We continued to digest the GSE bailout news and on the equity front it went into the esophagus, down to the stomach, and was puked right out as something rotten and nasty. What a slaughter. The bears are definitely back in control now and the prospects of a serious rally based on the GSE news is all but gone. Despite the equity market meltdown, there were some curious cross currents that were very confusing. The credit markets seem to still be looking at this GSE news somewhat favorably. The ABX, which is directly tied to the mortgage market, continued to see tighter spreads across the board despite the slaughter in the equity market. Bank CDS was also tightening across the board until about noon when it reversed. CMBX widened ever so slightly. Volume was as heavy yesterday and breadth was more negative than yesterday breadth was positive. Energy and metals stocks (besides the banks) especially got puked out as oil just collapsed. I personally believe we are in a super cycle but that we will have several years of anemic prices. I speculated several months ago that 12 to 18 months we will have an unbelievable opportunity to buy oil stocks. Still believe that to be the case but you need to be patient.
Today's story was Lehman. There is no doubt that Lehman is done as an ongoing public company. After the bell they announced they will be pre-releasing earnings tomorrow morning and disclosing strategic initiatives. You had four big banks come out today saying they are still doing business with Lehman (I am sure because of a call from Hank Paulson or Ben Bernanke). My guess is in the wee hours of the morning some kind of shotgun merger or private buyout will be put into place. Maybe with Goldman? Lehman is up 7.2% afterhours. There is a decent chance that we will be up triple digits tomorrow on the news. I think you can be more of an aggressive seller on this news than you could on the GSE news. Right behind Lehman is Washington Mutual, behind them are a host of other banks. The markets may get a lift but this I don't think has much potential of changing things. The other reason you could have a strong rally is Fed Ex and Texas Instruments with both coming out with good numbers or upt guidance and were up 5% after the bell. That could send technology and some other stocks moving higher. Thursday could be an interesting day if jobless claim numbers come out bad and reminds everyone of the horrendous jobs report last week Friday that was forgotten in the GSE news.
One interesting thing I heard today that I had not heard before is that some of the banks are worried that if things don't get better by the 4th quarter the auditors are going to make them mark down assets taking permanent impairments. The banks have been playing all kinds of games moving stuff to held for maturity and level 3 assets hiding by some estimates 500 to 750 billion in current losses (you don't mark held to maturity assets to market unless it is deemed there is a permanent impairment to value). So not only don't you get write ups but much more writedowns. So basically starting in the 4th quarter they moved stuff making an argument they shouldn't write it down and the auditors bought that argument but after a year lapses the auditors will say sorry, there is a permanent impairment to value now. This won't happen all in one quarter but would roll for several quarters as 12 months lapse.
The whipsaw will most likely continue but the psychology, perception, and credibility is very bad setting up potentially for something much worse than we have seen so far (and today was the worst day in the S&P going back to February 2007 which is when China collapsed). Minyanville talks about the collapsing psychology aspect.
http://www.minyanville.com/articles/psychology-perception-markets-wamu-wm-lehman/index/a/18880
People are doing stupid stuff out there because of the pressure. Stay focused on the things that mater and avoid trying to trade every piece of news.
Subscribe to:
Post Comments (Atom)
3 comments:
I think oil companies are too cheap now but the coupling with the stock market seems endless. They are priced as if oil was trading at 70 dollars. Not all companies profited a lot from higher prices as refining margins deteriorated. 2q08 average oil price sold was 110 vs 80 in 4q07, and the incremental earnings between those quarters were not spectacular. XOI index now is trading below 07 levels when oil was trading at 70-80,maybe markets are forseeing prices below 70? OPEC countries have 0,5 trillions dollars in reserves and they can cut production unlike 10 years ago when their finances were too fragile.
Why the huge decrease in margins? I understand the refiners but why did earnings not increase more than they did from Q407 to Q208? I think oil is going back to 80 and maybe lower. It depends how bad it gets worldwide economically. There is so much uncertainty about oil prices that it increases the risk premium dropping stock prices. MCF looks interesting on the natural gas front and COP on the oil front (no position in either). I just think it is early.
James hamilton at econbrowser has a great knowledge about peak oil and has written good posts. The geopolitical premium has increased in recent years as most of the reserves are concentrated in OPEc countries, besides developed countries are diminishing their share(ghwna oil field at saudi arabia, sea north, cantrall in mexico, iran , nigeria, irak have production problems. Besides finding oil is harder than before, companies taken for granted that oil expenses in exploration were fruitful and now it is priced is not so easy. My prefered companies are eni, british petroleum, and marathon all of which 2q 08 profits were amazing compared to peers.
Post a Comment