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Christopher Atayan |
| Repeal Of Mark To Market Is Helpful But Not A Panacea |
10/1/2008 7:00 AM EDT
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Clearly the mark to market rules have hurt the financial institutions in a falling market. However, repeal of this method in whole or part will not be a universal panacea as some are implying. Essentially the assets are only worth their intrinsic value to an arms length buyer. What we have is a shortage of buyers willing to do their homework and evaluate each asset. Due diligence is painstaking work and unfortunately most have relied on rating agencies or some structured conduit instrument.Nonetheless a modification of the rules gives buyers the time to properly evaluate assets and takes the fire sale aspects out of the picture. I wouldn't be expecting any overnight miracles though. Even if a cashflow approach is used to value assets there will be a large discount factor applied.
Position: none
Nice rally yesterday. Only Doug mentioned it but all day I was telling contacts that the entire long infrastructure of Wall Street benefited from a big up day because it was quarter end. While I am not a conspiracy theorist I suspect that played a role in the rally.
Another thing I believe played a role that received little comments was sharp drop in the Dow and S&P averages after the close on Monday. S&P Futures never traded near the cash close, holding at 1115 to 1120 vs the printed NY close of 1106. When the futures reopened at 4:30 and did not sink it was clear that all else equal overnight a rally was in store to at least recoup 1%. On the Dow I thought there was about a 150 point extra drop.
I've been telling clients since September 17th and 18th when Morgan Stanley and Goldman melted down that I thought we were in the process of bottoming. Yesterday's rally helps the cause I believe but we need to stop with the huge daily moves. I don't think down 800, up 500 builds much confidence in the market.
I am in favor of the bailout plan as I see it as emergency surgery to save the patient before a new program of long-term treatment can be implemented. I would have preferred to see the House pass it on Monday. However, the timing of the vote, just prior to a holiday, might have proved helpful. We got a day where things calmed down a bit. There was less emotion and we had a chance for some other parts of the rescue program to develop, most importantly, the possible changes in mark-to-market accoutning. We had less panicked talk (some have accused me of inciting it) and the markets got to function a bit (the relatively good performance in Asia and especially Europe overnight helped greatly).
I remain of the view that the resiliency seen in the economy since the credit crisis really started in the summer of 2007 will re-emerge as the credit crisis recedes. I am not saying the economy won't slow further or decline just that it won't slow or decline as much as conventional wisdom believes.
I think stocks are bottoming because Wall Street can deal with economic issues now that it is accepting the magnitude of credit crisis and taking big enough steps to wall it off. Wall Street has not been able to deal with and efficiently price the credit crisis. I believe Wall Street can deal with the efficiently price a weak economy. To me, that is a game changer and balances the risk-reward tradeoff for stocks.
Position: No positions mentioned.
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Rev Shark |
| Question for Jim Cramer regarding Short Sellers |
10/1/2008 8:22 AM EDT
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If you believe that short sellers are going to push good stocks down why not sell your long positions and buy them lower. Why are you holding these stocks long and then looking for rules against short sellers to save you? If the shorts truly are artificially manipulating prices why not take advantage of the great opportunities that they will produce? It seems to me that this temporary pricing inefficiency is a fantastic thing for long term investors.
Position: None
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Doug Kass |
| More Commercial Paper Problems?
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10/1/2008 8:48 AM EDT
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I am hearing that GE Commercial Credit 5-year CDS spreads are blowing out this morning.
Position: None
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Jim Cramer |
| Shorting and longing, as per Rev. |
10/1/2008 8:48 AM EDT
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Please re-read my column this morning, One, i am simply saying which scenarios benefit short sellers. I am, despite your characterizations, blaming them for nothing. I am saying that i would want the rescue package to fail if i were short. Second I have the highest cash position i have had in years for Action Alerts Plus and i can't short. Third, i find your emphasis on things i did not say somewhat misleading but i respect your right to characterize my views in any way you wish, but if the the things the shorts dont want come true it will be a btter market than it is. As someone who made close to 50% of his profits for many years selling short, i believe in shorting passionately and believe that they don't create values in many situations. Redemptions create values in good stocks, not shortsellers...
Position: none
Two separate reports on EMC (EMC) and Symantec (SYMC) (from Cowen and Jefferies, respectively) note that business ground to a halt in September because of the bailout problems. They both think the fourth quarter can end up alright -- albeit back-end loaded. But that still implies very cautious commentary in coming weeks from leading tech outfits. I would be very hesitant to commit any new money to techs right now, as they are not selling at the valuations that scream "capitulation," as I think is the case with industrials.
Position: none
Jim, I apologize if I mischaracterized your comments. Maybe shorts are rooting against a bailout bill but what does that matter? There are bears in this market, like in any market, and they don't believe that the bailout is going to save us. All you have to do is look at how the market was acting Monday before the House bailout vote when most everyone, including me, thought the bill would be passed.
I have no idea whether the bailout bill will help or not but I'm certainly skeptical. For now I see no reason to be a buyer and I see no reason to be angry with the bears and shorts who are selling. Why fight the trend? I'll leave the lobbying to others.
Position: None
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Doug Kass |
| Adding to Longs |
10/1/2008 9:46 AM EDT
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I am adding to my long rentals into this morning's weakness.
Position: none
Several months ago I advised subscribing to the Thomas Nogales report, a free monthly e-letter. I have read this report for several years, and find each issue provocative and useful.
The just-released October 2008 issue entitled "Three Phases of a Collapse, An Oil Play" is especially so.
"I firmly believe that most investors reading this e-letter will be essentially broke within ten years," editor Thomas Gleason writes. "Your money will be lost to inflation, a dollar decline and a series of failed defensive asset repositionings that won't protect your savings."
Scary stuff. But better that we prepare now than bury our heads in the sand. To learn more, click here.
Also, permit me a word or two about Washington. While our elected (and unelected!) officials try to fix the credit mess, they also need to cut government spending.
U.S. Treasury gross public debt is $9.788 trillion, up $794 billion from a year ago. The annualized rate of change: almost 9%.
I view growth in U.S. debt as a proxy for inflation. In contrast, the "official" inflation rate is 5.4% a year, through August 2008. In human terms, the incremental increase in public debt is $2,600 for each of the 300 million Americans. The trend is not our friend.
A long-term bull market in stocks will resume once investors regain confidence that our national checkbook is under adult supervision.
Position: np
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David Sterman |
| ISM Expectations Should Have Been Low |
10/1/2008 10:06 AM EDT
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The very weak ISM numbers are not necessarily a harbinger of a long-term economic slowdown, and could simply be a "freeze" we are seeing in the economy until credit gets unstuck. But this index tends to be self-reinforcing, so if it stays below 45 for a 2-3 months in a row, then we could certainly see a very tough 2009. That's why expectations of an imminent rate cut have just jumped.
Position: none
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Tom Au |
| Shorting Financials Is Sooo Last Month |
10/1/2008 10:06 AM EDT
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It seems to me that the SEC locked the barn door on shorting financials after the horse had (mostly) escaped. Although I do not short stocks myself, (except "synthetically" through the Prudent Bear Fund, or the occasional "put" purchase), I have (not unreasonably) been accused of being "short"-friendly. And I believe now in the"other shoe," not capitulation. So here are some bearish observations.
Did anyone notice the weakness in the Transports (under the Dow Theory)? Or how hard energy-related stocks were hit the other day? And that with the notable exception of Alcoa (AA), the cyclicals are pricey (relative to book value and dividend-paying ability)?
And has anyone noticed that for one of the few times, Doug Kass and I are on opposite sides of the debate? One of us is going to be wrong. But that doesn't mean that one of us doesn't belong in the business.
Position: Long Prudent Bear Fund
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Doug Kass |
| Explaining the Paper Chase |
10/1/2008 10:10 AM EDT
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This is important and might help to explain the blowout in credit spreads on General Electric paper.
We are hearing that a $30 billion Gordian Knot sponsored SIV (SIGMA) was invested heavily in asset-backed and unsecured debt in financials -- including GE credit bonds.
According to sources, SIGMA has been borrowing heavily to make coupon payments, and yesterday a counterparty (apparently JPMorgan) called in their collateral backing of a repo line to them.
Much of that collateral was in the form of GE Commercial credit -- which is being sold -- and resulting in GE CDS spreads widening out.
Position: none
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Tom Au |
| Should Have Sold My GE -- Again |
10/1/2008 10:33 AM EDT
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Doug, did you say that GE debt spreads were blowing out? Should have sold my GE (albeit a token position) yesterday, again, on strength.
"Should have, could have, would have, didn't."
Position: Curiously long GE
If Doug is right, then GE CDS are widening even though nothing has changed at GE from yesterday to today. This is leading to selling (and maybe shorting of GE common), which might be widening the CDS further.
That is just stupid. Either investors are completely mis-analyzing GE, or the problems in and with the CDS market are being revealed, or a bit of both.
Is it any wonder investors are losing confidence in the modern world of finance?
Position: No positions mentioned.
David, you suggest that "the very weak ISM numbers are not necessarily a harbinger of a long-term economic slowdown and could simply be a 'freeze' we are seeing in the economy until credit gets unstuck."
ECRI's Leading Manufacturing Index (LMI) disagrees. The LMI had held up through the spring but actually turned down in the summer, correctly anticipating the cyclical contraction in manufacturing that the ISM index is now confirming. The manufacturing sector had been the most resilient portion of the economy until now, partly due to the boost from exports. But, as I pointed out in August, "global growth is falling apart" -- and this reality has begun to seep into market perceptions in recent weeks.
You may be correct that some of the weakness in the ISM will be reversed once the credit markets unfreeze, but that cannot repeal the cyclical downturn now under way in manufacturing. Bottom line, because of both domestic and foreign drivers, the manufacturing downturn will deepen the ongoing recession, regardless of what is done in Washington.
Position: none
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David Sterman |
| Agreed, ISM Likely to Stay Weak |
10/1/2008 11:23 AM EDT
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Anirvan, my gut agrees with you, but I was premature this summer in expecting weak ISM numbers, yet they consistently came in close to 50. A decent bit of that strength was due to exports, which are now weakening.
If there is a "this time is different" angle, it is that many manufacturers have already been cautious -- and running output at lean levels -- for some time. We are not at risk of a big inventory drawdown.
The other silver lining is that a lot of the existing capital equipment is starting to rise above typical life-cycle usage. I was talking this week with an electronics manufacturer that simply cannot get any more life out of its "pick-and-place" circuit board stamper and must replace it. A similar cycle may hit trucks, large and small, within the next year or two. The fleet is aging.
So at the risk of appearing noncommital, I keep seeing both the push and the pull in this equation.
Position: none
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Doug Kass |
| Buying on Panic |
10/1/2008 11:29 AM EDT
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Taking a long rental in General Electric at $23.30 now -- as today's decline appears to be an overreaction to the liquidation of collateral, as suggested earlier.
Position: Long GE
David, about your premature expectations of a weak ISM over the summer, my gut would have agreed with yours. But the resilience of ECRI's Leading Manufacuring Index through the spring was, as usual, a salutary and objective corrective for my subjective feelings, which are no more reliable than anybody else's.
What our leading indices are designed to do is cut through all the "on the one hand" and "on the other hand" arguments that all of us are swayed by, and boil the pluses and minuses down to the bottom line in terms of the direction of economic growth. Because these leading indices have very rarely been wrong, I am comfortable with a forecast of a continued cyclical downtrend in manufacturing that began recently.
In the longer term, like a year or two out, other factors like the truck replacement cycle could very well give manufacturing a boost, but that is some time away. By the way, let me remind you of a data release that almost everyone overlooked during the mid-September market meltdown: the fact that in August, industrial production already experienced its biggest monthly plunge since Hurricane Katrina.
Position: none
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Doug Kass |
| Mind the Gap |
10/1/2008 12:43 PM EDT
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Responding to the divergence between coal futures and coal equities -- see chart below -- I am taking a long rental in Peabody Energy (BTU).
Position: Long BTU
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Doug Kass |
| Extension in the Works? |
10/1/2008 12:45 PM EDT
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Look for an announcement that the short-selling ban will be extended today with some exemptions -- like exempting convertible players.
Position: none
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Tim Melvin |
| The bailout bill |
10/1/2008 12:54 PM EDT
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Being the geek that I am, I had to read the actual bill. This is themost horrifying document I have read since my last divorce agreement.
Check out Section 112. How this helps our economy is beyond me but it is a key provision of the legislation.
SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES
AND CENTRAL BANKS.
The Secretary shall coordinate, as appropriate, with
foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such for
eign financial authorities or banks hold troubled assets as
a result of extending financing to financial institutions
that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101
Section 104 is pretty interesting as well. The Secretary of the Treasury is named to the oversight board charged with overseeing his action. Kind of like being on the jury hearing your case.
Position: short common sense
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Jim Cramer |
| HUGE--short selling extension |
10/1/2008 12:57 PM EDT
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As usual during this period, Doug's got information no one has. Can i just say this guy is paying for your subscription with every single post!
Position: none
Is IBM down because of the need for ready credit?
Position: none
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Doug Kass |
| The Struts and Frets Are Something to Behold |
10/1/2008 1:14 PM EDT
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It is remarkable watching the players these days.
It is remarkable that many of those talking heads (especially of a media kind) who -- after being bullish all the way down -- now suggest that it would be far better for the passage of the rescue package if our legislators and voters experienced more pain in the stock market.
Our system -- the government, media, banking, hedge fund and a lot of the rest of our communities -- is broken when it is suggested that decisions are made on the basis of such polling.
The moral of the story?
The weakest links, in all fabrics of our society, are exposed when distress occurs. Or, as Warren Buffett recently said, "You don't know who is swimming naked until the tide goes out."
Position: none
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Jeff Miller |
| Gasparino on Short-Selling |
10/1/2008 1:15 PM EDT
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Gasparino, citing SEC staff says the short-selling ban will now exempt convertible preferred stock. The discussion included the statement, "you can still short convertible preferred...since that will be an incentive to raise money." Presumably what he meant was that the SEC will permit short sales of common stock by those long the convertible preferred. Otherwise it could not help in selling convertible preferred to raise money.
Position: nm
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Rev Shark |
| Is Buffett Calling a Bottom or Feeding on Desperation? |
10/1/2008 1:59 PM EDT
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Is it really a good sign that one of the most important companies in America has to give Warren Buffett such a fantastic deal in order to attract capital? The media is determined to spin this in a positive way but it looks to me like Buffet is just taking advantage of companies that have some real problems and need capital badly. He isn't buying equities that he views as cheap. He is getting debt that pays big returns and is protected from market downside. The fact that GE needs to do this deal is not a good sign and makes me even more worried about the market.
Position: None
Thanks, Doug!
Position: long GE
If you watched what Doug Kass said here, you would have bought GE on the note that it was an overreaction. Great call you could flip it right now for a huge profit!!
Position: GE
On May 5, 2007 Warren Buffett commented on the subprime crisis: "I don't think there's going to be any huge danger to the economy," although the crisis is a "very big problem" to many in the industry. " It's unlikely that that factor triggers anything of a massive nature in the general economy."
Position: None
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Gary Morrow |
| Citi's 200-Day Moving-Average Challenge |
10/1/2008 2:31 PM EDT
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Citigroup (C) is hitting heavy resistance today in the form of its 200-day moving average. This is the first time since July of last year that C has tested its 200-day. Once Citigroup fell convincingly below this important support area -- a support level it had straddled since late '05 -- the stock came under extremely heavy distribution pressure by mid-October. The result was a yearlong bear market that eroded over 75% of Citi's value.
Last month, the stock, along with most of the financials, reached what now appears to be a selling climax. On the 19th, after putting in a new low for the year, C reversed course and closed with an 18% gain on record volume.
The next day C was up an additional 24% on extremely heavy trade. That's quite a recovery in just two days. Over the past week and a half, C has held on to the bulk of those gains while staying well above the expansive range it traced out on the 18th.
Not many of the financials were able to do the same, not even standouts WFC, BAC and JPM. I regard that as a strong positive for C. Today's 10% jump has pushed C above its 200 day, indicating continued underlying strength. C will likely struggle a bit in this area, but at this point the stock is putting up a good fight considering the overwhelming negative tone in the market.
I am currently long both WFC and BAC, and will be watching C closely over the next few days. How the stock handles the challenge of its 200-day moving average will be a strong tell as to how the remainder of '08 will play out.
Position: Long BAC, WFC
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Doug Kass |
| Out of GE Long -- Questioning GE's Capital Strategy |
10/1/2008 2:43 PM EDT
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I am obviously gone on the GE (GE) long rental on the reopening gap higher.
Maybe some will now question Immelt's buyback program done in the mid-$30s over the last year.
I have questioned Immelt's business acumen in the past, and this latest financing leaves me skeptical to the core.
Selling $12 billion of GE shares to the public (and $3 billion to Buffett) at a price about $13 less than the average paid in the company's BUYBACK over the last year is not a Henry Singleton-type strategy.
It is actually moronic -- or it is testimony to GE's fragile financial state.
Position: NONE
I don't know! But is everyone ready to find out soon?
Hopefully, Carl Icahn, ImClone's chairman, lets us in on the big secret tonight or tomorrow morning. And at what price? $70?
I'm notoriously lousy at guessing these things right, but Pfizer does make sense to me (and appears to be a popular pick for many folks.) I like Pfizer not necessarily because the company wants Erbitux, or even the follow-on to Erbitux, but more because Pfizer is a small molecule (drug) company that needs/wants to get into biologics (i.e. biotech) drug development.
ImClone does that for Pfizer. ImClone drugs are biologics and ImClone has a brand-spankin' new biologics manufacturing plant in New Jersey, just over the river from Pfizer HQ. Plus, Pfizer can afford to buy ImClone without the need for financing, a plus in this market.
As has been reported recently, Pfizer is investing heavily in cancer drug development and getting out of other R&D areas like heart disease. To really optimize R&D investments in cancer, I think Pfizer needs to get on the biotech bandwagon, which ImClone can do for them. (Even if they have to partner with Bristol-Myers on Erbitux.)
So, Pfizer makes sense to me, which is one big reason why it won't be Pfizer. I'm never right.
Other possible bidders? I have heard Eli Lilly, but that one doesn't make as much sense because Lilly already markets a good lung cancer drug, Alimta. If they owned Erbitux, too, it would be messy and weird and somewhat dysfunctional. My skepticism ups the odds that the bidder is Lilly.
How about Celgene? That's another name I've heard. Clearly the cancer synergies are there and ImClone's manufacturing plant is right down the Jersey turnpike from Celgene HQ. But CELG execs have been buying stock lately, so does it make sense for a deal to follow? Not so sure.
Of course, if you're a holder of ImClone, you don't care who makes the offer as long as it's real and close to $70. I know there have been a lot of snarky comments (from myself included) that Icahn is bluffing, but the mystery bidder does seem real. If the buyer is a company like Pfizer, the returns for ImClone holders (including traders playing the unveiling) will be better because there will be less finance risk.
Position: the Biotech Select model portfolio is long CELG
Today the VIX will close above 30 for the 13th time during the current selloff. During the huge selloff from the all-time highs in October 2007 to the lows in March of this year, a drop of 320 points in SPX, the VIX closed above 30 four times over a 16-week period. The current downtrend, which began mid-May, has taken roughly the same amount of points out of the SPX at last week's lows while bringing about dramatically different VIX readings. Four closes above 30 over 16 weeks vs. 13 straight closes above 30 since Sept. 15.
What is most interesting to me is how similar the SPX declines appear on the chart below. Just saying.
Position: none
Hey Rev – I was talking to a hedge fund friend who says the smart thing to do is peruse the "CAN'T SHORT" list for new non-financial short ideas once the SEC lifts the idiotic short-selling ban. After all, if a non-financial company requests to be on the list, there's got to be trouble brewing under the hood.
Position: none
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Geoff Johnson |
| OK, We Won't Call It a Bailout, but Can We Call It Detestable? |
10/1/2008 3:42 PM EDT
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There is a semantic game going on regarding calling the bailout a bailout so I'll tell you what. I'll concede that if we make one stinking dime after borrowing costs, then under some definition this is not a bailout.
In return, will those defending the bailout as not a bailout concede that to the rank and file public that when you rush in to save something that is failing by doing something you absolutely don't want to do you are, by accepted definition, bailing them out?
I include myself among those unhappy, but nevertheless in favor of the bailout and I respectfully disagree that this is such a great opportunity for me as a taxpayer. In fact, I'm glad Treasury isn't trying to spin me that this is so great. If the goods the government is buying are so wonderful, then private buyers would step in. If relative cost of capital between government and the private sector was the only issue, then prices would only need drop a bit further and then the government's advantage in this regard - all things being equal -- would be erased.
If that's all it took, then private buyers would simply negotiate prices that make deals work and the gears would turn.
Instead, the private buyer with the deepest and most patient pockets who could buy some of this paper and ride it out, Warren Buffett, is instead front-running the bailout with huge deals (with GS, GE) that enable him to benefit from passage of the deal.
Heck, he himself said the deals are predicated on the government taking action. Now, to hear Mr. Buffett say how good this deal is for us is tough to take. Which is not to say I hear anything sinister in his words, but rather when I hear them that I just can't set aside that I have to use the federal balance sheet to help him score. Ouch.
But don't get me wrong, if I were in his shoes, I would do no different, which gets to how I think the public feels when anyone on Wall Street informs them about how good this deal is for them and how it is not a bailout.
The public is disgusted and doesn't want to hear a bunch of Wall Street suits tell them that their definition of a bailout does not apply. Wall Street's semantic stifling of the public's anger is at best naïve and at worst patronizing.
No wonder the public is only getting angrier even as they become defeated and resigned to this terrible piece of junk.
If you can't bring yourself to calling it a bailout and you still would like to sway opinion, please at least call it what it is, a piece of junk. You may win more supporters. I actually think this is one instance in which you get more flies by coating the plan with vinegar, rather than honey.
Position: None.
CNBC reporting via WSJ that Eli Lilly (LLY) is the bidder for ImClone (IMCL) at $70 a share.
Position: none
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David Sterman |
| Assessing the Rate of Lowered Guidance |
10/1/2008 4:39 PM EDT
|
Although it appears quite likely that companies will give cautious guidance, the question will be, "to what extent?"
Taking guidance down by 5% and taking it down 25% are two very different things. But both situations will be greeted equally unmercifully. So the relatively small shortfalls could be seen as opportunities, while the bigger ones could portend lots more pain in the quarters ahead, as well as for the company's peers.
Looking at the "pre-announcers" in after-hours trading, Standard Micro (SMSC) lowered full-year sales guidance to roughly 10%-15% below the consensus, and EPS guidance that is 40%-50% below the consensus. Con-Way (CNW) lowered full-year EPS guidance 15%-20% below guidance, noting that freight volumes have fallen off quickly in recent weeks. O2 Micro (OIIM) sees Q3 sales roughly 10% below the consensus.
Sun Healthcare (SUNH) offered mixed guidance that, on balance, is a non-event, and Nabors Industries (NBR) actually raised EPS guidance slightly.
Position: none
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