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Sinclair
Noe’s Financial Review
Monday, October 15, 2007
DOW -- 108 = 13,986
SPX – 13 = 1548
NASDAQ – 25 = 2780
DJTA – 51 = 4888
DJUA – 5 = 514
RUT – 11 = 829
More than
80 companies in the Standard & Poor's 500 index
are scheduled to report earnings this week.
Citigroup
reported its third-quarter profit dropped 57 percent to $2.3 billion dollars,
which includes more than $3 billion in mortgage-backed security losses,
leveraged debt write-downs, and fixed-income trading losses. Citi’s renowned
credit traders lost $636 million. The
bank also boosted loan-loss provisions by $2.24 billion, a higher amount than
it estimated a week ago; very simply, Citi is anticipating more bad loans.
Meanwhile,
Citigroup, Bank of America and JPMorgan Chase announced plans to raise a fund
of up to $80 billion to boost liquidity in the credit markets.
C – 1.63 = 46.24
BAC -- .65 = 51.42
JPM -- .55 = 46.27
The
fund will buy securities backed by high-risk sub-prime mortgages and other
assets from structured investment vehicles, or SIV’s, which are affiliated to
the banks but do not sit on their balance sheets. Apparently last month the
Treasury went to the banks and asked them to set up
the fund after a shutdown of the commercial paper market left the SIVs unable
to borrow, forcing them to sell about $75 billion of assets. The new fund -- called the Master Liquidity
Enhancement Conduit or M-LEC -- would launch in the next 90 days and be used to
buy distressed securities from SIVs. That would in turn give them the capital
to pay off their commercial paper obligations, and ultimately extricate
themselves from what otherwise might have been substantial losses. By buying
SIVs' distressed investments, the new fund would inject enough liquidity into
the market to make investors more confident in buying commercial paper.
The funds'
backers said they will shy away from risky instruments and buy only highly
rated, asset-backed debt. This is really funny stuff. The problem with SIV’s is
that they dried up because nobody knew what they were worth, and if they
actually had to sell them, then that would put a price on the SIV being sold
and give a benchmark for the other SIV’s that they wanted to sell. A Don’t Ask,
Don’t Sell Policy. Why don’t they know the value of these Structured Investment
Vehicles? Because, they’re off-balance sheet. Years
ago, we had a similar problem and the Resolution Trust Corporation was
established to hold the mortgage assets of insolvent savings and loans. Now, we
are creating an M-LEC to hold the assets that may or may not be safe or risky
so they won’t have to be liquidated. You may wonder if this is just postponing
marking to market – also known as the day of reckoning.
Treasury
Secretary Henry Paulson is scheduled to speak tomorrow in Washington on home
ownership, mortgage markets, and the U.S. economy. And I’m sure we will all
find enlightenment. Today, Paulson said SIV’s may need greater transparency.
On Friday,
Paulson will host Group of Seven finance ministers and central bankers in
Washington. At the G-7 meeting in September 2006, Paulson told fellow policy
makers from Britain, Canada, France, Germany, Italy and Japan not to fret over
the U.S. housing slump. In February, he brushed off a German campaign to crack
down on hedge funds. So we have a Treasury secretary who hails from Wall
Street, who should know about markets, but has given no indication that he has
a handle on the situation. A G-7 task force is expected to put forth a plan to
investigate bank supervision, including off-balance-sheet investments and
liquidity. And the G-7 ministers are widely expected to raise a ruckus about
the ever shrinking dollar. The Dollar Index is down almost 9 percent this year,
dropping below 78 today.
The
Federal Reserve started the week by injecting an additional $14.75 billion
dollars in temporary reserves to the banking system through overnight
repurchase agreements.
Late
last week, Beazer Homes reported sales fell 39 percent in the fiscal fourth
quarter ended Sept. 30, new orders declined 52 percent, and its order cancellation
rate soared to 68 percent. Beazer also said it would restate financial results
back to 2004 due to accounting errors uncovered by an internal investigation
that also found violations of federal housing regulations.
At Barron’s, the financial magazine,
they looked at the news from Beazer and came to this conclusion. "People
are going to interpret this as a net positive simply because it quantifies how
much we're talking about and gives a sense of what the issues were…. In some
ways, it kind of puts it behind them." The people at Barron’s really need
to step away from the crack pipe.
BZH -- .22 = 9.16 (52 week high = 48.60)
Meanwhile,
the chairman and chief executive of Countrywide Financial exercised options for
139,916 shares of common stock under a prearranged trading plan. Angelo Mozilo
exercised the options Friday for $9.94 apiece and then sold all 139,916 of them
on the same day for $18.38 apiece, for a profit of more than $1.1 million
dollars. Clearly this is one CEO deserving a bonus.
CFC -- .40 = 18.34
Oil
futures hit another record high today. It is a story of supply and demand.
Maybe you’ve seen the TV ads from Chevron saying how they’re trying to find
solutions, saying they are investing in the needs of America’s energy future,
saying how they are investing in alternative energy, saying how they are
stewards of the environment, saying they are husbands and wives, moms and dads,
and they care – they really, really care. But they don’t tell you that what
they really care about is boosting share price with a $15 billion dollar stock
buyback; the $15 billion far eclipsing the budget for alternative energy. They
don’t tell you demand for oil
is expected to climb to 90 million barrels per day in 2010, and the energy
industry needed to invest $435 billion in development drilling and production
facilities and refining capacity back in 2005. But, according to recently
released IEA estimates, the industry (including national oil companies) were
only able to commit $340 billion, despite record setting profits and despite
government subsidies. And producing countries are closing off resource access
to multi-national companies, thereby slowing development. Further, a limited
supply of experienced engineers and geoscientists means fewer and fewer large projects
can be staffed in a timely manner. And so now, while Chevron is buying back
shares to boost stock prices, there is likely to be a shortfall of oil as spare
capacity is swallowed up by ever increasing demand, and oil prices climb to
record highs. And just to make it interesting, the Turkish government decided
to ask Parliament for permission to pursue Kurds into Iraq. We are now closer
to $90 dollars a barrel than $80 dollars. Light, sweet crude for
November delivery jumped $2.44 to settle at a record $86.13 a barrel, after
rising as high as $86.22, a record trading price.
Rising
oil prices and a falling dollar spell inflation. Seriously, with the dollar
falling almost 9 percent, and oil prices up almost 30 percent in the past year,
and food prices up 15 percent in the past 9 months, we might have a little
inflation problem. December gold gained $8.40 to settle at $762.20 an ounce. December
silver closed down 4 cents at $13.85 per ounce. Copper for December delivery
picked up 3.35 cents to settle at $3.686 a pound. November soybeans gained
10.25 cents to settle $9.87 a bushel, as futures edged closer to their 2004
highs above $10 a bushel. December corn added 11 cents to $3.62 a bushel. Wheat
for December delivery tumbled 24 cents to $8.335 a bushel.
The New
York Empire State Index -- a regional economic indicator published by the
Federal Reserve Bank of New York -- came in better than expected for October.
The index rose to 28.75 from September's 14.70.
Futures
traded on the Chicago Board of Trade suggest 68 percent odds that the Fed will
keep the target rate for overnight lending between banks at 4.75 percent at its
Oct. 31 meeting, compared with a 52 percent chance a week ago.
The
yield on the two-year note fell 2 basis points to 4.21 percent. The ten-year
note inched higher and the yield held steady at 4.68 percent. The 30-year long
bond fell 6/32 and the yield increased one basis point to 4.91 percent. By the way, the yield on the three-month bill
is 4.27 percent compared to the two-year at 4.21 percent. So, yes Virginia we
do have an inversion.
J.C.
Flowers & Co., on behalf of itself and its partners Bank of America and
JPMorgan Chase released a letter sent today to the Delaware Chancery Court
offering to terminate the Merger Agreement with SLM Corporation commonly known
as Sallie Mae; explaining that Sallie Mae has suffered a "Material Adverse
Effect".
SLM – 2.54 = 45.91
If you
have been using computers for a long time, there is a good chance that you once
had an account with AOL, America On-Line. And when you finally got tired of
paying a high fee for dialup service, you switched to a different provider. You
were then hounded by AOL’s telemarketing department. AOL figured it was better
to harass customers as they walked out the door than to change the way they did
business. Once upon a time, AOL was the 800 pound gorilla on the internet. Time
Warner’s Internet unit AOL will eliminate 2,000 jobs, 20 percent of their
workforce. It’s part of a restructuring that will focus on boosting online
advertising.
TWX -- .19 = 18.79
Sun
Microsystems will lay off 1,500 employees across the US, Canada, Europe and
Asia. The company has already laid off nearly 4,000
workers since June 2006.
JAVA -- .12 = 6.14
Leonid Hurwicz, Eric S. Maskin and
Roger B. Myerson won the Nobel Prize in economics for theories that analyze
imperfections in the marketplace and help set rules for transactions ranging
from government-bond auctions to elections. All three are professors at U.S.
universities. Their work helps explain what happens in markets when competition
isn't completely free and not everyone has the same information or goals.
Mechanism-design theory has been used in labor negotiations, taxation and
pricing stock options, in addition to designing auctions.
