“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.

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

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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.