Why come to me? What have I done to deserve such generosity?

General Electric has a triple A credit rating. They're borrowing money from the Central Bank of Omaha at a 10% interest rate and potentially selling a big piece of the company to Buffett. Goldman Sachs pulled a similar maneuver a couple of weeks ago and it stemmed the slide in their stock for about 24 hours. These are some of the largest and theoretically most stable financial institutions in the country. Do they need the cash that badly? Is Warren Buffett the new Federal Reserve?

I know this move is supposed to make me think General Electric is sound and credit-worthy but in fact, it's kind of making me think the opposite. It seems like a very bad sign.

SEC/FASB reviewing "fair accounting"

The market is rallying because there's talk the SEC and FASB will change the accounting rules -- perhaps if the accounting rules were different, none of this would have happened in the first place.

The main problem with most of these solutions is they are taking a problem like loose credit and solving it by creating a looser set of rules.

At any rate, this is one of them there vicious rallies I was talking about. It's the last day of the month. Rallies will cause a lot of psychological pain for portfolio managers who will not participate in the upside.

The other side

 

In 2005, there were some basic psychological truisms that contributed to the excess that we see being unwound now. Real estate prices always go up over the long-term – and these prices are moving up quickly! Get in! You can buy a house with practically no money down because credit is easy to come by. It seemed every corner of Manhattan had a brand spanking new bank branch opening. Blue skies, baby.

These conditions have reverted to the opposite end of the spectrum. Real estate prices are now perceived to be in perpetual freefall with no visible end in sight. Credit has been utterly retracted. The American dream of unending prosperity has suddenly become a nightmare of years of contraction. Banks are being seized by the FDIC and forced into life-saving transactions by the Federal Reserve. The bubble has become a smoking crater.

Credit is a contract of confidence between two parties. One believes the other will pay them back at a profit and therefore money is loaned. Currently, confidence has been withdrawn – banks and brokers fear loaning money to one another and to individuals. Banks are selling out to avert cataclysm. The system is frozen.

Bush, Paulson and Bernanke told us if the bailout bill doesn't pass, there will be panic in the streets. And so there was. The indexes plunged yesterday. The VIX, a measure of volatility that is often used to gauge levels of fear in the market, exploded to levels typically seen before major market bottoms.

Most of the managers I speak to are sidelined here. There's too much uncertainty. I have spoken with friends who are hoarding cash. I joke about canned food and shotguns and laugh nervously. If I think too much, I worry about civil unrest, about how truly unfair this seems to the average citizen.

It seems a foregone conclusion that this quarter is going to suck. Confidence is gone. Spending is being cutback everywhere. New projects are on hold. There's little reason to think it will turn around any time soon. However, this looks like shock to me. It will not stay this bad indefinitely. Business will certainly not return to prior levels of health, but we won't stay this conservative either.

I see a lot of stocks that might be bargains if the dust settles. I see a lot of analyst capitulation. I do not see any upgrades at all really. Charts are breaking levels that would have seen ridiculous only a few short months ago. The stage is set for a bottom, though I can't tell you what would make others believe that.

No one is invested. If psychology changed, the gap up would be ferocious. I have no idea what would cause that to happen. I can tell you that I am afraid to have a lot of shorts on as buying them back when things look better will be extremely difficult.

I do not like crowds and there's a veritable stampede of bears running by my window to the market, dropping valuables as if a storm will pass behind them and wipe out all that remains. I'm tempted to go out and grab some of the stuff lying in the street.

SEC banning nay votes

They're not... but only because they didn't think of it.

Market is getting into panic mode. I'm trying to compile a shopping list. Sooo scary right now.

Research In Motion (RIMM) 2Q:2009 results

 

Revenue in line. EPS in line. Subs close but not quite. Despite a series of product delays (Bold, Thunder [now called Storm]) and the flip phone for T-Mobile, RIMM managed to eke out a decent quarter. The guidance, however, was an utter blind-side.

Product gross margins will head down 350 bps for Q3 to ~47% and will head to the mid 40s for 2010. Research In Motion makes a great product – the Blackberry. One of the wonderful things about that business for them has been that they're all pretty darn similar – they use similar interfaces, similar internal parts, the same software. It creates manufacturing efficiencies – when you make millions of the same parts, you get better economics.

And along came the iPhone. The iPhone hasn't hurt their current business yet (though it's probably a factor in the lower outlook). What it did do, though, was cause a massive ripple in their design. No longer will the Blackberry be a somewhat clunky, slightly slower brick with tiny-size chicklet keys that handles email better than any other handheld device out there. Now they're doing flip phones, they're doing 3G, they're doing touch screens. They're trying a bunch of different things to try to bring new consumers onto their platform. In doing so, they've given up their manufacturing efficiencies and consequently gross margins are coming down substantially. Furthermore, they've got to be forecasting further price competition on the horizon as their guidance suggests any efficiencies they pick up over time will be eaten up by lower top-line pricing.

The company has said they don't feel the need to rush to respond to the iPhone… but that doesn't seem plausible. They announced products (3G, touchscreen) to stem the tide before they were ready – both the AT&T Bold and the Verizon Storm slipped out of the quarter because they weren't ready on time – right there, that's rushing.

Promotional activity is extremely high right now heading into the holiday selling season and will likely trail off early next year, creating some difficult sequential sales comparisons going forward. Though no one touched on it in the Q&A that I heard, their guidance of flattish corporate server software sales seems very aggressive – the financial vertical will remain extremely horizontal at present and shows no sign of improving. There's excess capacity there and the assets are in bankruptcy. And let's face it, banks and brokers are not going to be hiring again soon.

The stock is broken in a big way. Numbers will likely head down to $3.60ish. I think this market is nasty, people are hurting, RIMM is widely held. Multiples are bleeding as the economic woes are likely to overhang business for several quarters. Expect the stock to languish for a while. Stock could be $60 by the time the non-promotional flat quarters roll around early next year. I'd say $75 is a reasonable long-term target price. Sadly, that's a couple of bucks below where its trading now. And people are trapped and likely to stampede. Great company. Bad stock. Stay away.

(Sorry this wasn't posted pre-opening.)

 

 

 

 

 

REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:


I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE. I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA . MY COUNTRYHAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF800 BILLION DOLLARS US . IF YOU WOULD ASSIST ME IN THIS TRANSFER, ITWOULD BE MOST PROFITABLE TO YOU.
I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MYREPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOUMAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATIONMOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.
THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEEDTHE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESEFUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDERSURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR ARELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THEFUNDS CAN BE TRANSFERRED.
PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUNDACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TOWALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSIONFOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPONDWITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECTTHE FUNDS.
YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

Government unleashes orgy of stimulus

The SEC has changed the rules and short sales of financial stocks are no longer permitted. If the rally in the financial stocks fails, it will be catastrophically confidence destroying. I find it hard to believe it was shorts crushing the financial stocks. Frankly there just isn’t that much short money relative to the amount that buys stocks. Hedge funds make up 10% of the market – they are far more than 10% of the volume but most hedge funds still carry a long bias. Trust me… there were guys that owned the stocks selling them too.

The Treasury is insuring money market funds. The fact that they felt it necessary to insure them is terrifying as it means the egregious credit speculation of the last decade threatens to undermine even dollars that were not put at risk – savings account dollars.

Congress is trying to rush a package together to create a Resolution Trust–type fund to stick full of bad paper. Effectively, the government is going to create a gigantic off balance sheet warehouse for banks. The plan seems to call for the government entity to buy bad paper on the cheap from struggling financial institutions, leaving the banks and brokers hobbled by billions upon billions of dollars of write-downs but solvent. Over the next several years, the government will in turn try to extricate themselves from the positions. Preliminary estimates put the cost of the bailout at a trillion dollars.

Though the stock market is up several percent since news of these actions were leaked to the media, the severity of these issues and the fact that these problems will fester and linger in the coffers of the government suggest to me that recovery will remain elusive. If the government buys these obligations for 10 cents on the dollar, they’re going to be happy to sell them for 20 cents on the dollar. Credit values have collapsed and are being locked in at depressed levels. We are going to be unwinding the excess of the last several years for several years.

There will be no v-shaped recovery here. Earnings estimates are going lower and growth will be harder to come by.

WSJ: SEC plans to temporarily ban short-selling

 

SEPTEMBER 18, 2008, 8:13 P.M. ET

SEC Plans to Temporarily Ban Short-Selling By KARA SCANNELL and DEBORAH SOLOMON

 

WASHINGTON -- The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

 

SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.

 

It's unclear if the SEC's intention has been approved by the commissioners, which is required, and whether which stocks are covered or for how long it will be in effect. Earlier this summer, the SEC moved to restrict certain short-selling practices for 29 days, covering 19 financial stocks.

 

Thursday, the U.K.'s Financial Services Authority said it would ban short selling in financial stocks until January. The FSA said it would review the effect of the ban each month. The FSA also announced additional disclosure requirements from hedge funds of short-sales if a certain threshold is met.

 

The SEC's decision comes amid increasing concern that short-sellers are abusing legal trading strategies to drive financial stocks lower. Since the near-collapse of Bear Stearns & Cos. in March, regulators have been looking into a combination of short-sales and false rumors are part of the problem.

 

U.K. Treasury Chief Alistair Darling, who was involved in the FSA's decision, said in a statement Thursday, he welcomed the FSA's "decisive action." He said in current market conditions it was in the "interests of financial stability."

 

In a short sale, a trader sells borrowed stock, hoping it will fall in price and can be repurchased later at a profit.

 

The pressure to step up efforts against short-selling gathered steam since last weekend when Lehman Brothers Holdings Inc. steered toward bankruptcy and Merrill Lynch & Co looked for a buyer. Wall Street executives urged Mr. Cox to take steps to slow the sell-off, which they believe is triggered by heavy short selling.

 

Investment banks are particularly vulnerable to low stock prices as it hurts their ability to raise capital to secure their funding.

 

The SEC sped up its rule-making and on Wednesday the SEC announced three trading rules that were aimed at curbing abusive short selling. That was followed late Wednesday night with intentions to require hedge funds to disclose more information about their short positions.

 

Write to Kara Scannell at kara.scannell@wsj.com and Deborah Solomon at deborah.solomon@wsj.com

 

Sandisk faces a dilemma

In their disclosure of their $26 offer for Sandisk, Samsung asked for information about their "relationship with Toshiba, forecasted operating plans, R&D projects, technology roadmaps, key employees and pending litigation". This is pretty much an espionage shopping list in my opinion.

The following day, a mysterious story appeared in the Japanese press discussing Toshiba’s results being well below forecast. The company refused comment. That smells like a plant to me that highlights Toshiba’s own problems in NAND manufacture and potentially puts them in a shareholder unfriendly spot if they look to double up on NAND (which is what buying Sandisk would effectively do for them as Sandisk is their 50% partner in NAND).

Samsung did not make an official offer. This is similar to what Microsoft did with Yahoo and what Electronic Arts did with Take Two. In doing so, they reserve the right to walk away. This is sort of a no-lose situation for Samsung in that they could get access to their primary competitor’s trade secrets and leave them hanging.

I don’t envy Sandisk’s management who are likely to face shareholder pressure to pursue the deal with Samsung. I think Toshiba will be hard pressed to put up the cash to counter. I totally question Samsung’s true motives. And I also don’t blame them for wanting to understand the JV structure better. I would also like to understand it better and Sandisk’s JV disclosure is foggy to say the least. As I’ve said before, Sandisk’s JV structure seems to seek to mask manufacturing operations, not shed light on them.

Good move, Samsung. Good luck, Sandisk.

Fed not acting all that reserved; more questions than answers.

 

Fed finances takeout of Bear Stearns by JP Morgan. Fed puts FRE and FNM into conservatorship. Fed flat out lets Lehman go belly-up -- JP Morgan loans them 87 billion and NY Fed repays it the next day.

Fed agrees to loan $85 billion dollars to AIG to give them time to dispose of their assets in an orderly fashion. The first asset they're disposing is management. The Fed now owns 80% of the company's equity.

Fed injects 70 billion dollars of liquidity into the system today – prior to AIG – but doesn't ease as had been widely expected.

It's a pretty stunning series of maneuvers from an institution that only a few short years ago was known for it's tight lips and long-term view. The Fed must see the credit crisis as a short-term phenomena as it's wiling to take on so much short-term risk.

If you had been following a company for 50 years and it made such a dramatic shift in business behavior, would you feel comfortable?

Two weeks ago, would the Fed have been able to tell you about their plans to buy AIG? Do they run scenario assessment like the Defense Department, figuring out where they might next be attacked, trying to figure out how to avoid killing the most people? Or is this all happening so quickly that they're just reacting?

What would the Fed's balance sheet look like?

Would you want to buy their bonds, knowing the underlying asset was rapidly shifting towards illiquid financial instruments?

These may be brilliant moves. History will know better than we do at this moment. I can't help but feel disconcerted. I'm glad AIG isn't going to fail – it obviously would have been catastrophic. I'm also very frightened that it came down to the Fed having to step in when it seemed to be clear yesterday they didn't want to do anymore bailouts.

The market is extremely jumpy and with good reason. Every day a new sky is falling. Today the Fed elected to catch AIG. So maybe we get a relief rally. Maybe we bounce.

Like Bruce Willis in Armageddon, Bernanke has saved the earth today. Come to think of it, he died doing that, didn't he. Ok, bad analogy. I hope.

We remain in uncharted territory. I would be surprised if that was the last sky to fall… wouldn't you?

I invite your comments and answers because I'm all out.