"A fool and his money are soon parted." -- Thomas Tusser
Yesterday's reversal in equities put a dagger in the heart of the ursine crowd as they scratched their heads and wondered "what can get 'em down."
But was the rally justified?
The ramp in crude oil -- Goldman Sachs is now forecasting that crude oil could increase to $150 to $200 a barrel in the next two years -- to unprecedented levels represents a challenge to any meaningful market rise from here, however, some other headwinds seem to be surfacing.
Bond Market Bruised by Bailouts
For one, bonds are breaking down, and yields have made a multi-month high. The culprit? Not an improving economy but rather the largest domestic financial bailout in history has caused dollar-denominated debt holders to liquidate. Should the pattern of rising interest rates continue, loans will be more expensive and stocks will face an increasing competitive threat.
Cisco's Big Slowdown
. At the time of Cisco's earnings release, the media heralded its results as a beat. Wrong again.
Cisco's reduced share count had a lot to do with the modest EPS beat (from previously lowered expectations). Going forward, the outlook is dimming as the company's domestic orders are up by only 5%, continuing the decelerating rate of growth of the last three quarters, buoyed by the "assistance" of the government sector (a dominant theme these days) as federal orders rose by almost 20%. If one took out government orders, I estimate that U.S. orders would have risen by about 3%.
Even emerging market orders are slipping now, despite the China build being aided by the Olympics. In the aggregate, specific regional orders are down by 30% to 60% vs. growth rates of six months ago.
Another Mess for Mother Merrill
disclosed that its so-called Level 3 assets rose by over 70%, to $82.4 billion. Not a mention in the "media."
Fannie Mae Lives in the Red
lot is deteriorating, with losses four times larger than consensus and reported exposure to subprime and Alt-A of $51 billion and $344 billion, respectively. Meanwhile, the dividend is cut and the company plans to raise at least $6 billion of new capital.
Moody's downgraded the company's strength to "B," seeing nearly $10 billion of losses in 2008-09. And, by the way, the company sees the housing depression continuing into next year.
Don't Like What I See Ahead
All these things said, we appear to be back to an investment landscape that is characterized by chasing price, and, in the fullness of time, the cost to investors might be large. Bulls scoff at this negativity, as they are wont to do, expressing the view that the market is looking over the credit/economic valley.
I respectfully suggest that I, too, am looking over the valley, and I don't like what I see.
At the time of publication, Kass and/or his funds were short Fannie Mae, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.