Saturday, October 18, 2008

Dow 5K, Our Gap-Toothed Smile, and Paulson's Wheel of Fortune

Slow down, Ax! No way.

Dow 5K is where Eric Janszen of Itulip said he thinks the market should be right now based on actual earnings relative to inflation. So wake up those of you who have been chomping at the bit all week to dive into "once in a lifetime" opportunities, because this dude has been right about everything from the gold to the housing bubble to the market peak last year. Be careful. Take Corning for example. I tried to find the number of buy recos on this stock over the past year, but after the number godzillion came up, I stopped. Now trading below a 3-year low of $12, glad we didn't listen. You need to look no further than the NASDAQ as well, which peaked at 5K 8 years ago. How are we doing now?

Patrick McGurn, special counsel at corporate governance specialist RiskMetrics Group, referring to the actual bailout provisions this week said, ""Under the rules, you can still pay out up to three times annual salary and bonus. The legislation looked like it had real teeth, but the interim final rule is just a gap-toothed smile." Are any of us surprised that, not unlike the possibility that banks will simply avoid governance by using lower level tranches, that nationalized bank CEOs will still earn their bonuses and parachutes? C'mon, look at the leader....

Paulson. A fascinating interactive wheel linking Paulson to the major Wall St. Cretans/Titans was published in MSN Money yesterday: http://articles.moneycentral.msn.com/Investing/StockInvestingTrading/four-degrees-of-hank-paulson.aspx
Notice the outer layer with players like Countrywide and IndyMac didn't seem to fare as well as the inner circle with people like Franklin Raines, Dick Fuld, and John Thain. Also little surprise there. Fuld has been subpoenaed; I wonder when Paulson's is coming?

Despite this week's mild resurgence after the worst week in market history, real economy data was even worse than expected. Home sales were a meager 817,000, the Philly and Michigan surveys were both abysmal, and monthly jobless claims continue to rise. Retail continued to get hammered this week, as inventories actually rose despite a larger than expected 1.2% decline in sales. And it's not just Wall St. that's suffering. Even Best Buy is planning to reduce it's holiday staff by 10K employees. Add this to major layoffs at Pepsi, GM, Danaher, and Borg Warner, and these numbers will only continue to compound, creating a vicious cycle. "Wages grow more slowly when there's higher unemployment, so the downturn will be affecting most working families through reduced hours of work," said Lawrence Mishel, president of the partly labor-funded Economic Policy Institute think tank.

So hang onto your shorts, as retail will continue to fail and we are still awaiting a massive hedge fund redemption. And speaking of hedge funds, thanks to Alexandra at Greenlight Capital, Einhorn's company. It appears as if I'm not an SEC accredited investor (http://www.sec.gov/answers/accred.htm), and therefore, do not qualify to contribute to Mr. Einhorn's funds. I stated my case that I've actually outperformed Mr. Einhorn this year, but still have full faith in his abilities to manage money. Alexandra thanked me for my interest and support, and noted that most of the people working for him also do not qualify to invest in his company. Oh well. We wish you luck anyway.

http://www.marketwatch.com/news/story/corporate-governance-takes-back-seat/story.aspx?guid=%7B8750F6ED%2D3F7F%2D4E80%2DB39A%2DC8D03E13234A%7D

http://www.cnbc.com/id/27242943

http://www.harpers.org/archive/2008/10/hbc-90003696

6 comments:

DCNorth said...

Hello Ax,

I was feeling very puzzled this week. Warren comes out saying he's going to start dipping his toes in, and then you, The Coach and Nouriel Roubini say "not so fast...there is a lot more to happen out there...before we even think of getting better". A lot of the MSN money writers are in the same camp too. Definitely leaning towards yours and The Coach's suggestions!

Regards,

AX said...

DC, have no puzzlement over Warren's op-ed piece. Here is a man whos stands to gain greatly by the return of optimism to the U.S. stock market. Look no further than his to-date losing investments in GE and GS which were only buyoed by news of him buying (with guaranteed 10% returns either way). WB is a great investor, but don't kid yourself into thinking that the man who has criticized derivatives doesn't own a bunch, and the man who is trotted out by CNBC to tout stocks and the dollar doesn't own a company whose stock is down 25% this year.....

Samir (Novartis) said...

AX,

I've been back to reading your blog and I agree with most everything your are speaking of. Actually another point I was debating with an ignorant economic soul was the housing market. Who shall remain unnamed and assumes we will recover this year.

I believe we will not have a recovery in 2009 as many predict. I am thinking 2010 or 2011. Housing inventory at historic levels. Prices are dropping but the average household needs to be somewhere around $200,000 for a family of 4 avg income $60-65K. That demographic shift will take a while and for those who have been burned/foreclosed don't count on them getting back in the market for at least 5 years. Thoughts?

Any thoughts on P/E of a stock? Because everyone thinks stocks are soo cheap now but relative to what P/E??!! We don't even know that anymore what P/E is appropriate for an industry group.

Samir (Novartis)

Tiger Coach said...

Always a pleasure to read Ax... I have made bids on CAKE and WSM... DBRN is lame... my wife's personal opinion...

Let's look at a few more financials that could be headed to the tank... look at Zion's numbers...eeek!

AX said...

Samir, always good to have you back...housing market, particularly in S. Florida area, is in shambles. No hope for recovery for many years as it will take a long time to clear out the foreclosure glut. Also, in areas like Phoenix and Vegas, where are all of these high paying jobs going to come from? Unemployment is going to continue to soar and governments will start laying people off, including essential services like fire and PD.

P/E? What's that? When there's no visibility of earnings, how can you use this metric? The clowns on CNBC will insist that S&P P/Es are historically low, but when companies like Citi continue to lose $3 billion a quarter, what's it worth? Thanks for the input.

AX said...

TC, the gig on financials may be up. Which ones will fail over the next 2-3 years, I don't know. The rules have changed rapidly. Will check into DBRN, Lynch's wife had plenty of good suggestions for him.