Buzz Bits: Dow, Nasdaq Soar
Your daily Buzz & Banter highlights
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At first I didn't have the will to carry on. Illusions in my mind... - Todd Harrison - 3:12pm
How do you spell relief? In terms of alleviating an oversold condition, the answer is T-U-E-S-D-A-Y. That's not to say this lift can't continue, particularly with expiration influences into Friday and the next, tangible resistance up at S&P 1490.
- Laundry lists are great ways to keep your wits about you when the flickering ticks bicker quicker. If you're in the economic slowdown camp, consumer non-durables and pharma are likely candidates of relative out-performance. If you're a longer-term investor type, higher prices remain good opportunities to make sales. At least, that's my take.
- Wowzers, remember we talked about the potential UNH breakout last week? It's got more acne than a nervous teen, which is remarkable given the broader tape action during that time.
- If you were REALLY bearish into yesterday's close and REALLY bullish into today's close, take a step back, count to 100 (backwards by primes) and think about that for a moment.
- So, we can buy volatility 20% cheaper than it was six hours ago? Sweet.
- The definition of an investment should never be a trade gone awry. Discipline over conviction, Minyans, now more than ever.
BAC SEC Presentation - Kevin Depew - 2:22pm
Scott Reamer and I have been following the Bank of America (BAC) presentation and wanted to share with you some highlights from it.
First, Scott notes that they had about a $3 billion investment in a China commercial bank. It's now worth something closer to $19 billion, or so, a $16 billion gain. "They have been carrying it on their balance sheet at cost," Scott said, "... until voila... now... going forward they will carry as mark to market.... jeesh, i wonder why they would do that?!?"
Next, here's what the company said about Home Equity:
"We have grown home equity at above industry growth rates not because of taking outsized risk but because it was a focused relationship product where we innovated product enhancements and shortened fulfillment times for customers. Our originations average a FICO score of well above 750 and our current portfolio on a refreshed basis carries and average FICO of 721. Loan-to-value ratios are most important in determining losses. More than 80% of our outstanding have a CLTV below 90%. We have not been heavily involved in third party originated paper and, in fact, 95% of our outstandings have come from our branch originated strategy. While losses are increasing, we are tightening standards around CLTV levels but still feel comfortable with the risk in this portfolio. Year-over -year our losses increased $39 million, from 6 basis points to 20 basis points. Driven by the significant declines in housing values in the third quarter we increased reserves last quarter anticipating a loss rate of 40 basis points. We continue to monitor and will adjust if housing markets continue to weaken beyond our assumptions."
BAC's management clearly views that as comforting. In the narrowest sense, for BAC it might be comforting... in the same sense as discovering what you thought was a boil is only a pimple or something. Here is what that means: BAC is defending its home equity credit portfolio based on FICO scores that averaged 750 at origination - the premium level FICO score to which we all strive - yet their losses increased from 6 bps to 20 bps, they increased reserves for losses and DOUBLED the anticipated loss rate to 40 basis points.
That is actually THE credit story and it's far from comforting. That is not "subprime" credit quality deteriorating, that's premium credit quality deteriorating. and it's occurring in what BAC is adamant are not recessionary conditions. What if there is a recession?
Watch the Money Markets - Minyan Peter - 10:32am
As I have written previously, what happens with money market funds warrants considerable attention as we go through this credit cycle. Two weeks ago, Wachovia (WB) announced a $40 mln loss associated with purchases of bad commercial paper out of its Evergreen money market funds, and in the past 24 hours we have seen announcements from Sun Trust (STI) and Legg Mason (LM) to similar effect.
The news, however, this morning on SEI Investments (SEI) raises a new dimension to our credit cycle unwind. Per the Wall Street Journal, SEI is providing guarantees for funds which it distributes, but which are invested by Bank of America's (BAC) Columbia Investment arm. Up until today, SEI had been viewed by investors as a quasi technology "non credit" financial services company. With this morning's news, SEI joins the lengthening list of financial institutions providing "moral recourse" in support of the money markets.
While banks have capital structures designed to support potential credit defaults, I am not aware of a money manager or a fund distributor with a similar capital cushion. It remains unclear to me how long the non-bank institutions can provide support, particularly as the problem grows.
One other comment: I found it very interesting that there was no mention of BofA providing support to the SEI funds that Columbia manages. That BofA was willing/able to push the moral recourse to SEI raises more questions than answers.
Position in SKF
Google Update - Bennet Sedacca - 8:35am
Last week, with Google (GOOG) around 750, I showed a bubble comparison chart that indicated GOOG had gone parabolic and that a correction was near. Did I buy puts? Of course not! All kidding aside, it helped to avoid the recent downside in tech.
So I wanted to update the chart, which is below. I sense a bounce into expiration, and I could be wrong here, but the amount of outstanding November SPX and SPY puts that are in the money is astounding to me compared to the number of calls. So the path of maximum frustration, particularly into expiration, is higher. After that, who knows?
Click here to enlarge.
And any professor that would like to chime in on the November option expiry is welcomed.
Position in SPY
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