HON, a Value Buyer's Dream

A few random thoughts on a remarkable day.

The PPI was awful. The number makes you worry about inflation, until you realize that inflation is a lagging indicator. But then you worry about it again, since oil closed well over $100 a barrel, the six-month strip is over $100, and the 12-month strip not far from that number. I am convinced oil will be higher for longer (more on that tomorrow), but we need to have the price back off to relieve the specter of inflation and allow the Fed to keep lowering interest rates.

The Case-Shiller home-price index was discouraging, with declines in all sectors and, if you believe Goldman Sachs (GS - commentary - Cramer's Take), more damage is ahead of us on the home-price front. I quoted Jan Hatzius, chief economist at GS, the other day, who said if home prices decline another 15%, three million homeowners will have "negative equity" in their home.

Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take) report tomorrow, and the stocks are off again today, as more brokers recommend their sale. Expect bad numbers from both, but that will probably cause the market to rally. Bad news seems to be discounted already in the market.

Goldman Sachs was off today as well in a generally strong market, as the Street awaits their earnings. An analyst at Merrill lowered his numbers a lot, but at the lowered estimate, GS would still report an 11% return on equity. Life should be so bad for all the major investment banks.

So, the PPI hurts, home prices are in a steep decline, some of the major financial stocks are being beaten down, and on top of that, Google (GOOG - commentary - Cramer's Take), a market stalwart for so long, was off 5% today and is down almost 40% from its high. And the market was up!!!

The good news today is the IBM (IBM - commentary - Cramer's Take) repurchase announcement and its higher earnings guidance. Also, Honeywell (HON - commentary - Cramer's Take), a Scotsman Capital holding, had an upbeat analyst meeting Monday. The company reaffirmed 2008 guidance of $3.65-$3.80, growth of 16%-21%. With the stock at $59, the P/E at the low end of guidance is 16 times. A 16 multiple for a growth rate of 16%-21% is a value buyer's dream.

But, volume is light, and volume is a weapon of the bull. Maybe volume will follow. For now, I'll repeat the mantra of the last few days: when stocks go up on bad news, maybe the worst is over.

More lawyer inanity:

Atty: How was your first marriage terminated?
Witness: By death.
Atty: And by whose death was it terminated?
Witness: Now whose death do you suppose terminated it?

Atty: Doctor, how many of your autopsies have you performed on dead people?
Witness: Would you care to rephrase that? Long: HON

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Bad News, But Good Market Action
Posted at 12:49 p.m.

The Producer Price Index was just awful, coming in at +1.0%, with the core (ex food and energy) up +.4%. The year-over-year change is +7.4% for the headline number and +2.3% for the core. The headline year-over-year is the highest since 1981.

At this writing, the market doesn't seem to care. It could be that since the PPI doesn't include a service component, which is by far the biggest item in an inflationary sense, the market can afford to ignore this number. It could be since IBM (IBM - commentary - Cramer's Take) raised its guidance and said they would buy $12 billion of stock this year (about 7% of outstanding shares), the market opted to focus on better news. Or, it could be that when stocks don't go down on bad news, we should take notice.

Speaking of IBM, the company raised guidance by +.05 cents for 2008. Doug Kass points out that the repurchase of $12 billion in stock should raise EPS a lot more. Is the company being conservative to surprise on the upside later?

The Case-Shiller index of home prices showed a decline of -9.1%. Ouch! It appears that the less-expensive homes are declining at a faster pace than the more expensive.

Yet the market is up! Did I mention it's good news when the market goes up on bad news?

On this day in history, in 1870 New York opened its first subway, and it's still the best way to get around town. In 1995, Nick Leeson lost $1.4 billion at Barings Bank and the 200-plus-year-old institution went under. That $1.4 billion seems like pocket change now.

I'm going to quote a bit from the book "Disorder in Court." Word-for-word testimony from court reporters. What a job. Read on:

Attorney: This myasthenia gravis, does it affect your memory?
Witness: Yes
Atty: In what way?
Witness: I forget things.
Atty: You forget? Can you give is an example of something you forgot?

Atty: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?
Witness: Did you actually pass the bar exam?

Atty: She had three children?
Witness: Yes.
Atty: How many were boys?
Witness: None
Atty: Were there any girls?
Witness: Are you [kidding] me? You honor, I think I need a new attorney. Can I get a new a attorney?

More later.

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Reconciling C's Looming Pain With the Bailout
Posted at 7:41 a.m.

Meridith Whitney of Oppenheimer has struck again. She feels (and ignore her at your own risk, because she has been so right) that Citi (C - commentary - Cramer's Take) has a lot of writeoffs still to come in the CDO market, the leveraged loan market (loans made to finance buyouts that they still have on their books) and in consumer credit.

She says Citi will have to sell up to $100 billion in assets to reliquify its balance sheet and bring much-needed cash back onto its books. The problem is, of course, is that in times like these, the only stuff you can sell is the good stuff, which you would much rather keep.

The question that pops up is if Citi is in such a precarious state, what is it doing providing a backup to inject capital into the troubled bond insurance business? The answer is deceptively simple. If Citi and/or a group of banks underwrite a several-billion-dollar "bailout" of the monolines, the insurers keep their AAA-rated credit. Without that, tens of billions of bonds -- mostly subprime mortgage things -- now held by the banks would have to be written down, and the resulting mark-to-market loss would total far more than the money needed to bail out the insurer.

The state regulatory bodies know this, and their job is to regulate the insurers, not the banks. To protect the integrity of the AAA used by many municipalities to issue debt at lower interest costs than without it, the regulators have threatened to make the insurer break themselves up into two pieces. One Newco would do the traditional muni bond insurance, and the other would "guarantee" the toxic waste. Without the cash flow from the stable muni business, no one can accurately guess the worth of Newco-B's guarantee. Clever -- hardball, but clever.

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.