• When Will It Turnaround?
    Posted by on October 24th, 2008 at 8:08 pm

    Now that the S&P 500 hit another new low today, investors are curious when things will finally turnaround. Is every rally just a bear market rally? The market hit a major intra-day level low exactly tow weeks ago, and we’ve been hovering above it ever since.
    I’m no technical analyst but it does seem that the market likes to test its recent lows, and if no new low is made, prices rally. Fortunately, we didn’t break through the intra-day low from October 10. What impresses me is that most of the rally since October 10 was in pretty bad stocks, while the higher quality stocks, like our Buy List, haven’t been doing too well. That just tells me that this two-week interlude was merely a reaction against the reaction.
    Today is also the 79th anniversary of Black Thursday, and it’s the 101st anniversary of J.P. Morgan bailing out the economy during the Panic of 1907. The panic ended when J.P. said so — I wish he were around today. Still, spotting a bottom is tough business, and the rally often begins when things look terrible.
    A perfect example is what happened 18 years ago. Note the chart below. The black line is the S&P 500 (left scale) and the gold line is earnings (right scale). The two axes are scaled at a ratio of 16 to 1.
    image721.png
    The market rallied while earnings continued to fall through 1990 and 1991. Due to the rising market, P/E ratios soared, but that would have been a false signal that stocks were overpriced. Earnings were still plenty lousy through 1992. It wasn’t until 1993 that earnings growth really got going. The yellow line finally caught up to the black line in 1994, but both kept on rising.
    The point is that the market can turnaround anytime now. I grew used to clients saying that they’re just “waiting for the smoke to clear.” It doesn’t work that way. The market has already crashed. It can certainly go down further, but most of the risk is gone.

  • The 30-Year T-Bond Hits Lowest Yield Ever
    Posted by on October 24th, 2008 at 12:20 pm

    The 30-year T-Bond (^TYX) fell below 4%.

    Treasuries rose, sending the yield on the 30-year bond to the lowest since regular issuance of the securities began in 1977, as widening financial turmoil wiped more than $10 trillion off stock markets worldwide this month.
    U.S. notes rallied on speculation the global slowdown will deepen. The U.K. economy shrank more than forecast, a report showed today. Trading in U.S. stock-index futures was limited after declines of more than 6 percent. U.S. government securities returned 1.6 percent in October, the most since January, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as tumbling stocks spurred demand for the safest assets.

  • It’s Official: The New York Times Is Junk
    Posted by on October 24th, 2008 at 11:25 am

    Their credit rating that is. Of course, credit ratings are also pretty much junk.

  • Dollar Bill On Floor Sends Wall Street Into Frenzy
    Posted by on October 23rd, 2008 at 4:52 pm

    The Onion reports:

    Wall Street investors experienced a sudden surge in optimism Tuesday when, after six tumultuous weeks that saw record drops in the Dow Jones industrial average, a $1 bill was spotted on the floor of the New York Stock Exchange.
    The dollar bill was discovered in the northwest corner of the trading floor at approximately 12:05 p.m., and its condition was reported as “crinkled, but real.” Word of the tangible denomination of U.S. currency spread quickly across the NYSE, sending traders into a frenzied rush of shouting, arm-flailing, hooting, hollering, and, according to eyewitnesses, at least one dog pile.
    “With credit frozen and the commercial paper market poised on the brink of collapse, this is the most promising development I’ve seen on Wall Street in months,” said floor trader Tim Formato, one of hundreds who gathered around the $1 bill and excitedly called their clients to inform them that they were looking at actual U.S. tender. “I think I touched it.”
    According to witnesses, the trading floor was soon abuzz with energy, as traders pointed at the dollar and repeatedly shouted “Look!” and “Money!” A proposal to divide the $1 note into 1,300 equal pieces and distribute them amongst investors was considered, but ultimately rejected. Early reports estimate the dollar may have passed through as many as 65 hands before disappearing in the late afternoon.
    The bill’s absence, however, did not deter the growing enthusiasm from those on the trading floor. By 2:15 p.m., more than 60,000 shares had been purchased in the new publicly traded asset, DLR, after brokers placed a flurry of calls advising their investors to buy into the booming single-dollar market.
    By the close of day, economists were estimating the dollar bill’s net worth at just under $270 million.
    “We couldn’t be in a better situation right now,” trader Patrick Kady said. “Unless of course it had been a euro.”
    However, some financial advisers are warning against the rampant speculation the dollar has caused on Wall Street. Many have cautioned investors not to make rash decisions, such as liquidating all their low-risk government bonds in order to sniff the green paper bill for just a minute.
    “I bet it smells like rose petals,” mutual funds specialist Ken Stoute said. “My friend’s friend Tim Formato? He’s on the board at Westminster Securities and he says he touched it. He said it was warm and soft and wonderful. He said he knows where it is now, and I can put in an option on seeing it tomorrow for only $85.”
    Since the appearance of the dollar, the Dow has spiked an impressive 993 points—its largest gain ever. Initial numbers are showing the most sizable rises in technology stocks, a trend some are attributing to Microsoft’s CFO Chris Liddell, who toured the trading floor Tuesday morning with the bill stuck to his left shoe.
    The overall projection for the market following the incident has been positive, with many analysts claiming that the $1 bill may be an indication of other spare change lying around. This, coupled with reports out of Europe that there is a German college student who has not yet hit her credit card limit this month, could be enough to stabilize the Dow and jump-start the global economy once again.
    “This is just another sign that the U.S. economy is as strong and resilient as it has ever been,” said Richard Fuld Jr., former CEO of Lehman Brothers. “I’m just glad we finally have these credit and subprime mortgage loan crises behind us. This $1 bill will carry us through another 10 years of reckless, unregulated borrowing.”
    Added Fuld, “Just for God’s sake, don’t invest it in the stock market.”

  • The Decline and Fall of Old Media
    Posted by on October 23rd, 2008 at 11:10 am

    The New York Times Company (NYT) closed yesterday at a 13-year low. The company reported a loss for the third quarter and it considering cuttings its dividend. The current dividend indicates a yield of 8.4%.
    image720.png

  • Does this Make Any Sense?
    Posted by on October 23rd, 2008 at 11:02 am

    In July, Apple said to expect $1 a share in the next earnings report. Since Wall Street had been expecting EPS of $1.23, the stock dropped $4 to $162.
    Now here we are three months later and Apple reported earnings of $1.26. So the shares rallied $5…to $96!

  • Dennis Kneale Shocked then Composed
    Posted by on October 23rd, 2008 at 10:52 am

  • Nicholas Financial’s Financials
    Posted by on October 23rd, 2008 at 10:46 am

    A reader weighs in:

    I am not averse to buying microcaps and have in fact made some good money doing so. I bought stocks that had a good business model and became big companies. This is why I think I can help with regards to NICK.
    First, the finance receivables is very large compared to any other part of the left side of the balance sheet. Basically, you are buying the receivables, as a shareholder. You are buying them leveraged a bit (as you mentioned 2:1). You’re not really buying the operations of the company because again, earnings and cash flows are tiny compared to the asset side of the balance sheet; there will also be no earnings if receivables shrink and the company can no longer collect interest.
    With that being said, I’d like to point out that last quarter there was a charge off of close to $20M, applied to the receivables. This was 9% of the receivables, or roughly 20% of the equity. Meaning your shares, as they represent equity, should have declined by at least that amount — assuming there was no reason book value would increase in the near-term, which would be a long shot as “charge-offs” tend to be just that… off… for good. These are not to be confused with unrealized losses which occur due to mark-to-market fluctuations.
    Delinquencies on payments also increased across all time periods, indicating that further charge offs are in the wings. If the economy recovers soon there’s not much to worry about. If consumers pull pack (in Florida in particular) then even just a 20% charge off will have a massive impact. Because the company is leveraged about 2:1, that’s a 40% decline in equity. That’s also a cumulative ~30% decline in the receivables portfolio, meaning that next year revenues will decline by about 30% as well, because they make money from interest payments. The costs of running the company and collecting those payments are relatively fixed, so you will get an earnings decline of more than 30%, under this scenario. The cost of debt isn’t likely to get cheaper either, increasing another cost in the short run.
    Finally, in the last year there was a share offering which diluted your ownership stake by another 10-20% depending on the time periods you compare.
    If you know the risks then that’s fine. I respect the bet, which will either have a huge upside or go to zero. But this really is a bet on the consumer and finance receivables. There is no sustainable operating company if borrowing rates increase and the consumer weakens further. I didn’t feel that your post stressed this point enough.
    I hope my input is of value. I started looking through the financial thinking you’d spotted a gem. Under most economic scenarios there’s no operating company going forward. If we recover, then you are absolutely right, the stock will jump. But don’t expect this company to be around in six months if the economy gets much worse.

  • Your Daily TED Update
    Posted by on October 22nd, 2008 at 9:28 am

    We’re down to 251. This is looking much better.

  • It Was Only a Matter of Time
    Posted by on October 22nd, 2008 at 8:40 am

    Brokers With Hands on Their Faces