Tuesday, July 31, 2007
The Bear Funds
Last night I briefly ruminated that bad news in structured credit (eg. subprime), or corporate high yield credit would spur carry trade unwinding. It happened again today.
Let me be clear: Carry trade unwinding is driven in large part by the perception that risk taking ability is dropping here in the U.S. due to recent structured credit troubles.
There's a lack of understanding concerning the above emboldened line. Why? Because there are too many folks blaming things like subprime, or LCDX exclusively for stock market declines and ignoring the carry trade, or citing the carry trade as the sole culprit for market declines. Rising risk aversion due to the mortgage meltdown and contagion into corporate high yield debt are intertwined with the carry trade.
It's really a vicious and dangerous cycle because as more yen carry trade unwinding occurs there will come a trigger point when the Japanese yen rises enough for carry trade unwinding to go from orderly and voluntary to forced and disorderly. When carry trade unwinding takes on a disorderly life of its own it will then beget liquidation of whatever speculation it previously funded which would bring on further pressure to stocks and any other paper tied to speculative bets. It's a financial super highway with lots of traffic, no speed limit and no center barrier. It's this vicious cycle that one of these days bring us a 1,000 point down day for the Dow.
The risk game has always relied on the ability to take risks. Duh. How so many still fail to grasp that a meltdown in one risky area of the market can simply be "contained" (eg. subprime) and not impact risk in other areas, I'll never know.
The Dow was on the plus side until American Home Mortgage fessed up that it's insolvent, finally reopened for trading and went from a 10-handle down a $1-handle. Gosh is it oversold now and a buying opportunity? LOL. How cheap is cheap? Well, $1.04 for AHM may still be too expensive once they try to liquidate in "orderly fashion" of whatever will be left of it.
So we go from the west coast blow ups of subprime names like New Century to a big fish on the east coast which specialize in near prime (Alt-A) and prime lending. AHM was not a fly by night company, it was a top-10 mortgage company with a Q1 book value of over $20 bln. It is based in Melville, NY (Long Island) where a variety of money center banks have back office operations. It had over 7,000 employees, nearly 1,500 in Melville.
Of course, on Wall Street, the people at AHM who will lose their jobs hardly matters at this point (though ongoing loss of high paying jobs will eventually matter in a great way). It's the issue of exposure that got under the skin of investors today. Who's exposed and by how much to the AHM collpase? We know the numbers are in the billions and we'll be certain to find out more as the process unwinds - yep, just what the market needs more uncertainty about who's exposed to what and by how much.
RAIT Financial Trust (RAS) came out of the woodwork quickly to acknowledge its exposure to AHM through CDOs tied to AHM. RAS slumped 20%.
By coincidence, this evening, Bear Stearns (BSC) said that it was halting redemptions in a third hedge fund - just a few weeks after confessing that two subprime funds were vaporized by wrong way bets. This time around it's an $850 million fund with bets in ABS tied to the Alt-A tier of mortgages. Do I even bother to mention that Bear thinks the assets in this fund are priced at least at mark-to-market this time? That's what a Reuters story stated. We'll soon know.
As I mentioned in my CNBC options column recently, speculators have been loving the puts of Bear Stearns and it looks like they'll make some money Wednesday.
After starting the day lower, the Yen snapped back to the 118.55 level as carry traders did their unwinding into the damage caused by the AHM news.
Tonight Yen futures are up 22 points.... should be an interesting day on Wall Street tomorrow.
Chet had a 29 year career writing columns on investing and the stock market for the Associated Press and was also a columnist at Bloomberg, where he and I crossed paths.
At CNBC.com, my good friend Peter Schacknow has this tribute:
CNBC's Schacknow: Chet Currier, 1945 – 2007
Even in his final days, Chet's writing was as fresh as ever and prescient. This was his last column in late June: Do-Or-Die Time Nears for Old Investment Indicator: Chet Currier
Monday, July 30, 2007
Options speculators still love to hate Bear Stearns and mortgage lender Countrywide Financial.
And for a little fun, a nice chat with John Bollinger of Bollinger Capital Management...
Technical Analysis: Stocks Bounce, But For How Long?
There isn't much doubt among technical analysts that the stock market is oversold. But that doesn't mean the major ind...
In the context of what John was saying earlier, today's rebound might be a good sign, but internals will need to look stronger - so one day doesn't vindicate the buy on the dippers. Still, the rise was better than what I was thinking in terms of a "blue Monday scenario", if not worse.
Today was a reminder that no market goes straight up, or straight down without a breather, unless it's the Chinese stock market. lol, I think.
One of the things I didn't get to write in the above link was that John was looking for rotation back in the leading stock groups of earlier in the year as a signal to confirm a bottom.
In high yield land, the LCDX even put in a modest bounce of .8 cents on the dollar with the spread coming down to 338 bps. Even the ABX had a modest bounce.
Let's face it... the reality of the stock market for the time being is that it will be driven by what's going on in 1. high yield corporates, 2. the mortgage market and 3. the carry trade. It will be deja vu all over again if any of the three misbehave, and really if 1 and 2 misbehave then 3 follows. And if 3 misbehaves, then 1 and 2 will misbehave as well. But as Jim Sinclair at JSMinest.com points out, "expect every trick known to monetary mankind to be used when it threatens technically to unwind as it did Friday." One thing's for certain, volatility will reign supreme.
Sunday, July 29, 2007
Could Japan's Abe step down?
This past Friday night - the 27th, AHM announced stunning news:
American Home Mortgage Investment Corp. Delays Payment of Quarterly Common Stock and Series A and Series B Preferred Stock Dividends
The common dividend was supposed to have been paid on the 27th and I've heard that some brokers even credited the accounts of shareholders. When was the last time a company of this size withdrew its dividend at the last minute?
AMH says it has has been hit with margin calls on its credit facilities.
"The disruption in the credit markets in the past few weeks has been unprecedented in the Company's experience and has caused major write-downs of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities."
Ah, this is why paying attention to the Markit.com ABX indices is important. As indexes drop and the cost of insurance goes up to speculate in the mortgage products, it's a sure sign of trouble for companies like AHM, which did much of its business in Alt-A and non conforming loans. The ABX BBB- tranches are at 40-cents on the dollar and below.
What will this mean for the stock on Monday? Delayed open at least and good pounding... maybe down to the single digits?
Pure conjecture and opinion on my part: I would be highly surprised if the payrolls number came in light given tense market situation. The Administration can ill afford to have a weak employment number out in the face of seizures in parts of the credit market. Look no further than last week's politically correct advance GDP number for how these numbers can be massaged for a good photo-op. GDP at 3.4% annualized in Q2? LOL (that would be an Al Lewis type Grandpa Munster laugh), you really believe that? That was as funny as when 4th quarter 2006 GDP was initially reported at 3.5% only to be revised to a 2.5% growth rate... Yes, 1 whole percentage point off in measuring the growth rate of a $13-trillion economy. And they say economics is the 'dismal science'? It's becoming comedic in many ways!
Saturday, July 28, 2007
Folks, this blog gave you the heads up on this trade on Monday. I've got an excellent options screener that picks up this stuff. I'm in the process of setting up a new service that will be subscription only to provide this data on a daily basis.
I will keep all of you posted.
In a basic sense, the carry trade didn't start to matter until November of last year when it became fully apparent that the Japanese economy was finally starting to climb out of the deflation hole. The rally in the yen ($XJY on stockcharts, JPY on Bloomberg) during mid November led to a drop in the stock market Thanksgiving week and choppy trading in December. But as the yen slid back to 82 (a very key number) by late January, U.S. stocks were on their way back up. Then in early February the yen became very volatile as speculation mounted that the BOJ would hike their overnight call rate by 100% to .5% which they did on Feb 21st. In combination with tightened banking reserves announced the following weekend in China, the yen soared, the Shanghai market plunged and February 27th resulted on Wall Street. But things simmered down again and the yen was allowed to sink all the way to a low of 80.75 by late June, but then began to rebound in July as talk increased that the BOJ could again increase rates in August, or September. 82 on the chart below was the inflection point for trouble again. 82 had been an important floor for the yen earlier in the year and once broken in June became an important resistance level which was broken just as the Dow, interestingly enough, hit 14,000. The rest is recent history.
2. The Junk Bond Market. Bonds 101 states that trouble in one part of the market leads to trouble in the rest of the market. Many an arrogant nit wit said subprime didn't matter. That sort of ignorance had to be born in a pompous 'let them eat cake' mentality where only the little people of the subprime world would be getting their just desserts. That's a quick lesson in Social Equity 101 where the weakest rungs of the food chain can still impact the upper rungs. So two lessons for the price of one out of the School of Hard Knocks for the investment intelligentsia of the world who preached with Elmer Gantry-like verve that subprime didn't matter.
Subprime has now seized up the "junk bond" market. Yes, subprime has always mattered. I even wondered with tongue in cheek a few weeks ago: Should I Even Bother To Write About ABX?. I got the timing wrong on how quickly problems would show up in earnings ala the recent Countrywide earnings, but at least I was on the right track, just the slower train.
An even tougher lesson will come as those who now spout that the economy won't be hurt by these credit market woes. They fail to connect the dots and realize that the junk bonk market has funded more than just LBOs - it's the economic engine of the great majority of public companies who use money they raise through the sale of below investment grade debt to buy things... capital spending, is I think what they call it. If you've been paying attention to put buying in the options market, you'll notice that here and there, but with increasing frequency, January options are picking up in volume on the realization that crimped capital spending will make for tough times around Christmas and going into next year.
Helping to grease the skids on Friday, the Cadbury news: Cadbury's Not for Sale--Just Yet. Ouch.
The general assumption is that no deal reached during the LBO boom will be scuttled by syndicate banks due to contractual obligations, breakup fees, potential litigation, etc. But with nearly $200 bln in U.S. deals yet to be syndicated and around $40 bln in European deals in waiting - good luck with the "no deal will be scuttled theory". You can bet that bankers are looking at everything they committed to with eye toward 'what if we walk away and just eat the costs?' That perhaps is a very long shot scenario and almost unthinkable, but previously viewed long shots have been coming to pass, so it's something to be aware of.
Thus far options speculation in the deal names has been quiet on the put side. It's a good idea to keep track of put activity in names like Sallie Mae (SLM), First Data (FDC), Bell Canada (BCE).. the list goes on and on.
As for the condition of junk bond market.... it's ugly, but from a historical perspective, it's starting to get back to where it should be spread-wise. The fear is whether it overshoots and for how long the 'closed' sign stays up. My guess is for as long as the LBO overhang remains and that's likely to mean a seized up junk bond market going into September.
The biggest spooker for the market Friday was the further slide in junk. LCDX as one example plunged over 2 points Friday with its spread widening by almost 50 BASIS POINTS IN A DAY!
This almost has a Black Monday in-the-making-feel to it, but very Blue Monday is more like it. Any sort of stabilization in the junk market and the carry trade situation will give the stock market some quick relief; further deterioration and we're in for more pounding. I doubt we will see any blockbuster LBOs announced on Monday; anything over $10 bln is off the table, I would imagine. We could see corporate to corporate buyouts which could give the market some support.
As I mentioned in my post yesterday late day, I think we've got a good chance to see the 200 dma tested in the S&P next week down at 1448 and that could lead to a extreme oversold bounce opportunity. IF that doesn't hold then the next area of support has to be March lows and that would certainly leave a mark.
Friday, July 27, 2007
While I said last night that the market looked oversold, I also pointed out that some signs of capitulation were missing in Thursday's dive. We all know that markets can remain overbought for as long as they can remain oversold. I look at certain blogs and use them as contrary indicators - a bunch last night were saying "buy on the dip" and declaring that Thursday was a big "panic" day.... great contrary indicators that kept me looking at things with a more critical eye last night.
TRIN was low again and I suspect that what we're seeing is heavy, heavy damage largely confined to stocks closely tied to financials, or heavy damage in issues that are highly dependent on them (eg. regular tappers of the commercial paper markets, etc). I also suspect that the VIX is magnified by fear tied to the financials, but the further you get away from the financials the less implied volatility spikes you'll find which is why I like looking at the TRIN for a real broader market perspective on fear. It is panic in the financials, but not in big areas of the market like tech, or in names with clean balances sheets like Minnesota Mining and Honeywell, to name a few.
So, to me its very bad that the market finished at below the lows of yesterday and at levels not seen since April. I was willing to keep an open mind, but this is starting to look ugly. HA! Maybe that's the best contrarian indicator - that I am starting to get concerned.
It sure is looking like we're going to test the 200 dma on the S&P and Dow, or at least come close before we get a bounce. That's my quick impression late this afternoon and I will develop more thoughts as the weekend progresses.
Here's my CNBC options report for today: Options Report: Playing and Dealing With Volatility
Thursday, July 26, 2007
The above pokes a cattle prod at Avandia once again (Glaxo SmithKline - GSK), and also Actos, manufactured by Japanese drug company Takeda.
The bad press surrounding Avandia has been a boon for Merck (MRK) and its new drug Januvia (which I thought was a planet inhabited by the Januvians -- a stout and flatulent orange haired race -- in the 1960's Star Trek series). The bad Actos and Avandia news could also be good for the maker of Byetta - Amilyn (AMLN).
This is serious stuff, actually. As a long time diabetic, I once took both Avandia and Actos and hated both the medications. I wonder if this is why I now take heart pills as well? Hmm, better jump into the class action lawsuit so I can collect my eventual settlement that will probably amount to no more than $1.65.
This is a 'MUST READ': NakedShorts: Podcast: Henry Paulson, contained. Greg has outdone himself.
2% market declines - how many of those have we had since the Dow was created - umm, maybe more than 900 2%+ down days?
So don't get me wrong. I'm not here to pump the market, or resort to silly hyperbole and say it was a 'bloodbath' today and that it's time to gleefully buy with all available appendages. Make no mistake about it, these market down drafts are serious business after such an extended period time of rally, and if the negatives that have converged on the market become real fundamentals rather than speculative and psychological, the market will ultimately be slammed with a one day, thousand point-plus swan dive. It just wasn't that time today.
What I refer to as being speculative and psychological is the unknown of who is levered to mortgage paper meltdown and by how much. We know that every important player has some of this junk on their books, but we don't know who is going to be calling the NY Fed for emergency help in the middle of the night while we're sleeping. Another unknown is the shift that's occurring in LBO land where the banks are being forced to hold the paper since the corporates market is untappable. How many 'burning beds' are going to be out there and who's bottom line among the money centers is going to be most hurt? Another unknown is how the collapse of subprime and its spread into prime, etc will impact the economy as the debate rages between those who are sticking to a soft landing scenario vs hard landing. Certainly Bernanke did not help the situation and really exacerbated it when he sliced a quarter point off of economic growth potential this year during his Congressional testimony. There is little clarity on a variety of issues, and the previously intrepid trading community which has racked up huge gains, has decided, and I think smartly so, to look at the glass as being half empty for now.
We know in no uncertain terms that the mortgage market has come undone and that high yield corporates market is getting pummeled. ABX BBB-07-02 slid to 40 today and 07-01 tumbled to 37. AAA 07-02 fell to 95 and 07-01 slid to 92. LCDX tumbled to 93 with the spread widening to about 350 basis points. Still, we don't have clarity on who's going to be taken down and that opaqueness simply feeds the negative psychology we've been seeing.
While the point decline was large looking and internals were ugly (including extraordinary volume accompanied by just as extraordinary negative breadth, etc), this was hardly a panic day. The TRIN today managed only to rise above 4 level - that's not the type of fear that marks a capitulation day.
I'd say that on a short term basis the market has become rather over sold and with the VIX for a while soaring above 23 (up 27% intraday) and even surpassing the VXN today, it's likely we'll see a dead cat bounce early next week. Will market participants wish to make fresh bets with alacrity on Friday and get the bounce going ahead of the weekend? Many have been conditioned to buy on the dips and today's lack of panicky feeling and indications out on the blogosphere that a variety of folks are feeling it's time to do a cannonball back into the pool are an indication the conditioning has not been changed - because there hasn't been a REAL panic to change that conditioning. So while it's hard to imagine strong buying pressure on Friday, you just never know. GDP at 8:30 may seal the fate of the tape early on.
Here's a picture of the VIX (red broken line) and VXN (solid line) where it's plain to see that its not everyday that the VIX spends time above the more volatile Nasdaq VXN. FWIW, back in late 2005 when the VIX exceed the VXN the market kicked into a strong late year rally.
On the S&P we've slammed down through a variety of support areas and it was an impressive feat on the part of the bulls to keep SPX from slicing down to 1460 and to get it back above 1480. 1500 now becomes an area that needs to be re-broken to the upside first and then the same intermediate 10 point upward steps will need to be retraced. So my objective is going from 1600+ back to 1550, continuing to be conditioned on the need for meltdown conditions not to develop. If today's intraday lows are broken in the near term, you can sure bet on a repeat episode of what happened when Tuesday's intraday lows were busted.
This weekly chart of the S&P is interesting to me from an RSI standpoint. If weekly RSI slides below 50 again then I would be looking at this market in a much more bearish way. We'll see.
I started my post with a mini diatribe directed at the bears for failing to keep the market near the lows amid a variety of negatives. The biggest negative that I've been seeing in the market is the rebound of the Japanese yen. I find it faska-nating (hat tip to Popeye) that the Dow peaked at 14,000 as the yen managed to break above 82. Folks, this isn't psychological - this is a very real fundamental and extremely negative for the market. Carry trade has funded all strata of speculative activity around the globe. When carry trade is unwound, a variety of asset classes suffer, including U.S. stocks. Keep an extra close eye on this. If the rumor mongering about subprime/credit market black holes turns to a real event, or is quantified with some additional real numbers while the carry trade continues to be unwound - the bears will have the right combo of factors for a real market dislocation. This chart shows the Dow (solid black line) and the yen (broken line).
Wednesday, July 25, 2007
Goldman Sachs Economic Research released an interesting report entitled, "The State Sales Tax Slowdown: Is MEW to Blame?"
MEW is mortgage equity withdrawal. Goldman's report says, "State sales tax revenues have slowed sharply, from 7% year-on-year in early 2006 to 2.6% in early 2007." Adjusted for inflation, that would mean tax revenue growth is now at 0% on average.
Goldman itself says the state tax revenue information from The Rockefeller Institute are among "the most useful" regional economic data because the information is closely related to economic activity and is available more quickly than other economic indicators.
Not to belabor the point, or to end up duplicating all the information in the Goldman report, but their conclusion is the MEW is indeed having a negative impact on regional economies, especially in boom/bust states like Florida and California among others.
You'll be hearing more about state fiscal moaning and groaning in the months ahead.
With Apple flirting with $150 and Baidu.com roaring up to about the $220 mark even before analysts chime in about results in the morning, the bulls will have some strong ammo on their side.
I hadn't realized it until I read his newsletter this morning, but McMillan analysis president Larry McMillan noted that with yesterday's selloff, NYSE DOWN volume was 90% along with 90% down breadth. It's only happened 3 times since 1998 (though 40 times if you look at just stocks on the NYSE) and it usually signals bounce time over the next few trading days.
Tuesday, July 24, 2007
I sure was wrong about the narrow range I discussed last night as the market sliced down through 1530s on the S&P like a Ginsu knife through iron plate and suddenly finds itself in the 1511 range. That would leave me to guess that the 1490 is the next level of support to be tested in a further decline, if not 1500 first as a round number.
You've got to admit that the contagion worry is taking on a life of its own and beginning to snowball. My guess that 1530s would hold was a failure on my part to properly anticipate that high-yield yields would grab investors' attention as much as it did. Pimco's Gross, no doubt public enemy number one to the stock market bulls, did make some good points about the 150, or so basis points rise in the high yield corporate market. Sorry, that's reality in the CDX world and it's a problem that can't be ignored. The market also has every right to worry about how the Chrysler deal will be priced. I'll fall off my chair if the rumors of 800 points above LIBOR come true, but hey - this is the world we live where there is an opaqueness to what's going on in the credit markets and how things spill from one area to another and who's most exposed and levered.
I had a good chat with Hugh Johnson of Johnson Illington advisors late this afternoon. Hugh reminded that there will be important existing homes sales data for release Wednesday. IF the data can show some stabilization, Hugh thinks that will ease some market fears. He feels the same way about new homes data later in the week. Hugh also told me that he sees the likelihood that Q2 GDP will come in at close to 3% annualized when the number is reported Friday and that would also help the market.
Hugh has been around for a long time and I reminded him that the banking sector of today is not what it was back in the S&L crisis days when we went home one Friday afternoon and wondered whether Citibank would be shut by regulators over that weekend. Hugh did me a number of crises better going back to Silver Thursday and the Hunt Brothers and reminded me that contrary to the gloomiest of predictions during the crisis times, the market and economy ultimately rebounded and did not go into total meltdown. Hugh even talked about the 1998 LTCM crisis which happened during August and resulted in a large market swoon which eventually abated and led to strong gains in the fall of that year. Hugh said it's useful to look back at those episodes of angst to gain some perspective, though he also reminded that bad times can and do happen on Wall Street and that if we are at the cusp of another rough time the markets will muddle through as they always have.
I also caught up with Stanley Nabi over a Silver Capital Partners. He was completely unimpressed with the contagion fears, calling it a "side show". Stanley is a guy who helps manage $8 bln these days and has been around for a long time as well. He told me that the market was trading more on psychological driven momentum than fundamentals. He's in the camp that believes housing's woes are not going to tank the economy.
Michael Metz at Oppenheimer is another fellow I talked to today and one of his biggest gripes with this market are the unknowns that are associated with the world of hedge funds and their leverage. And he's not just worried about mortgage related problems. Michael told me that with the recent rebound in the yen it's looking as if some carry trade unwind is also going on, noting that during the last serious bout of unwinding, world stock markets took it on the chin back in late February and early March. Mike told me that the "carry trade has long be one of the most successful strategies and that it has become overcrowded". Again he complains that the carry trade and associated leverage are opaque issues.
So we're dealing with some interesting two-edge sword dynamics. The things the bulls have loved - hot real estate, big income from derivatives from securitizing mortgages, the carry trade and money to be made off the leverage in that arena - are issues the bears can easily exploit as well to the peril of the bulls.
Whether it results in a 1998 LTCM like crack remains to be seen. Stay tuned.
Monday, July 23, 2007
It's going to be a day to day manic trading picture until one side or the other can conclusively prove that the credit market fires won't turn into an all out credit crunch. The market managed to bounce back above S&P 1540 and this range from the 1530s to the 1550s is likely to hold until something rip roaring comes along either bullish or bearish. Certainly, it will be important for Friday's intraday lows to hold if we get another bout of selling. Can you say, Range bound? The backing and filling may turn into more of an up or down trend once we get housing data and GDP later this week.
Check out page 13, line 34: http://www.federalreserve.gov/releases/h8/Current/
It's no surprise that the figure has been running at an average of about $1.2 trillion in the last two weeks the figure has suddenly been reported. This why a sinking ABX across the board is a problem... hello? It's not even the $1.2 trillion that's important to grasp but the leverage that's tied to the $1.2 trillion. No wonder there are blow hards out there who try to mislead and dismiss the mortgage market problems as the latest passing doom and gloom fad. They've got it right, you really don't want to think about this when you go beyond rhetoric and look at hard numbers. But then again, there are no hard numbers since every thing is marked to model at fantasy par when the reality is that trading desks on a marked to market basis won't easily provide you with a bid/ask quotation on OTC paper.
I have no guess why the Fed has deemed it necessary to put the securitized figure out, but I will try to find out on Tuesday. Could be nothing, or pursuant to a new internal directive, but if anything, it's a reminder of why some concern about the mortgage world might be warranted given its size and how mortgages have been repackaged (securitized). Housing is not a shrub in the economic landscape.
I also took a look at straddle pricing in Apple and Amazon.com... big swings are anticipated in both stocks once earnings are released this week.
I also looked at Tellabs and how call buyers got way ahead of themselves thinking TLAB could fetch up to $17 a share.... not so fast says Jeffries. And later, I found out that another firm calculated TLABs value at below where shares are trading.
Options Report: Volatility, Tellabs, Apple and Amazon.com
Sunday, July 22, 2007
2. Will the Bancrofts approve the proposed News Corp buyout of Dow Jones? They're going to meet Monday in Boston, but the family process could still take several days.
3. Amazon and Apple earnings come our way Tuesday and Wednesday, respectively.
4. CNBC reported Friday that the first lawsuit inspired by two Bear Stearns hedge funds will be filed on Monday.
5. Big economic reports are also due, from GDP, housing to durable goods.
Read more here: http://www.cnbc.com/id/19831943
From a blogging perspective, I've been sharing my recent interactions in hopes that it will give you some further perspective on the markets at this critical time. I want to put real authority into the things I am writing here by quoting influential sources so that it goes beyond my mere blogger's opinion.
Some will find this even more unbelievable. Rich Bernstein lives around the block from me. Our children have been going to the same schools for many years. Before Rich became chief strategist at Merrill he was known for speaking his mind and injecting a dose of reality into the picture even during the times when it didn't gel with the rah rah Wall Street crowd. He was right many times, which is one reason he is chief investment strategist at Merrill. They don't come any nicer, or smarter than Rich on Wall Street.
Merrill’s Bernstein predicts more market volatility soon
But when you think about it, we've been exporting fiat treasury paper to them by the hundreds of billions, and they've also been buyers of our toxic mortgages... so it seems poisoned toothpaste and shrimp for poisoned American paper is about an even exchange?
According to court records, Francis was scheduled to appear in court last week in a child support case involving his 13-year-old son. In a financial affidavit, he said he earned $25,000 monthly."
Saturday, July 21, 2007
All of the major stock groups in the S&P were down with Capital Goods, Conglomerates and Financials leading the way lower as subprime worries and a few bad earnings reports from Cat and Google got under the skin of investors.
Amazingly, an earnings miss the size of what Caterpillar posted was worthy of not rallying the stock, but pounding it down. Bad news was actually bad news there. Wow, fancy that. Just imagine what CAT's numbers would have looked like if the dollar had not been sliding as it was during the second quarter. But then again, the 'just imagine' line is as bad as saying, 'just imagine how how the stock market would be if financials did crater on subprime news'.
As for Google, investors and speculators got what they deserved, especially the short term specs (don't investors always get what they deserve - good, or bad?). The miss was three cents a share on the bottom line and margins were nominally eroded as the company has been spending more on R&D (hiring droves of developers and engineers). I actually commend the company for doing what it needs to do and that it's not held hostage by having to play the 'beat the guidance-numbers' game. Remember, GOOG is hiring folks who each have the brain power of several Wall Street talking heads combined, or several journalists for that matter. LOL. Big deal the stock fell $28 to $520.12, or just 5%. How many stocks fall 5% on Wall Street each and every day and how many have gone from sub $100 IPO to $500+ in a few years?
Caterpillar and Google were just noise. The real issue is the credit market. The subprime epidemic is spreading into the loans markets and going global. The call back in February that subprime would impact other levels of the debt markets was a no brainer - that's just the way debt markets work and have always worked. It was Bonds 101.. not rocket science... it's realizing there are rules and knowing them... it's knowing just a little history of past credit market blowups... understanding that there is something known as 'risk aversion'... it's known as being aware of the moving parts you're dealing with as an astute investor... it's called not being stupid enough to fall for the 'it's different this time' line, or not being dumb enough to dimiss the subprime meltdown as just another garden variety worry, or doom and gloom scenario that quickly becomes invalid... it known as realizing that the new forms of derivatives tied to debt make for an ever more explosive situation.
RMBS (residential mortgage backed securities), CDO (collateralized debt obligations) were first, now we're seeing trouble in CMBS (commercial mortgage backed securities), and CLOs (collateralized loan obligations), etc. Sorry to again break this to the folks with the pink colored glasses on, but subprime cannot be compartmentalized and IS impacting the overall economy at its core as it is no longer just a subprime issue. Perhaps many of us don't feel the impact of LBO debt re-pricings and widening swap spreads, but that doesn't mean that the world as we have known it, especially since the glory days of 1% Fed Funds from which we all benefitted, isn't changing rapidly.
On the subprime front, The new ABX BBB- 07-2 , which only started trading on Thursday, finished Friday down at 47-cents on the dollar. While the ABX numbers offer the latest fresh evidence of the subprime lending catastrophe (the biggest chunk of the 'fat city' mortgage activity over the last few years) it's becoming an old theme . We know that subprime is on the trash heap along with the national housing market. The KB Homes (KBH) chief said as much on Friday by stating he doesn't expect housing conditions to begin improving in earnest until 2009. Need more evidence that housing is down for the count and not even near a bottom? Just look at what's going on at Beazer Homes (BZH): Beazer Homes expected to take higher impairment charges, CDS spreads continues to widen. Need more evidence: Check out this Florida condo glut story.
The real downward driver for the stock market Friday was the realization that a flight to quality was going on into the safest asset of all - Treasurys, as the subprime contagion has jumped the fire line into the loans market. 10 year yield, lo and behold is now below 5%. Less than two weeks ago it was flirting with 5.25 on worries about growing international rate differentials.
It was one thing to merely have subprime as the sole problem child, but we're going into dimensions not seen in a few decades with the scare over corporate credit. Look no further than LCDX which gauges risk in high yield corporate loans. It slumped to 94.8 on Friday. The iTraxx LevX, the European version of LCDX, also slumped to the 96 level as loan worries have gone global. Credit default swaps anyone?? Fuggedaboudit.... spreads have widened rapidly. The JP Morgan EMBI+ index of emerging market debt index? Down, meaning spreads have widened there too.
It's all an ugly picture as the loan market tightens up. Flight to quality into U.S. treasuries is generally not positive for U.S. stocks so be careful. Let's face it, these credit worries are pretty heady stuff to sweep under the rug. It's not only sent money flow back towards Treasurys, but has also sent the dollar to flirt with the big 8-oh on the dollar index (though thank goodness the latest TIC report is showing money is still flowing back to this country - otherwise where would the dollar be?).
In the coming week, I'm looking to see what kind of merger Monday we're going to have involving LBOs. There were certainly many rumors last week including Macy's, Williams Sonoma, etc). If new deals do materialize that will be a big plus for the stock market.
I'm also looking for KKR to make some headway in solving its Boots problem: UPDATE 2-Boots extends loan deadline, to change terms. I'm also anxious to see what Cerberus has done to get the Chrysler deal closed. LaSorda says it's "very, very close": Chrysler says closing of Cerberus deal very close. Some progress on those two fronts could ease market fears.
It would also be nice to get more clarity on who's going to get stuck 'holding the bag':Citigroup CFO: Sees needing to reprice more LBO loans in 3Q.
As long as the there are no sudden jolts, like an announced LBO unraveling, or another hedge fund meltdown a la Bear Stearns, the Dow could again be revisiting 14k though I think there is going to be a funk early next week. The market been climbing a wall of worry since the Fed stopped lifting rates last year, and really since the 2003 lows. Investors have been conditioned to buy even as the wall of worry has turned into a cliff to be scaled. In an odd sort of way, money that has been exiting very risky areas such as structured credit has blown back to some extent to the stock market which in part is why we have visited 14k twice. Yes, lol, stocks to some look great compared to the structured credit world.
Wednesday, July 18, 2007
To some extent the demise of the alphabet subprime fund was a sure thing and that Bear (BSC) is now on the hook for some bigger bucks and will likely face quite a bit of litigation.
What I found intriguing was the decent volume on the call side of the Bear options chain. While it wasn't all buying, there was enough buying from what I could decipher in the time and sales data to see that a number of folks think there's upside in Bear's share price. There was enough volume in the August 140 and October 155 calls for volume to exceed open interest.
If Bear's situation deteriorates further through a management shakeup, or more problems, this name could indeed be a takeover name... just a quick late evening thought.
Disclosure: I hold no position in the stocks I write about, though I do own Ace Greenberg's great book, Memos from the Chairman.
Since subprime didn't become a red alert issue well into late February and early March, it's not hard to imagine that this stuff will be as toxic looking as the 07-1 series. For good measure, the new series will also have a larger percentage of 40 year loans.... yes, 4 - oh.... 40, forty, not a typo.
An interesting bunch of places, though I can't believe that Nanuet, NY made it to the top 25. Nanuet (pronounced Nan-you-ette) is just a few towns over from me. In it's description, Money Mag leaves out the average property taxes as N/A - how convenient. Property taxes are through the roof in Nanuet and in all towns in my county and really in all downstate counties in NY. $15,000 is low end taxes in this county for a decent sized house. I'd have to say that any town in NY state within 30 miles of NYC is undesirable unless you like high taxes and traffic congestion. New York state is fiscally a black hole and the exodus out of the state by both businesses and residents is alarming. The job market in NYC is largely what keeps folks tied to this area, but the first chance they get to leave -- they do, and in increasing numbers. One these days I will join them.
Expiration week generally tilts positive, or has for the last 13 of 18 expiration weeks, according to Schaeffers.
Today's CNBC Options Report: Options Report: Brokerage Stocks, Macy's, Expiration Bias
CNBC is also having me do what I used to do here, a summary of analysts comments: Morning Upgrades and Downgrades: Punk Cuts the Brokers. My goal is to have this report up no later than 8:30 ET.
Tonight IBM posted solid enough results and Washington Mutual through some fun and games with derivatives trading and an accounting change related to its mortgage servicing rights (MSR) also managed to get the sheeple to buy. S&P futures up a smidge.
At this point we are in the mid range of the OEX WRT expiration - far enough away from the low end for computer driven selling and far enough from the high end for computer driven buying as we get closer to the end of the week.
As long as we hold S&P 1540 area of the S&P on a closing basis, just as we held 1490 for quite sometime, I will stick to the bullish side. No matter what is thrown at this market, it refuses to stumble for much more than a few days.
What if high put open interest in indexes like the SPX and the Cubes simply meant that traders weren't just making directional bearish bets, but could afford to be more complacent on down days since they might have really bought the puts to be well enough hedged to avoid panicking?
Tuesday, July 17, 2007
In this 'all is quickly forgiven market' it's more than likely that 14k was not fleeting like Nasdaq 5000+ was, but the sledding is likely to be rough tomorrow if not for a few days. The biggest factor with the subprime prime epidemic is the great unknown of exposure and containment. Who is else is levered and exposed? And as foreclosures pick up as gauged by the meltdown in the toxic subprime OTC sludge, will the consumer be impacted enough to further curtail spending and hurt the economy further (now only growing at less than 2%)?
On downdraft days when these worries surface, we've seen that selling simply begets selling across the board. Will all be quickly forgiven again? We'll just have to wait and see. Heck, with this market we could selloff tomorrow morning, but then Bernanke could say something nice at what used to be called the Humprey-Hawkins testimony, and we'll be at 14k by the end of the day. LOL... no, I don't think that will happen, but never say never.
As I noted in my CNBC options column, plenty of folks have been girding for market volatility as seen in the VIX's ability to hold fairly close to the year's highs even as the benchmarks hit record highs. They're going to get some volatility tomorrow.
Also, Novastar fell 5% after hours: NovaStar deal may not help lender survive: analyst.
The company explained itself on this evenings conference call, but shares remained lower in late after hours trading.
"We expect the impact of lower start-up costs for new manufacturing processes, lower unit costs for microprocessors, and higher unit volumes for microprocessors and chipsets to result in a net gain of 5 points," Bryant told analysts on a conference call.
Intel is forecasting that margins this quarter will bounce all the back to the 52 level.
No doubt, as Bear Stearns shares collapse, there will be a market selloff in general tomorrow that will take most everything lower, including the chips.
"Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.
Click More (subscription required)."
Also be on the lookout for a breaking Moody's story. Theflyonthewall.com reports Moody's has downgraded 8 ABS deals sold by Bear.
ABS does not stand for Australian Bureau of Statistics, or Acrylonitrile butadiene styrene, or American Bureau of Shipping, or even Six Pack Abs. No, ABS in this case, stands for
ABS issuance has already been down this year vs last year. You can bet tonight's downgraded is tied to subprime components of this stuff that Bear issued which of course is the key component to the good ole' structured finance CDO.
I wrote about subprime at CNBC.com this morning. Mike Metz at Oppenheimer gave me a few good quotes this morning. He's dead on concerning the lack of tolerance for this stuff when it spreads into the world of hedge funds:
- "The issue is the credit ramifications for those who have leveraged themselves to take positions in subprime loans. This is going to result in significant losses for those investors/speculators and the market can live with that," said Michael Metz, chief investment strategist at Oppenheimer.
- "What the market can't live with is a phase of forced liquidations at hedge funds which are leveraged to the hundreds of billions, but frankly there's no clarity on that issue."
- Metz says the toxicity of what's occuring in subprime debt is making "stocks look like the least overpriced and dangerous" of the asset classes for now. He also notes that "leverage in the system is not tied to corporate America where balance sheets "look great".
- "Not to sound cynical, but the stock market has one claim, it's going up," says Metz who says traders will have to look over their shoulders as "no one knows who's exposed and to what degree" to leveraged investments tied to sagging mortgage securities market.
Options Report: Investors Expect More Volatility in Market
Monday, July 16, 2007
I think there are a few things at work here.
1. Speculators. The big specs are holding 5x more paper barrels than the real wet barrels are in storage at present. Net length in WTI has not been this high since just before last summer's crude rally.
2. Worldwide supply demand imbalance. Pour through the numbers and it's not long before you realize that on a worldwide basis demand is up 1 mln bbl/d from last year while output is down by 1 mln bbl/d.
Each day the OPECers delay in lifting output simply means more upside pressure. We'lll be looking at $90+ crude this fall if things don't change soon on the production front, or a quick $10 decline if output is lifted, but with ongoing strong world demand, even a drop on OPEC increase probably will not last for long.
Triple B- slumped down to 45-cents on the dollar (really in the dead zone)...
When will the cracks in the RMBS arena matter to Wall Street and not only matter, but cause trouble for the market as a whole? I don't know. It has been suggested by some that today's decline in ABX may be a sign of someone having to liquidate, it will be interesting to see if that's true and who it is. I am going to be working the phones tomorrow to find out more.
Sunday, July 15, 2007
I suspect the Guardian report has it's numbers slightly out of whack. I can't imagine a take-under scenario for AA and that it's more likely BHP would make an offer at a premium especially in light of the shareholder activist element that the Times of London focuses upon.
Friedman Billings is saying $49. JP Morgan (one of BHP's advisors) on Friday mentioned $51 a share as a likely target following a sum of the parts analysis. Bear Stearns said $52 and Credit Suisse is saying $55 to $59. I remain skeptical about CRVD being able to jump into a deal with this type of sticker on the window, but never say never.
Activist shareholders could make a big difference in how this situation plays out. They surely aren't in the mood for a bid with a modest premium from BHP.
If Alcoa management were smart, which they aren't, you'd almost be tempted to think they cooked up the Alcan bid - knowing they would lose, but also knowing it would lift valuations in the whole sector, including their market cap. But, nah.. that would be too ingenious for the Alain Belda led AA. They have unwittingly opened the door to a huge takeover of the company and much to the great benefit of their long suffering shareholders.
Friday, July 13, 2007
If the playbook repeats itself again as it did last quarter, stronger than expected earnings are likely to propel the market at least to the point of where gets through the bulk of earnings which would be about a month from now. S&P 1540, to me, now become support. Given the huge amount of short interest in S&P futures, 1580 sure looks like a potentially doable next upside target over the course of the next month or so. All bets are off if the structured credit market melts down further and impacts the overall markets, we attack Iran, or if there is a summer terrorist attack. The Chertoff "gut feeling" remarks were ridiculous, but the repetitive al Zawahri phrases in the latest AQ tape make me wonder.
I chatted with Michael Metz, the chief strategist of Oppenheimer today - a guy who I talk to several times a week, actually. He's one of my favorite market commentators because he;s got the experience and has seen it all. He reminded me that the rise in this market is NOT based on fundamentals, but momentum. He says everyone wants to be in - that nothing has essentially changed from last week scary thoughts on subprime and consumer spending, except that the bears got nervous when the market didn't fall further and the bulls turned exuberant. He also went on to say that it's not just an American phenomenon, but a global craze for stocks over bonds. I think he's right on. There is simply a ton of money on the sidelines and it's being deployed.
Subprime ABX hit all time intraday lows today, GE announced it's closing its subprime mortgage unit, the dollar sank to an all time low for a time vs the euro and government retail sales were well below expectations - but no matter, momo continued and the market went higher.
Some took the speculation of a Warren Buffett purchase of a stake in home builder Hovananian (HOV) has an indication that bottom is in for housing. Not so fast. NFI, CFC, LEND - a variety of lenders did not confirm a bottom is at hand; they struggled today.
The irony of the dollar. It's a fiat currency not backed by anything except what people think it's worth and there has been a big disconnect. The buck hit an all time low vs the euro today, yet it's clear that investors worldwide have been moving into our stock market to buy dollar based stock assets. This is the ultimate example of a fiat currency when the message is 'FOREX be damned', as whole class of investors take matters into their own hands and simply view the dollar slide as a non issue. The old line used to be a 'falling dollar makes U.S. assets look unattractive', but not now - at least for the time being. Even U.S. treasuries managed to bounce off the lows of the past week.
Thursday, July 12, 2007
A good amount of credit for easing private equity collapse fears was due to the huge AL buyout offer from RTP. It was the 'art of the deal' on mega steriods. Options players in AL did amazingly well today as I noted in my options report: http://www.cnbc.com/id/19726900
As I've repeatedly mentioned with skepticism, the markets had a chance to rally due to massive available liquidity and failure by bears to do what they're supposed to do. As Bob Stovall, the head market strategist at S&P told me earlier today, bears are holding lots of cash, short interest has been high, there were increasing oddlot short sales (small timers) and put open interest also jumped. Bob said technical analysts at S&P see 1600 to 1650 as the next likely target for the S&P.
I also talked to Gary Shilling, who was actually tending to his bees and away from the office when he picked up his cell phone. He said subprime and foreclosures remain a huge negative. From one day to another Gary says it is hard to explain these moves in the market, but over the longer term he sees trouble ahead for the U.S. economy and stocks. Gary, by the way, says his bees are doing well, with good honey yields - no massive die off. The guy's got the magic touch with a solid portfolio management business and with bees.
I agree with both Bob and Gary. The market sure looks like it wants to skyrocket and 1600 to 1650 is a good target range (albeit wide). One of these days, however, the market will run into a brick wall. When was the last time housing collapsed and the economy didn't find itself eventually in recession? Thanks to global liquidity the move to recession has been slowed but all cycles eventually change whether bad or good. Didn't we learn back in 2000 that the rules don't change - that it's never 'different this time'?
The RTP bid for Alcan was simply amazing. Cash - $38 bln. That's a huge chunk o' change. Alcoa had no choice but to drop its AL bid. Checkmate. AA is now sitting like left over macaroni salad in the sun on a picnic table and will attract a great deal of attention that it doesn't want. What fascinated me was the numbers that Credit Suisse ran today saying that if BHP Billiton coughed up $55/shr for AA, the deal would be 9% accretive to earnings.
Will $55+ takeout of AA happen? Open interest in the August and October 50 calls were both exceeded by very strong volume which is the first time speculators have moved in a swarm to the 50 strikes. Most bets had previously been placed in the 45 strikes, so it appears the Alcoa is not long for this world in its present form. Only AA CEO Alain Belda and his golden parachute know for sure -- then again, maybe he doesn't even know what's being cooked up at this point. How many major aluminum companies are there? Not a heck of a lot of big players, so with Alcoa left flapping in the wind, it's hard to imagine that BHP, or one of the others who have missed AL will take a combined RTP/AL combo sitting down.
Disclosure: I own Reynold's Wrap aluminum foil, honey (though not Gary Shilling's honey which must be great) and hold no shares of the companies I write about.
Wednesday, July 11, 2007
What's especially notable about the above AAA chart is its compression since it has traded at near par for months. It's not so much that the line has turned south, but for so long it had been a flatline as the AAA tranches seemed untouchable and not subject to consequences from the 'bad credit people'. In the past few weeks the picture has changed and AAA is even responding to what's going on down in the basement of BBB-, but also in AAA itself as high end folks can suddenly find themselves crunched. When adversity comes calling, even triple-A can start falling.
Having said that, there are a few interesting things that pop out.
LEH calls... in dissecting activity, there was a lot of selling of the calls. If you look at the LEH put options chain, very active put buying in the Aug 70, 65 and 60 puts. Tied in with the theme of suggested bearishness in the financials is the activity in the BKX puts.
BDK puts have been increasingly more active in recent days. The stock was up over $2 today and last quarter BDK blew the door off of estimates. This is a 'keep it on the radar' situation. If you look at a chart, the stock ran into a brick wall at just under 100 in double top formation in early June. 21 day moving avg crossed below 60 day in mid June and is getting close to crossing below the 200 day.
Playtex (PYX) turned into a potential takeover play: UPDATE - Playtex shares jump after CEO cancels presentation. Be careful with these takeover extrapolations. It just may be that the CEO really had a scheduling conflict. Rumor mill stuff has been mostly junk.
NY Community Bancorp (NYB) also a takeover rumor mill name today. This is a bit more intriguing since stock was down 9 cents while Aug 17.5 calls rose 10 cents on volume that eclipsed previous open interest. Implied volatility also rose.
A quick note on Abbott Labs (ABT): GE, Abbott Abandon Diagnotics Deal. That's going to leave a mark for call holders. There was virtually no put activity in ABT today. The news comes as a huge surprise.
Disclosure: I hold no position in anything I write about. Big fan of Abbott & Costello.