 |
|
Christopher Atayan |
| Major Insurance Companies Still Aggressivley Looking at New Financings |
8/24/2007 7:30 AM EDT
|
I spent yesterday meeting with a major insurance company that historically has been very active in the corporate bond market on both a public and private basis. The key takeaway was that not only is the company open for business but it's getting the benefit from better spreads. The company is still very aggressive about bidding for transactions as are all the other majors. I think it is important to keep this real-world perspective on things. There is plenty of capital out there that still needs to be put to work.
Position: Long MET
|
|
Richard Suttmeier |
| Banks Play 'Hot Potato' and 'Musical Chairs' Simultaneously |
8/24/2007 9:21 AM EDT
|
This is a simple definition of today's credit crunch.
Mortgage-backed securities are like hot potatoes that no one wants to touch as loan collateral. At the same time, mortgage lenders are having their chairs pulled out of the market via bankruptcy.
Money-center banks and investment bankers are playing "hot potato" with mortgage collateral, not knowing whether a structure is toxic or not. At the same time, they play "musical chairs" with the creators of subprime structures not wanting to hold collateral if the chair of a mortgage lender is pulled as they go belly-up.
Position: none
There are a wide variety of reasons to discount today's strong report on durable goods orders for July, but the figure will nonetheless increase
doubts over whether the Federal Reserve will lower interest rates again.
The Fed wants to be seen as responding to weakness in the economy, or at
least the likelihood of such, rather than respond to volatility in the
financial markets. The durable goods report, hence, weighs on the side of
reducing the chances for a Fed rate cut, even with the many caveats for the
report's strength.
More in my blog later.
Position: None.
Very strong numbers. Plays into my long GIB/C theme and short the domestic consumer, housing, regional banks, and utilities. Hard to beg the Fed for a Main Street rate cut with claims so low and durable orders so strong.
Position: none
|
|
Jim Cramer |
| TRADING OPPORTUNITY--CROX |
8/24/2007 10:12 AM EDT
|
Hibbett saying good things about CROX right now--might work for a trade...
Position: none
|
|
Jim Cramer |
| TRADING OPPORTUNITY UA |
8/24/2007 10:13 AM EDT
|
HIBB also saying good things about UA. When Dicks did this both stocks ran. HIBB not as big as DKS but it could work again...Better tape
Position: none
New-home sales declined significantly on a year-over-year, actual basis. It's true that the unit plunge decelerated, but the pricing decline is accelerating. ISI has an interesting survey that shows home price declines accelerating as well. That's the big risk to consumerism.
Position: none
|
|
Bob Faulkner |
| A Less-Than Marvellous Morning |
8/24/2007 11:14 AM EDT
|
Marvell (MRVL) is being mauled today, and rightly so. The Street and I had half the quarter correct -- better-than-expected revenue -- but the margin pressure is more than a little surprising. Management's conference call last night was pathetic. They were really unable (or unwilling) to answer some of the most basic questions. It was as if someone announced a pop-quiz and they hadn't done the homework.
One thing I'm wondering about this morning (in addition to what to do with this puppy) is the source of the gross margin pressure. The easy answer is pricing, but maybe it's not from the customers but from suppliers. Two weeks ago, AMAT talked about the lack of expansion of leading-edge (65nm) foundry capacity despite many designs having taped out. Last week, Nvidia suggested its October quarter revenue may be limited by the availability of wafers from TSMC (also 65nm parts).
So my question is this: Is TSMC making upside available with a surcharge? It wouldn't be the first time foundries have played that game.
Position: Long MRVL, MRVL calls; the Telecom Connection is long MRVL
|
|
Michael Brush |
| Questions for Doug Kass and My Anti-Fear Portfolio |
8/24/2007 11:55 AM EDT
|
Doug,
In response to my post on the abundance of liquidity in the world, and sufficient economic strength to overcome the subprime fallout, you said the thrust of the bear case is that lenders may lose $200 billion due to subprime exposure. I have two questions for you.
First, can you explain why you double Bernanke's estimate of a bit more than $100 billion? He has good economists working for him.
Second, can tell me by what calculation you conclude that $200 billion is a significant amount in an economy as big as ours and in a global economy that is so huge in comparison?
I understand that $200 billion seems like a big number that could instill fear in anyone who does not have it in proper perspective, and I have no embarrassment at all in being aware of that.
But while the $200 billion appears to be big, I believe it is fairly meaningless when you put it in proper perspective.
1. Let's start with the U.S., and the top nine countries of the world, with which the U.S. economy is fully integrated because of trade. This group of 10 is also the likely resting place of virtually all the subprime. These 10 countries have an annual income of $33 trillion. A $200 billion loss is insignificant compared with this number. It is just 0.6%.
To put in context, for a person with an annual income of $100,000, it is the equivalent of losing $604. That loss wouldn't exactly make her day. But it's not even a weekend in Las Vegas. By Bernanke's $100 billion estimate of subprime losses, it is like that person losing $300. Compared with world annual income of $48 trillion, your loss estimate is just 0.4%.
2. The U.S. economy produces $13.2 trillion a year. A $200 billion hit is 1.5% of the economy, or the equivalent of a $100,000 earner losing $1,514. That's not too bad.
3. The total wealth of the U.S. is about $70 trillion. A $200 billion loss is the equivalent of a person with a net worth of $2 million losing $5,714. Again, not a big disaster.
3. And the $200 billion loss is only 8% of the capital gains in the stock market in the past year ($2.5 trillion).
I believe these numbers suggest that a $200 billion loss from subprime is not too meaningful. A more realistic $100 billion loss, at least according to Bernanke's view, is even less significant.
Of course there will tragically be personal hardship. But unless you can convince me that a $200 billion loss really matters, I'll maintain my outlook that the subprime fears are way overblown, and this is a great time to buy cyclical stocks getting hit by the exaggerated fears of subprime damage. Here is my anti-fear portfolio.
I like names such as Freeport-McMoRan Copper & Gold (FCX), Potash Corporation of Saskatchewan (POT) and Texas Industries (TXI) in basic materials; retailers with good insider buying such as Best Buy (BBY), and Barnes & Noble (BKS); and Tyco Electronics (TEL) and Texas Instruments (TXN) in tech. Among the financials, I like Citigroup (C), Bank of America (BAC), American Express (AXP), Accredited Home Lenders (LEND) and Countrywide Financial (CFC).
While there are obvious risks with Countrywide, the opportunities are great because if and when the company comes out of this, much of its competition will be gone, so it will have an excellent opportunity to gain market share.
To sum up, I'm not saying that fear can't spread and create real problems for the economy. That's the risk now. But I also do believe this is less likely if people keep the limited nature of the subprime problem in proper perspective.
Of course everyone is nervous now because few people know where the bad debt is. In time, it will become clear, and the fears will ease. Between now and then, it is crucial to keep the minimal nature of potential subprime debt damage ($100 billion) in proper perspective.
Position: FCX, LEND and other cyclicals
Home Depot (HD) makes an appearance on today's Rumors of the Day list, along with Texas Instruments (TXN), Broadcom (BRCM), Dell (DELL) and others.
Position: None.
|
|
Norm Conley |
| Crash Probability Poll |
8/24/2007 12:41 PM EDT
|
Yesterday I asked readers and contributors to provide me with their own estimations of the probability of a 20% decline in the S&P 500 before the end of the year.
Thanks so much to everyone who took the time to email me with their probabilities. I had 31 responses. On average,
the respondents placed a 21% probability of a 20% decline prior to year-end 2007. The median probability of such a decline was 10%. There were three respondents who placed a 0% probability on a 20% decline. One person estimated an 80% chance of a 20% occurring sometime between now and year-end. Five more placed a 50% to 60% probability of a crash.
This is not a scientific poll for lots of reasons. But let me give a few thoughts. First of all, the actual chance of a market crash is never 0%. To say that there is zero chance of anything happening in the financial markets is to confuse one's high level of confidence with certainty. And certainty does not exist in financial markets.
Secondly, 20% declines are much rarer than people think. They are so painful when they occur that they sit on our collective psyches like a ton of bricks, playing tricks on our minds. Millions of investors are trapped into framing their market expectations around the frames of past crashes. But crashes are really rare, and they are almost always unanticipated by almost everyone. We could crash in the near term, but if we do, I believe it would be the most anticipated and widely predicted crash in market history.
Anyway, back to the rarity of crashes. Since 1950, Oct. 19, 87 stands alone as the only single-day decline on the S&P 500 of greater than 20%. If we consider rolling five-day or 20-day periods that brought 20% or greater declines, again only the '87 crash fits this bill. If we expand our criteria to encompass rolling 40-day periods (roughly two calendar months), we had a total of 57 20% crashes in 1962, 1970, 1974, 1987, 2001 and 2002.
Some might say that the post-1950 period is too small a historical dataset. They could be right, but 57 years is longer than the investment careers of almost everyone. And pre-1957 securities data, much less the data that purport to show true stock market activity back to the 18th or 19th century, has all kinds of noisy problems.
There are fewer than 90 trading days left in 2007. The mean return for rolling 90-day periods in the S&P 500 since 1950 is 3.19%. The median return is 3.42%. The best 90-day period was 35.26%, and it was achieved in 1975. The worst was the 90 days leading up to the important July 2002 bottom -- the S&P 500 got pancaked by over 30% during that fun little ride.
There is always a chance that the market will crash. But my own belief is that the probability of a 20% or greater decline is much less than 5%.
More later when I can take some more time away from my day job.
Position: none mentioned
|
|
Tom Au |
| Some Answers for Michael Brush |
8/24/2007 12:59 PM EDT
|
I'm not Doug Kass (although I've sometimes been accused of being his doppelganger) but here are some answers for Michael.
It might seem that $100 billion-$200 billion of losses is not a lot in the whole scheme of things. But it is possible to drown in a creek averaging three feet in depth (because of one 12-foot hole). This amount could bring down a major bank (HSBC?), investment bank (Bear Stearns?) or hedge fund (the new "Long Term Capital"?).
Re: Michael's point No. 3, the reason why subprime is so important is because it calls into question the whole $70 trillion U.S. net worth number. The $200 billion (or $100 billion) is just an estimate of likely realized losses. In addition, there figures to be trillions of unrealized losses when these loans are marked to market, meaning that all homeowners will take a hit on their real estate values.
A cynical thought: I wonder if Bank of America (BAC) didn't invest $2 billion to shore up Countrywide Credit (CFC) so that it wouldn't have to mark its own portfolio to market.
Position: No longer long BAC or BSC. Never long HBC.
Market seems to be looking forward to a deal in the finance space this weekend. These stocks are way too strong...
Position: none
Much, but not all of the upset in the lending markets (which, if you look at swap spreads, the current manifestation of the crisis seems to be passing -- down 4 basis points today), is from deflating values in housing. My estimate for how much further real estate has to decline on average in the US is 10-20%. We need to find owners for about 4% of the US housing stock that is vacant. The pain that has been felt in subprime and Alt-A loans will get felt in prime loans, and possibly conforming loans as well. Fannie and Freddie won't get killed, but they will take credit losses.
So, listen to Cody. Residential real estate markets do not clear as rapidly as a futures exchange. The illiquidity and variations in lending standards tends to lead to markets that adjust slowly, and autocorrelatedly. I.e., if it went up last period, odds are it will go up next period, and vice-versa.
It will take a while for the residential real estate market to clear. When the inventory gets down to 3% it will be time to start speculating on homebuilders and mortgage lenders again, but real estate prices won't start rising in aggregate until the inventory of unsold homes gets below 1.5-2.0%.
Position: none
July's economic data were solid, led by stronger-than-expected durable goods orders and new home sales.
But remember, July was before the worst moments of credit tightening -- so monthly economic indicators aren't going to reveal the implications of the summer's credit crunch until we get to reporting on August activity, at least.
Even so, the impact of a liquidity crunch on the broad economy is starting to show up in the universe of companies with junk-rated credit. The cracks suggest that the near record-low speculative-grade default rate of 1.5% is unlikely to be sustained, as "a pullback in market liquidity has the potential to increase defaults among these vulnerable issuers," writes Moody's corporate finance analyst John Puchalla.
According to Moody's, the default rate for issuers with "weak" liquidity ratings nearly doubled in July to 10.5%, from 5.3% in June. The rate remains well below its historical 20% average of the past four years, but the trend is on a potentially treacherous path.
Moody's compiled a list of 71 companies with junk credit ratings of B3 or lower that face liquidity issues. The agency notes that 20 of them have "weak" liquidity, which means they "rely on highly uncertain sources of external financing." These companies include Revlon (REV) and Movie Gallery (MOVI), along with James River Coal (JRCC).
Moody's says an added 51 companies have "adequate" liquidity, which means they rely on committed lines of credit -- which Moody's notes may well be pulled by banks if their performance or other covenant triggers are tripped. The names in this group are considerably bigger: Ford (F), GM (GM), Rite Aid (RAD) and Charter (CHTR), for starters.
Position: none
Lakshman Achuthan of the Economic Cycle Research Institute was just interviewed on CNBC. His occasional updates are very important to those of us interested in economic analysis and forecasting. The ECRI has a great record that avoids "false positive" recession signals. They use proprietary leading indicators, but occasionally provide more insight into what they are seeing. Gary D. Smith also provides periodic updates on their indicators in his excellent Long/Short Trader column on RealMoney Silver.
The ECRI is not speaking for a sell-side firm nor trading stocks, so their comments come without any apparent bias. They sell their research, and they must deliver a quality product. Today's message? In answer to a question about the dramatic cover of Fortune, Achuthan made several interesting comments.
"...the bottom line is that ...dramatic predictions get attention....(A)lmost every year there is a recession call. In 2002, 2003, 2005, 2006 and now in 2007, we are seeing various scenarios. You know some speculation and you kind of link it together. There is a housing crash therefore there must be a recession. Or there is a credit market shock and there must be a recession. That's not how recessions are made. ...(S)hocks can help trigger a recession but the economy needs to be vulnerable in the first place."
Explaining that the ECRI was always looking for vulnerability, Achuthan continued, "The events we have seen over the last few weeks and months have taken the shine off of growth out a few quarters, and we'll get some slowing."
He stated flatly that we would not get a recession this year. He also pointed out that economic indicators could only look forward a few quarters. The longest leading indicators show slowing growth, but he called it "way premature" to forecast a recession.
Asked about a leading indicator he pointed to the spread between AAA corporates and BAA corporates. Since he thought that viewers might not believe it, he picked one that you can look up yourself. "It is a good leading indicator....The spread was about 100 bp's before the credit drama started and now it is actually smaller...(I)t is a fifteen-month low in the spread."
I like the ECRI's rigorous analysis. It includes long historical studies to discover the best indicators. It emphasizes quantification. It shows a clear concept of what leads to recession. Readers would benefit from looking up the video up on the CNBC site and taking a few minutes to watch for yourself.
Position: none
Jeff, thanks for your kind words about ECRI. I just wanted to say that was an excellent summary of Lakshman's remarks.
Position: none
Don't Trust New Home Sales - The headline for New Home Sales (July) was better than expected at an annual rate of 870,000 units. The Census Bureau clearly states in the release that the margin of error is 12%, and thus this report could have just as easily have been below 800,000. In addition,
The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The homebuilders have been telling us that cancellation rates are still running between 20% and 40%, and many homebuilders have suspended quarterly earnings guidance.
To show the risk of Recession look under the hood of the FDIC Quarterly Banking Profile in the column I wrote yesterday FDIC Data Shows Banks Not Out of the Woods and keep in mind that the worsening conditions in the global financial markets did not come to a head until August, and additional bad loans will take the US economy into recession in 2008 - 2009 just as it did in 1990 - 1991. Conditions are much worse today.
I define a recession as two quarters in a row of negative GDP growth, and the US economy has not seen that since Q4 1990 (-3.0%) and Q1 1991 (-2.0).
Position: none
|
|
Aaron Task |
| ECRI + Recession Calls |
8/24/2007 2:36 PM EDT
|
Jeff: Thanks for pointing out that CNBC interview with Lakshman, which I missed live but did just watch here.
The idea of "no recession" doesn't necessarily mean the stock market does well. But I will put my money (literally and figuratively) with Lakshman, Anirvan and the folks at ECRI vs. Mozilo or Serwer or (yes) Kass, Suttmeier and others on the site forecasting economic Armageddon.
Position: feeling better about the latest drop in the ECRI's weekly leading index.
Anirvan, I use TIVO to get accurate quotes! Meanwhile, I should have also mentioned your writing as a valuable ECRI source for RealMoney readers. It was through one of your articles several years ago that I first learned about the ECRI. As I recall, you were forecasting the last recession at a time when most economists saw only clear skies.
Position: none
|
|
Tom Au |
| This Year's Almost Over |
8/24/2007 2:44 PM EDT
|
Memo to Richard Suttmeier, Anirvan Banerji, and Jeff Miller:
No, even I (a big bear), don't think that there will be a recession in 2007--because the year's almost over. My best guess is that the third quarter will show positive (although slowing) growth. The fall-out from the collapse mortgage bubble (of which subprime is just the tip of the iceberg) would pull growth below zero in the fourth quarter of 2007 at the earlier. And that would not mean a recession "this year."
Beyond Q4 2007, the key quarter to watch is the first quarter of 2008, when the largest number of ARM resets take place. So I see "clear skies" just ahead, but fear what's just over the horizon.
Position: None
|
|
Cody Willard |
| George Hotz Against the World |
8/24/2007 3:05 PM EDT
|
I'm out on the road, but just saw the interview with the kid that hacked the iPhone so it could work on T-Mobile. Three points:
1) If someone can figure out a way to legally systemize hacking these phones, then it's not a hacker event. It would then be very meaningful for Apple and the entire wireless industry. This would be a good thing frankly for everyone related, creating virtuous open networks.
2) That kid was awesome because he was talking about the points and had studied the legality of it. George H.: Don't listen to the naysayers downplaying of what you did.
3) George H.: You have a job at my shop. Email me when you read this.
Position: net long AAPL
|
|
David Merkel |
| Protein is in Short Supply? |
8/24/2007 3:09 PM EDT
|
Smithfield Foods inks a deal to sell 60 million pounds of pork to a Chinese trading company. Nice move, and I bet that it is the start of something bigger. We need to export more to China, and they can use our agricultural products.
In sympathy, Industrias Bachoco, which is mainly a chicken and egg producer (biggest in Mexico), but also produces pork, is up significantly since I bought some last Thursday. Kicked out most of what I bought then, and am letting what I had prior plus a little ride. What a move, but it's still cheap.
PS -- Rebalancing trades are not supposed to work so quickly, but who am I to turn up my nose when they do?
Position: long SFD IBA
Weekly closes relative to five-week modified moving averages will determine whether or not the weekly chart profiles will shift to neutral or stay negative: 13,345 Dow, 1478.4 SPX, 2571 NASDAQ, 493.96 Utilities, 5031 Transports, and 806.54 Russell 2000 Futures.
If is shaping up as a close call for the Dow, S&P 500, NASDAQ and Dow Utilities.
Position: none
To Aaron and all others commenting, I do not consider a recession as economic Armageddon.
My forecast is for Recession is 2008 - 2009 (not 2007), as the bad loans on the books of the FDIC-Insured Financial Institutions keep piling up. We can scrape along at 2% GDP growth over the next few quarters, as the Bear Market for stocks evolves.
Economic Armageddon would be a year over year decline in current dollar GDP, which hasn't happened since 1958 - 1959. We could have a fifty year reunion!
Position: none
|
|
Gary Morrow |
| Mentor Graphics Soars |
8/24/2007 3:28 PM EDT
|
Mentor Graphics (MENT) is up over 13% on extreme volume. The company reported last night and received an upgrade from Merrill this morning. The result has been very impressive.
Mentor began the day with a huge gap higher open that pushed it above its July and August highs. Volume is running near record levels and is already beyond 4x its daily average. This is not the first burst of heavy accumulation Mentor has undergone this month.
Earlier this month, beginning on Aug. 9, the stock reversed its downward slide with the help of its heaviest positive volume day of the year. The following two days also drew heavy buying, confirming an important bottom was in place. With the addition of today's buying frenzy, August will be the heaviest positive month since 1999.
This will make August a key reversal month for Mentor. The continued slide during the first week of August pushed the stock well below its July lows. Today's breakaway gap has lifted shares well above the previous month's highs and has left behind strong support near the $13.25 area. A re-test of its 2007 highs just above $19.00 is likely once the supply near $16.00 is worked off. I will wait patiently for a low-volume pullback.
Position: No positions
|
|
Aaron Task |
| Flagged for Unnecessary Verbiage |
8/24/2007 3:46 PM EDT
|
Richard: Yes, I was being overly dramatic with the "Armageddon" language and I wouldn't put you in that camp.
Then again, you declared that a bear market (a technical term I presume you don't use loosely) had begun on March 1, reiterated that view on May 25 and haven't wavered from it since (that I've seen).
Now you say a recession is "unavoidable."
Kass, meanwhile, has suggested a 20%-25% drop for major averages "would not be surprising".
Obviously, volatility breeds emotion and we all serve the RM readers better if we tone down the rhetoric. But the bears (collectively) shouldn't dish the dramatic language if they can't take it on the other side.
Position: words matter
Interesting slow-motion melt-up toward the end of the day. Gotta wonder who's desperate to buy shares late Friday afternoon...on light volume. Always makes me think there's a bout of short-covering going on.
Volume tends to return to the markets at the end of August...at which point I would suspect that some exploration at lower levels will be needed to test the commitment of the buyers...and see if there are more lurking down there.
Position: The Dynamic Trading System remains on its buy signals for both the SPX and the NDX for now.
Tom, your post reminded me of an observation from my mentor, Dr. Geoffrey H. Moore, who founded ECRI before passing away in 2000, leaving us to predict the 2001 recession on our own. He was the only economist I know who forecast the 1990-91 recession 5 months in advance in real time. After 60 years of research into business cycles, knowing just how hard it is to predict recessions, he said that if you can predict a recession when it is just starting, you're doing very well as a forecaster! This is because some of the key events that lead to a recession often haven't been set into motion a year or two ahead of time. In other words, whether or not a recession will begin a year or two from now probably hasn't been determined yet, so I wouldn't dare to make a fearless recession forecast more than a few months ahead. In that context, when you say that 2007 is almost over, it gives me a bit of a chuckle. According to The Economist, in March 2001 95% of economists surveyed thought there would be no recession when one had already begun. Conversely, a PriceWaterhouse Coopers survey found 76% of CEOs believed the economy to be experiencing zero or negative growth in Q3/2003 - the very quarter GDP growth hit a 20-year high. It's easy for me to agree that the collapse of the mortgage bubble will have serious consequences, but making correct "recession" or "no recession" calls is not as easy.
Position: none
Well put, Adam. Wild close into an otherwise another summer weekend. Dislocations coming back? Thanks for the call out David. I'm also worried about how the leverage in the system (and frankly on top of the system) will magnify the pain on the way down in the same way it's created so much (perhaps excess) wealth on the way up. Gulp. (Or another brick in the wall...of worry).
Position: Coasting into weekend soon...have a good one.
|
RSS FEEDS
PODCASTS
