Stock Market Summary - February 12th 2008

Warren Buffet calls into the American financial channel CNBC this morning and announces his plan to essentially take the municipal bonds of the hands of the three major bond insurer companies. A nice idea, but all it would do is take the good assets away from those bond insurers and leave them with the poison. In other words he would leave them to die as he takes the good stuff. Kind of makes me think of an organ donor but in this case the patient is not dead yet, but would be after Buffet takes their heart. Tonight we learned which of the three companies told Buffet "no thanks", it was Ambac. Ambac has decided to continue finding new capital in order to keep their ratings… and their company alive. But it is becoming an uphill battle for these companies.

What caught my attention in the interview this morning was a statement he made when asked his thoughts on the current markets and stock prices. His response was that stocks are near fair value now. What does this mean? Fair value means simply that the price of a stock matches what the company is worth. another way of putting this is that the current P/E ratios are more in line with reality now. And for stock prices to increase substantially the value of the company would have to increase substantially as well to warrant such an increase. We agree with Mr. Buffet, stocks have been running up too fast and is why we said many times last year to take profits. There is always a time when reality and prices will meet. And it sometimes takes a major financial crisis to bring the two together as is the case we have now in our financial system.

The same thing happened with the tech bubble burst in 2000. Many dot com and other technology companies were trading at outrageous P/E’s and when it came crashing down it was an example of a crisis that brought reality inline with the companies actual worth. Any many of those companies (of those that are still around) never got back to those high prices ever again, and likely never will.

Currently we are seeing companies that have been trading at high P/E ratios getting slashed. Tonight Blue Nile (NILE) reported earnings and they were soft. NILE had been trading today at a P/E of around 57, after they missed their earnings the shares were slaughtered in after hours trading. We are seeing this in many stocks with high P/E’s, they are being revalued to reality. Always be very careful about any stock that has a very high P/E… it is a ticking time bomb just waiting for any bad news to ignite the fuse.

See you all in the morning, we will have more economic data to go over.

Citigroup Injected, Countrywide Rejected

The Dow and S&P closed in positive territory, but the Nasdaq couldn’t hold on to any gains.  In spite of the 133 point gain on the Dow, the market just wasn’t  "strong" today.  There was plenty of selling on the rallies.

Citigroup (C) plans to inject $3.3B in capital to support six of seven SIV’s it took back on it’s balance sheet last year.  They are trying to maintain their credit ratings.  The SIV’s assets total around $49B.

Fitch not only downgraded Ambac (ABK), but now they’ve downgraded 46 classes of RMBS (residential mortgage-backed securities).

A judge has denied Countrywide’s (CFC) appeal of the bankruptcy court’s order allowing an investigation into how the company calculated proof of claims on consumer bankruptcies.  This has been an ongoing affair.  Legg Mason is a major shareholder in CFC and is reportedly unhappy about the Bank of America/Countrywide merger.  It remains to be seen if he will fight this.

This isn’t earth-shattering, market-moving news, but watch for more of this type of action in other companies:  Bryn Mawr Bank (BMTC) announces their plan to freeze their pension plan as of March 31,2008.  They will close the plan to future employees and discontinue future benefit accruals for current employees.  No employee will lose previously earned benefits.  However, the company announced that in addition to the existing dollar for dollar company match on the first 3% of base salary, the Bank will make an additional, fully vested discretionary contribution of 3% of employees’ base salary into their 401(k) accounts without regard to the employee deferral contributions.

Just one more

Ok, I know my sarcasm has run deep today.  I’m really aggravated about this mess, but I’m better now.  But, just one more:  Even with all of these “rescue” plans out there, we’re not in real trouble until they send in FEMA.  All right, that’s all the cracks for today.

Treasury Secretary Paulson’s Wisdom

Treasury Secretary Paulson says the worst is just beginning for subprime resets and there is an economic limit to helping borrowers.  He notes it’s inevitable that there will be homeowners who can’t be helped and may become…..RENTERS!….Gasp!!  I guess you can tell I’ve had my fill of this crap for today.  Not to mention Fed heads are out talking from both sides of their mouths:  Inflation up, but it will come down;  economy weak, but will get stronger;  Santa Claus didn’t show up, but Easter Bunny on the way.  OK, that last one was mine, but it fits right in with what they’re saying.  I guess it beats saying “we’re in deep and aren’t real sure how to get out.”

Update:   According to Paulson, through the “Hope Now” plan, they are sending out 200,000 letters a month to at-risk homeowners.  They have already sent out 750,000, with a 16% response.  He says he doesn’t see likelihood of the Government setting up mortgage relief entity, then what the hell is Hope Now and Project Lifeline?  Oh, that’s right, they aren’t an official government entity.  No new details on that Project Throw-Me-A-Rope, yet.

Warren Buffett Saves America

Washington Mutual (WM) moved higher on rumors that Warren Buffett might be considering taking a stake in the bank.  WooHoo!  Buffet buys America!  We’re saved!  Sorry for the sarcasm, I’m just sick of hearing that Buffett is going to save the country’s financial institutions in one fell swoop.

The CFO of GM says their focusing on global automotive operations and expects that area to improve in 2008.  Let’s hope he’s not hanging his hat on Germany.  German December retail sales, including cars and gas has been revised down to 0.4% from 2.2%.  GM also thinks raw materials prices will be lower than in 2006 and 2007.

The indices are trading higher today on all this great news.  Chuck has shown the charts for the Dow, and where we’re are looking for resistance.  If you are trading this rally, keep your stops tight and don’t chase price.  Materially nothing has changed on the economic front and there is plenty of selling into the rally.  Don’t be a bagholder.

 

Our Stock Charts

Lisa and I maintain some of the major index charts and various sectors with technical analysis applied. Our charts can be accessed by clicking HERE. At the site to your favorites so that you can follow the charts.

Please be sure to vote for our charts (located at the bottom of the charts page on the link I just provided above).

Retail Sector (RTH) Technical Analysis

Stock Market - Pre Open Report for February 12th 2008

Warren Buffet has offered to take on the liabilities of the municipal bond portfolios from Ambac, MBIA, and Financial Guaranty Insurance Company. The offer he made to these companies was to essentially, for a small premium, back up the municipal bond portfolios which has an estimated value of somewhere between $700B to $850 billion. The net effect, should one of these companies take him up on his offer would be a guarantee of maintaining a AAA rating for that portion of the business. However, it would only be the municipal bond assets, not the CDO’s, SIV’s, and other assets that have become tainted. Mr. Buffet said in his interview that one of the three companies has rejected his offer. And that is understandable, for if any of these companies take him up on the offer would to be essentially raising the white flag and saying they failed. It would be an admission of total failure and would essentially be the death of that company. Bond insurers, a soap opera all in itself.

General Motors (GM) posted a 2007 loss of $38 Billion and has offered every factory worker (74,000) a buy out package if they would leave the company. If anyone needed any proof that the consumers are cutting back all they have to do is look to the auto industry and see just how much auto sales have contracted.

Futures are up but I’m seeing trepidation already so we will see how this day plays out. But we are still planning on shorting the market on a technical move. See the recent posts:

 http://blog.rebeltraders.net/2008/02/10/dow-jones-industrial-average-technical-analysis/

and

http://blog.rebeltraders.net/2008/02/09/russell-2000-shorting-setup/

Stock Market Summary for February 11th 2008

Three-card Monte… A favorite game among con artists. Try and guess which card is the ‘money card’.

In our current banking and financial institution situation everybody is playing the "three-card monte" and the con artists are the companies who are trying to keep moving around the losses.

Today we learned that the auditors would not sign off on American International Group’s (AIG) financial statements. The auditors discovered "material weakness" in how it reported the value of certain credit default swaps. This all comes back to the issue we brought to our readers attention back in December. We said back then that auditors were likely to not sign off on the books if they saw anything questionable in how a company was coming up with values for certain assets. For our long time readers you will recall our many discussions on the "level 3" assets. Those assets for which a value can not be obtained by a mark-to-market or a mark-to-model system of asset valuation. Level 3 is known on Wall Street as mark-to-wild ass guess. Companies who have already suffered losses (or who don’t want to reveal losses) will place as much questionable assets into the category of level 3 assets and then calculate their value by using a system which does not tie in directly to any current market value. And this was going to lead to trouble later, and later has arrived.

When we discussed back in December the possibility that auditors were going to be digging through these assets very carefully it was because the entire independent auditing business got burned with Enron. When Enron imploded it took their auditors with them because the auditors were just as guilty as the company for moving assets around so that the losses would not show on the books. When Enron was found guilty of fraud and deceptive accounting, the auditing firm of Arthur Anderson was viewed as an accomplice and it destroyed that auditing firm which had been in business since 1913.

The current situation with collateralized debt obligations (CDO’s), structured investment vehicles (SIV’s), and other forms of ‘packaged loans’ which have been harder to unload than trying to sell sun tan lotion to an Eskimo are littering the books of many companies. And these companies are trying to find ways to place a value on them that will not reveal their true worth, or at least hide them until they are worth more. And the auditing firms are blowing the whistle and calling ‘foul’. In the case of AIG it would seem that this may have been the case. The auditors don’t like how the company was deriving value for some of their assets and now it appears that AIG will have to restate prior earnings. Whenever a company has to restate earnings it is bad news. We expect to see more companies in the future who will have their accounting firms blowing the whistle.

Today’s trading in the markets was lack luster. As Lisa stated in an earlier post the retail sector (RTH) has been seeing some interest as speculators are betting that all of the bad news is "baked in" the share prices. If your a gambler and like taking on high risk trades then I guess you can jump in with the other high risk players. But smart traders wait it out, wait to see if retail sales begin to flatten out and then start an upward trend. Those who are jumping into the financial and retail sectors are betting the worst is over. This is a bet we are not willing to take with our money yet. Some may look at a chart of the retail sector and say "the bottom is in.. time to jump in" for fear of letting some large gains slip by. Fear of missing that "big trade" is what has led to many investors ending up in the soup lines at the local homeless shelter. Betting on a bottom and waiting for a "confirmed" bottom are two different things. Waiting for signs of stability and a new up trend is the smart way to trade. Do you think that by waiting for better risk to reward profiles to present themselves to us will evaporate all of the gains to be had in the markets? Of course not, the stock markets have been around for a long time, there is lots of money to be made when the time is right. The smartest traders are like tigers, always stalking and waiting for their prey to be in just the right spot before striking. And it is those who wait and know when the time is right to strike that take home the prize to the family more times than the ones who chase everything that moves.

Talking heads are claiming that a bottom has been established in the markets now, wait a second… I have lost count of how many times I heard someone say "the bottom is in" since August of last year. We are still in a bear trend, and until we see a healthy bull trend redevelop we are waiting and stalking… We still feel that there are more lows to come.

A few months ago the US Government established the "hope now" effort to assist home owners with their mortgage if they were on the brink of foreclosure. Tomorrow we are going to get another Government program called "project lifeline". This one now goes another step in actually stopping foreclosure on a home until the banks can work out new terms. I don’t know how this can be accomplished without some rules being broken somewhere. Contracts and bank lending laws are all of a sudden going to be ignored?  Three months ago is was "hope now"… now things have deteriorated so much that we have gone from having "hope" to now needing a "lifeline" … sounds rather ominous to me. What is next… "project abandon ship" ?

Tomorrow morning I will post the retail sector chart and where that stands currently.