Friday, June 27, 2008

Comments on an ugly market

The equity markets in recent days, in the U.S. and globally, have been experiencing a liquidity sales event that is self perpetuating. Current views of reasoned valuation are being tossed out as investors have gone defensive, seeking to protect gains, limit losses, and liquidate tax neutral positions expecting that they can get back in tomorrow if someone shouts "all clear". Here are a few thoughts:
---We are now definitely in an "event", recession or not. It's right up there with the '87 crash, the '90-'91 recession, the '97 Asian crisis, LTCM in '98, and the tech bubble pop recession of '01-'02. Now we have the uncertainty of finding the way out.
---The large corporate Oz premium, or whatever one wants to call it, does not seem to exist anywhere. Market premiums based on perceived management or organizational excellence are out. AIG sealed the deal on this one, and now GE has a 5% dividend yield. Even companies with no direct exposure to finance businesses, with market leadership and stellar balance sheets, are going nowhere unless modestly down. Look at JNJ or MSFT.
---Mid sized and small regional banks are being pummeled. That's not because they have CDO's or outsized subprime mortgage portfolios. We are just at that point when the concern is about an economic slowdown, and smaller banks have their own books of auto loans, mortgage loans, and, of great concern, regional commercial real estate exposure, land, construction or existing buildings. Sell now is the maxim, and wait for more information.
---Some financial companies are getting awfully close to collapse. For example,IMB(Indymac Bank) is now trading below a dollar. It can fail if need be and not be a threat to the system. The company is diluting itself(pun here) through a shareholder purchase program that may lead to nowhere. It must now being led by debtholders with stock who would prefer a bankruptcy. IMB was once viewed as having the best and most conservative Alt-A management team in the business.
---WM(WaMu, which has been commented on here regularly) is grinding out new 52 week lows almost daily, now below five bucks. This is, as the nation's seventh largest financial institution by assets, an issue of concern for the system. WM could be one funding run away from needing to be rescued. The company has a new capital infusion, continues to make nips and tucks in recognition of the challenges, but really just doesn't seem to get it. It's not just the cycle, it's the business. Their business model was a long shot in the first place and now it's a negative hat trick: mortgage with lots of subprime and home equity; de novo regional banking expansion focusing on small business; and now a renewed emphasis on credit card building off of the former Providian's old higher charge off portfolio. From this perspective, WM must be bought soon or go the way of Northern Rock.
---WB(Wachovia) mentioned here last week is being accumulated by someone it seems. Huge volumes, stock still where it was when I dived in although it did go up almost two bucks over a few days before coming back, which means someone is buying as well as selling. We may find out on August 15(13-F reporting day) that firms and funds like Capital, Davis, Windsor II, T. Rowe, and other value players who like dividends own huge amounts of this company. That doesn't mean that it won't go down further and the finger is an inch away from the sell button here.
---Watching CNBC is almost impossible now. Many of the good looking and confident folks in their twenties and thirties who fill the broadcasts with their babble are going insane right in front of us. They have no idea what's going on. Scary news for a short while had been great fun and a way to rivet an audience, build ratings, and create a reputation. This has now gone on for too long and they are running out of anything to say. To compensate, they talk even more and much of their commentary is inane. Dylan Ratigan purposefully striding across the NYSE floor as always when he talks(the producers must think that showing he can walk and talk at the same time adds heft to his commentary) is a perfect example of this if anyone cares or dares to listen to what he is or isn't saying.


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