Monthly Archive for March, 2008

Page 3 of 5

Two Charts to Begin the Week of 3/17/08

Posted on March 17, 2008, 12:28 am. Closed

Here are two charts that might give you some ideas for this week. The first is Shire Plc Ads (SHPGY).

 Shire Plc Ads (SHPGY) on 3/14/08

As you can see, at the beginning of 2008, the stock gapped down precipitously past its support line. The stock tried to break above it and the line is now resistance. I’m not sure if the stock can make another go at resistance, so I feel that this stock will be going down again to retest its January and February lows.

The second chart is for good ol’ International Business Machines (IBM).

Chart of International Business Machines (IBM) on 3/14/08

IBM was making new highs during the summer of 2007, but since then, you can see a pattern of lower highs and lower lows starting to form. In the next three or four months, I think there’s a good chance this stock will see 104.

Alcohol from Ireland

Posted on March 17, 2008, 12:06 am. Closed

GuinnessSaint Patrick’s is nigh upon us. Maybe I will go visit The Shamrock in Paine City? I just read this article about how Guinness has been losing market share in Ireland of all places.

Around this time of year, beer drinkers around the world raise their glasses to Ireland. Presumably, most of those glasses are filled with Guinness, the dark stout that’s as synonymous with the country as James Joyce, Gaelic football, and Saint Patrick himself.

Except, perhaps, in the pubs of Ireland, where you regularly find taps discharging Coors Light, twentysomethings clutching vodka mixers, and publicans serving a steady stream of Magners Irish Cider over ice. The days when Guinness could claim one of every two Irish pints are gone—since the 1990s, it’s more like one in three.

And here’s an article about how Irish whiskey is growing in popularity in America.

JPM Buys Bear Stearns for $2/Share

Posted on March 16, 2008, 10:16 pm. Closed

JPMorgan Chase Buys Bear Stearns for $240 Million:

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street’s fifth-largest securities firm.

Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

I’m not really sure whether this is a good or bad thing. Bear Stearns stock was trading in the low 30s last Friday. Does this severe depreciation of value mean than things are worse than we could have even imagined? Well, judging by the index futures as of this posting, things are looking bad, but who knows what things will be like next by the end of next week.

Here’s a list of some other recent articles on this mess I’ve been reading.

Sir John Templeton on Bull Markets

Posted on March 15, 2008, 6:25 pm. Closed

Sir John Templeton on bull markets:

Bull markets are born on pessimism,
grow on skepticism,
mature on optimism,
and die on euphoria.

Hat tip to Rebel Yid

The Bear Stearns FAQ

Posted on March 14, 2008, 2:26 pm. Closed

Bears

The Bear Facts – Portfolio.com

What happened to Bear Stearns?

It ran out of money.

That can’t be good if you’re a bank.

No. The stock is down over 40 percent today, and off more than 50 percent this week.

But surely the last thing this market needs right now is a bank failure?

Right. So the Fed is riding to the rescue, “allowing Bear Stearns to access liquidity as needed”.

Didn’t the Fed already do that, on Tuesday, when it announced a new “Term Securities Lending Facility” available to investment banks?

Yes, but the TSLF won’t go live until March 27. Bear Stearns couldn’t wait that long.

So was the TSLF announcement a failure?

It does look a bit like that. The TSLF was meant to boost confidence in the investment banks: when the markets have confidence in a bank, there are never any liquidity problems. The Fed might well have been hoping that the TSLF would provide enough of a generalized confidence boost that Bear Stearns in particular would be able to continue normal operations, at least until its money became available on March 27. But Bear didn’t participate in the big stock-market rally on Tuesday, and has been plagued by rumors of illiquidity and insolvency all week. Finally, today, it came clean and admitted it needed an emergency loan from the Fed. Oh, and that 400-point uptick in the Dow we saw on Tuesday as a result of the Fed announcement? We’ve already erased half those gains.

How about today’s announcement? Is the Fed’s money helping Bear at all?

It’s not helping the stock price, clearly. But it did helping the price of Bear’s credit default swaps, at least initially; they’re are a measure of how likely the market thinks Bear is to default. If you own Bear Stearns, you’re in a world of pain right now. But if you’re owed money by Bear Stearns, you do have some faith that the Fed will ensure you get it back in full – although obviously the market in Bear Stearns credit is extremely volatile right now.

Sounds like a bailout to me.

If it is a bailout, it’s a bailout of Bear’s creditors, not of its shareholders.

Why would the Fed do that?

Simple: Counterparty risk. Bear Stearns is a major broker-dealer; billions of dollars of obligations flow through it every day. If suddenly that flow was halted, and Bear defaulted on its obligations, there would be a huge risk to the entire financial system. As Herb Greenberg puts it, “if the hedge funds and rich folk get caught here, without a net, you imagine possible domino effect throughout the brokerage and banking industries as people start pulling out cash and heading for safer pastures, such as trust companies.” And the Fed simply can’t risk the entire banking industry imploding like that.

The FAQ goes on. Read it all.

CPI Cools, J.P. Morgan and Fed Provide Financing to Bear Stearns

Posted on March 14, 2008, 9:42 am. Closed

Apparently the CPI has cooled down a little, remaining unchanged in February.

A second bit of news is that J.P. Morgan, in combination with the Federal Reserve Bank of New York, has agreed to provide secured financing to Bear Stearns. There’s more to this than meets the eye. Despite all the “positive” news, seemingly designed to combat further market slides, I feel that the downtrend will resume soon.

UPDATE

The headline of the day at Marketwatch is “Bear Stearns Bailout.” Bear Stearns screwed up royally. Their stock was over $170 over a year ago. Now its in the low 30s. This is all attributable to arrogance and an over-abundance of greed (don’t get me wrong, greed is good, but too much of anything is bad for you).

“Our liquidity position in the last 24 hours had significantly deteriorated,” Alan Schwartz, chief executive at Bear, said in a statement. “We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” he added. “We have tried to confront and dispel these rumors and parse fact from fiction.”

Despite those efforts, Schwartz said “market chatter” had undermined Bear’s liquidity.

So blame it on those awful market rumors. What an silly and stupid a-hole!

Fed’s “Junk for Treasuries” Lending Program May Have Unintended Consequences

Posted on March 13, 2008, 8:28 am. Closed

After the announcement late last night that Carlyle Capital could not come to an agreement with its creditors and that its assets would be seized as soon as possible, futures were down sharply as a result. Since March 12, the company has defaulted on approximately $16.6 billion of its indebtedness, with the remaining indebtedness is expected soon to go into default.

But interestingly enough, this instance of banks seizing assets of a hedge fund unable to meet margin calls might be the unintended consequence of the Fed’s recent announcement a couple of days ago to allow banks to swap mortgage-backed (most of which is essentially worthless) debt for Treasuries. Via Robert Peston of the BBC:

In fact, it’s arguable that the banks’ seizure of Carlyle’s $20bn-odd in assets has actually been encouraged by the Fed’s mortgages-for-Treasuries offer. Because the Fed’s new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

So it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid US government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid.

If that’s the case, there will be some very scared people in hedge-fund land today. Hedge funds that have borrowed from banks against the security of mortgage-backed debt could be about to see their assets sucked into the banking system and their businesses vanish.

It’s not unusual for policy-makers to come up with a seemingly rational and well-considered plans, plans that in the end actually hurt more than they help. I wonder if the Fed foresaw this possibility? For some reason, I highly doubt it.

Secret Fed Memo Uncovered

Posted on March 12, 2008, 10:45 pm. Closed

This is just too funny. But then you might feel a little sad and depressed at the current state of affairs. Great thanks to Macro Man for sharing this memo with us.

To: Chairman Bernanke

From: NY Fed Governor Geithner

Re: Alternative collateral

Date: March 11, 2008
—————————————————————————————————

Mr. Chairman,

We made the announcement today regarding the additonal measures we are taking, including the TSLF. Initial market reaction to the expansion of our lending program has been positive; stocks have done pretty well- hell, even Bear Stearns rallied today!

However, I believe that it would be prudent for us to make contingency plans in the event that the TSLF fails to relieve market stress. After all, initial reactions to the discount rate cut in August, the 2.25% of Fed cuts that we have put through since September, and the TAF were all positive…..and yet we are deeper in the mire than ever before.

I have consulted at length with staff here at the New York Fed, who in turn have spoken with their network of Wall Street contacts. We have reached the conclusion that the next step in our campaign to re-liquefy the system should be to accept a broader range of collateral for those seeking to borrow at either the TAF or TSLF auctions.

The staff has drawn up a list of recommended items that we should be prepared to accept as collateral in the event that the TSLF does not solve the problems that we are facing. I intend to submit this list for discussion at our next fortnightly meeting, but per our standing arrangment I am notifying you of its contents in this memo.

The staff recommends that the following be accepted as collateral:

1) The borrower’s first-born child. The use of hostages to ensure compliance with a contract or treaty has been fairly common throughout human history, but has sadly fallen by the wayside in recent decades. The staff suggests that it could be effective in the current environment, however.

2) A T206 Honus Wagner card. These are among the scarcest securities in America, and should provide ample security for the borrowing of funds.

3) Gold Jewelry. It is the staff’s understanding that pawn shops occasionally accept gold jewelry as collateral for funds. Given that the Federal Reserve’s TAF and TSLF programs are beginning to resemble a financial pawn shop, it makes sense to start taking our cues from the original.

4) A copy of Shakespeare’s First Folio. It’s not as rare as the Honus Wagner card, but some might argue that it has slightly more cultural/historical significance.

5) A car. Staff report that the supply of autos on Bloomberg’s CARS function is flourishing (see below.) Staff recommends that the Federal Reserve accept the Kelley Blue Book valuation for autos used in the US, and the What Car? valuations for foreign-used autos in determining the amount of funding to be granted.
6) A note from the borrower’s mother. This tried-and-tested method works well in academia, and staff research suggests that it could easily be transferred to the Fed’s auction prgrams. Staff findings suggest that a similar methodology underpinned certain segments of the housing market in the current decade.

7) A Barry Bonds home run ball. Given that the Federal Reserve is attempting to “juice up” the financial system, what collateral could possibly be more appropriate?

8) The Tales of Beedle the Bard. This is one of the rarest and most sought-after works in the world. Our international contacts suggest that the People’s Bank of China would be particularly eager to accept it as collateral as part of a cross currency swap agreement.

9) Manure. While this is a bit unusual, staff feel that the bull market in soft commodities suggests that the value of fertilizing products is set to soar. Should manure prove unavailable, the Federal Reserve could consider accepting structured credit products, which share certain important characteristics with manure, instead.

10) Anything demoninated in euros. Man, have you seen EUR/USD?

More Bad News: CFO Survey Says Economic Recovery Not Expected Until Late 2009

Posted on March 12, 2008, 10:34 pm. Closed

According to the most recent Duke University/CFO Magazine Global Business Outlook survey, which asked more than 1,000 CFOs from a broad range of global public and private companies about their expectations for the economy, the economy doesn’t sound too healthy.

Optimism among chief financial officers in the United States has plummeted, with three-fourths of the CFOs saying the economy is either currently in recession or will be at some point during 2008. Nearly 90 percent of CFOs say the economy will not rebound until 2009. They expect inflation will increase to 3 percent this year.

We also had three major clothing retailers with weak reports: Talbots reported a loss on Wednesday, while American Eagle Outfitters and Men’s Wearhouse reported lower earnings. It seems to me that people are wising up a little and choosing to save more of their money by putting off new clothing purchases.

And yet another story on a crisis in the financial sector. This time its overseas: “Irish banks may need life-support as property prices crash.” There’s talk of nationalization of some banks as the property slump over there is leading to a wave of defaults.

Things still don’t look good here in the U.S. or in the rest of the world.

Shorting Southern Copper Corp (PCU)

Posted on March 12, 2008, 12:54 am. Closed

Purchasing a put on Southern Copper Corp (PCU) was my only trade for Tuesday March 11, 2008. The limit price for my put could have been better as I should have waited for the market close for a better deal, but oh well, this deal was still fairly good considering the stock was up by a lot.

Chart of Southern Copper Corp (PCU) on 3/11/08

This trade is based on two factors. First, my belief that all sorts of commodities are severely overbought, copper in particular. Second, I believe that this stock in particular is at an extremely strong point of resistance; I feel it is now at a formidable barrier of two different retracements and is hugging a very long-term trend line.