Monday, July 28, 2008

Obama's bizarre impact on opponents

It seems that Barack Obama's presidential candidacy causes his opponents to quickly morph into their evil twin. They become caricatures of their worst traits. First both of the Clintons and now McCain.

McCain, in just a month or so, has gone from being an unpredictable and at times refreshingly spontaneous and good humored politician to something completely different. Now, in the place of the guy most Americans sort of liked as a person even if they didn't agree with him, we have a mean spirited and resentful old man, approving advertisements that might raise a smiling Lee Atwater from his grave. McCain's body language has gone hostile and his smiles have turned into Bushian smirks. It's an amazing transformation. Guessing what it means for November 4th is about as useful as guessing what the stock market will do tomorrow, but it sure is unattractive to watch.

Tuesday, July 22, 2008

"There's always the afternoon"

Last post ended with that line, and it did not take that long for the market to stabilize. The afternoon then brought some enthusiasm. Wachovia's call must have been terrific, this new Steel guy must have put the moves on the market big time, because with those numbers, even with some significant actions like the drastic dividend cut and the headcount reductions, there was a massive bounce in the stock. More power to him. Sorry I missed it.

Now waiting for WaMu, but there are many parts of the market that revived just a little after the morning that provide some good near term direction.

Financials and Techs face rough day

Financial stocks will give back some of their recent gains today and tech stocks will continue on a punishing trend. With the financials that's a certainty for the morning as American Express disappointed and raised consumer credit concerns, or maybe poured kerosene on an already steady brush fire is a better way of putting it. With Wachovia and Wamu reporting there's the distinct possibility of large "just one more time" losses that will aggravate the situation. If by any chance either of these firms report lower losses than expected that could be some offset, and the guess here is that Wachovia has some chance of doing that and Wamu none.

For techs, any earnings miss, competitive challenge, or less than inspiring guidance gets clobbered and Apple's guidance and Texas Instrument's quarter will punish a Nasdaq that is already reeling from Google's nonchalant attitude about its performance. This could be ugly.

But that's the morning. The traders have so much going on and global markets have so many components that you can say at the moment, "there's always the afternoon".

Thursday, July 17, 2008

Financials and Techs, the key to market recovery

The market is showing some signs of life obviously. Financials and Techs are what must work to have a real recovery. Today's late afternoon tech reports are mixed, with old tech doing fine(IBM) and new tech(GOOG) slipping. New tech is not really tech in the old sense, it's market making in eyeballs, in product delivery. Financials after WFC's and JPM's steadfast performance are hit by Merrill's(MER)report, but this should not be news. Merrill has been a management disaster as Stan O'Neal really had no clue what was happening and it will take time for John Thain to clean it up. This should be the last hurrah for the O'Neal mess, or else Thain will begin to be tarnished. No Goldman man would allow that.

What is becoming clear is that differentiated management is now important. An economy that carried everyone is gone. Good management at companies is visible, bad management is obvious, even within the same industries. This is not always the case.

Saturday, July 12, 2008

"The Big Sort", by Bill Bishop

Now that Bill Clinton is using my friend Bill Bishop's book "The Big Sort" as the basis for his current speeches, I should finally have some kind of comment here. I read "The Big Sort" as soon as it was published and liked it, but not being one who regularly picks up social science books on political culture, I procrastinated. Here, now, are a few observations.

"The Big Sort" refers to the fact that lifestyle choices are causing like-minded folks to live together in communities where they feel comfortable and perhaps unchallenged. That has significant ramifications for our country's political and social development. To quote the book, "The lesson for politics and culture is pretty clear: It doesn't seem to matter if you're a frat boy, a French high school student, a petty criminal, or a federal appeals court judge. Mixed company moderates; like-minded company polarizes. Heterogeneous communities restrain group excesses; homogeneous communities march toward the extremes."

The fact that Republican strategists understood this well before the Democrats is detailed in a discussion with Matthew Dowd, George Bush's pollster in the 2000 election and chief strategist for the Bush campaign in 2004. According to Bishop's account, Dowd understood that "American communities were 'becoming very homogeneous'. He believed that to a large degree, this clustering was defensive, the general reaction to a society, a country, and a world that were largely beyond an individual's control or understanding. For generations, people had used their clubs, their trust in a national government, and long-established religious denominations to make sense of the world. But those old institutions no longer provided a safe harbor. 'What I think has happened,' Dowd told me early in the summer of 2005, 'is the general anxiety the country feels is building. We're no longer anchored." Bishop decodes this further, saying "Unsurpassed prosperity had enriched Americans---and it had loosened long-established social moorings. Americans were scrambling to find a secure place, to make a secure place...Most Americans have done that by seeking out(or perhaps just gravitating toward) those who share their lifeworlds---made up of old, fundamental differences such as race, class, gender, and age, but also, now more than ever, personal tastes, beliefs, styles, opinions, and values."

"The Big Sort" identifies 1965 as the beginning of the major shift in American political and social demographics. The result today, in a political sense, is underscored by the findings of Bishop and his sociologist/demographer contributor Robert Cushing. Statistics showed that in the 1976 presidential election only 20% of Americans lived in counties that voted for one candidate or the other by more than a 20% margin. By 2004, 48% of America's counties were this type of landslide county with 20% plus margins for one of the candidates. Big change.

Bishop's book manages to deal with this subject comprehensively while being fluidly written, informative, insightful and even entertaining. Somehow he pulls off the trick of letting us know of his participation in the "clustering" by living in a liberal Austin neighborhood where he fits in, without upsetting the balanced analytical perspective of the book. At least that's my take on it. It's an important book that seems to be gaining deserved recognition as we move toward November 4.

Remembering Hendrix's shout before a solo in "Are You Experienced" of "let Jimi take over", I'll add a perspective. What if this big sort, this "clustering of like-minded America" is not only "tearing us apart" but diminishing the lives of those who find themselves with their lifestyle choice fulfilled around them. A few years ago, a guy named Socrates said that "the unexamined life is not worth living", and one could hypothesize that there are few exams required within these concentrated clusters. This thought hit me as I was reading an essay by James Wood that is totally unrelated to politics. In this essay, "Hysterical Realism", Wood is reviewing a series of highly regarded current novels whose characters are to Wood less than fully developed. When he writes, "After all, hell is other people, actually; real humans disaggregate more often than they congregate. So these novels find themselves in the paradoxical position of enforcing connections which are finally merely conceptual rather than human.", it raised a question in my mind. Could the clusters of like-minded Americans be in the paradoxical position of coming together with their own kind and finding that meaningful interaction is unnecessary. What kind of experience is that.

Friday, July 11, 2008

Three great films seen this week, none blockbusters but one a bust

These three films dealt with serious topics in a candid and realistic way that was not always comfortable and not meant to be.

"The Great Debaters" --- while by no means a big hit for a movie with the star Denzel Washington, and directed by him as well, this one easily covered its $15 million budget with a gross of $30 million. This is well done history, sympathetically and convincingly told, history that should stay current.

"Stop-Loss" --- films about Iraq are apparently not something that the movie-going public can handle at the moment. Financially, this critically acclaimed film was a complete bust with a $5 million gross far from covering its $25 million cost. Step outside of politics, one side or the other just forget it, and look at what a great film this is about people caught up in something outside of their control or imagination. Some of the performances are special, especially Australian Abbie Cornish as a young and feisty Texan. If you choose, get the intended message too.

"Starting out in the Evening" --- limited release film starring Frank Langella that had a budget of $500,000 and now has a gross of $900,000, a little film for sure by market standards. This story of an aging professor and writer on the cusp of entering compromised old age has scenes of nuanced brilliance that are heartbreaking and real. Subtle, literate and powerful, this may yet achieve wider exposure.

Thursday, July 10, 2008

More financial comment, the good, the bad, and the ugly

---In an interview on Bloomberg radio today it was said that "90% of the increase in residential housing foreclosures in 2008 have been non-owner occupied new houses in Florida, California, Arizona and Nevada". That's a fascinating bit of information. These homes or units have never been occupied, so the losers here are the developers and the banks. The suggestion by much of the media and politicians that foreclosures are dumping more and more families out of their homes may be somewhat of an exaggeration. The foreclosure numbers are not a good situation, and banks and real estate businesses are getting clobbered, but perhaps the painful impact on the consumer is actually moderating.
---Wachovia's choice of Robert Steel for CEO looks like an exceptional choice---ex Goldman vice chairman, government experience, most recently engaged in the Bear rescue and mortgage market issues, and on top of that he's a native North Carolinian who is on the Duke Board of Trustees. It will take time for a new leader to make an impact and we can see an ugly example of that at AIG where Robert Willumstad, former President of Citibank, took over from the ousted Martin Sullivan less than four weeks ago. At that time AIG's stock was at $34 and with no significant company specific news in the interim the stock is now at $24, a huge 30% drop. Steel appears to be a relatively more powerful choice but it clearly doesn't mean that Wachovia's portfolio is granted a reprieve in the near term.
---Don't gamble on gambling stocks, that's double jeopardy. Las Vegas Sands(LVS) was trading at $149 a share in November '07, nine months ago. The company has a major presence in Las Vegas(duh) plus in Macao and Singapore which are viewed as huge long term growth markets. Today it's at $34 a share, 78% lower, and falling every day. Ask me, I decided to stick my toe in the water a few days ago at $39 and already feel like I've got a lousy dealer. Gambling is an addiction. It's supposed to be recession proof, or at least resistant. Something's wrong with this table, or me.

Financial comparisons may temper hysteria

Here are some comparative financial statistics relative to the U.S. and other developed major industrial countries:
---First quarter GDP growth---U.S., 2.5%; Britain, 2.5%; France, 2.2%; Germany, 1.8%; Canada, 1.7%; Japan, 1.3%; Italy, 0.3%.
---May consumer price increase---Japan, 1.3%; Canada, 2.2%; Britain, France, and Germany, all 3.3%; Italy, 3.8%; U.S., 4.2%.
---May unemployment rate---Germany, 7.8%; France, 7.4%; Italy, 6.5%; Canada, 6.1%; U.S., 5.5%; Britain, 5.3%; Japan, 4.0%.

The most powerful emerging economies are less relevant comparisons as they have an entirely different dynamic, but they are interesting to note. Brazil, Russia, India, and China, have on average GDP growth of 8.4%, consumer price growth of 9.1% and unemployment of 7.8%.

Focusing on the most meaningful comparisons with the developed countries: the U.S. is highest in GDP growth, that's a relative positive(first quarter is the most current set of fully developed numbers for this measure and second quarter will likely see declines across the group); has the highest level of consumer price increases, that's a negative; and just better than the median in employment, a modest plus.

The higher consumer price numbers in the U.S., the major negative comparison, are largely due to the weakness of the dollar and the higher percent increase in the price of gasoline and heating oil. It should be noted that the four European countries and Japan pay almost twice as much for gasoline as consumers in the U.S. do, so that the percentage impact of this year's increases have been lower off of an already higher base there, and that may account for some of the pronounced difference.

These economic comparisons could be looked at in several ways:
---We have company as the economy heads off a cliff
---Painful as the market declines and economic stresses are here, they are part of a global adjustment and not just ineptitude and greed in this country.
---While the unemployment rate has recently climbed in the U.S., it is lower than all but two of the G-7 countries and all of the BRIC countries. This could augur well for a recovery as adjustments are made.
---GDP growth, while under pressure in the last month, remains within current global standards of a developed country and one could extrapolate that it will continue to be buoyed by the competitiveness of U.S. exports.

Of course these financial comparisons are history, and where it's all going remains an open and worrisome question. At present, however, in the context of the global economy, the U.S. remains relatively stable.

Wednesday, July 09, 2008

International tensions impacting market?

Today's afternoon market wipe-out had to be more than just finding out that Fannie and Freddie had to pay more to raise money and an economic forecaster suggesting that tech stalwarts Intel and Cisco would by negatively impacted by the slowing economy. What's earthshaking there after already going through the wringer the last few weeks. Could it be that scary stuff in the Middle East is being taken seriously by market players. International tensions could be the auto-immune disease of the market, you can't pin it down but it's messing things up.

How could the market not react to what's happening now, and the timing of the afternoon swoon coincided with details of Iran's missile tests. Iran is making a public display of testing new missiles that can reach Israel, Turkey and other vital interests of the West. Iran, at the same time, ran drills at the Strait of Hormuz, that little channel that as much as 40% of the world's oil must pass through. Last month Israel made a public display of 100 jets on test runs apparently meant to show their range and capability should an attack on Iran be decided upon. More noticeable to some, at that time Israel also practiced helicopter missions of 900 miles suggesting to knowledgeable observers the preparation for pilot rescue missions or the delivery of special forces. The U.S. fleet is, by the way, in the midst of exercises focused on the Strait of Hormuz. But there's more going on...

Pakistan's government appears to be unhinged and parts of the country and elements of the army are to some extent operating independently. The bombing of India's embassy in Kabul is being linked to Pakistani intelligence forces, as was the attempted assassination of Karzai in April. With India and Pakistan being drawn into this regional tension we are now talking about two fully armed nuclear powers, not just a clandestine one(Israel) or a hypothetical one(Iran).

This is all unsettling and at some point must catch traders' attention. Who would want to be overly long on the day that something meaningful happens in that part of the world, and if it's imminent who would want to be out there today. Of course this area of the world is always in some degree of turmoil and most observers accept this news and put it in a broader, more contemplative perspective. That said, our last century was filled with obvious political tensions, military preparations, and aggressive actions being put "into perspective" until they no longer could be, with the recognition of real danger just an insight in hindsight. The global financial markets are not immune to all of this and whether it had an impact today or not, this tension could be one more strain on confidence within the market system.

Just an aside---naive as I am, these rising tensions in the Middle East seemed like big news to me with a number of angles worth examining. NBC news led with the story, covered several other unrelated new items and seven minutes into the broadcast the "hard" news was over and the Jon Benet Ramsey DNA news took center stage. I checked. CBS got to Jon Benet in 10 minutes and it took ABC a full 15 minutes to get to the story but they spent the longest amount of time on it once they got there. As the traditional news networks edge toward irrelevance, they are pandering their way to a faster decline and completely alienating what was once their core audience.

Monday, July 07, 2008

Bizarre facilitators of downward spiral in financials

The downward spiral in financials is being aided by what would seem to be an unlikely source, that's the financial companies themselves. In this extremely fragile market for the sector, any bad news more or less affects everyone in the group even if it affects the culprit or culprits of the day somewhat more than others. So it seems odd that just about every other day the analysts at Goldman, or JPMorgan, or Citi, or another major firm emphatically downgrade a few of their industry peers or associates, projecting ever deepening losses. Down, down, down they all go, call it the analysts' revenge. Today's shock research news from Lehman sent Fannie and Freddie tumbling, the market reversed, and now Japanese banks are sliding. Strange really that Lehman, who along with the departed Bear Stearns was the market leader in the mortgage backed markets, would lead this charge. The Lehman analysts got the headlines and scared the bejesus out of already terrified investors, by highlighting that the FASB, the accounting rules making group, was considering new accounting rules that may include rules that would require Freddie and Fannie to raise massive amounts of new capital but that it is likely that Fannie and Freddie would be exempted from those new rules if they were instituted. Hmm, sound like a done deal?, sell, sell, sell, there's no more appetite for risk, none, can't take any more chances, losses are already too great.

Veteran Lehman analyst Bruce Harting and his team are now in financial headlines around the world. The nuance of their comments is ignored and they of course knew that it would be. Why is this self immolation occurring.

One could say that some firms that have been busy handing out downgrades, notably Goldman and JPM, could possibly have some Machiavellian rationale, being in the top tier of a deteriorating industry that will thrive near term only on market share gains as the revenue pie is getting smaller. You certainly couldn't make that case, however, for the analysts at Citi and Lehman. Thinking that these self fulfilling downgrades are just the result of thorough analysis and letting the numbers speak for themselves would be the stiff upper lip approach, all's right with the world, but it might be naive.

Could this be the analyst's revenge, their time to grab the limelight after being shut out of the big salaries and big media audience by Spitzer's castration of their profession. That has been a disaster on all fronts with the exception of Spitzer getting to be governor for a few months but that's another story. But to touch on this tangentially, the brokerage firm securities analysts were once viewed as being controlled by the corporate finance departments and the main line institutional investors. With the link to corporate finance departments not possible in their paycheck, the best analysts departed and the major institutional investment firms began relying on their internal sources more than before. Other than their corporate office there's now only one major constituency that these brokerage analysts work for...

That's the high volume trading hedge funds, that have enough flow to actually have commissions add up to meaningful numbers for these analysts' firms and who can hire analysts who have done good work for them when they leave the Street, and pay them more in one year than they made in ten years working for the brokerage firm(it's an exact parallel to members of Congress departing to work as lobbyists and consultants for massive salaries, or even the head of the executive branch doing same).

It's so obvious that no proof is needed some might say. Combine this flawed brokerage research analyst function with bad mark to market accounting rules(discussed in eyesnotsold previously and agreement here with Steve Schwartzman actually) and the ever vicious competitive nature of Wall Street(never to be underestimated), and then mix in the predatory nature, huge wealth, and unconstrained practices(no uptick rule) of the trading hedge funds and what you get is a financial system under intense pressure that will not likely ease soon.

Sunday, July 06, 2008

Portfolio review time, ugh

For the average individual investor the last six weeks have not been pleasant. One bright spot could be that a more conservative asset allocation has been commission free as equities are now a smaller part of most portfolios. For one that believes that diversified equities---by large cap, small cap, domestic, international, emerging markets, and industry groups---are a required part of any portfolio, the collapse of recent weeks has been disheartening. Looking at, reviewing, scrutinizing, analyzing, turning upside down, chanting over, and taking breaks from a portfolio has not changed anything. There have been some changes here, overdue ones in some cases that became crystal clear in this type of environment. The fact is, however, that there is a rationale for most parts of the portfolio that still stands as long as this is not some doomsday rout. This portfolio holds some Citigroup and AIG, sad but true, but nothing to do now but sit and wait it seems, certainly not ready to jump into more yet although that time could come. Tomorrow could bring some action on a few names.

On June 19 eyesnotsold ventured here to share a jump into a Wachovia(WB) that had been, it seemed, destroyed. Now, right at the threshold of a 10% loss, forcing myself to follow some trading discipline may require exit tomorrow even though the thesis laid out here a few weeks ago still seems attractive. That's no fun at all, foul medicine to take but necessary perhaps. Then there's Insteel(IIIN). Such nice gains there that began to erode last week, so do I dare risk riding them back down or take the gains now and come back again later to a really attractive company with a pristine balance sheet and a business that is perfect for a Democratic administration ramp up in public infrastructure spending and employment. Too much trading is usually not a winning proposition but doing nothing here is not possible. Choices are forced in a market like this for an individual stock investor. But the indexes and broad ETF's, they'll just stay put through it all unless the whole game goes down. Thinking like that late Sunday must mean there'll be a little life in the market tomorrow.

Wednesday, July 02, 2008

Teens crush market

So you think that today's continuation of market disappointments was about the non-stop increase in oil prices, or the ADP report on job losses, the continued fall of the dollar, or the realization that inflation is global. Think again. We can blame it on the American teenager.

In a May 11 post here, there was the following warning---"The most popular teen based stores had sales gains and seem unfazed thus far. IF THEY TURN DOWN, WATCH OUT."(caps added today)

Teens clothing sales growth is screeching to a halt. The latest stats show a year over year sales gain in this category of 2.9% as compared to a 12% gain last year. Revenues are showing year over year double digit declines at stores such as Abercrombie, American Eagle, and Old Navy. Aeropostale and Urban Outfitters, the hottest stores in this niche, are still seeing growth but it is moderating. White hot summer style sensation Zumiez, however, is seeing its first profit decline ever.

If there was ever a consumer category that wants to be, must be, like needs to be, recession resistant the 13 to 17 year old teen category is emphatically it. Marketers, sports stars, trends, pop stars, peers and fads drive into their self-conscious and image sensitive psyches a need to participate in the world of lookin' good. Or at least ok. Kids know it, parents know it, grandparents know it, there's no mystery here. When teens pull back, it's not because they want to stop buying or because they have the capacity to make some rational decision about a slowing economy and declining markets that require a more prudent approach. No way. They have no choice. The money is slowing down.

They'll survive. Maybe they will just get more creative faster and move into the vintage eclectic look like some of their college age siblings, bragging about how little something cost. Maybe they'll migrate further to the cachét of Targét, or even now Pennéys, Searsé or Walmarté. Good for them ultimately, but this is not a good omen for any vibrant economy coming around soon. It's the eyesnotsold most important economic news of the day. All the other stuff we already knew.