Market Summary: Thurs. Jan. 31, 2008

Do you buy this rally? I’m not so sure. We had a 450 point swing in the Dow today, while bonds were up all day (usually, bonds move inversely to stocks as they are a “flight to quality” investment). Remember, bonds have been leading the markets lately. Was a 450 point rally the day before a HUGE unemployment number warranted? I don’t think so. This employment number will give the market direction for the next few weeks and people have been a little too bullish lately.

Yesterday, we saw stocks fall fast when one bond insurer got downgraded. One of the main reasons for the huge decline in stock prices in December and January has been because of uncertainty regarding bond and mortgage insurers. We opened lower this morning because of two pieces of information: 1) MBIA posted a huge loss in Q4 and there was speculation that they would lose their AAA credit rating, and 2) a weaker than expected initial jobless claims number (however, this number always gets revised). MBIA was the main focus today because of their 4 hour conference call (that’s ridiculously long). The market turned around when MBIA CEO said the company would be able to maintain its AAA credit rating and that it will have enough capital to stay in business. This statement soothed investors’ concerns and sparked a broad-market rally, led by the financials, home builders, and retailers.

Take a look at some ETF (exchange-traded funds) that track these three industries – banks (XLF), homebuilders (HGX), and retailers (XRT). These groups have been up huge since the emergency Fed rate cut last Tuesday. I think they are overextended and I would not be a buyer at this time. These industries (the so-called “early cycle” industries) are leading the markets higher mainly because of the aggressive easing action of the Fed.

Just before the market closed at 2:53 pm, Reuters reported that S&P (another credit rating agency) might still cut MBIA’s credit rating. Here is the Reuters article describing the bond insurers’ current situation. When this report came public, the Dow immediately shed 100 points in a matter of two minutes. For the most part, whatever MBIA does (news-worthy), the stock market will follow because the ripple effects of a MBIA/Ambac downgrade will cause chaos in the credit markets.

After the close, Google reported earnings that were below analysts’ expectations and the stock was down about $40 in after-hours trading. Just a few months ago, GOOG was trading at $747! It’s definitely a buying opportunity tomorrow morning. Proctor & Gamble, CVS, and Amazon.com beat estimates. Starbucks announced they will close 100 stores and open 400 less new stores.

What to watch for tomorrow? The unemployment number is key! A poor number will mean the Fed might be forced to cut again. A strong number will definitely cause the markets to rally. Also, Chevron and Exxon Mobile report earnings tomorrow. They have a combined market capitalization of $650B! Their reports will definitely move the market.

Market Summary: Wed. Jan. 30, 2008

You’ve probably already heard it all over the news, but the big story of the day was the Fed rate cut by 50 bp. The market got what it was asking for! Here’s the statement released by the Fed:

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”

What’s important to take from this? 1) Tightening of “household” credit = possible slowdown in consumer spending, 2) Slowing labor market = we’ll have to see Friday’s employment number to confirm this, 3) “Moderate inflation” = soothed some investors’ worries, and 4) They didn’t say they were done cutting (although I think they are).

How did the markets react to everything today? We opened lower because the Q4 2007 GDP number came in at 0.6%, less than expected. This pretty much confirmed every single analyst’s prediction that we would experience a significant slowdown (4.9% growth in Q3 vs. 0.6% growth in Q4). It’s really old news – everyone is focused on Q1 of 2008 and beyond. One thing to note, though, was bonds were down (yield up) before the Fed rate cut. Like I said last week, be sure to watch the Treasuries – they have been the leading indicator down the last six months, maybe they will now be the leading indicator up.

Once the Fed cut was announced, the financials jumped higher (more short covering and speculation that a bottom has been put in) leading the way up about 230 points. Because of the Fed cut, the dollar sold off hard. However, sentiment abruptly changed when Fitch Ratings downgraded FGIC, a bond insurer. They were downgraded to double-A from triple-A (the highest rating). Ambac and MBIA, two very similar companies, were down big on the day because of this news, and the rest of the market sold off beginning at 3:07 pm (just look at the chart). There are still so many concerns out there regarding the bond and mortgage insurers and when they get downgraded, the companies essentially lose their credibility as a lender. MBIA reports earnings tomorrow – pay careful attention to what they have to say. Here is a great article from Bloomberg.com with some recent breaking news regarding the company’s current financial situation.

On the earnings front, Yahoo! was down big after very negative guidance about the upcoming year. UBS announced a quarterly loss of $11.5B. Merck’s numbers came in below analysts’ expectations and the stock was down 3%. Boeing beat estimates, but provided guidance for 2008 that was below analysts’ expectations; however, the stock was still a bigger winner. More good news for Dave: Altria beat its earnings estimates and announced the much-anticipated spin off of Philip Morris International.

What to watch for tomorrow? Google reports earnings. It will be very interesting to see how tech will respond given that the industry has sold off hard the last month. Also, the initial jobless claims number will be reported tomorrow. The market got what it wanted, now we will just have to wait and see how troubled the bond and mortgage insurers are. If they start getting downgraded, look for more panic selling.

How Much Impact Does The Fed Have?

Well the cut was announced today. I won't steal Dave or Bellz's thunder by geeking out over it before them, but here is a contrary opinion about the effectiveness of this move.

Alan Greenspan spoke to some German magazine recently about the turmoil in the US. Saying this about our government's economic CPR:

"Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market."

But, Mr. Greenspan, how could that be?!?!?

"The resources of central banks relative to the size of global forces have markedly diminished. We have 100 trillion dollars of arbitragable long-term securities in the world today so that even large movements initiated by central banks have little impact." Anyway, let's keep ignoring the fact that our money is weaker than Bellz's game and we have trillion's of dollars worth of IOUs all over the world....

An interesting note: Should we be expecting any bubbles, the interviewer dared to ask?

"Bubbles are not created unless you have low inflation and stable and low long-term interest rates. In other words: One of the costs of a stable economy is that it often generates bubbles. The negative consequences go with it unless we are willing to forego the benefits of these stable periods with their rising asset prices and wealth creation. The negatives have always been far less than the positives. But we still have a choice. A central bank can always prevent bubbles by creating inflation."

BAM! Greenspan is so smart.....

Here is a fantastic Financial Times (think British WSJ) article about what is going on right now, albeit this article was written before the half-percentage point cut today. Even the Brits have concerns about the true effectiveness of the US Central Bank...

OH! And most importantly of all, Greenspan's interview ended suggesting that the growth of East Asian GDPs, and their approaching chance to challenge the US's [sic] economic soverignity as having "severe political consequences."

To which AL responded "The expansion of global forces is a positive development, not a negative. We have taken hundreds of millions of people out of poverty. This process benefits us all."

Amen!

About tomorrow...

Here's some opinions from people way smarter than us.

Market Summary: Tues. Jan. 29, 2008

Today we had a nice, although choppy rally which came as a result of stronger than expected durable goods data. The numbers were much higher than what the street was expecting. As I said before, this is a measure of domestic manufacturing activity and a good sign that the market is not as slow as some people think. There was talk on CNBC today that the Fed might only cut 25 bp tomorrow because of the strong durable goods number reported today, but I don’t agree with that. The Fed shouldn’t be watching the daily activities of the market, but rather the health of the broader economy.

The Fed, for the fourth time in about two months, auctioned $30 billion to banks at a 3.123% to help bring more liquidity to the market. This action encourages banks to continue to lend so the credit markets don’t dry up. Read this article for more information about today’s auction as well as the past three Fed auctions.

For the most part, a 50 bp cut is priced into the market, so anything less will most likely cause a sell-off. There is argument that this upcoming cut could be the last one because the Fed funds rate is approaching the inflation rate. This was a problem in 2001 when the Fed lowered rates to 1%, well below the inflation rate. Any money kept in banks was losing value because the inflation rate was higher than the interest rate banks were paying. Low rates also caused the horrific housing downturn that we are currently experiencing. Here is a good article from Bloomberg.com explaining the potential risks of lowering rates too much.

If you remember in late Q3, early Q4, we saw the NASDAQ significantly outpace the Dow and the S&P because everyone said these tech companies (with tons of cash and little debt) would not be affected by the credit crisis and the downturn in the economy. However, since then, only two companies – IBM and Microsoft – have not disappointed investors. After the close yesterday, VMWare (the hottest IPO of 2007) reported some bad numbers and tanked (as did EMC, the parent company). Today after the bell, the troubled internet search engine Yahoo reported disappointing numbers (down 10% after-hours) and said they were going to begin laying off workers. There are rumors going around that Microsoft might be interested in buying Yahoo. Expect the NASDAQ and other tech stocks to open lower tomorrow morning.

Occidental Petroleum, Valero, 3M, and Eli Lilly all beat expectations and were up on the day. Oil finished up about $1 while gold hovered around its all-time highs ($925).

Something interesting to follow is Lehman Brothers and the other troubled big banks. Today after hours, Lehman raised their dividend as well as their stock repurchase program. This brings up the question: are the big investment banks really as bad as everyone thinks? They can’t be that bad if they are spending their excess capital in the form of dividends and buy-backs. How exposed to bad sub-prime mortgages are they?

You have to think about where we’ve come from in the last week. The Dow is about 1,000 points above its Monday and Tuesday lows and everyone is expecting a 50 bp cut. If the markets don’t get what they want – a 50 bp cut – we cut easily lose a few hundred points the last hour and a half of trading tomorrow. Also, look for guidance from the Fed about future rate cuts and the health of the overall economy. If we only get a 25 bp cut, but we get good guidance from the Fed, don’t expect to sell off too much. Amazon.com, Merck, and Starbucks report earnings tomorrow as well. We will also get the preliminary Q4 2007 GDP number tomorrow morning. Anything above 1-1.5% should be positive – meaning, our economy is not contracting.

Market Summary: Mon. Jan. 28, 2008

Although today’s rally doesn’t seem too impressive (major indices up about 1.5%), I think it deserves a little more credit considering what happened to the Asian markets overnight. Hong Kong, Singapore, and Tokyo were down about 4%, and if you remember how we began last week, it was a very good sign today that we didn’t sell off.

Basically, all eyes are on the Fed and what they are going to do Wednesday: no cut, 25 bp, or 50 bp. Currently, the futures market has a 50 bp cut priced in and most are expecting the Fed to act aggressively again (even after last week’s surprise 75 bp cut). At this point, there is no immediate threat of inflation spiraling out of control given that oil has pulled back to about $90 and most commodities sold off hard the last few weeks. I do believe, in the long term, that oil and commodities will continue their bull run, but only after investors regain their confidence and the financial crisis is under control. In the last few statements made by the Fed, they have referenced “deteriorating market conditions” and the “tightening credit markets.” In my opinion, the financial institutions need the rate cut more than the economy does. Currently, the economy is slowing, mainly because individuals are reluctant to spend their money because of the uncertainty in the financial world. If the Fed can make lending easier (notice, I did not say “bail out”) by lowering rates, people – as well as businesses – will resume their spending.

Why did the market go up today? I believe it was due to continued short covering (mainly in the homebuilders and financials) before the much-expected rate cut. We had some mixed macro economic data as well as some mixed earnings reports that would have otherwise caused the market to trade sideways. The housing data was slightly weaker than expected, but once again, expectations are so low for housing it was barely a market-mover. McDonald’s reported good numbers, but their December sales were lower than expected and the stock was down about 6%. At about $50 now, $14 off its high only a month ago, this stock is a bargain. Corning (GLW) posted strong numbers making DLight a happy investor. Halliburton (oil and natural gas company) also beat numbers.

In other news, some big companies have been squeezed by rising costs (aka inflation). Tyson (the chicken company) and Hershey plan to raise prices to offset higher costs. The prices of chickens, cocoa, and sugar have recently skyrocketed. Also, Black & Decker warned that they will experience tighter margins due to higher metal costs.

Also, contributing to the day’s rally was a variety of upgrades of big name companies. Caterpillar, Merck, General Mills, and Kellogg were all upgraded. There was also talk that the Chicago Mercantile Exchange was going to buy the NY Mercantile Exchange.

Tomorrow, we will get the durable orders number. It is basically an indication of how the manufacturing industry is doing. Last month, the number came in lower than expected and investors panicked and everyone starting talking about a recession. I expect choppy trading tomorrow as investors try to position themselves before the Fed reports on Wednesday.

Activist Investors and what the Harvard Business Review thinks

Guys, not confident with which stock to pick for our next meeting? How about becoming an activist investor: buy a ton of shares in a distressed stock until you have enough voice to call an EGM, and maybe oust the management?

Ok, so realistically speaking, you probably aren't going to be able to afford to do that, let alone get anything done in time for next Sunday, but that doesn't keep this kind of thing from being commonplace.

This article is an interesting look into a meddling hedge fund who is trying to fix things at the New York Times by replacing the management:

Hedge Fund Seeks to Sway New York Times

How does this happen? Well when Dave told you that purchasing stocks means you own a little part of the company, he wasn't kidding. And with ownership comes the power to make decisions and change things. Oftentimes, a CEO or other members of the executive suite are tossed out by angry shareholders for doing a shitty job. Other times, it is by people/organizations which had no previous ownership, but merely bought into a company to turn it around with new management, and sell their stake once the value went up again.

Other times, they step in to simply sell off a lot of the assets, like cash, accounts receivable, or inventory, all of which can be sold very quickly. Sometimes, even less liquid assets like PPE [plant property and equipment] are considered. These assets are sold when they are worth more collectively than the company's market cap.

Carl Ichan is a famous example of one of these guys, oftemtimes called corporate raiders.

Interestingly enough, a recent issuing of the Harvard Buisness Review included an article written by Robin Greenwood and Michael Schor, entitled "When (Not) to Listen to Activist Investors," which offered a different opinion.

According to the article: "on average, a company that alters strategy in response to activist shareholders won't see stock gains that outperform the market - that is, unless the company is taken over." This is not the case for Harbinger capital, which just wants to scrap some of the NYT's assets.

The article goes on to say: "Our findings shouldn't be surprising. Activists are investors, not managers, and their real talent lies in identifying undervalued assets, not in determining the right steps to fix them."

This ties in well with all the recent hubbub about Soverign Wealth Funds as well - especially in terms of middle east ones, many of whom are interested in completely owning some companies, instead of purchasing large stakes in them. Because the talent out there is not yet as solid as it is in the states, and because these SWFs are buying up so much, will we have to worry about poorly managed companies in the near future?

At least for the time being, this will probably not be the case for Harbinger and the NYT, as is reported in the article: "Harbinger's nominees have 'deep expertise' in capital allocation, Internet media and brand strategy."

Websites

Great websites for financial researching:
Economic Calendar- http://biz.yahoo.com/c/e.html

Bloomberg.com (Great articles to stay abreast of the market)

Finance.yahoo.com

Finance.google.com

SeekingAlpha.com

Edgar Company Search (database of company's financial statements) http://www.sec.gov/edgar/searchedgar/companysearch.html

PGATour.com (best website ever)

Market Summary: Fri. Jan. 25, 2008

Unfortunately, we were unable to sustain the rally. As expected, we opened higher because of Microsoft’s, Caterpillar’s, and Honeywell’s strong earnings, but we rolled over to finish down on the day. Other than the three earnings reports, there was very little to move the markets and we continued our downward trend that we have been following the past few months.

According to Bloomberg.com, “financial companies are expected to drag S&P 500 members to their worst earnings season since 2001. Analysts estimate the index's average profit excluding some items fell 18 percent in the fourth quarter from a year ago.” Basically, most of the bad news is priced into stocks already, so any good news/upside surprises will move stocks significantly higher.

On thing to note is that the dollar index held up nicely this week (and over the last month or so) despite the surprise fed rate cut and the huge world sell-off. We saw the dollar plunge to all-time lows in recent months, but the thesis then was the global economy would remain strong while the U.S. economy slowed. That’s why investors shifted to other currencies. Now, there is talk of a slowing global economy, so the dollar is relatively stronger to the other currencies than it was a few months ago. Look for stability in the dollar even as the fed continues to cut. The fed cuts will hopefully revive the U.S. economy, so investors could find opportunity to get back into dollars.

Another interesting story surfaced today regarding Apple and their iPhone. Analysts have noticed a discrepancy between the number of iPhones sold and the number of iPhones activated by AT&T (the other international service providers). Apple says they sold 3.7 million iPhones, but only 2.4 million have been activated. Where are the other 1.3 million devices? Read this article to find out.

There has also been criticism of the Fed not acting fast enough to prevent the credit/mortgage crisis from leading to a U.S. (even a worldwide) recession. After the global markets sold off hard Sunday and Monday nights, in a surprise – almost panicked – move, the Fed cut the target rate by 75 basis points. It is very disheartening to see the most influential financial institution in the world panic. Now I can understand why the everyday investor is panicking and why uncertainty exists in today’s market. It will be very interesting to see what the Fed does Wednesday.

When news leaked of this “rogue” trader, it almost seemed like the Fed cut in response to this piece of information. However, the Fed denied knowing about this situation ahead of time.

Follow Up On CDOs

In my previous post, I mention how the ratings agencies came up with AAA ratings for what was essentially garbage debt. Well, this article explains the process of creating this garbage debt and shows why so many ratings agencies fell victim to believing that this debt was worth a AAA rating. It's rather long, so I'd summarize it, but it's honestly written so well and so clearly that I feel like it really shouldn't be summarized. Anywho, if you'd care to understand the subprime mortgage debacle a little better, this is a phenomenal read.

Explaining CDOs

About Regulation

Davos has always been a time for introspection and calls for action, and recently investment luminary, philanthropist, and grumbly old fudder-dudder George Soros has called for increased regulation and oversight in the financial markets. D

See him speak here for the Financial Times. If the US government is going to help support these companies when they bottom out, sometimes to near-insolvency, shouldn't they be required to regulate them further?

George Soros claims that the past sixty years, and in particular the past 20 years has seen a huge boom in credit financing. A boom which this recession will end as he expects drastic changes to be made in the financial sector.

How much can the Fed help fix this issue? Once again, Soros reminds us that if the Fed continues to cut short term rates, once they get low enough, long term rates should jump over (due in part to the reluctance to hold dollars, and increases in inflation), crippling the Fed's influence to stimulate the economy.

Furthermore, Soros mentions that even the current Fed intervention will not have a lasting effect unless the actual system itself is cleaned up? Could this be done privately through a market correction? Chances are more likely that it would require some level of increased regulation, which is what the first article mentions Soros is promoting in the first place.

Interesting to note: Soverign Wealth Funds continue to offer 11th hour financing for these crippled financial institutions. SWFs are great for those they invest in, because they (at least appear to) be investing for the long term, which is great for the stability of a company's stock price. Unfortunately, because these are obviously other governments' assets, there may be more sinister influences in play. Some people are especially worried about this when looking at where Saudi money goes. In speaking about Arab investment in our nation's ports, as the Economist reports, "On January 15th Hillary Clinton said: 'We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it.'” The Economist goes on to point out the hypocricy in our protectionist demands over who can invest in us, while at the same time demand more access to developing markets?

Not that anyone will be complaining about the financing now........

This ties in quite well with my last post about the Businessweek article which profiled SWFs in the middle east.

Also interesting to note: apparently Georgie only has one tie... (check all of the videos and pictures in the links)

Musings of an Actuary (To Be)

First, I intentionally made the title of this post as stupid as possible - so you can refrain from insults.

Anyways, in regards to the vast majority of finance/business related topics currently consuming headlines, I concede my knowledge is notably inferior to my colleagues. However, there is one notable topic recently in the news that I thought I might help shed some light on. That being the topic of Ambac and MBIA's recent financial struggles, since they are bond insurers and I do know a thing or two about insurance.

Let's start with a brief rundown of the function and initial purpose of bond insurers such as Ambac and MBIA. Briefly, bond insurers take on the default risk of a particular bond. Basically, a bondholder will pay the bond insurer a certain premium so that the insurer will pay the full value of the bond should the bond issuer go into default (be unable to pay back the debt). In essence, this turns any bond into a treasury bond as the default risk is stripped away. Anyways, one of the major reasons these bond insurers came into existence was to insure municipal bonds. All to often, local and state governments would struggle to raise capital for projects as investors were reluctant to take on the additional risk tied to their bonds. However, through the emergence of bond insurers, people were more willing to purchase these bonds since they could now insure away a portion or all of the default risk they previously feared.

Anywho, this was all well and good until many bond insurers decided they wanted to seek greater returns and start insuring other bonds - most notably CDOs (many backed by subprime mortgages). Now why did they decide to insure these bonds that we all know have wreaked havoc on the financial industry? Well because they listened to the rating agencies. Moody's, Fitch, and S&P had given these bonds AAA ratings - the same ratings they gave to CDOs backed by far less risky mortgages. Why did the rating agencies do this? Because there was no historical data present to evaluate the risk of these bonds, so they put together some mathematical formulas, churned the numbers through, and came to the conclusion that the risks weren't that bad. Whoops.

So you can just blame the rating agencies, right? Well certainly they should foster some of the blame, but think about this for a second. You have two kinds of bonds - one backed by financially stable, responsible mortgage holders who put down a sizable down payment, the other backed by financially distressed mortgage holders lacking the ability to put down any kind of a down payment - and your going to believe that they bear equal risk of default? That's like saying you're State Farm, and you're going to charge people in Iowa the same about for flood insurance as people in Florida just 'cause someone tells your they're about as likely to experience a flood - it just doesn't make sense. No doubt, there is more to it than that; yet, in a very simplified sense, that's the gist of it. But nevertheless, the bond insurers decided they'd go ahead and believe the rating agencies and insure billions of dollars worth of CDOs for premiums that didn't even almost cover the risk.

Not surprisingly, the hurricane hit, and these insurers got smoked. These CDOs backed by subprime mortgages were defaulting at a ridiculous rate and the insurers were paying out absurd losses. Then, somewhat ironically, after suffering enormous write downs, they've been scrambling to preserve the ratings (put together by Moody's, S&P, etc.) of their own corporate debt with Ambac being the first to get downgraded.

So here we are, with bond insurers falling apart 'cause of their atrocious risk analysis, looking to be bailed out. Some have been finding success, but it's undoubtedly a mess to all. The largest purchasers of bond insurance are banks - just think of how much more trouble they'll be in if the insurers default... Anywho, I hope that sheds some light on the situation that I'm guessing most of the readers weren't 100% clear on. The following link is where I got a fair amount of the info from and is an incredible read if you don't mind churning through it.

Bond Insurers Financial Struggles

About Jobs

Here's a new thread - any information found about specific jobs will fall under.

This one is about investment bankers at Goldman Sachs, which has chosen to flush out the bottom 5% of its performers. Sounds tough, but it isn't new news - Jack Welch championed a similar cause at GE, as he explains in his book Winning"

"...the top 20 percent of employees are showered with bonuses, stock options, praise, love, training…As for the bottom 10 percent in differentiation, there is no sugar-coating this - they have to go."

Welch, Jack. "Winning." Harper. page 41.

Sweet Numbers

I read a great article the other week in BusinessWeek entitled Who's Afraid of Mideast Money?

A few quotes, for those too busy to read - including some SWEET NUMBERS

"Six Gulf states - Abu Dhabi, Dubai, Kuwait, Oman, Qatar, and Saudi Arabia - account for nearly half of the world's sovereign wealth fund assets. They control some $1.7 trillion, as much as all of the hedge funds in the world and more than the $1trillion private equity industry - and Morgan Stanley predicts the total will grow by about $400 billion annually over the next sevaral years."

“The fund managers insist that Western businessmen and politicians have nothing to fear. Al Sa'ad ticks off a well-rehearsed list of reasons why CEOs should rejoice at the prospect of having Kuwait as a major shareholder. Reason 1: His fund will agree to multiyear lockups, providing long-term capital. Reason 2: Al Sa'ad expresses concerns to CEOs behind closed doors, not in the press. ‘If I were a CEO, I'd look for stability,’ he says. “

“Wall Street veterans worry in particular that Gulf funds are moving too far, too fast into private equity. Buying and running companies is vastly different from taking passive stakes in them. Even seasoned pros like Henry Kravis of Kohlberg Kravis Roberts have trouble managing a company when its industry hits the skids, debt payments become untenable, and key people jump ship.”

Market Summary: Thurs Jan. 24, 2008

Today was fairly choppy trading day, but nonetheless, it was good to see the market continue yesterday’s strong rally. Something to watch closely is the bond market, which is the stock market’s main competitor. The bond market has led this precipitous decline the last 6 months amidst many failed attempts by equities to rally. Today we saw a huge decline in bonds (price down, yield up) and it will be interesting to see where the trend goes from here. Maybe we also made a bottom in the bond market yesterday. Just something to watch.

On the economic front, the housing data wasn’t great, but the expectations are so low, this information doesn’t really move the market anymore. The median home price in 2007 declined for the first time since the 1930’s (reference Bloomberg.com). Also, initial jobless claims came in above analysts’ expectations, so this could be a good sign for the employment number next week.

Also, there was an announcement from the White House discussing their proposed stimulus package. They said the refund would be $600-1200 and this gave a little boost to the market (reference finance.yahoo.com). This refund should benefit retailers the most because with interest rates so low, people will probably spend their money instead of putting it in the bank.

After the bell, Microsoft reported strong numbers and the stock was up about 5% in after hours trading. Expect the market to open higher tomorrow morning and for a strong showing from tech and the NASDAQ. There is no economic data being reported tomorrow. Be sure to watch earnings tomorrow from CAT, Harley-Davidson, and Honeywell.

Bellz Is No Jim Cramer - Or Is He?

January 4th, 2008 - I wake up to an e-mail that read as follows:

"what did you buy at the end of the day?

oh, that's right...you were working out.

I bought apple right at the close....watch me make some mad money!!!!!!!!!!!!!"

Now it should be noted that I didn't buy anything at the end of that day, because a) I was focused on improving my already enormously chiseled physique and b) I didn't have the money or the information to buy anything. Regardless, Bellz had solid reasoning in purchasing AAPL. AAPL closed at 180.05 (I think Bellz got them at closer to $178) which was a 7.63% drop for the day. Furthermore, their wasn't any strong reason for the hit and moreover, they're a proven winner (they've experienced a 235% increase over the past three years!) that was selling at what seemed to be a discount.

Either way, I felt like AAPL was overpriced and would drop for a number of reasons (to be fair I wasn't very confident at the time, but I did undoubtedly call it a "dumb trade"). Most notably, we were facing a potential recession which obviously induces an overall decline in consumer spending - of which AAPL relies heavily on. Furthermore, MacWorld was rapidly approaching and consumer were all afraid they might miss the unveiling of the next iPhone. When their fears turned out to be unwarranted, the stock was quickly unloaded. And there are certainly more contributors, but I don't know or don't care to comment on them - primarily the former.

Either way, they closed the day $139.07 - a 21.87% decrease compared to the Nasdaq's 11% decrease over that time. So, there's definitely a substantial amount of ground to be made up...

Needless to say, it's easy to criticize Bellz for this debacle, but I think it a bit foolish to question his knowledge based solely upon those results (even though I've been laughing my ass off...). The point I'm trying to get at is that even the most seasoned and knowledgeable experts struggle mightily to predict the market. The "great" Jim Cramer is a man admired by thousands (millions?) of Americans and widely respected as one of the most cunning financial minds in the industry. Yet, not only has he missed on some of his predictions (we all make mistakes) but he's missed both significantly and repeatedly. The following link exhibits this very fact and also serves as a somewhat interesting measure. Anyways, the point is this: experts are certainly experts for a reason, but to all you novice investors (myself included), it is absolutely critical you make decisions for yourself. Even the advice from the most credentialed investors must be taken with a grain of salt.

Jim Cramer's Market Prediction Accuracy

Market Summary: Wed. Jan. 23, 2008

What a day – a huge 620 point reversal! We had a gap lower at the open for two reasons. One, Apple disappointed yesterday afternoon with their guidance for the next quarter although they reported very strong numbers from the previous quarter. Their guidance was below analysts’ estimates and the stock just got slaughtered. Secondly, the European markets were down big because the European Central Bank did not cut interest rates. They are still very hawkish on inflation and investors want them to focus on maintaining growth (and global growth).

We were very oversold from yesterday’s big sell-off (although we were able to rally back about 300 points) and I wasn’t surprised that we had that initial bounce around 9 am. The market then proceeded to just roll over and the fear that was in the market yesterday came back. (Look at the “vix” chart – ^vix – from finance.yahoo.com. This is a measure of the fear in the market and we spiked the last two days.) We tested yesterday’s bottom and the technicals help up nicely.

So, why did we rally 600 plus points? One, there was a report that the New York State insurance regulators were pressuring banks to provide $15 billion in capital to help the bond and mortgage insurers. The market has just completely tanked since the beginning of the year because there have been rumblings about these companies (Ambac, MBIA, PMI, MGIC) possibly going under. When this info was released, the shorts were forced to cover and these stocks led the rally upward. Also, there was tons of bargain hunting by investors who just couldn’t resist the ridiculously low prices of some great companies.

All of the great “bull markets” from 2007 seemed to have been hit the hardest – oil, tech, agriculture. There are two possible reasons for this. First, these were the stocks that went up the most last year, so to raise capital investors sell these stocks to buy some of the bargain stocks. Or, because of the emergency fed rate cut (and the potential of another rate cut next week to avoid recession) investors are moving their money into the financials and retailers (mostly short covering). With the big rate cuts, the banks will be able to make more money and the mortgage-backed securities are not worthless anymore. This will be interesting to follow over the next few weeks to see where the “smart money” goes and which industries will take the leadership of the market. Is this the beginning of a new cycle?

What to watch for tomorrow? Microsoft earnings are out after the bell tomorrow (this will move the market Friday morning). Rumors have it they will report strong earnings, but as we saw with Apple, it’s what they say about the next quarter. This report is big for tech stocks because they have been crushed lately (thanks to Apple and Intel). Microsoft is not really a consumer play although it is tagged as one. Only about 11% of their business is consumer-based; the rest is big businesses upgrading their software.

We might have made a bottom today, albeit a short-term bottom, but bottoms are usually retested so I expect more volatility over the next few weeks. There will be special focus on the fed’s decision next Wednesday. Their moves have been very difficult to understand (the last 6 months since the credit crisis began) and the markets will move significantly. Don’t feel like you’ve missed the bottom. If the fed doesn’t please investors, there’s a chance you’ll see much lower prices than mid-afternoon today.

Bull Stocks

Ok so my contribution in starting a new thread is that when someone gets a bull stock idea they post it hear breifly explaining why they like it. Essentially a sales pitch. Benefits are 2 fold: 1) you get to verify your understanding of the company by explaining it in type, 2) others get good investment ideas (hopefully).
Tough call but I'm going to start it out with not Altria (MO)(which I think is the best stock to buy out there right now), but MEMC Electronics (WFR). WFR makes solar wafers formerly used only for semiconductor manufacturing but are now being used in solar panels. The company reports after the bell tomorrow (1/24) for their year end. Last year was about 1.6BN in revenue. However, they were just beginning to enter the solar market. Over the course of this year, they have almost sold out their solar capacity for the next 10 yrs signing deals that will bring in 12-15BN over that timeframe. They have room for one more contract which will be in the 1-3BN range, meaning, if you straight average that out over 10 years, they've doubled their revenue. Margins are better on solar meaning the sales will translate well to bottom line results. The market simply does not have this unreal visibility accurately priced in with WFR trading at a 24 multiple. I've been buying under 75 and have a 100 target on to start scaling out.

Sweet Numbers

This is the first post of a thread entitled "Sweet Numbers."

The gist of it is that when you're talking shop, when you're chewing the fat, when you're shootin' the shit with your fellow businessmen about (what else) business - it's always a good idea to have a few interesting statistics in your ammo belt to dish out and impress everyone with. So here are a few.

"India is expected to become the world’s most populous country by 2035. It is already the youngest: home to 20 percent of the world’s people under 24 years of age."
Gupta, Rajat. "A Healthier Future for India." McKinsey Quarterly. January 2008

Why is that cool? Well, the article is about the importance of developing the health care industry in India, but that is a SWEET NUMBER for a very different reason: marketing. As India grows in wealth, so shall their spending - and having the youngest country in the world, as well as the most populous, means you're probably going to be doing a lot of business SELLING to Indians in the near future.

Links of the Day

The WSJ has a pretty sweet blog I'll be posting from often - mostly because the content of this blog probably shouldn't include tech news unless it is pertinent to discussions about finance or the economy.

I don't know how much everyone knows about business, so I'm gonna write for those who don't know a thing. For those bros with chops, just click on the link to get what you WANT. WHAT YOU NEED!

This first article talks about the state of private equity. Just as a quick and dirty introduction, private equity is essentially a sector of companies which are privately owned and managed . PE firms have varied roles, but they all essentially finance (give money to) companies in return for partial/complete ownership by the PE firm. Companies can also find financing through banks (borrowing, or leveraging, money is called debt) or by offering stakes of their companies on a public exchange in the form of an IPO (initial public offering). In fact, PE firms oftentimes buy up companies so that they can later sell them in an IPO.

Private Equity and the Paralysis of Cash



And this is an awesome article about what type of banker might have been responsible for the subprime mess, and inadvertently has a lot of good information about different types of bankers for those of you who are having trouble figuring out what the hell else you can do with a finance degree aside from ibanking.

Should the Feds Set Banker Pay?

...And it begins

This is the inaugural inception of the greatest investment blog for college students ever created.

Be prepared for insight into the following:

1. Market News
2. Industry Trends
3. Stock Tips
4. Career Advice

Be excited. Make money.

Love,
SIC Money