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Roll Out the Barrel . . .
We'll have a barrell of fun!
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Friday, February 29, 2008 | 04:00 PM | Permalink
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Batten Down the Hatches!
NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/29/2008 before the market closed.
This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.
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Several weeks ago, we discussed the likelihood of a tradable low being put in place. On January 23, 2008, we thought conditions were in place that would allow agile traders to play for a bounce -- but advised that long-term investors avoid the sloppy tape. At that time, we suggested an 8, 10, or 12% bounce trade was in the offing.
That has come to pass. We now find ourselves in a situation where the markets have rallied significantly on lighter volume, and have since rolled over. This is a significant sell signal.
Consider: Over the past month we have seen one-day rallies of nearly 200 Dow Jones points on four separate occasions. A review of the headlines shows all too infrequent arguments against the possibility of a recession, or if there is a recession it being mild and fairly discounted by the equity markets. The economic news continues to worsen, while the Bulls maintain a steadfast state of denial. Articles abound, explaining why there won’t be a recession, or if there is a recession, it will be mild and is already priced into equities. My favorite piece last week was “How to play the coming recovery.” These are signs that people are still speculatively inclined, are buying the dips. The bigger fear is not any on stocks, but missing the rally. That is not what you see at market bottoms.
These optimistic views are increasingly being proven false. We are now in a Bear market and are in all likelihood in the beginning quarters of a recession – one that is potentially deep and long lasting. Housing inventories are at record highs, the US dollar is at record lows, Oil is over $100 a barrel, and Gold has set all-time highs.
These are not the sort of conditions that lend themselves to economic growth or stock gains.
As of leap day, February 29, 2008, you have several choices ahead of you: a) you can try and catch the falling knife and, an activity that in the past has proven to be dangerous and painful; b) You can sit tight, watching your portfolio decrease in value, confident in the belief that stocks will eventually return to their previous valuations (What is unknown now is whether that will take months or years to occur; c) Or, you can aggressively become even more defensive than we have advocated in the past few quarters. Preserve precious capital, wait out the storm.
We choose “C.”
We will go into greater details on the economy in a future missive, but for now, from an investor's standpoint, understand what your role is today and preserve capital, and be cognizant of risks. Now is the time to Batten down the hatches to preserve capital and to wait patiently for the greater opportunities that will exist to play equity's on the long side. Rallies are opportunities to exit equities. We are constantly looking for better opportunities to put your hard earned capital to work, and today, the in a long side of US equities is not it.
-Barry Ritholtz
February 29, 2008
Friday, February 29, 2008 | 03:48 PM | Permalink
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Lindsay!
Walking back from a lunch meeting, and who do I bump into? Lindsey from WallStrip ! She is interviewing people on the street, asking them about the G-Spot, when I recognize her, and stop to say hello.
She asks me about the G-Spot. I respond that since a C-Spot is a $100, a G-spot must be a $1,000. Also, I tell her the female orgasm is a myth.
We do "Long/Short," and I admit to being long female orgasms and short equities.
Fun stuff. Except for the people who don't know my sense of humor, and say "Who is this pinhead who thinks the female orgasm is a myth?
Friday, February 29, 2008 | 02:55 PM | Permalink
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Leveraged Losses: Lessons from the Mortgage Market Meltdown
My buddy Paul is off skiing in Aspen, Colorado leaving us worker drones to do the heavy lifting. Ski boy managed to forward me this report: Leveraged Losses: Lessons from the Mortgage Market Meltdown.
The abstract and graphs below are quite compelling:
"This report discusses the implications of the recent financial market turmoil for central banks. We start by characterizing the disruptions in the financial markets and compare these dislocations to previous periods of financial stress. We confirm the conventional view that the current problems in financial markets are concentrated in institutions that have exposure to mortgage securities. We use several methods to estimate the ultimate losses on these securities. Our best (very uncertain) guess is that the losses will total about $400 billion, with about half being borne by leveraged U.S. financial institutions. We then highlight the role of leverage and mark-to-market accounting in propagating this shock. This perspective implies an estimate of the eventual contraction in balance sheets of these institutions, which will include a substantial reduction in credit to businesses and households. We close by exploring the feedback from credit availability to the broader economy and provide new evidence that contractions in financial institutions balance sheets’ cause a reduction in real GDP growth."
I've plowed thru most of it; THIS IS YOUR MUST READ HOMEWORK ASSIGNMENT FOR THE WEEKEND!
UPDATE: February 29, 2:30pm
Just got back from a lunch meeting (bumped into Lindsey from WallStrip on the way back!) and saw the WSJ Real Time Economics post on this:
Banks May Need to Shrink by $2 Trillion on Subprime Losses
Mortgage losses, compounded by contemporary risk management and accounting practices could prompt banks and other lenders to shrink their lending and other assets by a staggering $2 trillion, a new study concludes.The resulting withdrawal of credit could knock one to 1.5 percentage points off economic growth, significantly compounding the impact of collapsing home construction and softer consumer spending due to lower home wealth, the study, presented at a joint academic-Wall Street forum in New York Friday.
The study is one of the most exhaustive efforts to date to pinpoint the scale and location of mortgage losses and how those losses will affect economic growth.
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Source:
Leveraged Losses: Lessons from the Mortgage Market Meltdown
David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin
US Monetary Policy Forum Conference Draft, February 29, 2008
http://www.brandeis.edu/global/rosenberg_institute/usmpf_2008.pdf
Banks May Need to Shrink by $2 Trillion on Subprime Losses
Greg Ip
WSJ Real Time Economics, February 29, 2008, 11:59 am
http://blogs.wsj.com/economics/2008/02/29/banks-may-need-to-shrink-by-2-trillion-on-subprime-losses/?mod=homeblogmod_economicsblog
Friday, February 29, 2008 | 12:15 PM | Permalink
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Read It Here First: You Walk Away.com
One month ago today, our site-of-the-day was You Walk Away Dot Com.
Today, there is a front page NYTimes article about -- anyone? anyone? -- You Walk Away.com:
"Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure...
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say...
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim...”
The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts." (emphasis added)
Just doin' our job, keeping you informed a solid month ahead of the mass media.
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Previously:
You Walk Away Dot Com.
http://bigpicture.typepad.com/comments/2008/01/site-of-the-day.html
Source:
Facing Default, Some Walk Out on New Homes
JOHN LELAND
NYT, February 29, 2008
http://www.nytimes.com/2008/02/29/us/29walks.html
Friday, February 29, 2008 | 10:36 AM | Permalink
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S&P500 Earnings for 2007: Down -4.2%
At the beginning of 2007, the S&P500 was over 1,400, the Dow was just under 12,500, and the Nasdaq was about 2,500. Stocks, according to consensus estimates, were "cheap," and profit growth expected to be 10%+.
With 90% of earnings reported by the S&P500 firms, we now have enough data to see how the full calendar year was for profits.
Here's the overview from S&P's Sam Stovall:
At the end of 2006, S&P equity analysts expected operating earnings per share (EPS) for the S&P Composite 1500 (comprised of the S&P 500, MidCap 400 and SmallCap 600 indexes) to advance 10% in 2007, a healthy follow-up to the 15% gain seen in 2006.
Yet with 2007's results nearly final, we now find that EPS for the S&P 1500 actually sank by almost 4% on a worse-than-expected fallout from the housing, subprime, and credit crises.
Within the S&P 1500, the S&P 500 index, which represents 88.5% of the market value of the 1500, likely registered a 4.2% year-over-year decline, while the S&P MidCap 400 (7.8% of the 1500) eked out a 0.1% gain, and the S&P SmallCap 600 (3.7% of the 1500) fell 5.6%.
The 1500's negative earnings results for the year were the result of deteriorating profit growth for the Consumer Discretionary and Financials sectors in particular, as these sectors posted declines of 17.8% and 33.3%, respectively, as of Feb. 19, 2008. The second half of last year was the toughest for the overall market, as it suffered through EPS declines of 9% in the third quarter and 22% in the fourth, a quarter that many dubbed the "kitchen-sink quarter" as companies wrote down everything—including the proverbial fixture. (emphasis added)
The relative performance of the mid-caps was likely due to the presence of many energy, commodity and agricultural stocks. Indeed, a few sectors have done rather well: The exporting industrials, anything Ag or energy related, consumer staples, utilities have all thrived. Financials, anything house related, many retailers, consumer discretionary all performed poorly. I was a little surprised by the full year number, thinking the good sectors and the first half numbers might partially offset the second half.
What does this say about the market itself as a forecaster?
Short answer: The easy, glib readings -- so favored by all too many ignorant media pundits -- are all too often, wrong. Accurately interpreting the body language of Mr. Market is far more difficult and nuanced than the usual nonsense you hear peddled.
Here's the amusing part: The same group of S&P equity analysts who foolishly were looking for a 10% advance in 2007, are now expecting a profits recovery in the second half of 2008. Their favorite sectors are (drum roll) Consumer Discretionary and Financials.
The thinking must be that the credit crunch will just go away, energy and food prices will drop, and the consumer will begin another wanton spending spree.
Hmmmm. I suspect this S&P profit forecast to be every bit as prescient as the previous one . . .
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Source:
Earnings: A Clearer Picture Emerges
Sam Stovall
February 26, 2008, 7:44PM EST
http://www.businessweek.com/investor/content/feb2008/pi20080226_304457.htm
Friday, February 29, 2008 | 05:30 AM | Permalink
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UK House Price Crash
For our UK and European readers: Here's a cute flash based movie out of the UK by Chris Parker: Vocation Vocation Vocation
The author writes: "This movie is dedicated to Kirstie Allsop of Channel 4's "Location, Location, Location." I would love to get more color on this spat . . .
Sources:
Vocation Vocation Vocation
http://www.parkerchris.pwp.blueyonder.co.uk/vocationvocationvocation.html
House Price Crash UK
http://www.housepricecrash.co.uk/index.php
Kirstie Allsopp and the Tories
http://snowflake5.blogspot.com/2007/10/kirstie-allsopp-and-tories.html
Friday, February 29, 2008 | 03:00 AM | Permalink
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Ridiculous Price: 7.2MP Digital Camera
Casio Exilim EX-Z75 7.2MP Digital Camera with 3x Anti Shake Optical Zoom
I have the pre-predecessor to this camera: The Casio EX-Z50. My camera is 5 megs (not 7), no video capture, no Anti-Shake DSP image stabilization, and cost about ~$300 three years ago. I have been very happy with it, so much so that I got the predecessor EX-70 for the missus for about $200 18 months ago.
This one is wicked cheap: $134 at Amazon (w/free shipping)
Even better deal: If you are in NYC, J&R had an ad in today's paper: $129!
Casio Exilim EX-Z75 7.2MP Digital Camera with 3x Anti Shake Optical Zoom
Go buy 3 or 4 and give them out to all your friends . . .
Thursday, February 28, 2008 | 06:30 PM | Permalink
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Does Google Lose Market Share as Web Advertising Grows?
Interesting analysis from online REPORTER:
"For the past few years, Google has lorded over online media and advertising, but according to recent data other media companies might have a fighting chance for more market share.
In its quarterly wrap-up report, researcher IDC says total US Internet ad spending in the fourth quarter of 2007 grew nearly 28% over the same quarter in 2006 to $7.3 billion. For the full year 2007, online ad revenue grew 27% year over year to $25.5 billion.
IDC research also found that Google's net US market share declined for the first time in two years due to slower growth in domestic fourth-quarter sales. The market leader's net US Internet advertising market share was down 0.5 percentage points to 23.7% last quarter compared to Q3 in 2007.
Google's estimated net US Internet advertising sales (excluding the traffic acquisition costs they pay out to the partners in their networks) grew by a little more than 40% in 4Q07, but its year-on-year growth rate in the quarter before had been 50%. It doesn't sound like much of a decline, but it might be good news for Microsoft and Yahoo if they merge.
Source:
THE online REPORTER
February 16-22,2008
http://www.onlinereporter.com/
Thursday, February 28, 2008 | 04:30 PM | Permalink
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Dollar Submerged
Thursday, February 28, 2008 | 02:00 PM | Permalink
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