Washington Financial Recovery Plan: Don't Obsess On Looking In The "Other Guy's" Pocket; Think Proactively Now
9/29/08 7:00 AM EDT
I have been involved in thousands of corporate transactions over the years. One of the basic tenants I have adhered to is to not look into the "Other Guy's" pocket so to speak. If the deal was good enough for me or my client that was all that mattered. When you obsess on what the other guy is getting it is incredibly hard to get a deal done.Although the Washington Financial Recovery Plan is a political act,I look at it through the same prism. Is it the best plan? No clearly not. But on the other hand it achieves the objective of not having a world wide financial meltdown. In the end that is an outcome that makes sense for the interests that I have a fiduciary obligation to.
The focus now is to figure out who the investment winners and losers are going to be. The cows are out of the barn now. Don't worry about who did what to whom. A lot of bad guys benefitted over time but then again so did some good guys. That is part of the capitalistic system we live. There will be plenty of good books and movies written on the excesses that occured.
My advice at this point is to channel all your energy to postive thinking.Take a proactive stance and continue to seek opportunities and inefficient markets. That is always where your going to make your mark. Don't worry about what the "Other Guy" got. Focus on how to make your own portfolio the best it can be.
Financial Industry Advertising is Significant
9/29/08 7:28 AM EDT
Last week Michael Morris, UBS Media analyst, provided an update to his earlier report on financial industry advertising exposure. Michael deserves credit for identifying this as a risk to the advertising driven media stocks several months ago.
In his update, Michael notes that according to TNS Media Intelligence, in 2007 the financial industry spent more than $17 billion on traditional advertising media, equal to about 10% of the total pie.
TV is most exposed with about a 45% share, followed by print with 30%. Thus far, the weakness has been concentrated in local media with radio, TV, and newspapers seeing double digits declines in financial ad spending. Last week, NBC Universal CEO Jeff Zucker indicated that local TV stations were feeling heavy pain from the cutback in financial ads and national TV was also finally feeling some pressure.
Among the major casualties in the finance industry restructuring, TNS reports that Wamu spent $170 million in 2007 and AIG spent $130 million. Merrill, whose ads I recall seeing often, spent $41 million.
In his earlier report, Morris noted that Viacom was particularly exposed to cutbacks in finance spending as its younger demographics attracted a lot of ad dollars. CBS also is heavily exposed as it relies overwhelmingly on advertising for its revenue compared its more diversified peers. According to TNS, 10% of CBS Network revenue was from the financial industry in 2007.
With a major ad category facing unprecedented turmoil and the lagging nature of advertising cutbacks, exposure to ad supported media stocks should remain low. I remain long only Time Warner, Central European Media Enterprises, and Discovery Communications. TWX is least exposed to advertising among the major media conglomerates. CETV is a play on secular per capita ad spending growth in Central and Eastern Europe where checking accounts, not credit products are advertised. Discovery Communications is a special situation where a recent recap has unduly pressured the shares and exposure is to natonal cable TV networks advertising which is still holding up well with upper single digit gains.
Position: TWX, DISAD, and CETV are widely held in client accounts. TWX and DISAD are held in my personal accounts. CETV is by far the largest position in my personal accounts.
Punishing Wall Street
9/29/08 8:03 AM EDT
One of the most frightening things in these 'bailout' talks is how politicians, like Nancy Pelosi, want to punish Wall Street but make no distinction between investors/traders and the lending institutions and brokers who have had such horrible judgment. This idea of transaction tax on trades is still out there and our next President will influence its passage but other things like this ban on shorts is already hurting liquidity. I'm just hopeful the politicians won't kill the stock market in their zeal to punish Wall Street.
9/29/08 8:05 AM EDT
With two days left in the quarter, more than a few companies have a pretty good read on whether they can meet expectations. A few are out this morning with lowered guidance, including Littlefuse (LFUS), Gentex (GNTX), Circuit City (CC), and Steelcase (SCS).
This is a crucial time for value investors to be ready to move. I continue to think that the recent scary headlines are going to cause a temporary freeze in non-essential spending in a range of industries, which could send a good number of stocks lower. However, many of these companies will still have strong balance sheets and solid long-term market positioning, so any major sell-off in some names creates one of those "once in a decade" deep value entry points. I'm on the prowl for companies selling down to less than 7 times normalized free cash flow, companies that are selling near or below book, or companies with more than 30% of their market value reflected in net cash.
Walgreen Meets, With Issues
9/29/08 8:31 AM EDT
Walgreen (WAG), the country's largest retail drugstore chain, met consensus EPS estimates of 45 cents this morning but slightly missed on revenues of $14.6 billion.
Margins may have been an issue, too.
The conference call is starting now, and we haven't yet modeled the numbers, but WAG did mention a "vacation accrual benefit" is included in the 45 cents EPS. I'm not sure why that was specifically mentioned in the earnings release.
I'll have more after the call.
Position: Long WAG (one low-cost basis position from 1997)
Dollar: State of Play
9/29/08 9:25 AM EDT
The are two drivers behind the dollar's advance. One is the relief that despite the politicalization of the process, a comprehensive program to address the financial crisis in the US has been agreed. The second is the heightened financial woes in Europe--impacting the UK, Germany, Italy, Iceland, Belgium, Netherlands, and Luxembourg.
On top of the financial crisis, the economic data, in particular sentiment in Europe has eroded and French President Sarkozy was quoted on the news wires acknowledging that the Fench economy is now in a quasi-recession. Although it is not clear that that really means, it obviously is not good. France's Economic Minister Lagarde noted over the weekend that French unemployment is set to rise sharply (Aug).
While the focus may have shifted toward Europe given the news stream, the US is not out of the woods by any stretch. First, the financial crisis is still unfolding as today's developments (Wachovia, etc) illustrate. Second, the tensions in the capital markets continues unabated. The TED spread is up 40 bp to new highs, interbank lending remains paralyzed, and some participants continue to use the swap market to raise short-term funds.
The economic data highlight of the week is the US jobs report at the end of the week. The consensus is for a loss of more than 100k jobs. Before that the ISM and auto sales data should underscore what appears to be a dramatic US economic slowdown in Q3. CaseShiller home price index is out tomorrow and the risk is that prices fell more than expected (consensus 16% year-over-year pace for the 20 metro areas).
The dollar's advance today brought it within spitting distance of the 61.8% retracement of the drop seen since Sept 11. For the euro that level comes in near $1.4260 and for sterling $1.7915 and CHF1.1140. These levels appear safe, unless participants begin expecting that the ECB, which meets Thursday, may cut rates, which, to be clear, I do not think is likely.
Why Go Long if Others Have to Sell?
9/29/08 9:47 AM EDT
We seem to be entering into the next phase of the "buyer's strike," which is keeping value players on the sidelines. I have heard several friends and colleagues utter the same thought over the last few days. It goes roughly: "even if I like a stock a lot, why would I buy it when some institutions that already own the stock may need to cash out."
This sentiment is likely based more on uncertainty and fear rather than cold hard data. But until long-oriented investors see that we aren't getting further liquidation in value names, they may stay on the sidelines.
A TARP can't protect against a hurricane
9/29/08 11:31 AM EDT
A tarp can protect you if you want shelter from a heavy shower, but not if the root cause is a hurricane. The Troubled Asset Relief Program (TARP) that the powers that be have designed is meant to protect against financial market problems, but the root cause, about which there has been widespread denial, is the deepening recession. Too many analysts who don't really understand the business cycle mistakenly believe a recession is two down quarters of GDP, and don't get the fact that with the broadest measures of employment, industrial production, income and sales falling in concert, the economy has been in a recession all year, because the Fed didn't act forcefully last fall, and the tax rebate checks arrived much too late -- only when recessionary job losses had taken hold. We are in this current mess because of the intercation of the risks taken by financial firms and the recession, which is the key. So hang up the TARP, by all means, if it makes you feel better, but it won't be much use in a recessionary hurricane.
HR 3997 Debate
9/29/08 11:34 AM EDT
A CNBC anchor complained this morning that a deal was reached 24 hours ago on the "bailout" legislation, but it had not yet been passed. I wonder how many of those following the markets, including foreigners, do not understand the legislative process. It is not just a matter of the Congressional leaders cutting a deal with the President. The legislation is subject to debate in both the House and Senate before a vote.
Actually, Congress is moving at warp speed! Last week I stated that it was unrealistic to expect any legislation to be passed before the weekend. I predicted that C-Span would be competing with football. It actually took a day longer.
The House is debating the bill under a strict "rule," as it is called. A floor manager for each party parcels out time in chunks of two minutes or so. The legislator gets to make a brief statement for the camera and then "extends and revises" remarks for the record.
At the current pace, the House should be ready for a vote by about 12:30 EDT. Some are arguing that the Senate should also act today. There is a recess for Rosh Hashana. Unless the Senate can act before sundown, the vote there will occur on Wednesday.
Wachovia:Evaluating The Stubb When The Fine Print Come Out
9/29/08 11:52 AM EDT
It may be worth the time to evaluate the stubb that remains in Wachovia. At this point the stock hasn't opened so we don't have that data point.As far as we can tell the remnant will be a retail broker and money manager. The question is how "clean" the business will be. I will wait until the fine print comes out to figue that out.
House Debate Clarifies and Answers Questions
9/29/08 12:08 PM EDT
One aspect of the House debate is the attempt to clarify various provisions. This is helpful, since there has been little time for most to analyze the entire bill. Here are two examples:
Mark-to-market accounting. Some are (incorrectly) stating that the legislation suspends FAS 157. A careful reading shows that it simply re-affirms existing SEC authority to do so. The SEC has ceded authority to the Financial Accounting Standards Board. Rep. Frank, responding to a question, from Rep. Jim Costa (D-Cal) made this quite clear. He even used the phrase that we are not "legislating accounting." The focus of the concern in this interchange was the impact of the various distressed sale prices on smaller regional banks.
Exemption from lawsuits for the Treasury implementers. Rep. Frank pointed out that this was changed to restore the appropriate separation of power among the branches of government.
Last Thursday Sen. Lamar Alexander (R, Tenn) stated that 40 GOP Senators would support the Paulson plan, at least as it stood at that time. Alexander is Chairman of the Senate Republican Conference. If his count remains true, the House vote will be the key.
Position: long IAT (regional bank ETF)
It's Getting Hot in Here
9/29/08 12:48 PM EDT
I am covering aggressively in here.
We are witnessing capitulation with a capital "C."
A happy and healthy new year to all my Jewish friends!
Now We Know Why LEH Took So Long with Neuberger
9/29/08 12:50 PM EDT
It was unclear why Lehman Bros. didn't sell Neuberger Berman a month or two ago. Everybody whispered to Fuld that Neuberger was worth $5-7 billion, based on comps. He probably got that number stuck in his head.
The $2 billion actual purchase price today looks like a steal for Bain and Hellman & Friedman. The biggest risk would have been that Neuberger PMs would have moved their clients elsewhere, but with the new stronger financial backers, that risk is now greatly mitigated.
Not like a football game
9/29/08 1:44 PM EDT
The time for a vote can stretch out beyond the fifteen minutes as arms are twisted. The Dems are watching the GOP vote balance. There are some who will vote for the bill only if needed -- ducking out if possible.
9/29/08 1:54 PM EDT
They need to switch ten more votes -- some have already changed -- and the Dems are insisting that some are from the GOP.
Credit Market Responds to 'No' Vote
9/29/08 1:57 PM EDT
The 3-month T-bill rate is now at 0.55%, down from 0.75% a little over a half hour ago. The two-year T-note moved to 1.66% from 1.91% just before the vote. The 10-year Treasury note yield fell to 3.60% from 3.70%.
The two-year swap rate soared to 150 basis points over Treasuries from 135 basis points, a sign of worry about credit spreads.
9/29/08 2:04 PM EDT
Maybe the shorts will cover here and lift the market. Oh wait...never mind.
Moving to Reconsider
9/29/08 2:15 PM EDT
Many probably saw a last-minute maneuver. A supporter of the bill changed his vote to the 'nay' side. Only someone voting on the prevailing side can move to reconsider. He asked when his motion would be taken up (trying to get some more arm-twisting time). When the chair said "immediately" the motion to reconsider was tabled.
9/29/08 2:24 PM EDT
Won't be today, will be when overseas markets reopen and pass judgment, since they are the ones financing our mega-deficits. Shock is in, but nothing more may happen today in equity markets.
9/29/08 2:24 PM EDT
Some readers have asked what will happen next? During the debate, several of the opponents suggested that there was undue haste. They suggested that the House return to work next week (abandoning the normal pre-election recess). I have described passing legislation as putting together a coalition. You add and subtract pieces to get a majority. The leaders will now see if some concession can be made that will add a group of votes and provide cover for them to switch -- and do so without losing existing support.
9/29/08 2:32 PM EDT
A re-vote after they go home to constituents and get an earful is likely to increase resistance, yes? Seems like they missed their only good shot at passing the bill.
9/29/08 2:39 PM EDT
Alan -- I agree. Meeting constituents in person will be even stronger than the calls and email they have been getting. As I have said throughout, the average person does not understand or support this. The partisan reactions that we are now hearing will make it even more difficult. The moment for bipartisan action has been lost.
Double Bottom? Recognize it; Don't Predict it.
9/29/08 2:52 PM EDT
Big capitulation day today -- another "Black Monday" as the widespread distrust of Washington D.C. boils over into a political conundrum where there is no "right" move for our elected officials to make. Simply put, it's all political, and that's a shame. Yes, it's a shame...but it's also reality.
A while ago I sent out a video link to my email list with my take on the current price action. However, given the volatility of the market, I'd share it with RealMoney members as well. You can view it here.
Position: Happily in cash and outperforming the Dow by 5% just today.
9/29/08 2:54 PM EDT
It sure feels like Armageddon. There is no trust in our law makers. There is no confidence in the financial markets. I am selling some stocks but am not pulling the plug. Blood is in the streets.
As bad as you may think it is remember it is likely worse for someone else.
Maybe the New Year will bring a change for us all. Happy and Healthy New Year to all who will be celebrating the Jewish New Year.
The Role Of Uncertainty
9/29/08 3:06 PM EDT
We have had two factors in addition to the obvious affecting credit markets that may either pass or be ameliorated soon.
The first is the end of the quarter. Banks have been hoarding cash out of mutual distrust, well-founded in most cases, but also for the window-dressing in their quarterly reports.
The second has been the uncertainties created by the ongoing political debate. Why should anyone step up and buy any distressed security today if the "official" price may be lower tomorrow? And why buy anything mortgage-related if they are talking about wholesale modifications? If we eliminate these possibilities, (or enact them)the uncertainty will be reduced. That is never a bad thing in a panic.
Bailout Mini-Crash of 2008
9/29/08 3:58 PM EDT
Remember the mini crash on Friday October 13, 1989? It was caused when UAL could not get funding for its leveraged buyout (in retrospect a deal best not done). The Dow fell 6.91% on that day and the S&P 500 (SPX) fell 6.12% that day.
Welcome to the Bailout Mini Crash of 2008.
Remember today because you will be telling your grandchildren about it.
You Say You Want a Revolution, Well You Know...
9/29/08 4:44 PM EDT
This is the closest thing to a revolution that we'll ever see in this country. No tea being dumped in Boston Harbor, and no cold winter in Valley Forge...but a bunch of very angry citizens who are fed up with the status quo and are finally letting their fingers do the walking by contacting their congressmen and letting them know about it.
The end of life as we know it? I doubt it. But a big paradigm shift? Most assuredly. But it's important to have faith in capitalism -- and that capitalism derives from people, not from government. No doubt that this will be painful for many. I believe that history will judge our current political leaders very harshly and will identify those who have been chirping about the need for "bipartisanship" as those who have actually been the most partisan of all. While politics is, by definition, ugly and messy, leaving the other party hanging out to dry with an "It's all your fault" speech at the 11th hour doesn't exactly smell like bipartisanship, does it? In fact, it undercuts the argument that this is a very badly needed $700 billion check that needs to be written and signed.
Memo to Washington: If you really want to underscore the seriousness of the issue, then hold a news conference with representatives of both corrupt political parties where the representatives admit that this is trouble that has been brewing for a long, long time; that there is plenty of blame to go around (call it "bipartisan responsibility"); and that both parties expressly accept that each party had a hand in creating or sanctioning the dynamics that created the current crisis and, as such, neither party can legitimately and credibly point the finger at the other.
Chances of that happening? Nil -- too much partisanship...and too close to November 4th.
Position: Making many notes in my trading diary and taking lots of snapshots of my indicator screens. Opportunities like this don't come along very often.
Dow and S&P Close Questions
9/29/08 4:52 PM EDT
My one minute chart on the S&P shows a 4 PM price of 1124. I then show steady deterioration to the posted close of 1106.42 which occurred at 4:23 PM. The Dow chart show something similar with a decline of around 150 points after the 4PM close. I'm not saying the close wasn't real and S&P futures have given up 7 points in the last few minutes are trading at 1115 but does any one have other explanations for that last leg down in cash markets?
Position: No positions.
Here's How They Voted
9/29/08 5:08 PM EDT
In case you want to know who voted yes or no, here is the roll call.
The Dreaded "Catch All" Phrase
9/29/08 7:14 PM EDT
Just finished reading the text of the bill that was denied by Dems and Republicans (note: lots of Democrats also voted against the bill).
That bill has so many holes in it that it is truly tantamount to a blank check. Aside from the bad mortage loans and all the derivatives that they've spawned, the definition of "troubled assets" that the Treasury Secretary can buy includes "...any other financial instrument that the Secretary determines the purchase of which is necessary to promote financial market stability."
That "catch all" clause means that the Treasury Secretary isn't limited to buying bad mortgage debt (including derivatives). He can buy down anything he wants, which opens the door to buying up bad credit card debt, defaulting student loans, or debt held by foreign banks, and just about anything else the Secretary decides will "promote financial market stability."
Bottom line: This bill was a disaster and is just the kind of thing that would have led to a huge boondoggle in the years to come. A proverbial "soak the rich" and "spiff the poor" program.
Hopefully our elected officials will now get back to the table and write a bill that's more limited in scope and does exactly...and only...what it is supposed to do.
But, as my dad used to say, "Hope is not a method."
Position: Hoping for a miracle...but bracing for a monsoon.
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