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Thursday, October 30, 2008

The centre does not hold

I was looking at the ted spread – the difference between interest rates on LIBOR and t-bills. Yesterday, the fed cut 50 bps. The market has been blistering higher. I was surprised to see that the ted spread hasn't budged much since it's initial decline a couple of weeks ago. And frankly, looking at it, it hasn't really come down at all relative to historical rates. It's basically where it was in earlyish September, when the trouble really began. If we were out of the woods, it would be dramatically lower.

I'm looking at Hartford Financial Services Group (HIG). It's down 50% today. Their credit rating is in jeopardy, their portfolio is very precariously poised here. Essentially a big downdraft in the stock market would wipe them out. They're an insurance company.

Again, I'm struck by the inevitable leaks. As the government tries to plug holes, new ones open up. This problem is systemic and they're trying to fix it company by company. By trying to treat the symptoms and not the problem, they create new symptoms. You cannot fix a leverage problem by offering more leverage. AIG was loaned 80 billion then came back for 40 more. What if they need to come back again? There won't be a choice, will there. What these companies need is risk management, not a continuance. There is too much credit in the system. It will correct over time. Prolonging the inevitable will only prolong the illness. Think about it. The worst managed companies that were unable to survive are being given the most aid. Mismanagement is being rewarded. How is that a good thing?

Anyway, as I was thinking to myself that the market is rallying but the central problem remains, Yeats popped into my head.

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

Surely some revelation is at hand;

Surely the Second Coming is at hand.

The Second Coming! Hardly are those words out

When a vast image out of Spiritus Mundi

Troubles my sight: somewhere in sands of the desert

A shape with lion body and the head of a man,

A gaze blank and pitiless as the sun,

Is moving its slow thighs, while all about it

Reel shadows of the indignant desert birds.

The darkness drops again; but now I know

That twenty centuries of stony sleep

Were vexed to nightmare by a rocking cradle,

And what rough beast, its hour come round at last,

Slouches towards Bethlehem to be born?





Google pushes 600mm server farm out to 2010, Tuesday Tea also cancelled

Google continues to clamp down on spending.

A 600 million dollar Tulsa, OK server farm planned for early 2009 has been pushed back to some time in 2010.

Brin still thinks you're all a bunch of spoiled brats, Googlers. Valleywag had this item a couple of days ago. Tuesday Tea is suspended, meal hours are shortened, dinner is not to be served "to go". The horror.

They're focused on very small things (controlling perks) and that almost always means the big things are getting much harder. Expedia today on their conference call said cost per click is declining. That's what I'm worried about -- rate cuts in the advertising business. There's simply no way real estate, mortgages, financial products and automobiles can be getting slammed like this without some kind of notable impact on ad rates and keyword pricing. Amorphous as it is, keywords are an asset like anything else and they're going to be worth less in a slower economy. I think Google knows it, too, and they're trying to cut fat as quickly as possible as the top line moderates.

Wednesday, October 29, 2008

Government suggesting Goldman not pay bonuses this year


Big move

After massive interventions at all levels of the financial infrastructure, the market displayed its oversold power and had a gigantic rally, the 2nd best on record. Many of the articles cited an impending Fed interest rate cut as the primary driver.

I don't think the Fed should cut until they absolutely have to and I don't think they absolutely have to. I don't think it's affecting lending anyway. It's a token. The market is really expecting it – fed funds have a ½ a point cut factored in and investors would be very surprised if they didn't – and I don't think the Fed can jeopardize the market's tenuous hold here. They probably will cut… but they shouldn't. They and the Treasury have completely flooded the system with liquidity through other means.

I think yesterday's rally had most of the earmarks of a bear market rally. They may carry further. The VIX remains stubbornly high. I think the market moves lower over time but for the time being the low price/earnings ratios make stocks appear attractive. Prices look great. The problem, I think, is that earnings estimates are complete fiction, based on economic forecasts that have no validity in the current environment. I see modest upside to the market here – maybe 6% to about 9700 in the DJI. Downside target remains under 7500, which is now a 17% move if it happens.



Monday, October 27, 2008

Here come the cavalry

Today, the Federal Reserve will become active in the commercial paper market in an effort to provide liquidity and bolster confidence.

Also, the TARP bank investments are coming out today. Each company will announce them on an individual basis so as not to create a list of haves and have nots. It's probably a bad choice to let banks reveal the information themselves. It doesn't help anyone -- it makes conditions murky. We need clarity, not obfuscation.

I wonder if the companies that receive assistance will not wind up being a hit list of companies in critical condition -- that these programs may in fact have the opposite of their intended effect.

As we know, the problem here is one of confidence. We have seen plenty of companies assure us of their balance sheet strength and credit worthiness one day and go belly up the next. If the market decides these companies that receive direct government assistance have solvency risk, the bailout programs could run into serious jeopardy.

The treasury investment program has been chosen as the primary rescue mechanism. The Fed has never been so far out of bounds mucking about in capital markets. If the companies that receive assistance do not hold today, we could spiral lower.

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