Treasury investing in bank stocks, FDIC insuring damn near everything

The government, in their efforts to save our flawed banking system and spur lending activities, has opted to perpetuate existing conditions by injecting more capital into major banks. The bailout plan continues to disproportionately benefit a select few companies chosen by administration preference behind closed doors. The assumption in place must be that the banks are more market savvy than the Treasury and will put the capital to better use than the TARP fund would.

It seems a bit underhanded that the Treasury just two weeks ago was in front of congress saying they needed to create this fund to buy securities. Paulson and Bernanke were grilled about the culpability of the banks. Democrats raged about executive compensation caps. They told congress if the package wasn't approved immediately we would fail. What seemed like an afterthought attachment that they might buy shares in banks has now become the centerpiece of their strategy.

That said, this is probably a better plan than burying the securities. It would be very hard for the TARP to determine what they owned and how to deal with it – thus far the banks have not been able to do that and they bought the stuff in the first place.

The troubling aspect of this strategy is that it does nothing to correct the conditions that got these banks into dire straits. In fact, it seems to validate their over-levered balance sheets. If the plan comes with stipulations that the banks should not have risky investments, what are they to do with the risky investments already on the balance sheet? Those investments are no less risky and now probably fail an acid test for new investment. How will the dangerous paper go away if they're only allowed to own good paper?

The FDIC has decided to insure everything in sight, raising insurance on accounts to infinity and protecting new preferred securities for banks to pass between one another that will be issued in conjunction with this plan. They will also be offering counter-party insurance.

I understand the plan but I don't understand how it fixes the infrastructure problems. Once again, it prolongs any kind of true realization of the issues. The hangover is extended.

IBM "reaffirms" guidance

I have to say, I'm generally surprised that there haven't been more preannouncements in tech. I think companies must just be afraid to say anything. Their stocks are getting pounded and business has evaporated.

IBM, however, has decided to lay it out there. Revenues look about a billion below analysts forecasts of 26.3 billion. Gross margins are slightly better than expected and pretax income is a little higher as a result. They're reiterating their prior earnings guidance of $8.75 for the year.

Conspicuously absent from the release is any kind of bookings guidance for the services division -- which to me (and most analysts) is the real indication of business strength for IBM. Without bookings and backlog, you can't really tell what IBM's future business looks like. With a hundred billion or so of backlog, IBM can play with the quarterly figures pretty broadly. They can recognize previously booked business in a given quarter to show what they'd like. That's part of why it's perceived as safe.

The problem with the stock, though, is IBM relies on a significant corporate finance division to fund operations. IBM relies on the strength of other businesses to sustain growth -- and there isn't a lot of that strength stuff right now. As the economic weakness has spread beyond the United States, IBM's recently described business as usual tone has probably changed.

I had suggested buying this stock in a fit of trying to catch the bottom last week. That was a bad call. I'd sell the stock into this guidance reiteration if I still owned it.

Again, apologies for bad stop loss reporting. You should know this about me -- I turn on a dime at times. Usually it means I've gotten hurt and I want out now.

Whack-a-molenomics

Today, the Fed is lunging at the commercial paper market. Almost in response to the plugging of one leak, paper problems shoot out of the next best crack – in commercial real estate, at Morgan Stanley (though they deny it on the tape), in the autos. Once again, the Fed is engaged in a very dangerous game of whack-a-mole with the markets. Even if they hit the one popping up today, there's going to be another one primed and ready to go. They cannot save everyone.

And here we get to the big problem with the bailout. It will disproportionately aid those with congressional ties. No one is going to tell you that outright but take a look at the big picture. We have multi-billion dollar companies begging for government intervention. The new mantra in banking is get too big to fail or fail. The Fed window has quickly turned into a soup kitchen line with a velvet rope. When the soup starts to run out, there's going to be less trickle-down.

Until we have free markets, our markets won't function properly. That means short selling, that means companies that mismanage their businesses disappear, it means that if the fair price of our market could be significantly lower. Like it or not, that's the way it's got to be. No one… not even the Fed… can dictate fair value. If they do, it's inherently unfair value and it will quickly become perceived as a rigged game that no one wants to play. That's what we're seeing so far, right? That's what this is all about: money hiding from the scary paper.

I fear that this is going to resolve the same way whack-a-mole does. We lose a quarter and get some useless booby prize… except in this version of the game we don't get to have any fun.

 

 

“Stop the greed and corruption on Wall Street”

 

The American people seem to blame Wall Street for the economic hard times they're encountering now. A friend pasted me a link to a story in the WSJ about how Greenwich, CT is ailing due to the maelstrom of destruction in the financial sector. "Look at the comments," he said. I scrolled down for a good 20 minutes. There were pages upon pages of posts, crying foul and for the heads of hedge funds and investment banks. "They hate us," my friend said.

There is a lot of blame being cast at the purveyors of weapons of mass destruction here and very little at the ones who chose to use them. Never mind that savings went to record lows, that home ownership as a percentage of assets went to record highs, that consumer credit grew out of control for years upon years. Conventional wisdom appears to be that this was the fault of lenders for making this credit available, not the fault of those who chose to use it. I call bullshit. Take some responsibility. Some chose to get all levered up and suck down every gadget and luxury they could fit on their plastic, bought houses they couldn't afford, spent up their own unknown future. It's bad risk assessment all around. The lenders are to blame too, sure, but there's a big fat jar of blame to slather around – it shouldn't all be dumped on the heads of "Wall Street".

What Wall Street did was repackage mortgages and sell them to investors. That created liquidity for mortgage lenders to loan to ordinary folk. When an individual trades on Wall Street, they have to put up half of what they play. When people bought houses they had to put up 10% -- and there were tales of 0-5%. The leverage there is 10* what you get in the market. And guess what? People made dumb choices – they bought houses they knew were too expensive with gigantic leverage. This didn't happen on Wall Street, friends, it happened on Main Street. There wasn't a stock broker anywhere near the room when this went down.

Bad decisions and bad consequences – that's how life works. The yin and yang of the universe seems to be working just fine. The lending system, however, is overleveraged and will be hobbled for years to come.

 

 

 

Wow.

The selling is pretty relentless. It looks like they're going down forever. Some charts are telling me I need to be a buyer. It's very hard to buy things here as every time I look at the market I feel like a moron for trying.

I paid $17.20 for BRCM, $17.35 for NOK, $104.2 for IBM.

Covered VSEA $23.4.

Wish me luck.

Micron (MU) reports tonight

I would imagine its a disaster. Memory products of all shapes and sizes are significantly lower than a year ago and the prior quarter. All signs point to a decent downtick in the month of September for electronics products including PCs. Inventory seems very high. Production cutbacks at major memory manufacturers (the list is too long to mention) could alleviate pressure on pricing in the future -- but not now and not in time for Christmas. Micron is allegedly exploring the purchase of Qimonda's assets but it's unlikely that would happen without some other kind of capital event like selling the CMOS division or getting a new partner in NAND. Neither seems likely near-term.

Expect to see them eviscerate their capital expenditure budget for next year. Expect losses and then expect more losses. Micron's greatest hope is that they can survive long enough to see competitors die. It might happen but I would not take that bet in the present unforgiving environment. Stocks with high levels of debt and poor visibility are selling targets for struggling money managers.

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.