Commentary


From Bloomberg:

On a conference call today, analysts demanded that Immelt explain why he told retail investors on a March 13 Webcast that Fairfield, Connecticut-based GE would likely meet its annual forecast of at least $2.42 a share.

“Two days after the Webcast, the Bear Stearns situation took place,” Immelt said. “The last two weeks in March were a different world in financial services.”

There is plenty of criticism going around, and rightfully so.? But unless GE was directly invested in Bear Stearns shares, this shouldn’t have had such a big impact on it’s quarterly earnings.? But if we look past the headlines, we might be able to see why this really happened.

For several years now, GE has always met or beat earnings estimates by a penny every quarter.? This is basically impossible to do for a company that size without doing some fancy footwork.? That footwork usually involved GE Financial, and specifically buying or selling large assets in order to smooth their earnings in any given quarter.

From the article, “GE put its U.S. credit card business and Japanese consumer finance units up for sale last year.”? These are two of the assets that they were planning on selling to help them smooth out this quarter’s earnings and meet the earnings that they had originally stated.

So, while many people are pointing to GE and saying they’re a financial company disguised as a manufacturing company.? While that is partially true, it is not surprising to me that when the Bear Stearns collapse rattled wall street, no one wanted to buy GE’s assets to help them out — everyone who was able to buy assets of this size was busy covering their own balance sheets…

So, did GE deserve the brutal reaction on Friday?? (The stock closed down 12% for the day.)? Yes, but I think it also opened up an opportunity.

I don’t know whether GE will fall out of good graces with institutional investors because of this, but I believe their business is strong and their strategy (outside of the financial footwork) will be successful in the long run.? This might be a good opportunity to buy shares of GE at the bottom of a 3 year long price channel.

A quote I came across today…

?”As of the end of the fourth quarter of 2007, 5.82% of all mortgages were delinquent, with fixed and adjustable subprime mortgages running at a 14% and 20% delinquency rate, respectively.”

On an unrelated topic, my previous question of whether or not you should consider credit a form of emergency savings…? you shouldn’t.? From Mish:

Nina writes…? “I?ve always believed that keeping a HELOC readily available is the best insurance policy and the back-up plan for if / when the emergency fund runs empty…”? and then “..we got the letter from Citibank about our $168,000 line of credit: “We have determined that home values in your area, including your home value, have significantly declined. As a result of this decline, your home?s value no longer supports the current credit limit for your home equity line of credit. Therefore, we are reducing the credit limit for your home equity line of credit, effective March 18, 2008, to $10,000.”

Credit can, and in extreme circumstances will be withdrawn.? There is no substitute for cash, and credit is not an emergency fund.

On another topic, BSC (as per the rumors in my last post) is bankrupt.? It has managed to be sold for $1 billion thanks to a NY Fed bailout and the desire to keep the counterparty system from collapsing on itself.

My perspective on the bailout is this…? if you see your neighbor playing with firecrackers in their living room, and you warn them of the dangers…? you feel like you’ve (maybe) done your ethical duty.? But when their house catches on fire, you can’t stand there saying “I told you so…”, you have to grab your garden hose and try to help put out the fire.

The Fed’s parade of obtuse acronyms and abbreviations is their own modern day version of the garden hose.? Will it work?? Time will tell…? but they have to at least try to put out the fire before the whole neighborhood goes up in flames.

Does Bear Stearns (and the rest of Wall Street) deserve to be bailed out?? No, absolutely not.? But their house is on fire, and it blatantly threatens our own houses (society at large), so emergency measures are required.? The time to avoid moral hazard was two or three years ago.

Now I’m pretty much as “free market” as they come…? but I have to say either we don’t have government bailouts, or we regulate those who would receive said bailouts.? If the Fed is going to back-stop Wall Street (which, for all intents and purposes, it has to), regulation is required. ?You can’t have your cake and eat it too — or rather, you shouldn’t have your cake and eat it too.

No, not da bear market… da Bear Stearns (BSC). Yesterday was one heckuva swing in the mid-tier broker. With a daily low of $55.42, and a daily high of $68.24, that is a whopping 23% move from peak to trough (and back, mostly) in one day. Here is a 1-day chart:

image

Even more amazing, rumors abound regarding the broker. Today there is a rumor going around that the Fed acted to keep Bear Stearns (BSC) from going under. Yesterday it was that Bear was at risk of bankruptcy, accompanied with a high volume of put action.

If the Fed did consider Bear’s position with yesterday’s TSLC announcement, I only have one thing to say… Counterparty risk is a bitch during a deleveraging cycle.

Most of my thoughts about bottoms recently have focused more on the beach-bathing variety I’m starting to see as spring creeps back to the beach. But since everyone is wondering about the market bottom, I’ll bounce the proverbial quarter off of it and see how high it goes.

I’ve talked before about market “gravity” and price clusters that attract future bids. It’s based on basic auction theory: the price that attracts the most bidding represents the best guess at the value of an item even if people who really want the item badly (or are ill-informed or excited) will pay more (or in reverse auctions, less).

I’ve advanced my work on the idea by taking to the computer and working with the R statistical platform to analyze markets from an auction theory perspective.

So how does the?S&P look in this context? (more…)

The Fed has proven yet again that they know how to time a market to either (a) make the most impact, or (b) improve their perception of market savior.

Allow me to explain… it should be obvious to anyone with a pulse that the S&P and the Dow Industrials broke down to new 52 week lows (on a closing basis) on Friday last week and Monday this week. If the market were to break down further, the Fed would potentially be allowing a systemic crisis to unfold… which is (as their logic continues) worse than a little inflation (which they “know” how to deal with). So, as the market is at risk, pull out all the stops and give the stock markets a little juice!

As to my cynical view (option “b” above), the stock markets were also very oversold, and basically at the bottom of their downtrending channels. As a matter of typical trading, the S&P and Dow were due for a bounce, or at least some sideways action for a few days. What did the Fed accomplish with this cynical view? As many people have recently questioned the impact of the Fed, they make themselves out to look like the savior of the markets, taking credit for the bounce that was high likely even without their action. At least, the mainstream media is quick to credit them… and the Fed knows that it is better to have the popular opinion on their side than blaming them for not acting.

Now the bad news… the one day zinger (up 3.7% on S&P, up 3.55% on Dow, and up 4.1% on the Nasdaq) has only reversed the losses from the last three trading days. While the equity markets may benefit from an additional bounce from here, it is worth noting that this is the 3rd or 4th time (I’ve lost count) that the Fed has resorted to “bailout” measures and used market timing to maximize their effect…? only to face panic again within a few months time.

What is the net effect?? An orderly decline, and giving banks time to earn revenue to dig themselves out of the holes in which they inconveniently find themselves.

Has anyone seen the TIP rates? TIPS are inflation protected Treasury bonds and arguably offer a view of the minimum amount of “risk-free” real?return people expect on their money. According to Accrued Interest, the 2-year TIP yield is now -0.72%. That’s negative zero point seven two percent. People are willing to give their money away for the next two years to avoid?risking more in risky assets. This fits in line with the poor rates Jason pointed out at his banks. Throw inflation into the picture and they lose money. It kind of reminds me of people being held up at gun point and sheepishly handing over their wallet to keep from getting shot. It’s criminal. But keep reading the article above for some interesting alternatives that take advantage of the situation we find ourselves in.

With the R-word everywhere these days, I thought I’d remind readers of this quote from Ahead of the Curve:

Perhaps the single most important insight in economically getting ?Ahead of the Curve? is that of recognizing the lagging characteristic, even deceptiveness, of ?recession? as a measure of economic downturn. Businesses suffer loss of sales, inventory buildup, and slowing-to-declining corporate profits when the rate of growth in economic activity (real GDP, measured here on a year-over-year percent change basis to provide clarity) begins to slow from its peak. (more…)

Worth sharing from The BigPicture:

Moody’s Economy.com estimates that 8.8 million homeowners — about 10.3% percent of all U.S. homes — will have zero or negative equity by the end of this month.  Another 10-15 million households are at risk of becoming "upside down" if prices continue falling.

Holy crap.  The potential for 20 million homes, or close to 28% of homes could be under water…  no wonder so many people are walking away, or considering it.

I also read somewhere (unfortunately, I couldn’t find the source) that 20% of subprime adjustable rate mortgages have delayed payments.  And that number does not include the 12% of subprime ARMs that are currently in foreclosure.

Before the fit hit the shan, Nouriel Roubini was chided as being a perma-bear with the most pessimistic outlook imaginable…  and he recently stated that in the context of everything that is going on today, he was truly guilty of being too optimistic.

It’s not just sub-prime folks…  Michael Jackson’s Neverland Ranch may go up for auction under foreclosure soon, and Veronica Hearst (of the Hearst publishing empire) recently lost a beach-front mansion to foreclosure

It’s the time of year again for mutual funds to be disbursing their taxable income in the form of dividends… as we saw last year, some of the really good actively managed mutual funds have very large disbursements to make. The upside is that if you own these funds in a taxable account, they just gave you the funds needed to make your tax payments to the IRS.

If you were invested in the mutual fund for the whole year, you should have done well… but often these disbursements settle the taxable income from multi-year holdings, resulting in a tax hit for those who may have bought this year, but get to enjoy all the taxable events regardless of whether they owned when the mutual fund purchased the assets.

Here’s a shockingly too common chart ? ICENX is down 25% on its disbursement date (most likely 2% or so of the change is from daily changes in its holdings).

That means, if you bought in the last 6 months, you just inherited a tax burden that you didn’t “earn”.

While it’s great that the fund was able to earn 25%+ gains this year, this is an all-too-real problem for mutual fund investors. This is also one of the reasons why ETFs have gained so much in popularity… as the buyer and seller of an ETF, you get the benefit of determining when (and if) you incur a taxable event.

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