The Day that Was - December 17th 2007

Confidence in the US stock markets appears to be waning quickly. The bulls are growing tired of propping up the market with the growing amount of bad economic data which just keeps coming.

Today’s selling in the markets started early and just continued throughout the day. The realization that risk is quickly becoming a major factor to contend with in the markets is starting to make some see the implications of what is unfolding in our economy. And for that we are seeing more and more selling as risk takers are saying "I’m out".

President Bush spoke about the economy today and when ever he does I just know it means something bad is coming. Just like when he spoke on TV about the economy back in the early Summer, then the problems really hit the fan. So if his track record holds, then we have more bad news coming.

Lisa mentioned in her earlier statement the subject of companies and stock buyback’s. I tried to find the link to an article I read over the weekend regarding this subject, if I can locate it one day I’ll post it. But what the article said, and which Lisa and I agree with very strongly, is that this intense rise in the number of companies announcing stock buyback’s is not a sign of a healthy economy. On the contrary, it tells us that a company is pulling itself up into its shell, much like a turtle when afraid. Companies who are growing and healthy do NOT need to do stock buyback’s, ever! They constant invest the cash of the company into new growth, and capital expenditures. Once a company resorts to buyback’s of their own shares it means one of two things. 1st, it means the company is no longer growing at a reasonable pace, investing money back into the company is useless as they have reached market dominance,  at least to their capability. So if you can’t grow the company any more than you issue dividends or buyback your shares. 2nd, if a company starts announcing a stock buyback it is often confused as "well, if they are buying their stock, then maybe we should to", this is bull crap. The article I was looking for showed that companies who engage in stock buyback’s are more often worth less later than those who don’t buy their shares back. Stock repurchase plans are a way to build confidence in the retail investor by making it appear that the company has confidence in itself. If I want to see how much confidence there is in a company by the executives I’ll look at the SEC Form 4 filings for any "confidence or not".

Stock buyback’s are a waste of the company’s money, instead of using it to foster new growth and add to the organic growth of the company.Why do people invest in companies that keep announcing stock buyback’s instead of companies with great growth? Maybe it is because they also have a great dividend? The other great lie in the stock market. A company has a great dividend because they don’t invest it back into the company, and get people to invest in them by offering something in return every quarter or yearly. Instead of great  growth in  the company they settle for poor or worse yet, negative growth but just keep giving them their measly dividend and they think they are making money. Dividends and stock buyback’s, two of the biggest myths and lies of Wall Street. The only thing that matters for you and your long term investments is "how well is this company going to grow over the years" , and take the stock price with it?  And when they have reached their plateau, it is time to move on.

The recent onslaught of announcements of companies initiating stock buyback’s is nothing more than an attempt to prop up their EPS in the light of decreasing revenues and growth. As Lisa said, the companies are circling the wagons and preparing for a long winter battle.

What is becoming more and more concerning to me is the Asian markets, particularly the Nikkei Average. With the Nikkei now below the 15500 level it is approaching a roll over point and is teetering dangerously close with a slide into a bear market. So many of the world markets all have hooks into other world markets, one goes down and it tugs on the others. So many events going on, and many implications at foot. Where we go remains ion question, but all appearances still point to a recession (official recession that is, for me I consider us already in one). The unknowns are what tricks the Government will have up their sleeves in the coming days. The Government does NOT want the word recession on anybody’s lips going into the election. Why that would give the republican party a bad name and they certainly don’t want a bad name, now do they. So what Secretary Paulson, Ben Bernanke, and President  Bush do for their next trick remains to be seen. But I for one am not looking at it as an end to the economic conditions we are sliding into.

We are also hearing that California is expected to be making an announcement that it may have to declare a "fiscal emergency" very soon as they have losses of $15 Billion dollars which were connected to the mortgage industry. This gets scary, what about pensions? Have you checked with your employer lately to ask them about the health of your pension plan if you have one? No, maybe you should. Find out what to what degree your pension is tied into mortgage notes, commercial paper, SIV’S,  and CDO,s, maybe they won’t want you to know!

Market Close

The Dow closed at the low of day.  A rather lackluster, but down trend day.  Just not a lot to report, mostly rehashing of the same issues that won’t go away anytime soon.  BusinessWeek is reporting that the SEC and US Attorney’s office in Brooklyn is looking into allegations of insider trading at Bear Stearns.  This is in relation to their two hedge funds that collapsed.  Apparently, there may have been some insiders pulling out personal funds during the time they told other investors to stay put.

Goldman Sachs reports tomorrow.  I expect great numbers and a glowing guidance.  Reuter’s is reporting GS is starting a new stock hedge fund of $6B, could attract as much as $10B.  Are they going to use the “black box” method again?  Didn’t seem to work too well for their Alpha Funds.  If they can pull in $10B, maybe they should just put a down payment on Citigroup.  Then when Paulson leaves the government position, he can head Citi. 

Adobe (ADBE) reported earnings, and the numbers weren’t bad.  They beat consensus by a penny.  After hours, the stock lifted a bit, then sold back down.

The number of companies announcing share buybacks just keeps growing every day.  Circling the wagons, I think.

Mid-day Update

Markets have been down, but range trading.  Most sectors are pretty weak today.  OIH (Oil Service Holders) is getting hit again, too.  At this point it’s hard to tell if we’ll continue this down trend today, or just stay flat.  The NAHB Housing Market Index came in at the expected 19.  Anything under 50 is negative sentiment by builders.  This is the third month at the all-time low number of 19, so expect some to start calling a “bottom” here.  I’m not that optimistic yet, however.

President Bush spoke on the state of the economy this morning, here’s a synopsis: 

He said he will veto any tax increase and is against raising the gasoline tax.  He’s still harping on Congress to fix the alternative minimum tax and reminds them a delay means it’s more likely that $75B in tax refund checks will be late.  He said a budget bill must include funding for troops in Iraq.  He said the Government should never bail out lenders, and says the housing bubble will take a while to work through.  He said that Congress needs to get a bill to his desk to make it easier for FHA to help keep people in their homes (even more legislative interference).  Oddly enough, he said there are too many lawsuits in the health-care industry, causing some doctors to leave the industry, which is helping increase the cost of medical care.  (With all due respect, he is completely wrong about what ails our health-care system!)  He said we need to push nuclear power plants to offset dependency on oil and that it makes ‘no sense’ that we have not been building new refineries. (Most sane thing said regarding “energy problem” yet, and he didn’t even say new-cue-ler).

Before anybody starts yelling at me for being in support of more refineries and nuclear power, governmental interference (oh, I mean support) in the “green energy” field has only contributed to the rise in commodity prices.  Saving our planet is the job of capitalism, not so-called environmentalism and government programs.  The more we stand in the way of true invention and innovation, the more we hurt ourselves in the long run. 

Pre-Market Update

Futures are down this morning, but that doesn’t really tell how the whole trading day will unfold.  The December NY Empire State index is 10.3 vs 20.0 consensus, the lowest since May.  The Q3 Current Account Balance came in at -$178.5B vs -$188.9B prior.

Bloomberg reports that Wall Street sees a possible 20% drop in M&A activity.  This could hit Goldman Sach’s profits as this type of activity brings in big fees.  The number of LBO’s and such will surely drop while it is more expensive to obtain funding. 

Commodity prices are still rising, gold is down a bit and oil is hanging around the $90 area.  The dollar has gained, as it was oversold and sentiment is the Fed’s won’t be slashing interest rates.

From the NY Post:  Greenspan says he favors spending US govt money to bail out mortgage borrowers who risk losing their homes……. And, again, this is why this poor man needs to fully retire and stay home.  He seems quite confused these days. 

Weekend Update

Ah, the best laid plans….We had expected to have more up this weekend, but Chuck is under the weather and I had family “stuff” that took up some time.  I hope you all had a great weekend and took time out for fun activities! 

As of this writing, the Asian markets are trading down and the S&P futures are down as well.  It’s the week before Christmas and the expectations are for volume to be light.  Since the market has been pretty unpredictable lately, I’m not even going to venture a guess as to how the whole week plays out.  I’m taking it one day at a time.

Here’s a couple tidbits for you.  See you in the morning with a premarket report.

Excerpts of new stories from FT.com:  (writers: Bernard Simon,  Peter Smith in Sydney)

Canadian asset bail out falters

A panel seeking to restructure Canada’s frozen asset-backed commercial paper market is struggling to persuade more than a dozen Canadian and foreign banks to provide billions of dollars in back-up funding for the securities……The committee, headed by Purdy Crawford, a prominent corporate director, failed to meet Friday’s deadline for an agreement on restructuring terms, or to provide details of the assets held in 21 frozen trusts, or conduits. One trust has been restructured……David Dodge, Bank of Canada governor, warned last week that a meltdown of the highly-leveraged trusts could have a severe knock-on effect in global financial markets, affecting assets worth up to C$250bn ($246bn)…..The Canadian exercise is being closely watched by other countries where similar problems have emerged……..Under an August 16 deal, known as the Montreal Accord,a group of issuers, investors and banks agreed to a moratorium on claims while they worked on a deal to convert the ABCP into longer-term securities……Canada’s six biggest banks, up to 11 foreign banks, including Deutsche Bank, HSBC and ABN Amro,plus other institutions, have been asked to contribute to the facility.

The foreign banks’ involvement stems from packages of credit default swaps they sold to the conduits, giving them the right to make margin calls as the value of the assets declines. The margin funding facility would help investors meet those calls.  But some banks have balked at committing sizeable resources to resolve a problem not of their making. Mr Crawford said “if the banks participate, it will enhance their reputation. The Canadian banks are only as strong as the Canadian financial markets.”  Still, Daryl Ching, an ABCP consultant, said: “It is obvious that various parties are growing impatient and may lay [down] the hammer as early as January 31, causing an event of default and lawsuits”.

Lehman faces legal threat over CDO deals

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank’s local subsidiary, Grange Securities.  At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange, which marketed Lehman-originated CDOs to dozens of Australian councils as well as to charities and a public hospital provider. 

The losses suffered by the councils and charities are further evidence of the damaging impact of the recent global credit turmoil as it spreads from sophisticated large investors to small communities round the world – and is increasingly starting to hurt mainstream, risk-averse investors such as local governments and pension funds.  (Bold mine)

Lehman has admitted that, “in very few cases”, the CDOs sold by Grange breached the councils’ investment guidelines because of the length of their maturity dates. It has bought back some CDOs.

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

The sale by Grange and others of many hundreds of millions of dollars worth of CDOs to Australian councils, some of which had 70 per cent or more of their total investment devoted entirely to CDOs, has sparked an investigation by the state government of New South Wales. (Lehman says, in part) :  We believe that everything Grange sold to customers conformed to NSW ministerial [investment] guidelines. There will be cases where Grange does not believe, on objective grounds, they have to cancel [the CDOs].”