have bounced back at and are up about half of what they lost yesterday.
Gold is flat as is oil and Treasuries are a bit better. U.
S. stocks are trading with a positive bias
in the pre-market.
Investorsí Intelligence figures are basically unchanged in the latest
week with 42% bulls and 36% bears.
The ADP employment report which precedes the Government number expected
on Friday suggested a loss of 23,000 jobs in February.
Fourth Quarter Productivity was revised to up 1.9% with Costs revised to up 2.6%. Those are
Washington Mutualís share price is down 70% in
the last 12 months and so the following news should be discouraging- to say the
least- to shareholders:
The board of Washington
Mutual Inc. has set compensation targets for top executives that
will exclude some costs tied to mortgage losses and foreclosures when cash
bonuses are calculated this year. The move, approved last week and disclosed in
a securities filing late Monday, essentially shields the pay of chairman and
chief executive of the thrift, Kerry Killinger, and more than 100 other
executives from the continuing mortgage fallout. In the fourth quarter, the
thrift reported a $1.87 billion loss fueled by a sharp increase in its reserve
for loan-related losses. Loan-loss provisions on mortgages, as well as
foreclosure costs, will be left out of the new formulas. In the filing, the
human-resources committee of WaMu's board, which approved the compensation
targets, cited the "challenging business environment and the need to
evaluate performance across a wide range of factors." The committee said
it will "exercise its discretion" to determine the exact amount of
the cash bonuses for executives covered by the plan and "subjectively
evaluate company performance in credit risk management and other strategic actions." *****
During the 100 points rally in the DJIA in the first hour
of trading we sold MSFT and BRCM for plus scratches and SYMC for a negative scratch. The
overall net scratch was positive. That clears the anchovies form our accounts.
The markets are rallying on
rumors that the Fed or some one, anyone is going to start buying mortgages that
are of decent quality but canít be sold at any reasonable price.
In reading the comments of John
Chambers, the CEO of Cisco, that
were give as part of the reason for the market rally in the last hour yesterday,
we certainly didnít get the same buy now
think later vibes from his words that the rally would imply. He said that
long term growth for the company would be fine but he also said that there
remain "bumps" in the U.S.
economy, which could last for several quarters, he said, adding the downturn is
relatively shallow. The slowdown is likely to last two to three quarters, but
could last as long as five quarters.
earnings and sales are out and the loss was a bit lower than analysts expected
but sales were less than analystsí expectations. The shares are off 12% in a
generally strong up market and most of the retailers have been moving higher
today and the last few days on what we would guess is short covering. We bought
shares $8.85 for a trade.
With the DJIA holding a 100
points gain on hour into the† trading
session we note that Apple has been trading lower all day which is the opposite
of the way it traded the last two days when the markets were lower.
Two hours into the trading day
oil is up $4 to a $103 level and Gold has rebounded the $20 lost yesterday plus
$4 to trade at $990. The hedge fund boys and girls are having fun.
Three hours into the trading day
the DJIA spiked to up 115 points when trading ws halted in AMBAC for news pending. The news is that AMBAC is going to have an
equity offering to raise at least $1 billion in capital. Citi and some other
banks are underwriting the offering which means they are trying to make a few
bucks as underwriters while attempting rescue the junk they created.
When that news was finally
released the markets began to ease off and at
The DJIA is now negative and most financials are lower as traders say ďSo what!
Say what was all the fuss was about? Itís just the same old same old.Ē Or
something like that.
We found the following
New York-based Citigroup,
the largest U.S. bank, helped create at least $6.9 billion of CDOs insured by Ambac
that have tumbled in value, according to research by Tavakoli Structured
Finance Inc. Of the $22 billion of Ambac-insured CDOs linked to the
mortgage market, about $7.5 billion were underwritten by Citigroup. Of those
CDOs, $6.9 billion are experiencing so-called events of default, Tavakoli said
in a report last week. Such events signal the most-senior classes may not be
paid in full. Citigroup has ridden to Ambac's rescue before. In 1985 Citibank
purchased a majority stake in Ambac and provided it with capital after its
parent Baldwin-United, a Cincinnati-based piano maker filed for bankruptcy. Citigroup sold its controlling interest in
Ambac as part of an initial public offering of the company in 1991 .
What is interesting
is that Baldwin United was not a
piano company when it failed. It had turned itself into a financial services
company that had sold single premium deferred annuities to investors and not
properly invested the money and individual
investors lost hundreds of millions of dollars ( a lot of money in the early
1980s think billion now) when Baldwin United failed. The annuity fiasco of the
1980s was the precursor of the CDO scandal of the current decade.
around comes around, the apple never falls far from the tree, and Wall Street
will always find a way to disadvantage its customers while lining its pockets. *****
We re-purchased Blackstone on our large/aggressive
accounts at $15.71 to try and reprise the profitable trade of last week in
these same accounts.
Oil closed in NYC up $5 at
$104.52. Gold gained $22 to $988. Long Treasuries were weak while short
Treasuries were firm. European bourses closed mostly 2% or better higher and Mexico
and Brazil were
both up less than 1%. The euro closed at $1.52.
The DJIA gained 45 points to end
at 12254. The S&P 500 was up 7 points to 1333 and the NAZZ gained 12 points
Breadth was flat after being 2/1 positive
all morning and volume was moderate.
There were 135 new lows on the
NYSE and 175 new lows on the NAZZ.
The big boys and girls worked
their upside magic in the last five minutes of trading to push the major
measures higher with buy programs. Nevertheless we are going to say that
The bulls and bears tied today. *****
4 March 2008
Asian markets were lower
overnight and even Shanghai lost
over 2%. European bourse indexes are down about 1% or more at . Gold is up another $3, oil ahs a $102
handle and Treasuries are firm. Stocks are going to open lower since Intel
warned this morning.
Samir al-Ansari, chief executive
of the $13 billion government-owned investment firm Dubai International
Capital, said Tuesday at a private equity conference that it will take more
than the combined efforts of the Gulf's wealthiest investors -- the Abu Dhabi
Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed
bin Talal -- to save Citigroup.
Goldman Sachs analysts issued a
note saying a modeling miscalculation led it to overestimate its profit
forecast for Citi. Goldman on Tuesday lowered its prediction of a first-quarter
profit at Citi of 15 cents a share to a first-quarter loss of a $1 a share. It
also reduced its 2008 full-year profit estimate to $1.35 a share from $2.50 a
its gross profit margin forecast Monday for its first quarter, blaming a steep
drop in prices for memory chips for the shortfall. The company said slumping
prices for a type of memory called NAND flash had depressed profits more than
anticipated. NAND flash is used in portable electronic devices like digital
cameras and MP3 players. Intel said its gross profit margin ó a crucial measure
of profitability that gauges a companyís ability to control manufacturing costs
ó would come in at 54 percent of revenue, plus or minus a percentage point.
That was down from its previous forecast of 56 percent, plus or minus a couple
of percentage points. Intel said its other guidance had not changed, including
its expectation of $9.4 billion to $10 billion in revenue for the quarter which
meets analystsí expectations. The share price is off 30 pennies in pre market
The DJIA is down 100 points in
the early going to begin the trading day. That is the same action as yesterday
although the average reached the down 100 level a bit more rapidly today.
Chairman Ben Bernanke urged lenders to expand mortgage write downs for borrowers
whose home values have declined, saying more must be done to stem foreclosures.
ďEfforts by both government and private-sector entities to reduce unnecessary
foreclosures are helping, but more can, and should, be done,'' Bernanke said in
remarks prepared for a conference in Orlando, Florida. ďPrincipal reductions that
restore some equity for the homeowner may be a relatively more effective means
of avoiding delinquency and foreclosure. Bernanke went on
to say about this idea, "Lenders
tell us that they are reluctant to write down principal. They say that if they
were to write down the principal and house prices were to fall further, they
could feel pressured to write down principal again. Moreover, were house prices
instead to rise subsequently, the lender (bank) would not share in the gains.
In an environment of falling house prices, however, whether a reduction in the
interest rate is preferable to a principal write-down is not immediately clear.
Both types of modification involve a concession of payments, are susceptible to
additional pressures to write down again, and result in the same payments to
the lender if the mortgage pays to maturity.Ē
We called our
banker today but he didnít want to take Uncle Benís advice and reduce our
mortgage. We are amazed that Uncle Ben seriously suggested this approach. He
really does live in an ivory tower. The only way a bank will work with an in
trouble lender is if the borrower owes more money than the banks can afford to
lose i.e. Donald Trump or Harry Macklowe. All the rest of us mortals are at
J.P. Morgansaid losses from
home-equity loans could nearly double to $450 million in the first quarter,
with losses stemming from the loans dogging lenders and their balance sheets
for the rest of 2008. The bank's net charge-offs for home-equity lending --
where a bank lends money to a homeowner against the equity in the home -- rose
to $564 million in 2007 from $143 million in 2006. The pace of losses is
quickening: J.P. Morgan's home-equity charge-offs grew more than 65% in last
year's fourth quarter alone, swelling from $150 million in 2007's third quarter
to $248 million in the fourth. Mike Cavanagh, the bank's chief financial
officer, said in a presentation at the firm's investor day that those losses
could grow "as high as $450 million" in 2008's first quarter; if they
do, he said, J.P. Morgan would have to compensate by making "substantial
additions to reserves."
The S&P 500 is back to 1315, under 1320 support and
it almost touched the January 22 closing low of 1310. With the DJIA down 150
points the bulls have to make a stand here. We are taking a tad more money off
the table by selling Cisco for a
plus scratch. We sold at $24.20. $21.50 was the low on the last earnings report
a month ago. *****
We read the following on
realmoney .com and thought it might be instructive as to why in technical
analysis support/resistance levels are important.
The real insight to be gleaned from identifying key "support" levels (where demand
has consistently outstripped supply and the stocks or average has not dropped
though that level before) and key "resistance"
levels (where supply has consistently outstripped supply and a stock or average
has not been able to rise above it in prior instances) is to look beyond those
levels. What happens when a stock or major average falls below support or rises
above resistance...and why? The "why" is the crux of the issue...not
Support (resistance) levels and a break of support
(resistance) would be unexpected...and
this unexpected surprise would throw investors into a stage of uncertainty--of
crisis--and they will be prompted to make decisions and take actions that they
would not otherwise be taking were support to have held. These actions, based
on hasty decisions that derive from the widespread emotional upheaval, tend to
be more aggressive than the usual selling or buying. As such, the velocity and
extent of the move will be heightened. That is why support and
resistance are important. *****
the DJIA is down 200 points and the S&P 500 is back at 1310 support.
These are some good points from
consider the very pervasive negative sentiment out there, don't be too quick to
rush in and conclude that it is so bad that it is a contrary indicator. One of
the things you will hear all the time during a downtrend is that since everyone
is so gloomy and negative that we have to bounce soon. The logic behind contrary thinking is that when everyone is negative,
that means they have acted on those feelings and have sold their stocks
already. Since so much selling has already been done, it won't take much buying
at all to turn us back up.The problem with that sort of
contrary thinking is that there is not always consistency between what people
are thinking and what they are doing. Just because someone is negative, that
doesn't mean that they have acted on that and dumped all their stocks. One of
the other problems with using contrarian thinking is that there is tendency to
rely on subjective and anecdotal evidence. We often form our opinion of the
market mood by our contact with a small group of people around us. That can be
very misleading at times. Contrary
thinking works only at the extremes.The
majority of the time, the crowd is right, which
is why momentum works. Right now the crowd is very negative and
although we are ripe for a bounce, we need to be careful about assuming that
this sour mood means that the worst is over.
The S&P 500 is back to where
it was trading in April 1999.
Google is down $16 today at $440. Apple has been trading higher all day but at it looks as if it is going to crossover the negative
column. That may lead more market sell off into the hour when the bulls will try to rally the markets.
Apple says it has no sub prime market exposure in the investment of
its cash hoard. That of course begs the
question of whether AAPL has any other exposure in the miasma of the
mortgage markets. The hedge fund that was liquidated over the week-end owned
only the highest quality mortgages but could only get 85 cents on the dollar
bid for them.
There are reports that S&P
500 companies have combined cash holdings approaching a trillion dollars. It
strains credulity to think the friendly folks at Goldman and Mother Merrill and
JP Morgan did not do company CFOs a large favor by letting them in on some of
the more attractive (big spiff * to the broker) CDO products.
Gold lost $20 to $966. Oil
dropped $2.33 to $100.02. European bourse indexes closed over 1% lower as did Mexico
and Brazil. The
euro ended at $1.51 to the dollar. As the markets rallied in the last hour Treasuries
weakened with the two-year at 1.65% and the ten-year t 3.66%.
the buy programs arrived with positive comments from John Chambers of Cisco
fame and the DJIA gained 150 points in ten minutes to down 60 points from down
210 points. Charlie Gasparino, a
WSJ/CNBC reporter, is also on CNBC saying that AMBAC will be rescued. If that
is the reason for the rally that will be the third time in three weeks he has
initiated a late day rally with that same news.
The DJIA closed down 45 points at
12215. The S&P 500 closed at 1327 down 4 points and the NAZZ dropped 3
points to 2255.
Breadth was 2/1 negative at the
bell after being over 3/1 negative at
but volume was light.
New lows expanded to 275 on the
NYSE and 325 on the NAZZ. Those figures are still well away from the 2000
combined new lows on January 22. That is the type of bottoming number we are
awaiting for another trading opportunity.
The late rally helped the bulls, but not enough and the win
goes to the bears.
*Spiff †/spɪf/ Pronunciation Key - Show Spelled
Pronunciation[spif] Pronunciation Key - Show IPA Pronunciation -Slang.
bonus or other form of remuneration given to retail salespeople for promoting
the products of a particular manufacturer.
3 March 2008
The almost 500 points drop in the
DJIA on last Thursday and Friday didnít surprise since the markets had looked
tired to us and that is why we raised cash before we left. Our inclination is
to let this pullback develop and we may re-enter the markets if we have a large
down day as occurred in January. But if not, we will look for individual stocks
that get hit and drop to attractive valuations. Dell earnings came last Thursday and they were nothing special. The
share price is off $1 from our sale price and we are comfortable awaiting a
better price point for re-entry.
While we were away Sprint
reported a terrible quarter and we abandoned the stock and removed it from our
screens. Sprint lost 1.3 million subscribers and borrowed money to repay debt.
We donít think they are going broke and we continue to think they will be
acquired. But with their terrible subscriber loss numbers the takeover will probably
be a take under.
We also sold Coldwater
for a scratch in order to get accounts down to one (Talbotís) under performing retail
stock. CWTR announces earnings on Wednesday and we would rather be on the
outside looking in given current market conditions. Talbotís announces earnings on March 12.
Asian markets were lower
overnight with India
down 5% and Japan
down 4.5%. Shanghai was an outlier
since it gained 2%. European bourse indexes are lower by 1% to 2% at Monday. Gold is moving towards $1000
trading up $9 this morning to $984. Oil has a $101 handle and Treasuries are
Microsoft is going to seek boardroom seats in its attempt to
HSBCís profits were up 10% last year even though the world wide
banking giant wrote of $17 billion in bad debts incurred in the U.S.
We found the following quote
interesting: "If ever proof were
needed about the benefits of diversification, these numbers from HSBC fall
squarely into that category," said Richard Hunter, head of UK Equities at stockbroker Hargreaves
"Its performance in the ever-strengthening markets of China, India and Hong Kong proved
a more than ample buffer against its U.S. sub prime woes."
Of course the U.S.
housing markets were described in those same terms a few years ago before the
collapse. We donít think that China
and India can
continue to grow at the rate they have as Europe and the
From the London
credit crunch has forced Peloton
Partners, a $3bn (£1.5bn) hedge fund run by former Goldman Sachs star
traders, to liquidate its two investment funds, leaving its founders millions
of pounds out of pocket. It is understood founders Ron Beller and Geoff Grant
decided to sell off the assets of Peloton ABS (asset-backed securities) and the
Peloton Multi-Strategy Fund about 10 days ago when it became apparent that they
could no longer meet margin calls from investment banks. Peloton's ABS
fund was one of last year's best performers, netting returns of 87% after
betting against the riskiest types
of sub-prime debt, but it began to face difficulties after the market for even
highly-rated asset-backed securities froze last year. The Multi-Strategy Fund
had a 40pc stake in the ABS fund and could not continue to trade once it was
closed. By yesterday, the fund had sold off all the assets at a substantial
discount to face value. London-based GLG Partners and US
fund Citadel are thought to have been offered some of the paper. While the
banks that lent money will get it all back, it is thought there will be almost no money for investors.
Yesterday the fund wrote to its investors to tell them it was suspending all
redemptions. In letters obtained by The Daily Telegraph, Mr. Beller and Mr.
Grant told investors: "We have been working day and night exploring every
feasible option to alleviate the situation. In the end the best solution has
been to seek buyers and we have been actively pursuing this option and many
others in an effort to stabilize the situation." It is thought the pair
put more of their own money into the funds in recent days to keep them trading
and prevent a fire-sale. In the letter, they also hit out at the investment
banks, writing: "Because of their own well-publicized issues, credit
providers have been severely tightening terms without regard to the
creditworthiness or track record of individual firms, which has compounded our
The partners of Peleton made $550
million last year from their fees of 2% of assets plus 20% of profits. They had
$120 million in their funds which they lose but over a two
year period that still leaves them up over $300 million. Fund partners will get
This failure is interesting
because the securities the fund held were of high quality and not defaulting.
But the mortgage market has become so disoriented that there were no realistic
bids for the securities owned. And so when those securities were marked to the
market at a bid at 85% of face value, the equity of the partnership was wiped
out because of the leverage involved. (The hedge fund had borrowed 7 times the
value of the securities held. So they owned $35 billion of mortgages. When the
mortgages dropped 15% in value the portfolio value was only $30 billion and the
$5 billion lost was the $5 billion equity of the fund.). As the old stockbroker
used to say of buying on margin: ďhe who buys what isnít hisín must pay it back
or go to prison.Ē Or broke as in this instance.
The following press release from Thornburg Mortgage, which makes jumbo
loans to wealthy investors, makes the point about prices being set that have no
relation to the actual ability to pay. TMA shares are down 50% this morning and
are down 90% form their 52 week high.
Thornburg Mortgage, Inc. today announced that since February 28, 2008, the filing date of
its 10-K Annual Report, the company has been subject to additional margin calls
of approximately $270 million on its reverse repurchase agreement borrowings
outstanding as of February 29, 2008.
The Company has not met the majority of
its most recent margin calls, but it is working to meet all of its
outstanding margin calls within a time frame acceptable to its lenders by
either selling portfolio securities or raising additional debt or equity
capital. These margin calls are strictly the result of continued deterioration
of prices of mortgage-backed securities precipitated by difficult market
conditions, but are not a reflection of the credit performance or long-term
realizable value of Thornburg Mortgageís high quality portfolio, which
continues to remain exceptional. ďThe
turmoil in the mortgage financing market that began last summer continues to be
exacerbated by the mark-to-market accounting rules which are forcing companies
to take unrealized write-downs on assets they have no intention of selling. In
this environment, the current market price of assets has become disconnected
from their underlying recoverable value, resulting in increased volatility and
imprecise quarter-to-quarter comparisons of asset valuations,Ē said Larry
Goldstone, president and chief executive officer of Thornburg Mortgage. ďWe believe that this latest downturn in the
mortgage finance market was brought on by a continued lack of trust and
confidence in the broader financial markets and has resulted in a substantial
excess of sellers versus buyers of high quality mortgage securities.Ē
U.S. construction spending tumbled at the
sharpest rate in 14 years during January, pulled down by the credit crunch and
housing crisis. Total construction spending decreased by 1.7% at a seasonally
adjusted annual rate of $1.121 trillion, the Commerce Department said Monday.
It was the fourth consecutive decline. December spending fell at a seasonally
adjusted annual rate of 1.3%; originally, the government said spending that
month fell 1.1%.
The February ISM manufacturing index came in as expected at 48.3 from
January's 50.7, with the prices index at 75.5 from the prior month's 76.0. The
report signals a pull back in activity, although not to the degree some had
From the WSJ:
After suffering a beating from
their exposure to home loans, banks and securities firms are about to take
their lumps from office towers, hotels and other commercial real estate. And
the losses could last longer than those from the sub prime shakeout. As the
economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are
starting to slide, with analysts at Goldman Sachs Group Inc. projecting a
decline of 21% to 26% in the next two years. That means misery for securities
firms with exposure to commercial-real-estate loans and commercial-
The price of sawdusthas soared
since 2006, up from about $25 a ton to more than $100 in some markets. Blame
the housing slump: Fewer new homes mean fewer trees cut for use in
construction, which leads to less sawdust and other wood waste, driving up the
1320ish on the S&P 500 was
the May 2006 high and the current support level. The closing low in January was
1310 on the S&P 500.
The following †report reminds us of the brokerage ads on TV
that have you picking what kind of retirement you want and then the brokerage
picks the investment portfolio to earn the assets to provide the needed annual
return to support the life style. Never mind that such a strategy is
That average return from the
stocks markets over the last century has been 9% and that includes five or ten
year periods when the markets rose an average of 15% a year, which means there
were ten year periods like the last ten years when the markets return was negative.
And taking money out of portfolios when the return is negative makes the job
even more difficult.
Philadelphia's $4 billion pension deficit is causing the
city's retirement-fund manager to shun Treasuries at a time when the Bush
administration needs him most.
Yields on 30-year U.S. bonds that fell to a record low of 4.10 percent this year are forcing
pension funds to favor equities, corporate debt and commodities in an attempt
to cover unfunded liabilities and meet return objectives of about 8 percent.
Even the federal government's own Pension Benefit Guaranty Corp. said on Feb.
19 that it plans to shift $15 billion to stocks from debt.
``The reality is there's not a lot we can do'' other than buy high-risk
securities to close a pension shortfall in a short period, said Chris
McDonough, chief investment officer of the Philadelphia Pensions Department.
The sixth-largest U.S. city will probably also issue debt, he said. *****
From Mesirow economist Diane
Federal Reserve Bank of
Philadelphia President Plosser is delivering a defense of rule-driven policy
decisions at the National Association for Business Economics (NABE) policy
conference in WashingtonD.C.
He essentially defends his rule-based approach, but admits it is not
appropriate in the current environment. He argues that we need to ease further,
but then retreat (raise rates) quickly once "conditions return to
Bottom Line: Chairman Bernanke
and his crew in Washington have
brought the Fed Presidents around. The Fed is ready to ease soon (at least 50
basis points) and they will remain happy as long as the Fed openly states it
will retrace its steps and tighten as soon as economic conditions stabilize.
Gold ended up $12 at $986. Oil
gained $1.43 to $103.35. Treasuries were firm with the two-year at 1.62% and
the ten-year at 3.55%.
European bourse indexes closed
over 1% lower but Mexico
and Brazil were
GM and Ford said Monday
they would cut second quarter production in the face of falling sales. GM
reported a February sales decline of almost 13 percent while Ford sales slumped
7 percent. Toyotasaid plummeting sales of sport utility
vehicles and large sedans contributed to its 3 percent drop in U.S.
sales for February.
Entering the final hour of
trading the DJIA was down almost 100 points. But short covering and late day
buying created a slow rebound and the major measures closed with small losses
on the day.
The DJIA lost 10 points to close
at 12260. The S&P 500 was up 1 point to 1332 and the NAZZ dropped 14 points
Breadth was 2/1 negative and volume
There were 235 new lows and 50
new highs on the NYSE and 275 new lows and 45 new highs on the NAZZ.
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