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Friday, September 28, 2007

"Gaming" news

WYNN raises about $550 million in a spot secondary, and yesterday MGM spoke to an analyst to revise his capitalized interest costs. Looks like Dubai World is frustrated that no one is tendering shares. Offer $110 and then see if anyone tenders. And in micrcaps I had to mention this number as it will get action today. SilverStar Holdings, a seller of entertainment games (SSTR 2.45) made .25 for the quarter, and bumped numbers. The daytraders will have fun with this.

Thursday, September 27, 2007

Crack Spreads

The refiners have been getting clocked as they've been getting squeezed by the crack spread. What's a crack spread? The "3-2-1" crack spread is simply this: From 3 barrels of oil, you get 2 barrels of gasoline, and 1 barrel of heating oil. But it takes time to refine the oil. So the futures market can do it for you. If you buy 30,000 barrels of oil, and sell 20,000 barrels of unleaded gasoline and 10,000 barrels of heating oil for the next month you have a crack spread. And the wider the spread, the more profitable it is for refiners.

The price of oil has gone up, but gasoline hasn't. So now you have a crack spread as tight as Jessica Alba, and it's about $4, down from $24. So Tesoro (TSO 47.14), Valero (VLO 67.56), Western Refining (WNR 40.30) have all been beaten up. But it takes work to keep the crack spread as tight as it is now. I'm sure the administration has been jawboning the oil companies to keep the price of gasoline down, despite the rise in crude. But give it time, and nature will take it's course, and the spread will widen. And then the refiners profit margins will fatten.

Cheap Chip stock?

The gaming stocks have had a great run, but Gaming Partners (GPIC 9.40) is close to it's yearly low, after being cut in half sine May. Their web site will tell you that "GPI USA, previously known as Paulson Gaming, manufactures the widest range of products for live games for licensed casinos. GPI USA offers Paulson and Bud Jones chips, 3 brands of precision dice, felt and synthetic layouts, playing cards, tables and other gaming accessories to all North American casinos. All GPI products have a proven track record because they combine aesthetic appeal, reliability and security. Security is the key. A large selection of security features can be added to chips, dice and playing cards to make them safer and to prevent counterfeiting."

The chips, the currency of the casinos, are increasingly complex to prevent counterfeiting. RFID microchips in the chips provide security and easy counting, while holograms, ultraviolet and luminescent pigments, laser inscriptions, and chip designs make each casino's chip unique. Bud Jones has been selling chips for 40 years, GPI's SAS, (Bourgogne et Grasset) has supplied chips and plagues to casinos around the world for 80 years. 28 out of 30 of the largest domestic casinos use their chips. So why is the stock down? It was answered in yesterdays news.

Yesterday, GPI announced that the Venetian Macau had ordered 2 million of their high security chips, and they were used at all of the Venetian's 870 tables. Analysts were fretting that Matsui and Australia's Dolphin products were making inroads in Macau, as GPI's earnings weakness was only in Asia. Now it's possible that the casino companies in Macau are just doing business with their "home" team, and GPI's earnings were affected by the costs for the chip rollout and RFID embedded plagues for the Venetian Macau. At this price, it's worth a look, and any positive news could give the stock a boost.

Wednesday, September 26, 2007

Amazon's prime

1193331618151217133020331712151816133391

Is not the above prime palindrome, where you can find 11 of them in here. But Amazon's (AMZN 93.39) prime is $79.00. It's the annual charge for "Amazon Prime" membership program, where you can get free two-day shipping and $3.99 overnight shipping on over a million in-stock items. Now it costs you $79 to join, but AMZN used to have free trial programs, that converted to the paid membership program unless you opted out. Most forget and got opted in. And that $79 makes AMZN happy, and the bears sad. It's AMZN's "happy prime."

Tuesday, September 25, 2007

MGM tender update

The tender was extended to October 5, as only 730,271 shares were tendered at 84.

MGM and Macau

Have you seen the move in the casinos stocks in Macau? WYNN, LVS and MPEL, have moved 50, 40 and 5 points since I talked about them the past month, or about 40% each. MGM (85.36) has just sat here the past month, as the stock has been capped by the tender of 14 million shares at $84 by Dubai World. Unless extended, the tender offer expired last night.

MGM's Macau casino opens in December. If Dubai World, doesn't get a full tender of MGM's shares, what will stock buyers do? They'll assume that 84 is a floor on the stock, because investors didn't want the cash for their shares, and the stock is now in the stronger hands of a long term strategic buyer. Watch the buyers now come into MGM, as they realize it is also a Macau play.

Lowe's and Lennar

Lowe's cut estimates late yesterday, as they underestimated the severity of the housing slump, and Target cut estimates for September sales. Today homebuilder Lennar came in with bad numbers, losing over $500 million for the quarter, with half of the loss coming from the writeoff of deposits for land for 15,000 homesites that Lennar walked away from. Buyers also walked away from 35% of their contracts. At least these numbers will silence those who said the Fed should have cut only 25 basis points, as now that viewpoint can't be taken seriously. Look for another cut in rates in October.

Saturday, September 22, 2007

Will the ECB cut rates?

Friday the eurozone service sector, had the fastest declaration in growth in nine years, and the the purchase managers index, which measures activity in both services and manufacturing fell to 54.5 from 57.4 the previous month; the largest drop since October 2001.

Further pressure came from French president Nicholas Sarkozy who broke protocol by criticizing the ECB saying, "When the Federal Reserve cuts rates, things get better. When we don’t cut ours, we sink." Businesses also are complaining about the strong euro; Airbus warned about deeper cost cuts of close to $3 billion yearly to offset dollar exposure.

Back in August Cramer ranted that the Fed needed to cut rates here; now Sarkozy is the voice in the wilderness and he's gathering disciples. The ECB needs to cut, and they will in October.

October surprise? Not the one the bears wanted!

Friday, September 21, 2007

Sovereign wealth funds

Yesterday the dollar was weak against the euro and yen, as Saudi Arabia was balking at the dollar peg. So we get selling by sellers and shorts afraid of their shadows. Longer terms rates have risen modestly, causing the Cassandras to say the Fed was wrong to cut 50 basis points. Give me a break. Longer term rates reflect a shift from the sovereign wealth funds into equities, and a better economy going forward. Just look at the action in LSE and OMX and the Nasdaq.

Dubai said it would take a 19.9% stake in the Nasdaq exchange, and the 28% stake in the London Stock Exchange (LSE); then NDAQ would get the Nordic exchange (OMX). But during trading yesterday Qatar spent $1.37 billion buying 20% of the LSE, and $470 million to take down 10% of the OMX, trying to scuttle Dubai's plans. Do you think these sovereign wealth funds are buying stock exchanges if they're not bullish?

Abhu Dubai's investment arm, Mubadala Development Co. picked up a 7.5% stake in Carlyle Group for $1.35 billion. Those that think the money from oil just flows into gilded palaces better reasses this global economy. And consider the impact of this money on equity prices around the world.

Thursday, September 20, 2007

Sallie Mae

SLM (48.55) has an offer of $60 on the table by buyout group JC Flowers. Flowers wants to pay a lower price. If they walk away, they have to pay $900 million. So they renegotiate, by threatening to walk away from something they can't. President Bush is expected to sign into law a new bill that reduces subsidies to student loan lenders. Since it passed the Senate 79-12 and the House 292-97 it's not very controversial. SLM says it could crimp profits for the next four years by less than 10%. That wouldn't trigger a material adverse change (MAC) for the buyout.

But credit conditions have tightened, and it's it everyone's interest to get the deal done. Bush will have a bill signing ceremony in the next few days. After that, look for the buyers of Sallie Mae to come up with a lower price and an acceptance of it by SLM. I think the deal gets done at $55, and the stock's a buy.

Wednesday, September 19, 2007

Top for the Euro?

We were told that if the Fed cuts, the dollar will be weak. With the euro now at 1.40 to the dollar, I'll take the other side of that trade, as the rate cuts should help strengthen the faltering US economy.

The easy trade of shorting the dollar is now over.

LEND has a deal

Lonestar offers $11.75. First it was $15.10, and then the stock went to $5. Then an $8.75 offer. Now Accredited (LEND 9.78) shareholders get $11.75 cash, and a done deal. Wall Street screamed bankruptcy when the stock was six. Cramer said that the deal was iron-clad. It was a great trade down at six, when the cassandras were screaming sell. Now 10 million shorts find out the hard way what happens when you short first, and do your due diligence later. Chalk one up for the good guys, and chalk another one up for this blog.

Tuesday, September 18, 2007

Who writes these scripts?

The WSJ had this to say about the Fed cuts:

When the Federal Reserve cut rates yesterday, Wall Street held a party. But the Fed's move could backfire, helping spur another round of carefree borrowing that ends with an even bigger credit-market hangover.

Backfire? Are you kidding me? Real estate won't clear, banks in England need to be backed up by the BoE, and banks are still lugging LBO debt and debt from conduits backing commercial paper. With an all time record of short interest in the market, (that is people betting against the market) it seems these journalists are getting spoon fed from those with bearish inclinations. Maybe the shorts should consider these two things:

1) The discount rate cut was on the Friday of option expiration.
2) This 50 basis cut in rates was on the Tuesday before triple witching option expiration.

Does it occur to any of these bears, that just maybe, the Fed is attempting to break down the pervasive bearish psychology in the market? Does it also occur to these bears, that the Fed, by acting with a 50 basis point cut now, will not have to cut rates as deep as would of been necessary if they would of just done a 1/4 point? A small cut, would of prolonged the domestic economic agony in autos and housing. Now, the Fed will have a greater impact with their cuts because they are affecting the psychology of the market, and thus the confidence of consumers.

Those that look at the relative level of the indexes, miss the damage that has been done to a vast amount of stocks. When the shorts and underinvested bulls either start to cover or invest, stock prices will be substantially higher. And stocks will get a deserved PE expansion, as the uncertainity regarding the Fed has to be discounted by stock prices. Those that say otherwise, are just as mistaken, as those who are not buying a house now, or who did not cover their shorts into the meltdown we just had. Good prices were offered on a silver platter to buyers, but they smugly refused. Now it's the bulls turn to make the bears toss at night.

A "seminal" idea

MGIC (MTG 33.50) provides private mortgage insurance to homeowners, and the stock has gotten killed. Some real smart value buyers picked up the stock under 30, when financial markets were occupied with fear and loathing. Today the Fed cut both the federal funds and the discount rate 50 basis points; now fear and loathing have left the building.

The knocks on MTG are known entities, but the two largest are now gone. Fear, was the liability that MTG would have for it's PMI insurance. That's already been discounted in the price of the stock. Loathing was the $4.9 billion merger agreement with Radian, which was called off two weeks ago, but stock buyers were still scared. Today they nibbled, tomorrow the shorts start to cover, and you could get a move in this number, rivaling that what you got in HOV. With 25 million shares short, and a recognization that housing may start to recover, I think there will be a scramble for the shares.

Did you see the action in the investment banks today? Lehman reports good earnings, and, as advertised, the rest followed. The same group think works here. Moody's (MCO 47.33) was up 4 bucks, and PMI Group (PMI 32.57) was up 2 and change. Think like Wall Street. Did HOV save housing with their "Deal of the Century?" No, but it started the shift in pyschology, and the Fed with the cuts sealed it. So today you had the big move in HOV. If the cuts saved housing, then why are the PMI insurers not up big? Wait a couple of days and they will. You just need an analyst to come out and say the coast is clear.

I said it was a "seminal" idea, so you get to remember it with Seminole hot sauce. If you looked at Eva Langoria's tatoos, you may have missed the 10 points advertised in Mastercard (MA 145.81). Don't miss the next 10 here.

The pundits puke

Remember when the bearish pundits were gesticulating wildly and spouting that a 50 basis point cut would "scare the markets?" They were just talking their book. The only scare I see is if you were short!

MA up 8!

As advertised this morning.

HOV at 13

And you had all you wanted at 11, as advertised here yesterday. But with 22 million shares short; the bearish market forces have developed such a negative think tank, they couldn't spot a bottom if they were changing diapers. They missed the bottom in financials, the bottom in oil, the bottom in the market, and the bottom in natural gas, and they completely missed the notion that the Fed would cut 50 basis points.

But this blog? It had each and every one.

Fed cuts .50!

WOW!!!!!!!!!!

Mastercard

MA (136.72) could get a boost from the strong earnings from Lehman,as GS, BSC and MS are all trading higher. I know MA is not an Investment bank, but you make money by the price of the stock, not the logic. The stock's beaten down, and a "derivative" play on the IB's. At least that'll be the Wall Street spin. Not enough for you? Then look at Best Buy (BBY 44.54) which reported earnings of .55 versus .44. The stock should trade up 6%. So if sub-prime didn't kill the IB's; and it didn't kill the consumer at BBY, then credit card defaults probably won't be as high as expected. That's Wall street's tatoos!

Investment Bank earnings

Lehman (LEH 58.62) just reported decent earnings, of $1.54 vs. estimates of $1.47, and the stock is trading up 3 in the first few minutes. The cassandras missed this. Next on deck is Morgan Stanley (MS 64.91) on Wednesday, and Bear Sterns (BSC 115.38) and Goldman Sachs (GS 187.61) on Thursday. Don't let the cassandras let you miss these. The problems are already discounted in the price of the stocks.

Monday, September 17, 2007

AMD's new chip

Anybody go to www.dell.com and price a desktop with an AMD chip? They're a couple hundred bucks cheaper than Intel. Remember last month when there was no inventory of iPods at Best Buy? Apple then came out with it's new iPod.

Tonight AMD announced it's three core chip, which should appeal to game players that don't want to spend the money on a quad-core. It could increase AMD's yield. You could have a quad-core chip with a defective chip and sell it as a three core! Even though it won't ship until Q1 2008, AMD's still showing it can throw a jab at Intel. Tomorrow thru Thursday Intel has it's development forum in San Fransisco. A nice way for that to start.

Star crossed lovers

If Shakespeare's Romeo and Juliet were the star crossed lovers, then Eva Longria would have to be the star crossed gnome. (If that doesn't make sense, click on the picture, and "read" the tatoos from left to right.) Now if only Bernanke and Greenspan could make up.

On November 12, 1956, UK's Harold Wilson then the Shadow Chancellor, coined the phrase the "gnomes of Zurich" about the financiers who were successfully speculating against the pound. (Remember also the fight over the Suez Canal and oil interests?) And the term "gnomes" stuck, especially when a currency crisis hit, or when central bankers seemed to be manipulative. With the coming Fed's decision on interest rates and the hammering of the pound after the BoE bailout of North Rock, I'd thought it be appropriate to refresh your memories on the financial lexicon from yesterday with events happening today. So if you hear grumblings about the "gnome" financiers and central bankers; it's just history repeating-again.

Tomorrow some will love Bernanke, and some will hate him, depending on how they're positioned when the Fed plays it's interest rate hand at 2:15. It was Juliet that said, "My only love sprung from my only hate" and stock jockeys should remember what the Friar said to Romeo, "Wisely and slow, they stumble that run fast."

Morning soundbites

Since the market wants a soundbite to trade off, here's the morning bytes. Greenspan now says that the housing "bubble" was worldwide; as a Fed Chairman, he said higher oil prices were transitory-he now says oil would be at $130 a barrel if we didn't go to war, courtesy of Sudan. He's pushing his new book, The Age of Turbulence. Goldman Sachs says oil will be $85 at year end. They're probably pushing their book also.

In the UK, people are pushing in lines at Northern Rock, showing they don't care what the BoE says. Friday, the futures opened down sharply on that news; and the markets closed flat. Today we get a do-over and probably the same result in the market. By noon they'll forget about Greenspan, and start thinking about Bernanke.

Hovnanian (HOV 11) had the Deal of the Century as this weekend they were pushing homes. The sale centers I went to were packed, and I'm sure this will be touted as a success, especially since Ara Hovnanian's mug will be on CNBC.

But the most interesting aspect of the market, is the action in the sovereign wealth funds once again. Qatar's investment arm reached an agreement to buy the 30% stake of the London Stock Exchange that he Nasdaq had acquired, for a big price. Which means that even the NYSE Euronext (NYX 70.69) has value at these levels.

Friday, September 14, 2007

Retail sales ex-autos down .4%

This indicates that housing, on the margin, is affecting the consumer. Fleeting days of stabilization in the stock market does not mean that the consumer is on track. He isn't, and neither is housing. However, the rest of the world, seems to be doing fine. Which is why the US dollar is so weak, and markets are so bifurcated. Our economy, instead of leading, is only following the strength in the world.

And that's the problem with the Fed. They need to be ahead of the curve, instead of behind it; they are following, not leading. A .50 basis point cut in the fed funds is not baked into the market. That's why the market is so jittery. There is an acceleration of weakness in the consumer; and a cut by the Fed will help psychology, and lower costs in the economy.

However the opening pressure on the markets is not just from weak retail sales as weakness in futures existed before that number came out. It wasn't from markets in Asia which were strong, but from pressure in the European markets, which were weak. The catalyst was a run on Northern Rock, PLC, one of the UK's largest mortgage lenders. The Bank of England (BoE) directly intervened provided emergency funding to Northern Rock.

Yesterday, BoE governor Mervyn King bragged about their hard-line stance and said, "The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior. That encourages excessive risk-taking, and sows the seeds of a future financial crisis." In this last credit crisis the ECB injected $353 billion, while the BoE only injected $8.8 billion to the markets.

Today the shoe was on the other foot, as the mortgage contagion hit the UK, and the BoE had to act today, after bragging yesterday. Our Fed had it's own comeuppance last month, and today hardliner King from the BoE got his. But that's a central banker for you. They recognize a problem only when the whole world does.

Thursday, September 13, 2007

Manna for MPEL?

Melco PBL Entertainment (MPEL 14.91) was up over a buck today, on news between the headlines, as gambling companies keep their cards and news close to the vest. Late yesterday, Harrah's trumpeted the purchase of their "seventh" golf course-100 acres in Macau next to Sheldon Adelson's Venetian Macau, and next to the property owned and that will be managed by MPEL. The cost of the golf course? Rumored to be around $2-3 billion.

Harrah's, which owns Caesars, does not have one of the six gambling licenses or subconcessions in Macau. MPEL does. Harrah's eventually could build a casino, and MPEL could "manage" it and get a nice chunk of money without putting a penny up. The building of a casino by Harrah's would also greatly increase the value of MPEL's property.

MPEL also has an option on $250 million of land on the Macau peninsula, next to the gambling ferries. In two monthss, the ferries will be running again, and the value of that will be up appreciably. MPEL just raised $1.75 billion to finish their "City of Dreams" and $245 million last month to buy back their stock with Packer's casinos guaranteeing the debt. Last month the stock was as low as 10. It's moved 50% since then. It looks like the billionaire backers of MPEL, Lawrence Ho and James Packer knew more than the myopic shorts of Wall Street.

Now all of this is speculation regarding MPEL, but does anybody believe that Harrah's bought this golf course without having a way in the casino business? Harrah's is being taken over by private equity, and they are restructuring the casino and land business separately. That way they can borrow money against the land to pay for the takeover, and highlight the value that accounting hides-the depreciation of the land that goes up in value. Casino companies see what others do not. To create value for the long term, you have to invest in the growth areas now. And there's no better place to have a casino than Macau.

MPEL paid $900 million for their subconsession gambling license. What would that cost now? $1.5 billion? That's a starting figure for what this deal could be worth to MPEL

Happy New Year

Wednesday, September 12, 2007

Selling China?

Alcoa is selling a $2 billion stake in Aluminum Corp of China (ACH 66.18) at around a 12.5% discount to it's Hong Kong price, and will be walking away with a profit of close to $1.8 billion.

Warren Buffett lightened up his stake in PetroChina (PTR 145.05) to 9.2% of the tradeable shares. (He sold the shares that trade in Hong Kong also.) This was the stock some shareholders were urging him to sell at his annual meeting on May 5th because they felt PTR had operations in Sudan. (The week before the annual meeting PTR was at 116). In actuality, the controlling shareholder of PTR, CNPC (China National Petroleum Corp.) owned a 40% venture in Sudan. It went to a vote and the proposal got 1.8% of the vote. It didn't get mine! He now owns just a shade more than $3 billion of PetroChina; the cost of his remaining shares is less than $440 million, and now that is in the economic interests of all shareholders, Warren has lightened up his position.

Funny how those that were urging Mr. Buffett to sell his shares in PTR, weren't selling their shares in Berkshire Hathaway. Berkshire was at $109,000 a share at the annual meeting; today it's at 118,800.

Nice trades!

Tuesday, September 11, 2007

Long term investing?

After the markets opened on September 17, 2001 you could have bought these stocks at these prices. Apple 7.87, Research in Motion 2.45, Valero 10, and Amazon 7.48. I'm sure you bought books off Amazon, gas at Valero, read emails off your blackberry, and thought Apple was at least a cool computer company. A month later, on October 23, they introduced the iPod. Now you had a chance to buy Apple at just a few dollars above the cash on it's balance sheet.

Today we hear worries about housing, credit and the possibility of a recession. Investor assets are overseas, and the money flowing in domestic stocks are at a trickle; and the long term investor has disappeared. Maybe it's time to rethink your investments. (Credit Noah Blackstein for the idea.)
www.thestreet.com

9/11

Monday, September 10, 2007

Sarkozy

Last month when Republican presidential candidate Giuliani was gushing about the book "Testament" that French president Sarkozy wrote, the media said he had a "man crush" on him. A couple weeks later Sarkozy is pictured canoing in Paris Match magazine. Nothing like a little photoshop to get rid of some "lovehandles." The point is, political figures, who pretend they are impervious to pressure, care about their image. So does the Fed. Now that we have a decent 3 handle on the two year it's time to leave the Fed alone until their meeting next week.

Tomorrow, is the six year anniversary of 9/11. What happened to our leaders? Maybe after some reflection, they'll start to reassert themselves and tackle the more weightier issues in the world.

Fed's Fisher speaks

Discordant: being at variance

In today's speech, the Fed's Fisher, had this to say about the employment numbers which showed no growth for last month, and was revised downwards for the previous two months. Referring to them he said it was occasional discordant note, such as last week's employment numbers.

It's only discordant if it's an anomaly or an outlier.

In April, of 2005, he said that the Fed was in the 8th inning of it's increase in interest rates. Even though Fisher's speeches read the best of any on the Federal Reserve it looks like he whiffed again.

Washington Mutual adds $500 million

to losses, says CEO Kerry Killinger this morning. So they now set $2.2 billion in losses for this year; the increase of $500 million is just from July! Want to know what's really going on in WM? Look at the line-item in their SEC filings: Capitalized interest income from optionable adjustable-rate-mortgages.

In the six months ending 2006, they had $439 million of capitalized interest; this year is $706 million. So I'll do a back of the envelope estimate on this $706 million. (remember this is interest on your mortgage that isn't paid. It is deferred. The idea is that upon a sale of the house, WM will get this money back. Or will they?)

Let's assume that on a $2000 payment that a homeowner is making, the interest only amortized payment is $2500, so $500 a month is going on the deferred payment--or as they call it the capitalized interest payment-a payment the homeowner is not making which is added to the loan owed on your home. So if you have a deferred interest of $706 million for the six months, and assuming that those with deferred interest are only paying 80% of the principal due, then you have actual due of interest payments of $3.5 billion in six months, or $7 billion of interest in a year, tied to these ARM mortgages.

Now if I assume a rate of 8%,on these mortgages, just multiply $7 billion by 12.5 to calculate the balance on these loans. (8x12.5=100), and I have (7X12.5) $87.5 billion principal balance of ARM mortgages that already they are not making a minimum of payment, and deferring interest. Now we know that WM has over $375 billion in these ARM's that are going to reset, but let's do the math on the $87.5 billion, of ARM's they are "collecting" (see they aren't collecting anything) deferred interest. In other words at least a quarter of their ARM mortgages are having a bit of trouble so far.

And if I assume a default risk of 5%, on the 87.5 billion, I have $4.37 billion of mortgages at risk, and assume that they can get back at least 65%, of this collateral on those defaulted mortgages, then WM looses 35% on this 4.37 billion or $1.5 billion dollars. Add in the $700 million of deferred interest or "capitalized interest income from ARM's" and the loss is $2.2 billion, of which WM set aside for this year.

Now I'm not an economist from Princeton, and I don't have a PHD, and this was done in 10 minutes, but it's a starting point for those that do figures on a napkin.

And maybe, the Fed should find one, and wipe their brow. The CEO's of the mortgage companies already have.

Police book McDonald's clerk

For a salty burger! And then they send the burger to the crime lab for forensic evidence. I don't even want to know what the police were thinking.
http://www.msnbc.msn.com/id/20677230/?GT1=10357

Apple sells millionth iphone

Jobs cuts the price for market share, not demand. So much for demand waning. And I'll use my $100 rebate at the Apple store, thank you very much.

News this weekend

Bloomberg mentioned that Lehman Brother 5.75% bonds of 2017 yield 6.29%; you get a higher yield at Lehman than the country of Columbia. The banks stocks in the MSCI index in France trade at 7.96X earnings; comparable ones in the US trade at almost 10X earnings. You think the markets are in a funk? Disney needs to tests their toys for lead paint; economists throw out the R-word but it still costs you $500 for a Hannah Montana concert ticket. Maybe the Fed's concerned over concert tickets, they should look at the clothing discounts Gymboree is giving, where the real world shops. But thinking outside the box isn't new. You just had to check out the VMA's. Britney used to wither with a snake, now she looks like she's auditioning for a Jenny Craig slot. So we ended the week with a Friday selloff. Now we get a Monday rally, as that was the pullback to the lows.

Saturday, September 8, 2007

Robert Reich on "Moral Hazard"

One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action.

http://robertreich.blogspot.com/

Ableson's "Up and Down Wall Street"

Barron's this weekend had these comments:
"Ecobabble was in full bloom last week as the Federal Reserve's open mouth committee earnestly spread the message, in big city and rural hamlet alike: There's no credit crisis. So why, we wondered, is gold bolting above $700 an ounce? And why, as Joan McCullough of East Shore Partners put it in her Friday dispatch, did "the central banks of the world pump their brains out yesterday," including the beloved Fed, to the tune of $31.25 billion? It's a question as old as philosophy: Is there a crisis if no one sees it?"

That's what I meant by the dots. If you look for it, you don't see it. Thus they must be quantum dots. And if I haven't measured it (rearward data that the Fed uses), then it doesn't exist. For the Fed quants, the cat's out of the bag, but they still think it's Schrodinger's!

Friday, September 7, 2007

Why can't the Fed connect the dots?

Wall Street can. Stock traders and bond desks can. So can the CEO's of companies affected by the domestic economy. But the the Fed governors paid by our tax money can't.

I can understand that when we export our junk rated AAA paper to the banks in China and Europe, that China may feel entitled to gives us faulty tires, lead paint toys, and poisoned toothpaste, helped by US corporations making a few extra bucks selling their products. Didn't the brokers and investment banks do the same with the paper they peddled to China? So we get as much junk as we give.

But the Fed bewilders me. We appoint these officials, for 14 year terms but we can't ask them questions? Should we give them black robes also? Why are we beholden to economists, who follow instead of lead, when monetary policy lags? What did we give to get this?

In 1942, Economist Joseph Schumpeter introduced the idea of creative destruction, whereby nimble companies destroyed the value of monopolistic, slow moving corporations. Now we have a nimble, electronic marketplace pricing and trading billions of securities on bits of data, while we have a Fed that's an anachronistic behemoth being dragged kicking and screaming into the real world because it's governed by people who live in textbooks and theories, and play economic experiments with our money.

Today the Fed should have cut rates; now they must cut 50 basis points on the 18th or risk disappointment by the market. The Fed, by trying to become measured, has only become measured in their foolishness.

Bernanke on sale! 85% off!

Bernanke the academic, now the Fed chairman, assures us that he's vigilantly watching the economic horizon for clues on Federal interest rate policy. I'm sure he's even passing out the book he authored to other governors to assist them in conducting Fed policy. Now you can buy it: Principles of Economics on sale for just $8. Yes $8. ($3.95 on Amazon for a nice used copy.) The original list price was $55.01. A haircut of 85%. No wonder Bernanke doesn't like markets! It discounts his books, and refuses to believe his forecasts. Maybe the emperor is naked.
www.a1books.com

Emergency Fed rate cut?

In a perfect world, it would happen today, and the Fed would cut at 3:20 ET, like they did almost 9 years ago during LTCM. The pronounced weakness in the dollar, is a result of weakness in the US economy, not the future lowering of interest rates. But maybe the Fed governors like running around naked at the beach. Their intransigence however, is exposing the "real" economy to more than a sunburn.

Loss of 4000 jobs!

Is that enough for the Fed? Jobs fell off a cliff, and now the Fed has the cover that is needed. We can quit bellyaching now that the real economy isn't getting affected. It is. The last three months job figures were revised downward also, and all the academics with tenure, who never had to worry about job security, have now been proven clueless.

Look at the chart that I posted on the Labor Day weekend and click on it. Notice the "creation" of jobs in the financial and construction industry in the birth/death model? Did any of you believe that jobs were created in those industries? Now that the news is out, the Fed should start cutting aggressively. One of Mr. Buffett's most famous lines is "You never know who's swimming naked until the tide comes out."

Looks like the Federal Reserve needs to buy some bathing suits. Too bad they waited until after summer.

Unemployment numbers

Look for a weak number, and talk about a 50 basis point cut when these numbers come out.

HOG gets slaughtered

No not Hogzilla, who was actually a pet pig, peppered by an 11 year old, but Harley Davidson. They warned that sales in August were in the tank. I wonder if Harley is considered in the "real" economy by our August fed officials? The stock looks to gap down around 49, and historically, the stock has been a buy about six weeks after these gaps when the real long term investors add or build a position.

Thursday, September 6, 2007

The Moon and Luna moths

For some reason, I've always been drawn to both. So forgive me for being attracted to microcap Luna Innovations (LUNA 3.79) a stock so sleepy it looks like it has overdosed on Lunesta. One of the best stocks for the past 1, 3 or 5 year periods has been Intuitive Surgicals (ISRG 229.97), makers of the minimally invasive da Vinci surgical system. On June 14th, LUNA announced an intellectual product licensing, development and supply agreement with ISRG, and the stock popped to 5.26, closing at 4.66 from 3.75 the day before on heavy volume.

On the 18th of this month, LUNA will be at a small cap growth conference and they probably will update on their multi-year collaboration deal with ISRG. Is this developmental product any good? I don't know-but ISRG's COO Gary Guthart should, and he had this to say about it: "We view Luna as the clear technology leader in the area of advanced shape sensing and position tracking systems." The stock is thin, they are a long way from any commercial development with ISRG, but it could be a play on ISRG's "halo" effect. Or instead of picking up a 100 shares, you could buy an iPhone, and get your "halo" effect that way.

Opening game of pro football

80% of the action is on the over 53 1/2 on the Saints/Colts game tonight. With QB numbers like Peyton's 18, and Drew's 9, the numerologists can come out, but I'll just take the Colts minus 6 1/2.

Unemployment figures and Fedspeak

Today Poole is now saying there is a risk of a recession and central banks have a responsibility to limit the downside; Fed governor Kroszner said banking crises hit the economy harder than other crises, and that financial stress has spread beyond mortgage markets, and that the Fed is still monitoring financial markets closely; and Yellen said things started with sub-prime woes. You don't have to parse these statement like Bill Clinton to understand their meaning. The Fed wants to cut.

Will weakness in the unemployment figures tomorrow give them that cover? From their statements, it appears that way.

Check the flight log


RBC Centura Banks of Canada offered to buy Alabama National BanCorporation (ALAB 53.12) for $80 a share today. Surprised? Here's where the CEO was flying on September 4th.
http://flightaware.com/live/flight/N540CB/
history/20070904/1325Z/KBHM/CYT
Z
BE30/L Birmingham Intl (KBHM) Raleigh-Durham Intl (KRDU) 06:08PM CDT 08:43PM EDT 1:35
BE30/L Toronto/City Centre (CYTZ) Birmingham Intl (KBHM) 03:55PM EDT 05:27PM CDT 2:32
BE30/L Birmingham Intl (KBHM) Toronto/City Centre (CYTZ) 08:25AM CDT 12:04PM EDT 2:39

Wednesday, September 5, 2007

SIV's sieve

Simian immunodeficiency virus (SIV) is the strain of the virus that causes AIDS. SIV(structured-investment vehicle) is the "virus" affecting the credit market. Here's what you need to know.

SIV's are off-balance sheet items. They have problems because of their opaque nature and this "structured" finance, is off-balance sheet; the vehicle being established in the Cayman Islands for tax purposes, with US debt sold by a Delaware subsidiary. SIV's raise money by selling commercial paper, and investing in higher yielding or riskier assets, earning the spread, and paying the manager a big fee. You have 30 SIV's controlling $400 billion, and Moody's downgraded $14 billion of the bonds today. Why? Because the value of the collateral has dropped to 85 cents on the dollar, and those exposed to mortgages have dropped to 72 cents on the dollar.

Now when you hear how the commercial paper market has "seized up", understand that these vehicles use commercial paper for funding. What do they do now? They tap the banks with stand by letter of credits. Now the banks, already stuffed with mortgage and LBO loans, now have SIV exposure. Who started the spread of this virus? Enter the NY investment banks.

These investment banks, put some of these products together and sold it to the banks in Europe, so the investment banks clients, the hedge funds, could buy the inventory of the garbage these banks were peddling, by borrowing money at a cheap rate courteous of those European banks, who thought they were buying AAA paper with a higher yield. The hedge fund, who now had a cheap source of money, turned around and bought even higher yielding product from the investment bank who would pocket nice sized commissions, by selling his inventory of overpriced bonds to the hedge fund manager, who levered up these transactions, so he could make more overpriced fees. As long as the value of the asset, backing the SIV increased, it worked. Now that house prices have turned down, those SIV's with mortgage exposure are getting marked down across the board.

Now you know why it's called an SIV. It's a financial virus of exposure; and with fear pervading the bond desks, no one wants to partner in this daisy chain. They've gotten fiscal religion, and have turned off the financial porn channel to watching Hanna Montana on Disney.

Yahoo rumor time?

Look for Wall Street to start playing games with Yahoo (YHOO 24.19). The stock has formed a base for the past month, and it needs a catalyst for it to move up. The company is buying back stock, lending support, and the stock is sticking in today's down market. So whisper a takeover by MSFT to get it to move.

Catch CAT

Notice the run in John Deere? It's tacked on over 20 points since it's recent low. It also announced a 3 for 1 split. Take a look at Caterpillar (CAT 75.63) right now. It could be a sympathy play for those that missed the run in DE.

Know whom to ignore

Before the Fed cut the discount rate, on Friday August 17th, Fed governor Poole chimed in on Wednesday night, August 15th, that the Fed had no real reason to cut. The next day the market sold of 377 points, as the bears ran over the bulls. Yesterday, we had Fed governor Lackey, say the Fed hadn't made it's decision to cut interest rates. So the market's down 150 points already. What do you do?

Well, what happened last time? Just get out the same script. You bought the dip, and ignored the Fed governor(s) who should be ignored.

Lacker the Lackey?

Lackey: def A servile follower.

Yesterday afternoon, Jeffrey M. Lacker, President of the Federal Reserve bank of Richmond, pulled a "Poole." He said the Fed was still concerned about inflation, and tried to show there was still some indecision on the Fed cutting interest rates.

Does anyone buy that? Apparently, some did, as the market dropped 50 points yesterday afternoon, and is opening sharply lower today.

Do I buy Lacker's comments? Are you kidding me? The LIBOR rate moved up for the 11th day in a row, and the ECB meets tomorrow. I believe the ECB will not raise rates tomorrow, giving the Fed move to cut 50 basis points, as I've been advertising.

And Lacker? He's the Fed governor who wanted to raise rates, being a dissenting vote. So we should listen to him? The WSJ today said Virginia's 2007 tax collection were $234 million below target, and this year $407 million below estimates. Virginia's Governor, Tom Kaine, plans new budget cuts, and the Secretary of Finance, Jody Wagner thinks Virginia is in a "prolonged slowdown."

Maybe they should talk to Lacker!

Monday, September 3, 2007

Unemployment Rate


The Bureau of Labor has a birth/death model, which estimates the creation and demise of jobs. Is it accurate? You decide. (Click on it for a larger version.)
http://www.bls.gov/web/cesbd.htm

The highlighted figures indicate the new jobs created in construction and finance in thousands. Anybody got a bridge to sell me?

Labor Day

If you haven't spent any time in Sturgeon Bay, Wisconsin, you should book a trip. My childhood memories are of our clan of seven being driven in the station wagon over this steel bridge on the way to my Grandparent's homes; the last trip of summer before school.

Labor Day to me were shipbuilders and farmers and factory workers. The laborers of America. And a trip to Sturgeon Bay that would make the Griswold's proud.

HSBC buys KEB from Lone Star

HSBC announced their intention to acquire KEB on August 20th, and now Lone Star will quadruple their investment. HSBC is paying 1.2 billion more than the current market price for Lone Star's 51% stake or 6.3 billion, that they paid $1.4 billion for in 2003. If the Korean government gives it's approval, Lone Star makes $5 billion for its 4 year investment. Wouldn't you like to make those percentage returns? Maybe you need to reread this.
http://aaronandmoses.blogspot.com/2007/08/
can-you-lend-me-1510.html


Lone Star had offered to buy LEND for $15.10; and you could buy all you wanted at less than 6 even after the deal was announced. Wall Street had no confidence in the deal, but I did:

..in October of 2003, in the depths of the Korean crisis, they put $1.4 Billion for 50.5% of Korea Exchange Bank. It tripled. Now people are saying Lone Star undervalued the stake in the Korean bank when they bought it. So they know what they are doing, and they know what they are getting into.

Last Thursday, Lone Star offered to buy LEND for $8.50 a share with no conditions, after they tried to pull their $15.10 offer. LEND told them to take a hike, a deals a deal-pay us $15.10. They go to court September 26. After making $5 billion on KEB, another distressed situation, do you think a judge will have any sympathy on Lone Star? Accredited Lending, who Wall Street said had no cards, had pocket aces, and just drew another on the river.

Sunday, September 2, 2007

Housing, Interest rates and the ECB

Those that feel the Federal Reserve is cutting .25 basis points on September 18 should consider what happened at Jackson Hole, this weekend. Federal Reserve governor Frederic Mishkin said, "monetary authorities have the tools to limit the negative effects on the economy from a house price decline." How is that? It's true only if the Fed will cut, and cut aggressively. So follow the money men, and you have the script.

Axel Weber, the president of the Bundesbank, said, there was a maturity mismatch, and that the non-banks, who needed the money weren't getting it. So the "conduits" which are owned by the banks or which have back up funding credit lines, used to finance long term mortgages or asset backed securities with short term funding, but the the commercial paper market has seized up. Thus the banks take the paper, and as he states, "a banking crisis."

Paul McCulley, of Pimco, the world's largest manager of bonds, said their was a "run on the shadow banking system" and that 1.3 trillion of assets had to be put on the banks balance sheet. How and when and at what cost is still not known.

Thus the ECB, cannot raise rates Thursday, allowing the Fed to cut. Now this information is known in the markets, but if you read this blog, you knew it here on the 27th.
http://aaronandmoses.blogspot.com/2007/08/
fed-fiddles-while-housing-burns.html

And then you would of caught the last rally in the market. Or you could have not read this blog, and not made any money. And get your news when it happens, not before it happens.

Moral Hazard

Since I mentioned "socially conscious" I better define some terms thrown around Wall Street last week. "Moral hazard" and "puts." If the Fed cuts, (to the socially righteous bears-the arbiters of morality who wish a depression so they can profit at the misfortunes of the masses) the "Bernanke put" can lead to "moral hazard." What does this mean?

Moral hazard simply means that if the government bails out the institutions who gave loans to homeowners, then it will encourage these banks or institutions to make risky loans in the future. But look at how it is twisted. These pundits say we don't want to bail out homeowners. That's so rich. In other words, these homeowners, who didn't understand the mortgages or read the fine print, had an expectation of getting bailed out because they understood the financial implications of "moral hazard?" Think about that the next time these suits talk.

The "Greenspan put" now being ascribed to Bernanke, is also a lesson in semantics. If financial markets go down or seize up, should the Federal Reserve cut interest rates? Who cares if hedge funds and their hundred million dollar managers lose money. At least that's how the argument is presented. Shall we bail out them? That isn't the argument. If financial markets fall apart, does not that indicate there may be a reason for it? Shouldn't the central banker attempt to stem the possibility of a recession? Not if you're short! You want calamity, because calamity allows you to get paid! Now that's moral hazard!

Finally a "put" in the financial lexicon is used for protection. When the fed cuts rates, the problem is already known. If something is known on Wall Street, it already has been "discounted" into the stock price. The price of the asset has already fallen! There is no protection in this "put." The cutting of rates by the Fed, is an event after the fact, and the subsequent rise in stock prices, after the cuts, is the discounting of the future recovery, helped by the lower cost of money and the confidence of market players.

So the next time you hear the mention of the "Bernanke put" just put it this way: Does wearing a condom after a one-night stand provide you any protection? So how did "put" come about and "putting" on a condom provide protection?

Noah had three sons, Shem, Ham and Japheth and Ham's sons were Cush, Mizraim, Canaan, and Phut (Put). In Genesis 10, which describes the genealogies of Noah's sons, and his son's ancestors, there isn't a genealogy written for "Put." So the word "put" has evolved into "protection" in financial circles, and if you "put" on a condom, you'll be like Put-without a genealogy. But Put was still protected, it wasn't until Ezekiel 30:5 that his genealogy was known, but then under a different name, and a thousand years later! And if you don't like the etymology of "put" even though it's in black and white-I guess I have just one expression for you (and then you'll understand where that came from!)

"Put that in your pipe and smoke it!"

AuH2O Fashion

Up and coming artist and fashion designer, Kate Goldwater, is having a fashion show, next Sunday in the Village. www.auh2odesigns.com She has an environmentally and socially conscious clothing store, where the clothes are made from "recycled materials, such as old t-shirts, slips, ties, vintage dresses, costumes, curtains and other unwanted fabric. Goldwater sews everything herself at her store, so no sweat-shop labor, mass-production, or carbon-dioxide emitting shipments are involved. Plus, every piece is one-of-a-kind. AuH2O clothing also advertises feminist and political beliefs.."

Saturday, September 1, 2007

The Supercrunchers

Can now predict anything with "staggeringly accurate results"or so says Yale author Ian Ayres. This weekend's FT has a lengthy article on number crunching with excerpts from his book, The Supercrunchers so it seems that the Wall St. quants, with their black box portfolios, who blew themselves up the last couple of months, will have a new book to buy.

Now I write a little tongue in cheek, but newbodog.com which had the lowest line on the Georgia Tech blowout of Notre Dame wasn't "sacrificing" anything by enticing Irish bettors. But it "appeared" that way. What number crunching did they use? Ayres? No. Ayre. As in Calvin Ayre, who made a billion from the $10,000 he started his online betting company with before the Feds made it illegal to bet online-unless you're trading stocks, bonds, currencies or futures!

College Football is back!

Anyone notice the line on the Notre Dame Georgia Tech game? The Irish were favored by 3.5 on the opening line, now it's 1.5-2 in Vegas, but bet with Bodog (btw it's newbodog.com now) and it's a pick. Looks like someone wants the Irish action, and is willing to "sacrifice" the first game as a cost of doing business.

Now why does Countrywide still offer some of the highest CD rates in the country? It's the same in the world of "gaming." They want your money! And you wonder why the market's going up? No one's sweating stocks this weekend. We have action on the turf. Place your bets!