Wall Street Reaction to no more rate cuts?

4 Federal Governors are publicly stating that they are against further cuts.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adJIM71hYaxo&refer=home
“Federal Reserve policy makers, sensing both renewed inflation dangers and a possible economic boost from government rebate checks, may be nearing a pause in interest-rate cuts after the fastest reductions in two decades.”

Maybe this is just a way to talk down inflation.
Maybe the Fed will indulge in 1 more cut on the 30th and then wait.

Certainly cutting rates has been a success in reinflating the balance sheets of many banks.

Why we care:
Wall Street likes rate cuts. Right now, the Federal Funds rate is BELOW inflation. The Fed is literally giving away money.

And the impact is a reinflated Wall Street. Will the Fed now pop that bubble? They don't want to, considering the ongoing mess. A positive Dow helps to buy time for the ailing financials. But the Fed is also aware that a lot of people are getting mighty pissed off at runaway inflation. The real CPI, including gas and food, is topping 7%.

Perhaps the Fed really believes its own bullshit that all will be better by July (a stronger 2nd half, they proclaim). Which would make them willing to hold the line on rates.

Economic Downturn Accelerating

Consider the following pieces on unemployment in New York, California and Florida

NEW YORK - Financial Services job cuts almost double
http://www.nytimes.com/reuters/business/business-wallstreet-layoffs.html?_r=1&oref=slogin
Financial Services Job cuts January-March: 36,000
New Job Cuts announced: ~30,000
Citigroup 9,000
Merrill 2,900
Bear Sterns 9,000
Wachovia 8,600
These jobs pay $200K and bonus, adding $25B+ to the NY economy.

CALIFONIA - Unemployment jumps
http://www.latimes.com/business/la-fi-caljobs19apr19,0,5944269.story
California jobless rate rose to 6.2% from 5% last year. Highest rate in 4 years. And that doesn’t include the unregistered workers.

Unemployed rose 89,000 in March (up 229,000 for the last 12 months). That is, it almost doubled in 1 month.

FLORIDA
http://www.heraldtribune.com/article/20080419/BUSINESS/804190361/1661
30,000 people lost work in Florida in March

Notice the disconnect? According to the government, only 80,000 jobs were lost in March. According to local articles, 120,000 jobs were cut in just California and Florida. The difference is because the Federal Government massages the raw data.

We care for 2 reasons:

1. More unemployed means more economic problems and worse corporate performance

2. Better unemployment figures keep the market in a rallying mood.

While Wall Street acts as if the worst is behind us, the reality is that the bad news is accelerating.

The Rally Holds

The rally is holding strong. Every day an attempt to go down has been swatted back.

I do think that options and short covering is playing a role here, but th esentiment is overall very positive.
A key part is the fact that the financial companies are not declaring insolvency. Citigroup wrote off another big chunk, but the loss is less than last quarter. Clearly the losses will continue as the lenders continue to try and ride out the losses on their books, but the massive crisis is over for now. The patient is still in trauma but not dead or dying.

And then GOOG had great results. Again, these were jazzed by the weak dollar, but the market is seeing growth.

In any case, the market strength is very unfortunate given our massive short position. I continue to look past the near term and focus on the basics. Joe Sixpack has no money. Consumer spending is falling apart and so is corporate spending.

The best case scenario is a mild recession, which I don't believe.

Bay Area Median Home Price drops $100K

http://www.dqnews.com/News/California/Bay-Area/RRBay080417.aspx

"The median price paid for a Bay Area home was $536,000 last month, down 2.2 percent from $548,000 in February, and down 16.1 percent from $639,000 in March last year. Last month's median was 19.4 percent lower than the peak median of $665,000 reached last June and July"

Santa Clara Sales Volume: -46%
Santa Clara Median Price: -9%
San Francisco Sales Volume: -21%
San Francisco Median Price: 0%
San Mateo Sales Volume: -45%
San Mateo Median Price: -4%

The majority of the year's sales happen March-June. Typically there is a jump in sales from February to March. This year, that jump was half of what it usually is.

The new myth is that sales will jump once mortgage rates loosen up.

It's a myth because rates won't loosen up. Banks want to lend to qualified borrowers who can show ability to repay: 20%+ downpayments, proof of income, and top credit scores.

And with prices dropping $9K per month, buyers are waiting for better prices.

But when it comes to price, there really are 2 markets here: the Silicon Valley and San Francisco Market and the other areas. Prices are dropping fast on the margins and not in the major metro areas. I think it's for 2 reasons: more stable income and fewer home developments. Home builders are embarking on fire sales, distressing prices. However, even without homebuilder fire sales and layoffs, housing in SF and SV are affected by ARM re-sets.

And lets not forget foreclosures - banks are starting to accept the reality and deal with it by lowering prices.

ETFC rebounds

Nevermind the release - it was bad news.
The important thing was that they are nowhere near bankruptcy and can now build going forward.

The market liked what they saw, even with the big miss, and ETFC was trading ~$4 in afterhours.

I talked about buying back the calls, and that would have been a nice play, but a greedy one. lets take our gains and move on.

Well, at least we'll see. Tomorrow is expiration day and anything can happen. The market continues to shrug off the steady drumbeat of negative economic news. They like the few positive notes that the big companies are showing. And the big jump yesterday may mean shorts will have to cover.

Looking past tomorrow, I would say the market will weaken. Short covering drove much of the growth yesterday and today. That ends next week and it's business back to normal.

Impact of the weak dollar

What do Nike, Intel, Google and IBM have in common?
Answer: they all attribute much of their growth to the weak dollar. And not to greater sales because of a weak dollar but to the benefits of turning the Euros, yuan and yen into dollars.

Look at $/Euro exchange rates
1/1/07 0.757
4/1/07 0.748
7/1/07 0.734
10/1/07 0.70
1/1/08 0.685
4/1/08 0.64

From Q1 2007 to Q1 2008, the dollar has fallen almost 20%.
Since each of the baove companies does at least 50% of business overseas, the weak dollar automatically adds 10%+ to revenue and even more to earnings (because the extra bit goes directly to bottom line profitability).

The dollar isn't going up anytime soon, so this trend will continue 2 more quarters at least. By Q4, however, unless the dollar continues to crash, the benefits will fade away.

But the impact and endurance is making me question the NKE put. I'm conunting on a broad market pullback to get us breakeven on those. If possible.

California Housing Much, Much Worse

http://www.car.org/index.php?id=MzgzNzc=

I forgot to share this one.
"Home sales decreased 28.5 percent in February in California compared with the same period a year ago, while the median price of an existing home fell 26.2 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today"

Wait! Back in December they said that home sales would drop 4%.

Meanwhile, look at how the SF Bay Area is doing:
"Statewide, the 10 cities and communities with the greatest median home price increases in February 2008 compared with the same period a year ago were: Encinitas, 25.7 percent; Santa Barbara, 23.4 percent; Walnut Creek, 21.5 percent; Redwood City, 14 percent; Carlsbad, 10.9 percent; Sunnyvale, 5.3 percent; Mountain View, 3.4 percent; Rancho Mirage, 2.6 percent; Santa Monica, 1.5 percent; Los Angeles, 1.5 percent; Santa Clarita, 0.9 percent"

Not high end areas like Los Gatos, Palo Alto or Cupertino. Blue collar areas like Sunnyvale and Redwood City.

Meanwhile, another $300B of loans has yet to re-set in California. 26% drop? This is going to get ugly.

San Diego has fallen to 2003 levels and they were at the lead of this bubble. So the Bay Area is easily 1 year lag. Once it starts to drop, however, look out.

Goldman Sachs: 15% drop in market coming soon

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/14/bcngold114.xml&CMP=ILC-mostviewedbox

"David Kostin, the chief US investment guru for Goldman Sachs, expects the S&P 500 index of Wall Street equities to plummet a further 15pc over the "near term" as companies scramble to lower their outlook for this year."

"Goldman Sachs said the key for equities will be the full-year guidance offered by companies rather than first quarter profits. It cited the example of Bed Bath & Beyond, where the stock fell sharply last week after the firm said the earnings prospects for 2008 would be around 16pc below consensus estimates."

So if this is Goldman's position and advice, how do you think their trading and lending will change?

Intel Beats...or does it

http://biz.yahoo.com/ap/080416/earns_intel.html

It's an old game: guide down and beat. Except they really didn't beat:
* EPS expectations 90 days ago: $0.32
* EPS expectations 30 days ago: $0.29
* EPS expectations 1 week ago: $0.25
* Actual EPS: $0.25
In other words, expectations were dropped 20% in the last week.

The market and Wall Street will treat Intel's results as a big positive - a sign that all is well.
* Sales: Up 9% year over year.
* Earnings: Down 12% year over year.
* Guidance that margins will improve

Why are sales strong?
1. Flat Sales Prices. With AMD falling far behind, INTC does not face pricing pressures
2. Weak dollar. Over 80% 20% of its business comes from outside the US. Re-calculating overseas sales into dollars is a guaranteed increase
3. More market share: Apple sales and AMD demise. A little market share growth helped.
4. More unit sales in the server market. Thi sone I need to understand better.

So why are earnings down 12% to $1.4B? With a 9% sales upside and strong margins and pricing, that's a 21% droop.
1. Write off. They dumped some business for $329M
2. Weak dollar and global mix. With 80% of business outside the US, dollar denominated earnings grew. I estimate an upside of $155M (10% dollar strength on 80% of pre-write off earnings)
3. Layoffs. Intel fired 10,500 workers over the last year. At $75,000 per person, that reduces costs $787M per year or ~$200M per quarter.
4. Reduced shares. There are 122M fewer shares. That added another penny to EPS.
5. Higher tax bracket. They pay 2.5% more or $30M

By my calculations, Intel's one-time loss was balanced by the other gains. So no earnings reduction should have happened. This makes no sense unless last year something juiced up the earnings and I don't see any record of that.

I must be missing something

In any case, they are happy with the lowered guidance. The tighter margins, imho, reflect layoffs (another 1,400 this quarter) and dollar exchange rates. This is temporary. By next year, same quarter, the dollar benefits will have worn off.

MGM Down, ZLC UP, MVL/ACI/WLT not going down

MGM fell today - our puts have almost doubled, which is nice
ZLC however rose sharply - which confuses me. All signs are pointing to much lower sales. I can understand that earnings will be better as they close stores and layoff employees, but that's not enough to counter a major drop in sales.

Meanwhile, I keep hoping for a better buy-in price on ACI/WLT and espceially MVL
When MVL dropped $1 last week I got excited, but it snapped back. Darn. And there are barely 2 weeks left before IRONMAN debuts. I may have to bite the bullet....

Retail getting ugly

http://www.nytimes.com/2008/04/15/business/15retail.html?_r=1&hp&oref=slogin

“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer "

"“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer"

"The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603."

This is why we are short consumer goods, consumer services, and commercial real estate

PPI higher than expected

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.o2Ke_vb2z4&refer=home

PPI rose 1.1% in 1 month. Excluding energy and food, that rate was 0.2%

Yesterday we learned that consumers are buying fewer things as food an gas eat into budgets.
Today we find that companies are facing the same pressures from inflation.

The Fed can try and play a game that excludes food an dfuel but in the end there will still be an economic slowdown. Cutting rates further - as expected this month - will increase inflation.

The Fed seems to be willing to suffer short-term inflation in order to jump-start the economy. Unfortunately, they will get the inflation but not the economic jump start.

MGM Admits Troubles Ahead

http://biz.yahoo.com/ap/080414/mgm_mirage_layoffs.html

"Budget-tight guests have shown a tendency to spend less in all major segments of the business, Feldman said.
"Instead of four days, people stay for three. Instead of a five-star experience, they are going for four stars. Instead of two shows, they're going to one," he said. "There certainly is the possibility that there are people who are also making a decision to gamble less."

Dead Cat Bounce

Except for agirculture and oil service stocks, the market is not doing well. Barely flat after a massive collapse Friday.

ETFC is getting hammered in a guilt-by-association spirit. We don't care - we'll re-write the calls if we have to.

Bad News Bears: CitiGroup and Merrill

http://www.bloomberg.com/apps/news?pid=20601087&sid=a14SC3UVha.4&refer=home

According to this article, Citi will writedown a further $10B and Merrill an other $5B.
This follows Citigroups $24B writedown just 3 months ago.

If you think the glass is half full, then you like the way the write-downs are decreasing in size: from $24B to $10B

If you think the glass is half empty, you have to wonder what changed in 3 months.
Does Citi not know its business?
Were they hoping for more handouts from the Fed?
Or are things just getting worse an dworse as the months go by?

In my opinion, banks are truly unaware of the extent of the problem. Worse, they are stringing everyone along with a wait-and-see attitude. They hope that they can just ride it out and clearly they can't.

Why don't they just say: we have $100B of paper at list price and we'll assume the worst and write off 70%. After all, if they are too aggressive, the assets will be more valuable in the future and they can present them as gains.
Banks can't do this because they are held to lending ratios that tie back to the value of assets on their books. And with the Fed acting like everybody's favorite rich drunk Uncle, they certainly aren't about to hold banks accountable. That means the shareholders and the market will.

Here's how it will play out. The Fed will ignore the fact that banks are technically illiquid or in default of basic bank laws. Worse, they will abet these serious crimes by buying the bad debt (also known as giving non-stop loans and taking dud loans as collateral).
But the market now perceives the problem and they know the reality of the ratios. This latest writedown has destroyed all trust and faith, like the wayward husband who strays one time too many. They simply don't believe banks and the Fed anymore. And they can smell blood on the water.

This will be a week of runs on banks, margin calls, and more money being extracted from the markets.

And it's spreading to Europe.

I do think that our April ETFC calls will be unexercised. Friday is expiration and I think the market will punish banks and lenders. if that happens, wait 2~3 weeks and ETFC will recover ground and we'll re-write the calls.

Liverocket Performance Week 15 - Up 2.7%

Because I am doing more trading these days, I will return to a weekly performance posting.

This was a nice week for separation: we rose 2%+ while the markets fell ~2%+. If I am right that the market is about to downshift even more, we should see continued improvements.

In general, I am comfortable with being short given the 9 month window on these puts. Right now, because I jumped in early, we are playing catch up. But I remain confident.

I want to go long on MVL June calls and the pullback was refreshing. ACI and WLT as well.
Because of the volatility, I will be looking at options more than taking equity stakes. get in, get out.

This week we bought puts on MGM and AGN and we bought more CF and sold covered calls.
MGM I referenced in previous posts: I believe Vegas is falling hard and MGM is too dependent on the US market. The curveball here is Dubai: they could buy more shares and push up the price (they just got approval to exceed 10% ownership). mad oil money may make them sloppy with their cash, but Dubai may want to wait-and-see. Another $2 dop in the stock sees us up 100% and we'll look at exiting
AGN is new. They make Botox among other things and this is a very discretionary item. A lot of folks are cutting back and I've read that sales people are not making quotas. Certainly sales won't be rising in the US, which would be contrary to their recent guidance.
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I am recording the covered calls as follows: money is booked into cash and the current price for the underlying equity is recorded at the lower of the strike price or stock price. So, for example, ETFC strike price is $4 and the actual market price is $3.75, so I record as $3.75.

This is different from last week when I just recorded the market price for the stock. That overstated last week's performance ~0.75% (which means this week was actually closer to a 3.5% rise).

For the options, I am recording the BID price (the price at which I would sell to close).
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Quick comments on a few positions:
TRID: Patience. They softened a bit before earnings but we are looking for guidance on design wins.
AN: With car sales so weak, how can AN do well?
NKE: This one is hurting. We know that Nike sales are flat in unit terms but the exchange rate is helping them turbocharge their earnings. The US consumer i stired and I'm hoping that this will show up soon. Or at least that Under Armor will put the hurt on them
ETFC: They dropped and not just because of GE. After rising to $4.50 they pullde back to $4.10 and then GE hit them harder. Our premise is the same: they aren't going under and the stock could soften but we are protected on the downside. Their stock price will be tested this week as other financial houses release poor earnings. That may give us an opportunity to close out the calls, wait a week or 2, and then write them again.

The Week Ahead: Stormy Weather

I expect the markets to be very upset as we get news about inflation, retail sales, and a slate of bad earnings releases.

This is the bedtime story the Fed is telling the markets: inflation will soften as the economy cools, but the economy will only cool slightly. Nice fairy tale, but it isn't true.

For this to be true, we have to see tame inflation (less than 0.2%), inflation is running high for food and energy, but it isn’t clear about the rest. The trend is inflationary (the cost of imports has shot up), but companies may not be passing it on to the consumer. So PPI could be up but CPI flat. CPI is the big dog here because anything >0.3% means that (1) the Fed is wrong and (2) inflation is high and further interest rate cuts may not be happening.

retail sales may look strong because of dramatically higher prices of food and gas. But the underlying message will be a reduction in spending. Industrial production may be higher due to exports and a slowdown in imports that will drive more domestic sales.

Monday: Retail Sales. Analysts expect an increase 0.2% excluding autos & parts
Tuesday: PPI, Home builders Index
Wednesday: Housing starts, Industrial Production, CPI. Analysts expect CPI to grow just 0.3% for all and 0% less energy and food. They also expect no change in industrial production.

Meanwhile, we have a slew of financial earnings releases, as well as a smattering of consumer and IT releases.
* Financial – Until last Friday's GE report, the market imagined that the bad news was out. Now the fear is that the bad news will continue. WAMU on Tuesday will set the tone.
* IT – There are two types of IT: the consumer (Sandisk, Intel, Seagate) and the Corporate (IBM, Infosys, Seagate, etc). Both are forms of discretionary spending and I think we’re going to see the first strong indicators that companies are slowing their IT spend.
IT spending is usually a lagging indicator because companies have long-term contracts and they can't turn of the spending spigot quite as fast as consumers. I suspect that business has been slowing for 5 months, so it’s time for that slowdown in IT spending to emerge. Nevermind that layoffs hit PC sales or that the squeeze on financial companies means they will push out IT projects to preserve capital. I am talking about a more widespread trend that will confirm slowdown.

Thursday brings 2 companies of consequence to us: E Trade and Harley Davidson (HOG).
E Trade: a lot of recent weakness thanks to GE. There could be further softness, but we can always write more calls.
HOG: should get hit hard from sales slowdowns and delinquency rates (GE showed that delinquency rates are surging – and if folks are getting behind on dishwashers, those $20K bikes must be straining resources even harder). Plus I've heard used Harleys are starting to show up.
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Tuesday: Infosys (gauge of IT services both US and EU), Intel (IT gauge), Linear Tech (IT), J&J (consumer and health), Seagate (IT), WAMU (Financial), US Bancorp (Financial)

Wednesday: Illinois Tool Works (Manufacturing), IBM (IT), JP Morgan (Financial), Wells Fargo (Financial)

Thursday: AMD (IT), Bank of NY (Financial), Capital One (Financial), ETrade (Financial), Harley Davidson (Auto & Consumer), KeyCorp (Financial), Marriot (Travel), Merril Lynch (Financial), MGIC (Financial), Nucor (Steel), Sandisk (IT), Zions Bancorp (Financial)

Friday: caterpillar (construction), Citigroup (Financial), Schlumberger (energy infrastructure), Wachovia (Financial)