Chart of the Day
11/20/08 4:46 AM EST
Click here for a great chart comparing four major US market bear markets.
73-74, 00-02 and this one are all -50% events. 29-32 is the next benchmark, that one was -89%. This data seems hopeful, barring a depression we've gone as low as the worst we've seen in the past century.
Of course we could end somewhere in between. The Nikkei is down 77% from its high in 1989. The Japanese experience has been described as a "lost decade" (actually two), but never a depression. So terminology may be irrelevant.
I Scream Kohn
11/20/08 6:17 AM EST
Vice Chairman of the Federal Reserve Donald Kohn's comments yesterday were important. There are three take away points. First, he indicated that he thought the risk of deflation was small but it had grown recently. In this context risk is best understood as a product of credibility multiplied by capability. The credibility in this case may be low, but its ruinous capability is great.
That leads to Kohn's second point. Policy should respond "as aggressive as possible" to any deflation possibility. His remarks no doubt were prepared, but they are especially noteworthy in that were issued within a few hours of news that consumer prices showed their biggest decline in 60 years last month.
The third point, which is one I also have been making, is that the Fed is already engaged in forms of quantitative ease. One key way, though that it differs from Japan's experience is that the Fed's quantitative easing has occurred along side monetary easing or interest rate cuts. In Japan's case the BOJ had brought its overnight rate to zero before engaging in quantitative easing.
Because the effective Fed funds rate, which is what the futures contract is tied to rather than the policy rate, the futures are less helpful in signaling market expectations for Fed policy, but after yesterday's comments and data, there was increased speculation that the Fed may cut by 50 bp when it meets in mid-Dec.
In the currency market itself, it seems to me that the relationships that every one has been highlighting with the equity market may be weakening, but it is more as something to be on the altert for rather some thing to act on immediately...euro is holding its own against the yen and swiss franc despite the continued weakness in equities. Some EM currencies are firm, like Turkey-which cut rates yesterday by surprise. Even the ruble is stronger. But not all are firmer as the rand has been hit and the latam currencies are poised to open lower.
Position: smaller by the day
Met Life and Prudential Will Both Be Long Term Survivors
11/20/08 7:00 AM EST
Met Life and Pru are both in the crosshairs right now as concerns are rising about their CMBS portfolio. I have had many private placement dealings over the years with both companies and have found them to be very careful and not the types of organizations to reach for yield by taking excessive risks.Moreover the quality of the professionals I have dealt with over the years was uniformly high.
With respect to the specific issues with real estate,remember, Met Life sold some of its largest real estate assets Peter Cooper Village-Stuyvesant Town and the two Met Life buildings for enormous prices at the peak. I pointed out at the time was a bearish signal for real estate as the life insurance companies are well equipped to look to long term trends in assets due to the predictable long term nature of their liabilities.
So while I am sure things are not going swimmingly for both, in the overall scheme of things my instinct is that neither is any real risk of melting down. While their is no doubt the current portfolio of investments is getting hammered , new holdings are being put on at attractive prices with very prohibitive make whole provisions. So for those with a longer term orientation both of these high qualitiy enterprises are at prices that make economic sense, as each will be a long term survivor.
Position: Long MET
11/20/08 7:20 AM EST
My post from yesterday was supposed to mark a bottom by me getting even more bearish.
So now that we have breached 8,000 on the Dow and Asia is slinking into oblivion tonight, what is one to do with their 188k plan?
I can only advise those who have followed me for quite some time and have been mostly in cash. To you all, I say it's time to go shopping for a few stocks. Once again, the stocks that I buy will all have pristine balance sheets because those are the only stocks that will bounce, when -- IF EVER -- we do bounce and or dare I say it ... bottom.
Here is my Hanukkah wish list for certain stocks.
* Apple (AAPL) in the 70s (I own it)
* Google (GOOG) will add some to the sheets in the morning and hoping for an obliteration to a low $200 or even $1 handle
* Amazon (AMZN) in the 20s
* Adobe (ADBE) in the teens
* Salesforce.com (CRM) in the teens (I own it)
* Chipotle (CMG) in 20s
* Nintendo (NTDOY.PK) in the 20s
* Visa (V) in the 40's (I own it)
* Electronic Arts (ERTS) under $15 (I don't think it will bounce hard because of earnings preannouncement)
I will be plunging back in from a mostly cash position if we break 7,800 and get pretty invested for a trade at 7,600 and below.
For me, pretty invested right now would be 30% net long.
As a hedge fund manager in this environment, my having a good year means nothing. Even my most loyal investors can pull at a moment's notice. It's just a part of the business you have to factor in to your decision-making.
The stock market is broken and you must not be in a hope mode. You can't hide your statements. The companies on this list above are far from broken.
I am truly getting excited for owning some of the best brands in history at what I think are bargains. Time will tell as always.
Position: long AAPL, CRM and V
Reader Response to Buying From Bankrupt Automakers
11/20/08 7:21 AM EST
Yesterday I posed the question to readers of whether they would buy a car from an automaker operating in bankruptcy. I received a large number or responses, many with well thought out comments.
By a 3 to 1 margin, Real Money subscribers say yes they will buy from a bankrupt car maker. However, many of the yes answers came with the same two caveats. First, everyone wants a discount. Second, and related to the first point is that people want to make sure the warranty would still exist but if it didn't a lower price to subsidize third party warranty would suffice.
Based solely on this aspect of the responses, I think that the CEOs ought to be revising their sales pitch for the bailout money. Based on what I heard, they kept going back to "no one will buy form us if we are bankrupt so bankruptcy is the same as shutting our doors and the ramifications of that for the economy are too great to risk."
Several subscribers noted a parallel between flying on bankrupt airlines and buying a car from a bankrupt company. A few noted this but qualified by stating that an airline flight is just a few hour commitment while the car has warranty issues.
One reader compared the issue to the runs on banks and brokers and felt a similar run could occur on a bankrupt automaker in terms of buyer boycott.. Another reader noted that resale value on US cars is already very poor compared to foreign cars so bankruptcy really would not matter.
A few readers indicated that they would buy form a bankrupt company but would not buy now when they don't know what form the company will be in a few days, weeks, or months.
This brings me to my final point. A few readers replied with tales of dealerships. One dealers says there have been zero, I repeat zero sales for several weeks. Another said that just one or two cars have been sold in the past month. Part of this could be due to the fact that uncertainty is keeping folks away form buying that would be buyers from a bankrupt company.
But more importantly, the urgent tone of the CEOs emanates from right here. Sales have slowed to virtually nothing. This is why the cash burn rate is so high and accelerating.
Position: No positions.
Memo to Prince Alwaleed
11/20/08 7:27 AM EST
Prince Alwaleed is on the Dow Jones tape, saying that Citigroup (C) is materially undervalued.
Memo to the Prince: You have been saying that over the course of the last 46-point drop in Citigroup's shares.
Fortress Worries About Obama's Plans
11/20/08 7:35 AM EST
Last Thursday, we had the spectacle of five top hedge fund managers testifying on Capitol Hill. Several Congressmen honed in on the current tax code which allows hedge fund partners (and other partnerships) to be taxed at a lower rate because of the rules on carried interest. At last week's hearing, George Soros and Jim Simons agreed that the rules should be revised. John Paulson, Philip Falcone and Ken Griffin offered several conditions.
The folks at Fortress Investment Group (FIG) weren't on that panel, but that same day they reported its first quarterly loss since going public in February 2007 and announced that redemptions were running around 25%. But it was some of the new disclosures in the 10Q they filed that piqued my interest.
While the warning about the potential change in the tax code in terms of carried interest has been in previous filings, the last line was new:
If legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals. Senator Barack Obama, the President-Elect, has publicly stated that he supports similar changes to the tax code.
Also new was a warning of the increased attention on hedge funds by members of Congress and the additional regulation that this could bring. Among the concerns singled out was the SEC's rule on short-selling, which expired last month, though companies are still required to file the Form SH until next August: "Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business."
Of course, given Fortress' performance -- the stock has declined a whopping 93% since February 2007 -- new regulations seem like the least of their problems.
The Princely Boost
11/20/08 8:13 AM EST
With all the current turmoil, it is too soon to expect an M&A upsurge. Those deals will come en masse when things quiet down and it is clear that we are just falling into a profound recession and nothing worse. Before then, actions like today's large buy of Citigroup (C) by Prince Alwaleed bin Talal bin Abdulaziz Al Saud is one of the few panaceas available to this market right now, single-handedly turning the futures around.
There have been a lot of investors on the winning side of trades these last few months, and seeing some of that money flow back into equities would be very supportive to establishing any floor.
Dysfunctional, But Not Irrational
11/20/08 8:14 AM EST
As the market makes new lows a fair number of market commentators and managers are out arguing that the problem is that the market and investors are irrational and are forcing stocks to trade at prices below their estimation of fair value. I continue to believe the coming drop in earnings will fully bear out the appropriateness of the stock price, especially in terms of multiples. In fact, there seems to be some sense of entitlement as to what a reasonable multiple is for a stock. I believe this may be a function of the fact that most of today's investors have not lived through a low multiple world and are adamant that whatever caused low multiples in the past is history, cannot happen again and that there is no new event that could make it happen now. Oh, really? I can't tell you what the low-point multiple will be, but I can say now is a great time to be open to the idea that it will be low.
I noted once before that given the market swings and volatility, this market is certainly dysfunctional, but the pricing of stocks does not strike me as irrational.
Rev Shark Keeps Throwing Strikes
11/20/08 8:17 AM EST
I am not worthy! I am not worthy!
Rev Shark continues to throw strikes, and his opening missive today is spot-on as he moves closer to winning the 2008 Cy Young Award.
11/20/08 8:18 AM EST
As an example of how ugly some sectors have become, I thought I would point out that the basket value of the Coal stocks I follow (ACI, BTU, MEE, CNX and FCL) has plummeted from 460 as of 7-1-2008 to a meager 77 as of yesterday's close...a decline of more than 83%
I know Doug has been or is short a number of these stocks...if your still holding short, what would make you cover?
Should You Buy It? Addendum
11/20/08 8:32 AM EST
Sierra Pacific (SRP:NYSE) is changing its name to NV Energy today, and will trade under the new ticker NVE. Nice timing, Dave.
Also, another item that initially drew me to the name but didn't make it into the final copy is the recent insider buying in the stock.
Two insders, including CEO Michael Yackira have bought a total of 15,500 shares this month on the open market.
11/20/08 8:40 AM EST
Initial Claims came in at 542k vs 505k consensus. Prior weekly claims were revised to 515k from 516k.
This is the first time we have had 2 consectuive weekly readings over 500k since 2001.
Continuing claims came in at 4.01 million versus expected claims of 3.90 million.
Futures did a fake out
11/20/08 8:41 AM EST
right before the unemployment data came out, futures were up slightly, now they are down about a percent as the unemployment data came in weaker than expected.
I called around a bunch of traders/money managers yesterday after the close. The comments from people can be summarized as follows:
- Most of the managers think we get one more whoosh down, hit 770 or so, and then "rip up".
- the qualification being , "unless the system is broken".
- People loved Alan Farley's comments yesterday on the site that perhaps the entire trading mechanism in the US markets is broken, particularly with the lack of an uptick rule. the idea being that at the end of the day the only volume is the electronic trading systems which are just smashing stocks down by shorting without the uptick.
- Mark to market remains a big debate. As Jeff Miller pointed out yesterday, many of these assets (securitized mortgages, etc) are performing fine, but hedge funds have marked them down to 20 cents on the dollar in some cases.
- Spoke to one fund manager of distressed debt. They are getting mega-redemptions from funds of funds that were leveraged up. However, the gates are going up. Hedge funds (some of them) are finally starting to say, "listen, we have to get out of these in an orderly manner and we are allowed to gate your redemption - meaning, you get it back when we feel like it."
My personal take: In the future things will be higher than they are now. Significantly higher. The bulk of the selling has been hedge funds and electronic trading. But, who really knows if we see more pain today or tomorrow or next week.
11/20/08 8:42 AM EST
The Market has been down all morning and was not helped by the jobless claims numbers... We are currently at 26.47 with no buying so far... We are oversold in the short term and should see a bounce this morning... I will be looking for minimal selling and an early pop anywhere from QQQQ 26 to 26.20 with a pop to 27.... Stay awake because if we get what looks like capitulation, we can pop 3 bucks on the QQQQ ... 25 to 25.50 would be what I would expect for capitulation numbers... Financials will lead us today if there is any serious buyers lurking...
If Only They Were Lending Right Now
11/20/08 8:51 AM EST
It's hard to overlook the associated drop-off in bond yields. The 10-year is at 3.25%, and the 30-year is nicely below 4%. That should be great for mortgage rates, car loans, etc. Hopefully, when things quiet down, rates will stay put and increased lending activity can keep economic activity from falling off a cliff.
PDCO - no tooth fairy in dental land
11/20/08 9:00 AM EST
PDCO missed the quarter, putting up 40c vs. 46c consensus, and guided down their fiscal year earnings to 1.73-1.77 from 1.94-1.98. Dental consumables were flat year over year - dental consumables growth has held up until this point. Doug Kass and I discussed yesterday that we've been surprised by the consumables resiliency. No more. PDCO's equipment was actually ok relative to my expectations - basic equipment up 7%, while overall dental equipment up 1% year over year (implying much weakness in the high end). But to add insult to injury, the company expects equipment to weaken further as the installs this quarter represented "orders placed prior to economic turmoil."
Position: Short PDCO, HSIC, XRAY
11/20/08 9:00 AM EST
You know what keeps me watching baseball still after 45 years? It's the wonder of the game--whenever you think you've seen it all, the game surprises you and you see something just a little (or wholly) different.
Ok, you know where I'm going here. But let's keep the analogy confined to oil. 25 years in the trenches and of course, I've never seen anything like this. There's no story from a fundamental point of view and probably won't be for a long time; all the abuse I took in the summer arguing that speculative premium in oil accounted for at least 40% of price at $145 now rings as a hollow victory in the light of the recent carnage --
The most unfathomable is the continued NEGATIVE value of gas cracks, virtually COSTING the refiners money every time they create a gallon of gas. As a temporary financial aberration, I've seen it before -- but for the last 3 months???? Don't give me a story, either, about demand destruction.......check out my piece on RM, it lists gas sales figures that show AT MOST an 6% decline and mostly less -- hardly reason to keep gasoline $4 dollars UNDER the price of crude.......
Hey, just another triple play while the runner steals home.........after a balk ---
Jobless Claims Surge
11/20/08 9:05 AM EST
Jobless claims increased 37,000 to 542,000 in the week ended Nov. 15 to their highest level since the week ended July 25, 1992. Excepting that reading, which was an anomalous spike well outside the trend at that time, claims are at their highest since December 1982.
Continuing claims increased 109,000 to 4.012 million, the most since December 1982. A key metric that helps keep these statistics in perspective by accounting for population growth and more specifically growth in the size of the labor force is the unemployment rate for insured workers. It stands at 3.0%, the highest since June 2003. Following the 1990-1991 recession, it went as high as 3.3%. In the 1981-1982 recession it reached 5.4%.
The current level of claims is consistent with monthly job losses even higher than that of the past two months, which saw payrolls fall an average of 262,000 a month.
More in my blog shortly.
Denying The Black Swan
11/20/08 9:06 AM EST
A huge part of the populace still doesn't believe we are in a crisis that could hit depression level economics in 2009 or 2010. Part of the cynicism comes from the September bailout drama, in which our government officials predicted immediate and dire consequences.
The non-believers figure that, since the worst hasn't happened yet, it isn't going to happen anytime in the future. What they don't realize is this is a sequential crisis, in which very bad dominoes are lined up and ready to fall, one by one.
The head-in-sand mentality isn't confined to one political party. On the right, the Bushies have decided nothing new will be addressed until Obama takes over in two months, even though two months could make things far worse.
On the left, MSNBC's Rachel Maddow needs to get "talked down" because she sees the bailout as nothing more than a clever way for fat cat companies to steal government money.
With all this disbelief churning around, I'm concerned the financial markets have a long way to go before they "price in" what's about to happen in the world.
Yes, I see the 2002 lows, expect a big bounce and "hope". those levels contain the downside But I'm no longer confident we're anywhere close to the end of this bear market.
11/20/08 9:21 AM EST
Consider going long USO around 41... Its looking like a very oversold condition.. It has been trading up and down with the market... Unusual behavior, probably due to electronic trading with baskets of ETFs..
11/20/08 9:22 AM EST
800 on the emini does not have any real value as a support/resistance level...other than its a big figure. I will be watching for a spike through 775 down towards 770 on any early morning purge. S&P 775 was the bottom back in 2002.
In the event that the market advances...initial resitance will come in at 813.50-815 followed by extremely strong resistance around 829-831.
It doesn't matter which side your playing on...if its a trade, don't let it become an investment (long or short).
GE Is a Poster Child For Too Much of Corporate America
11/20/08 9:24 AM EST
Doug "Papa Bear" Kass hit the nail on the head this morning when he pointed out that General Electric (GE) had to go to the well for capital again, essentially telling the world that it is undercapitalized.
Unfortunately, the company is far from being an isolated case. GE has long been a poster child for too much of corporate America, under a formerly iconic (and overpaid) CEO, a culture that valued appearances over substance, and a resulting habit of sweeping problems under a mattress. Those problems are now coming out of the mattress,which is why investors are (in some cases literally), putting their money back in.
With the dividend yield now approaching 10% (through a price fall), maybe ordinary investors will finally get the returns that Berkshire Hathaway (BRK/A) got with its preferred deal.
But are GE bonds really an AAA credit? Fuhgedaboutit. The rating agencies have been asleep at the switch, again.
Position: LOng BRK/A. No longer long GE.
11/20/08 9:25 AM EST
Doug, I saw it this morning and it did send shivers down my spine. GE has been one of the scarier animals to me over the last few months, mostly because the implications it would have on the debt and equity markets, if its magical AAA rating was marked differently. How many orphans, widows, pension funds, etc own GE debt and equity? Shouldn't GE cut its dividend to shore up capital? This line of logic gets very scary to me. I don't claim to have answers, but I do know leverage is not a friend in the current environment, and they have quite a bit of it.
Position: Short GE
With everyone looking for 765...
11/20/08 9:34 AM EST
We either don't get there or materially overshoot.
Plummet in Money Market Rates
11/20/08 9:37 AM EST
Back-month eurodollar futures contracts, which are contracts used to place bets on where three-month eurodollar rates will be in the future, are trading down over 40 basis points on the day, reflecting the idea that interest rates will stay low for a protracted period of time.
Eurodollar contracts maturing June 2011 and beyond are all down 40 basis points or more (the June 2011 contract is trading at 2.92%, down 41 basis points on the day). Numerous other indicators in the credit markets, including the yield curve and swap rates, for example, are also moving sharply on this idea.
Quick Service Restaurants
11/20/08 9:44 AM EST
I am seeing some relative strength in restaurants exclusively in the low end (but high quality) quick service names in the early trade prints. I don't know how long that lasts because the first ten minutes is nothing like the last half hour. My guess is we lose those bids as well. Later today I will have a Real Money Idea on Nathan's Famous (NATH).
11/20/08 10:02 AM EST
If anyone's heard anything on ALVR this morning pls shoot me an email. Not complaining about it being up 15%, would just like to know what's going around.
Position: The Telecom Connection model portfolio is long ALVR
JP Morgan Downgrades Dry Bulk Shippers
11/20/08 10:04 AM EST
JP Morgan's downgrade of several dry bulk shippers continues to hammer the entire industry. The reason is possible breach of debt covenants based on decline in assets values: "After a long absence of second-hand vessel sales during the accelerating rate decline since the end of the summer, a couple of modern ships have now been sold at prices that are more than 50 percent below last-done deals for similar assets,"
Memo To Doug and Tom RE GE: Abandoned Balance Sheet Management Which Was Very Un Singleton Like
11/20/08 10:06 AM EST
Doug and Tom your both absolutely correct about GE. Mr. Immelt is the antithesis of Dr.Singleton. Singleton believed above all in the primacy of the quality of the balance sheet.Cash return on assets was sacred and the principle upon which executive bonuses were paid.The rules were strictly enforced.For example It was a career ender for someone in audit if they missed on an inventory valuation. That is why Teledyne had enormous reserves and survived several downturns in the various sectors it was involved(all of the same that GE is involved with by the way).
As Tom pointed out many times over the years on this and our old sister street insight,it was the arrogant corporate culture at GE that contributed to its current condition.At its peak under Mr. Welch it was famous for its anti customer approach.In that regard I have given Mr. Immelt some credit for at least trying to change it. Although that is something that will take decades to reverse. At the end of the day most corporations only do business with GE if they are forced too. There was a reason they used to say GE Capital was the lender of last resort. As they where famous for retrading deals at the closing table.
Conquer the crash
11/20/08 10:17 AM EST
Robert Prechter's wrote a book entitled Conquered the Crash back in 2002. He made a very persuasive case for deflation. At the time I held both gold and gold stocks the intention of holding them permanently. After reading the book I certainly believe that deflation was a possibility. He aptly pointed out how poorly commodities do during deflation. After reading the book in 2002, I no longer viewed gold as a permanent holding and ultimately sold my holdings in 2006. In other words, as deflation materializes gold will go down along with everything else. He recommended holding only very short-term treasuries and short selling in a deflationary environment. Whether you believe we're in a deflationary environment or not, his recommended investment strategy for deflationary environment certainly worked. Unfortunately, Prechter's books came out in 2002, and as a result of the ensuing rally, the views, while not totally discredited, were certainly not taken seriously. Had his book been published in 2007, I believe it could have saved people a lot of money. We are in a deflationary bust. There is too much debt and the ability to service its debt has been impaired. This impairment has taken many forms including large losses at banks and unemployment. Paying debt is now a struggle. Interestingly, gold is had a mysterious bid. I know technicians are going to say that goal should be plummeting, and soon will, but its actually been doing quite well. There is no way that I would bet on deflation long-term. In fact, I think we are very close to the end of deflation given recent Fed and Treasury actions. I have not repurchased my gold yet as we still are spiraling down, but holders of gold today understand the only solution to our problem: Direct Inflation. The government will stop monkeying around with these bailouts and they will do what every government has done in the past, and that is send citizens money directly. The government can easily issue ten trillion in treasuries to the Fed for 30 years today at 3.7% and send every household in the U.S. $100,000. Why not? Would the debt-laden public complain? The savers and the rich will be hurtby this, but are a minority right now and they are unorganized and unpopular politically. I am not advocating this, but I think it is a possiblity.
11/20/08 10:31 AM EST
I am long QQQQ off 26 expecting at least 27... and USO off 40.66 expecting 42.50 ...
Position: USO and QQQQ
Wake Up, Chris Cox
11/20/08 10:34 AM EST
Christopher Cox can't defend the indefensible -- namely, doing away with the uptick rule -- based on a sample of Russell 3000 activity during 2005. It was a ridiculously low volatility sample. His study did not incorporate a "stress test," or a period with unusual volatility.
Originally implemeted by Joe Kennedy in the aftermath of abuses during the Great Depression, the absence of an uptick rule has contributed to bear raids during the current decline. Citigroup (C) et al. should be screaming in his ear, waking him up from his nap and demanding that the uptick rule be put back in place.
Still Q's Over S's
11/20/08 10:49 AM EST
I've still got the Q's over the S's.
Position: Long SPY and QQQQ
That Was Weird
11/20/08 10:52 AM EST
There was a brief swoosh up that momentarily pushed the Dow higher for the session, but we're now back down around down 70 for the session.
A fair amount of green on my screen for what's a stomach-churning day. Mostly consumer-related names.
11/20/08 10:59 AM EST
It's been a while but the AAII folks really pulled in their horns this week with a reading of only 24% bulls. Last three readings in the low 20s were: July 9th at 22%, March 12th at 20% and January 9th at 19.6%
11/20/08 11:05 AM EST
Don't forget about expiration tomorrow...the craziness should continue. The 786 are should prove to be decent support on any pullback in here.
Where Are Insiders?
11/20/08 11:13 AM EST
I totally agree with Doug's comments on insider buying. He points to the turn in BXP and notes the signal a Buffet buy of BRK would send. I am getting lots of reader and client and friend comments about the lack of insider buying and lack of company buybacks.
I understand the stress the credit markets are having on personal and corporate balance sheets but at some point it seems insiders and companies need to step up if their pontifications that things are alright are to have an credibility.
Position: No positions.
Rate cuts a plus, but...
11/20/08 11:19 AM EST
Jim: I agree that Bernanke could push for another round of global rate cuts but the 1,000 points on the Dow to the upside will come if they suspend mark to market accounting, if only temporarily to let companies truly assess pricing in this sea of forced selling. I am quick to criticize my own advice as being a short term issue, however, it's needed. I also doubt the true solution--providing banks with an opportunity to mark down principal mortgage balances to consumers--will happen.
11/20/08 11:19 AM EST
Good morning. I've posted an 8 minute video over on Stock Market Mentor with some thoughts on the current state of the market, as well as some suggestions for managing your portfolio.
Same old song
11/20/08 11:27 AM EST
This looks to be a session, once again, where traders are trying to pick a bottom. By the end of the day, however, these same traders will probably not want to hold their stocks overnight in the face of what's happening to Citigroup and General Electric. Breadth remains horrible, new lows are expanding, we've violated support, and the VIX remains elevated. They're simply not much like here.
11/20/08 11:30 AM EST
From the PDCO call - dental consumables grew in the low-to-mid-single digit range in August and Sept and weakened in October to get consumables flat for the quarter - the math works to high single digit percentage decline year over year. fyi
Position: Short PDCO, HSIC, XRAY
Not All of the Insiders Are Hiding
11/20/08 11:36 AM EST
But they're also proving that they can lose money as fast as the rest of us.
Lew Frankfort at Coach (COH) picked up 50,000 shares today.
The CFO of Walter Industries (WLT) also bought 35,000 shares Wednesday, but according to the Form 4 filing, he bought between $16.25 and $17.75, and the stock is now changing hands down around $13.
A director at Hertz Global (HTZ) bought 55,000 shares earlier today, and he's already 27% underwater.
And that's not to mention Jeffrey Immelt's latest buy of General Electric (GE) of 50,000 shares last week between $16.41 and $16.45.
11/20/08 11:50 AM EST
According the data I look at, yesterday's breadth showed downside volume on the NYSE totalled 98%. I have not seen any mentions of this today, but I would have to think this is some sort of record.
Anyone have any historical data on this?
Also, I like the bounce today off of SPX 776, but realize it's how the market closes that counts. And on that front, we still have an eternity of trading ahead of us today. Can someone hit the fast forward button?
11/20/08 11:58 AM EST
time-honored, pathetic hidden-hand nasdaq rally developing that is a coin-flip for a plus 2% down 2% outcome
What is C worth?
11/20/08 12:06 PM EST
If this vicious cycle of mark-to-market continues?
Vince Farrell and I are on the same page. If we want to talk about more money losing bailouts, keep market to market. If not, suspend it.
11/20/08 12:13 PM EST
It's nearly impossible to take issue with any of Tony C's filings in the last few months. They've been amazing.
But I really wonder if investors are nearing the numbing point, in terms of bad news. This has been a continuing theme in his columns since September.
In line with my post earlier this morning, I believe a good share of the investor population still believes this is a routine bear market in a routine recession in a routine economic cycle.
Nothing could be further from the truth. It "is" different this time around.
Position: short with helmet on...
11/20/08 12:22 PM EST
The S&P 500 hit an intra-day low this morning of 776.76. That's the exact same level as the closing low from October 9, 2002, the previous bear market low. Incidentally, the closing Dow low of August 12, 1982 was 776.92.
The Dow is inches away from reaching 10 times the S&P 500 for the first time in 42 years.
11/20/08 12:25 PM EST
The rally is not led by the financials, which would be a blessing, but by the recession proofs, which is better than the minerals. Of course, it is XOM that is the tell..
786 held...for now
11/20/08 12:26 PM EST
I agree that the final hour of trading is all that matters anymore...but for the tick chasers out there, as long as the 786 area holds I would lean bullish. A hard break of that level should give us another swoosh lower.
USDJPY is holding and drifting higher...Crude, for the time being, is holding. 815 and 829-831 are both stall points if your swinging long. Everyone is waiting for the oversold bounce (myself included)...
Position: Long ETFs USO
Screaming on TV
11/20/08 12:28 PM EST
It probably only represents the tension we all feel but it seems like the hosts on CNBC are yelling all the time. At each other, at the guests, at the viewers. Seeing as they have paying jobs not tied to the level of the market I don't understand why they are so tense. It doesn't matter I guess but it is very annoying and is leading me to keep the sound off even more than normal.
Not to toot our horns but the discussion here in CC is pretty intense at times a helluva lot more respectful.
Position: No positions.
11/20/08 12:34 PM EST
You have to love a good manipulation upward led by the major oil company when oil futures are crashing!
buying OSK and TEN
11/20/08 12:35 PM EST
Buying OSK and TEN for scalps....off of GM F.
These are risky trades !! Be quick if you play.
Position: Long OSK TEN
Eight-Point Plan? Add One More - The SEC
11/20/08 12:45 PM EST
There is most definitely a growing consensus on this site and pretty much everywhere else that bold, aggressive action is necessary to stem the vicious cycle of declining asset prices and their effect on worldwide economic growth. That's nothing new, but the fallout from Paulson's TARP reversal is now really starting to hit home.
Cramer's eight-point plan is good, but it should be a nine-point plan. He forgot the SEC. We need immediate action to fix what is now an extremely dysfunctional market (yes, the uptick rule!!), and then a subsequent complete overhaul of the SEC.
This is from the SEC's website:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
US Auto To Get Federal Aid
11/20/08 12:48 PM EST
Apparently bipartisan support for aid to US automakers has been reached. GM and Ford are rallying ringing the market higher as well
Taking off depression from the table
11/20/08 12:50 PM EST
Remember that every time we get some injection of capital into the private sector it DOES matter. If we are able to salvage something from the autos without causing massive unemployment, we have a real chance to forestall anything negative,. Of course, those buying these common stocks of GM and F are playing with fire but the fire goes on until we find out the deals!
THis time the rally is "for real"
11/20/08 1:05 PM EST
Just to address the bears on my piece to the left, i simply think that we could get a snap back from levels where we are because of option expiration and some auto deal,. If no auto deal bets are off. i am relying on news reports, which these days is probably not a great bet, just a good one...
Bottom has been postponed
11/20/08 1:10 PM EST
If the market reacts to the proposed bailout of the automakers like it is reacted to every other bailout, we should be starting a new leg lower. Every single bailout has been sold thus far. This leg lower, however, might be different (worse) because the market never rallied on the supposed "good" news.
Tenke Fungurume You! FCX at $18.00.
11/20/08 1:10 PM EST
After all the fireworks, FCX traded under $18.00 today, the price I argued it would trade at based on my copper/gold/moly price decks. Actually, at this point copper and moly are well below those points and if that continues FCX will not earn anywhere near what I predicted if anything at all. One of the many counters to my argument was that it was inconceivable that FCX would ever trade to that level because I was told that as a market leader would ride over the valley of economic weakness. And that was the nice commentary!
Not that I look so smart. In fact, I feel a bit like the manager who can't short straight. I shorted FCX poorly off a chart with a steep decline. I covered too early with only a meager 7% gain (mostly because I'm trying to cover most everything when the market gets oversold, a nice strategy but still wrong). I did add to my overall copper short on a lift by shorting PCU which helped me net a bit more profit, but that was the only saving grace.
I'm bullish on FCX long-term, but until I do fresh homework I have no opinion. However, that does not mean I lack concerns. I see the inflow of new projects demanding copper contracting sharply in the coming year or more and with the most major impact coming in the second half 2009 and 2010 (after we get through construction projects already in the pipeline). It could be a long drought and given that existing projects will continue for a while I doubt the demand drop has barely hit. I see copper at risk back down to $1.00 or lower, where it was last recession. Gold? I don't know that one, but I'm not ruling out deflation and gold going lower if it happens. Miss Moly isn't in good shape either.
FCX bulls, what is downside here if any? Is the dividend safe given the continuing plunge in copper prices and continued inventory build? Or, at least where do you see copper/gold/moly going and at what price would the dividend be at risk? Would a dividend cut matter? And what about Tenke Fungurume?
How can retail stocks be bouncing higher
11/20/08 1:12 PM EST
i'm sitting here watching the tape and while the S&P 500 bounces up and down, positive to negative and back, I am amazed that certain retail stocks - ANF, ANN, BEBE (who just lost a key executive) and several others are moving higher and are outperforming the S&P 500 today. Yeah the sector has gotten slammed of late but with good reason as the economic data has shown. With the jobless claims number in and the Philly Fed Index in as well, its hard to see dramatic upside in these names. Recent company meetings over the last few days underscored that the key concern in 2009 will be consumer activity.
Position: Short ANF
11/20/08 1:14 PM EST
We had a classic "jump on the bandwagon" news event with the auto makers bailout announcement... F was very easy to trade, GM a bit faster but easy also... This is the type of opportunity short term traders thrive on... The news itself is not the gift that will keep the market moving up... Most stocks were already rising off of early lows as the QQQQ Hit 26... I hate to say it but we can go back to the lows later.. I don't see any real bullish momentum..
11/20/08 1:20 PM EST
We need some sort of deal in autos to get the market rallying, and i have said that over and over. My rally piece will not hold without it for certain
Watch the Phantom tax
11/20/08 1:55 PM EST
I had a conversation this morning with a good friend about his investment portfolio. I took a look at his portfolio of mutual funds and discovered something most of us probably have not thought about and it could be expensive. A lot of traders and investors also own mutual funds so I though I would mention it here.
A lot of funds have sold stocks they have owned for years. They may have just wanted to take profits or were forced to sell to meet redemptions. Either way, in some cases they were multi year holdings that had large gains. Those gains will be distributed to shareholders at year end, and if held outside a retirement plan, they are taxable. I lookrd at serval mutual fund websites and found that there are funds out there down 40% on the year that will have gains to distribute. I cannot imagine antyhing more frustraing that paying taxes on an investment that has fallen substantially.It's worth the few minutes to check on your funds for possible year end gains distributions.
11/20/08 2:06 PM EST
The endless avoidance of the Lehman issue--no authority blah blah-is a TOTAL COVER-UP, The federal government has a constitution and the government is supposed to promote the general welfare and it has the ultimate emergency authority to do what is necessary. They continue to deny they could have helped lehman or that it was even important,. They are liars and fools and the pain of their dissembling cuts deep into the core of finance as there isnt a single serious person in finance who doesn't know that they blew lehman,.
Balance Sheet Analysis of DRYS - A Possible Fire-Sale Liquidation Value
11/20/08 2:18 PM EST
With the recent crash of DRYS shares, I wanted to share a conservative balance sheet analysis for DRYS based on the balance sheet numbers as of September 30, 2008.
Shareholders equity is $2.1 billion.
Shares oustanding are 43 million.
This suggests BV of of $49 a share. Clearly this is drastically inflated given the market conditions.
So let's make some very conservative adjustments. First, write down goodwill ($692M) to zero. Also, vessels, on the balance sheet at $2.1B should be discounted by 50% because ship prices have crashed. JP Morgan came out today and noted that ships were selling for 50% less than even six months ago. The drilling rigs, at $1.4 billion can be discounted 10%. The long-term market for ultra-deep water business is still sound. Also because these rigs take years to build, I beleive that many buyers would step and pay a strong price, possibly full book value.
This adjustment totals approximately $1.8 billion, for an equity value of $330 million. At 43 million shares, this equates to conservative liquidation value of $7.70 a share.
Obviously these are my assumptions, but becasue I have written on DRYS I wanted to provide a fire-sale type liquidation value should the worst occur. Right now the BDI index is down over 90%...this has never happened before. Shipping rates are so low as to assume that we need no ships. The key is the ability to meet your debt convenants. If DRYS can do this (or more appropriate if they can convince thier lenders to sit tight), the business is worth more. Many have been concerned in light of the percipitous fall over the past few days. My goal is to provide a bare bones look. None of this assumes the 25 million shares that were to be issued for the new ship acquisitions. I can't imagine management going through at these levels...if they do, that's will tell us a lot about thier compentency and ethics.
Position: wrote puts on DRYS
11/20/08 2:19 PM EST
Haven't we been punished enough? Do we really have Paulson and Pelosi/Congress speaking to the nation at the same time and while the market is open? What, is the Prez busy? Couldn't they get him behind a podium speaking, too?
11/20/08 2:20 PM EST
Jimmy, we are surrounded by reactive, unimaginative and untalented policymakers. And, in large measure, I blame the decline of the last two months in the world's equity markets on our leaders whom I have euphemistically called The Three Stooges of 21st-century capitalism -- Bush, Bernanke and Paulson.
They knew (and know) nothing!
Be a Dentist!
11/20/08 2:25 PM EST
Listening to them, "Jazzy" Geoff Johnson, is like sitting in the dentist's chair.
Worse yet, it's like owning Patterson (PDCO), Danaher (DHR) and Henry Schein (HSIC).
Position: Short PDCO, DHR and HSIC
Deal Or No Deal
11/20/08 2:28 PM EST
The news conference by the Democratic leadership just put the kybosh on an auto financing deal. This is a disgrace. Doug - you can put Pelosi, Reid and Frank in the same category as your Three Stooges. They are about as clueless as Jerry Yang. Now Jim's C's Great Depression II is now back on its Washington fast track.
No rally--RESPONSE TO DOUG
11/20/08 2:30 PM EST
We had two attempts, Doug, to get it right: Paulson and Congress. I bet one of them could work out, it was wrong. We have nothing and now the ProShares Ultra Bear funds will take over... XOM breaks price and here we go. This one had more of a chance because of news reports of a GM deal,. THe reports were totally ERRONEOUS and i bit and believed. THe press is ludicrously value-less in this market.
The Hank Tank
11/20/08 2:34 PM EST
The Hank Tank continues to plow along running over anything in its way. It always helps boost confidence when you say things like "we shouldnt' be hasty in your regulatory response". Good point, too bad you didn't make it a month agao. What is the purpose of this speech anyway?
And of course we have Nancy Pelosi saying "we intend to save" the auto industry. That sounds like an old joke but the punchline isn't very funny.
Amazing that they wont quit --query to dougie
11/20/08 2:38 PM EST
Doug, have you noticed, though, there is a bid underneath? Where does it come from, options expiration??
11/20/08 2:42 PM EST
Rev, as people know that i usually have this slot on t.v right now, at least a half-dozen guys have now hit me and asked me how Paulson's speech/apologia/dissembling can be on the air.... .good question....
Back to Jim 'El Capitan' Cramer
11/20/08 2:47 PM EST
I don't see that bid, Jimmy.
New Gallup Polls shows consumer confidence erodes further
11/20/08 2:53 PM EST
I just saw this and it underscores the comments I made earlier about how it does not stand to reason that some of the retailers were moving higher earlier in the trading day. Gallup's new poll shows that after a very modest improvement around the Presidential election, "consumer assessments of the economy deteriorated significantly once again last week, with 61% rating the economy poor -- a new weekly high." I continue to be bearish on those companies that are highly dependent on disposable personal income and favor the more defensive names, like PG, CL and KMB
Position: Long PG, CL and KMB; Short ANF
11/20/08 2:53 PM EST
Did anyone else hear a cheer in the background when CNBC cut back to Erin Burnett after Paulson finished his speech?
At least one subscriber who I IM with heard it.
Position: No postions.
11/20/08 3:06 PM EST
Listening to all these politicians today forces me to repeat yesterday's point. All the rants, pleas, bailouts, interventions, stimuli, and political announcements will not eliminate the effects of the Great Unwind. We will face severe economic and financial market repercussions from a 30 year debt bubble for at least the next 5 years. I guess CNBC will be finding the bottom dozens of times in that period. Oh my.
To Chris Versace on Retail Bounce
11/20/08 3:15 PM EST
Chris, you mentioned the bounce in retail stocks. I was actually beginning to wonder if somewhere around here retail was discounting what is immediately ahead of us. Even if there is worse to come it seems to me that there is a point at which it is too early to discount that worse case as it is not fully clear it will happen. With that said, this is only the case if demand shock abates and we're not just in the eye of the storm of the crash, something I believe is a distinct possibility.
11/20/08 3:25 PM EST
The oils are such a big part of the S&P now that this sell-off in the group can take the wind out of any bull's sails. And SALES!Financials are less of a factor in the index now. ..
To Geoff - follow up on Retail
11/20/08 3:37 PM EST
No doubt the market is a forward looking animal and at some point the good news will be priced in but so far (at least to me anyway) it seems the data continues to get worse be it confidence numbers or expectations for a really weak holiday season. The later part can spell real doom and gloom for a number of companies, particularly retail and especially those that derive a disproportionate amount of revenues and profits during the holiday season. All I can say is, stay tuned.....
Position: Short ANF
Same story different day...
11/20/08 3:39 PM EST
After the bounce from the 786 we tagged 815 and then spiked up to 820. I though we had a shot at holding strong...then there was Paulson (Pelosi and Reed).
And there goes 770.
Position: Long Guns and bullets
Way to go Rev Shark
11/20/08 3:51 PM EST
Rev, for a trader, you have remained incredibly patient with your thesis of waiting until the market goes up to buy. Readers of this site have saved themselves a lot of money and a lot of grief by listening to you. Your strategy is incredibly simple but extremely difficult to execute. I'm looking forward to when you start buying.
Position: long Revs posts
Gold Holding Up
11/20/08 3:53 PM EST
It's worth noting here that gold has held up much better than stocks, oil or most other commodities, despite all the deflation talk since early September. I don't know if gold demand is being driven by mom and pops snapping up bullion like its Hanukkah gelt or if it's due to investors worrying about Ben Bernanke's helicopter dropping TARP dollars; I just know that gold looks like its bottomed and is heading up.
"Strange Game, The Only Winning Move Is Not To Play"
11/20/08 3:54 PM EST
Further kudos to Rev. Rev Shark's strategy to win in a bear market made me think of the above quote from the movie War Games. In War Games the only way to win a global thermonuclear war is not to play. It turns out the same is true for most of us when it comes to a global thermonuclear bear market. Rev's known it from the start and he has made me money. Good call.
11/20/08 3:56 PM EST
I realize crude will never go up again (yes I am joking)...but maybe the Fed could be a little forward thinking and fill up the SPR NOW rather than wait...just a thought and humble suggestion.
Whole Lot of Ugly
11/20/08 3:59 PM EST
The Powershares QQQ Trust (QQQQ) is closing at 6-week channel support near 25.5.
A gap down on Friday that doesn't fill in the first hour will trigger a channel break that might signal a wide range selloff day. This ugly event makes sense, with VIX closing above 80 this afternoon.
If this worst-case scenario plays out, we could see the Dow Industrials test and break 7000 by next week.
Prem Watsa Decides It's Time to Buy
11/20/08 4:03 PM EST
Fairfax Financial's Prem Watsa has decided to close out the hedges on the company's equity portfolio.
"Given the unprecedented decline of the equity markets during the past several months, we felt it was prudent to promptly inform our shareholders that we closed out our equity index total return swaps this week and effectively eliminated our equity portfolio hedge. While we believe the recession may be long and deep, we also believe that stock prices may have already discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world. That said, in the short term we recognize that stock markets can continue to fall significantly."
11/20/08 4:14 PM EST
Dell's numbers are out and, althought they missed on the top-line, EPS was well above do to a significant ramp-down in expenses both at the COGs line and SG&A. Long overdue. CC is not til 5:00 PM
Position: The Telecom Connection model portfolio is long DELL calls
11/20/08 4:15 PM EST
I appreciate the kind comments. My goal here is very selfish I just want to make sure that our readers keep their cash safe so they can keep on reading us when the market does improve. The best way for them to do that is not buy in a downtrend.
It is just mind boggling that the S&P500 has now given back 11 years of gains. Maybe all those academic studies that tell us that market timing is futile and that you do best if you buy and hold need to be reviewed.
11/20/08 4:29 PM EST
Bob, despite the revenue miss, I'd call this a good quarter for Dell, most of it margins, and most due to SG&A. They had a slightly higher effective tax rate according to our spreadsheet, which makes it all the better.
Since Dell gives all financials with the earnings report, I see it trading at just over two times balance sheet cash with $4.50 in cash on the balance sheet, four times enterprise-value to cash-flow and five times EV to free-cash-flow.
The world has officially lost it.
Position: Long DELL (at much higher prices and still holding)
Vik Bob Desperate
11/20/08 4:37 PM EST
Vik Bob needs Cox. Chris Cox to ban shorting? Smacks of desperation. Vik Bob bad for stocks. All stocks.
Prince supports Vik Bob. Prince supported last Prince. But then chucked Chuck. One Prince a dunce. Both Princes unhappy shareholders. Both Princes not dancing.
Vik Chuck Bob a complete disaster. Bored to thank for that. Chuck Vik. Chuck Bob. Chuck Bored.
Taxpayers want nothing of Vik Chuck Bob. Really.
Notes From Lunch At The Italian Village In Chicago With Roger Spencer
11/20/08 4:43 PM EST
Roger Spencer,who was a top food and agricultural analyst from the old Mitchell Hutchins days and old friend,hosted me for an old fashioned investment roundtable today at the Italian Village in Chicago,where he has had the same table each day for lunch for the last 50 years or so. While I received a collegial grilling on my own businesses from the assembled group, I noted a keen interest in dividends and cashflow. In particular many of the dividend related strategies advocated by Jim Cramer recently where very much in the mainstream of thinking. All of the group had plenty of scar tissue from 73 and 74 and seemed to take the entire goings on today in stride. Moreover the intensity of interest in new ideas was amazing. By the way the Chicken Marsala was excellent.
Position: Long High Quality Stock Picking Analysts and Chicken Marsala
Forget short selling ban. Timeout on Market to Market
11/20/08 4:55 PM EST
I'm going to say it for the third time in two days: unless we want to see the Citigroup bailout discussions (those of you short would!) and a 6-handle on the S&P, halt mark-to-market immediately. I mean, NOW. I should be arguing for lower prices given my cash as % of portfolio but in this case, pigs get fat, hogs get slaughtered. In a market to market world, my cash may not matter.
11/20/08 5:02 PM EST
I agree Brian. They've made some nice improvements in margins both on the commercial and consumer side. It will be nice to see if it continues rather that playing ping-pong like they've been doing for the last year.
As for the valuation? Hey, only 20 more trading days like this and there's no more market. We can all go home and rest.
Position: The Telecom Connection model portfolio is long DELL calls.
Strrreeeetttccchhhed Rubber Band....
11/20/08 5:15 PM EST
I no longer post on Fridays or I would go into this in more detail in an article on Friday. However, I'll direct any chart-watcher to look at a daily chart of the S&P 500. The close was more than 37% below the 200-day moving average. That's a record.
Also, the Fear Index (Volatility Index -- VIX) closed at a level we haven't seen since 1987. "When the VIX is high...."
Just passing this along to those who might be looking to do some counter-trend work.
Position: No positions in S&P
11/20/08 5:30 PM EST
To add to Dan's comments, the VDEX made another all-time high of 4.51%. I expect it to go up again tomorrow whether the market goes up or down..
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