Five Things You Need to Know: Florida's Sunny Tip of the Iceberg; Subprime Crisis Reaches Ultimate Low Point; It's About The Magnitude of Imperfection; Good News: Ford Edge Reportedly Endorsed by Unidentified Blogger; Of Course It's Hard to Buy Right Now!
What you need to know (and what it means)!
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Florida's Sunny Tip of the Iceberg
Still more grim details are continuing to emerge from the Florida State Board of Administration investment pool fiasco. It turns out that not only are public schools and local governments exposed to downgraded and defaulted short-term debt, but so is the Florida pension fund.
- According to Bloomberg, the State Board of Administration that manages $37 billion in short-term assets also oversees the $138 billion Florida Retirement System.
- The State Board of Administration purchased $3.3 billion of debt whose top ratings were reduced following the collapse of the subprime mortgage market, according to documents obtained by Bloomberg.
- Bloomberg reported that Florida officials approved a plan by BlackRock (BLK) to split in two a $14 billion investment fund for local governments, isolating the $1.5 billion of downgraded and defaulted holdings.
- But that's not really why any of this is important to us.
- Here is why this news matters: One of Wall Street's secrets is that a large percentage of the buyers of commercial paper and asset-backed commercial paper, some of the vehicles involved in the downgrade, were pension funds, state and county governments and school investment pools.
- Now, we're talking about the "worst case scenario" for this commercial paper that no one ever thinks about.
- I sympathize, as a former broker I sold some of this short-term debt to investors who wanted just a little extra yield because, Hey, it's short-term paper, what can go wrong?
- We always knew there was a "worst-case scenario," but none of us, even as we were disclosing the terms, ever figured it would be a worst-case scenario that actually comes to fruition.
- The thing that makes this dangerous and notable now, as a "tip of the iceberg" event, is these public fund managers are not compensated for taking this kind of risk, but are most definitely fired for taking it when it blows up.
- This creates risk aversion.
- And this kind of risk aversion, even if it is unjustified (which the large banks say is the case every chance they get), removes a significant layer of demand from the short-term debt market that won't return likely return anytime soon.
- Or look at it this way.
- The worst-case scenario for public fund managers is that the "safe" short-term debt vehicles with fancy names that they invested in lose money.
- The worst-case scenario for Wall Street is when Main Street learns the names of the fancy products they sell.
- Think about it. How many of us had ever heard of Structured Investment Vehicles and asset-backed commercial paper 90 days ago?
2. Subprime Crisis Reaches Ultimate Low Point
Now that more details of the Treasury's subprime rescue plan are trickling out, the heat is starting to rise in Washington. See, for example, Bloomberg columnist Caroline Baum's piece today, "Mr. Paulson Goes to Washington, Loses Way."
I read her piece first thing this morning and mostly nodded in agreement. Then I punched up the news screen on the Bloomberg terminal and ran across the following twisted, bizarre headline: "Subprime Credit Market Seizure Solution Seen in Hospital Bills."
So that's what it's come to, eh? We've reached such a low point in the subprime debacle that it seems like a good idea to tap the hospital billing industry for answers? That has to be some kind of low point, right? See Number Five today for more.
3. It's About The Magnitude of Imperfection
Moody's (MCO) at the UBS Global Media & Communications Conference was asked about an "implied conflict of interest" in their current business model, which quite a few Minyanville professors have questioned over the past year, long before the current credit market deterioration.
The answer, according to Moody's Chairman and CEO Raymond McDaniel was of course! "I think it needs to be said that of course there is a potential conflict of interest in this business model. Anyone who would assert there is not, I think probably doesn't understand the business."
The headlines yesterday afternoon played up the fact McDaniel said Moody's faces long-term revenue "impairment" of 10-12% due to weaker demand for ratings of credit derivatives going forward.
The more worrisome aspect of the presentation, however, was McDaniel's acknowledgment that there will probably be significant litigation coming out of the current crisis, "and some of that litigation is aimed at credit rating agencies."
But even more worrisome than the more worrisome aspect of "significant litigation" was McDaniel's unbending stance on the matter:
"It is probably going to be an incremental cost for us in the sense of defending those actions and we are absolutely going to defend those actions. This is not an area for settlement. We offer opinions about the future. That is what we are in the business of doing. They happen to have good predictive content. They have had for over a hundred years, which is why they are valued. But they are not guarantees of the future. They are opinions. They are not even opinions about the present or the past they are opinions about the future and if firms are not able to offer opinions about the future than we have got a much more significant issue than whether there is some liability associated with issuing credit ratings from the ratings industry. So this is an area that if you can't talk about the future without having to absolutely be right 100% of the time we are all going to have a problem."
And just when things at the conference were going so well! This is a classic straw man argument and disingenuous at best. Moody's likes to get paid for having opinions, but who doesn't?
The issue is not about being right "100% of the time," a ridiculous assertion coming from the chairman and CEO of one of the ratings agencies. The issue is the magnitude with which Moody's and the other ratings agencies have been wrong, and with the implicit conflict of interest (of course!) that laid the groundwork for the magnitude of these wrong "opinions." It's not about perfection, it's about the magnitude of the imperfection.
4. Good News: Ford Edge Reportedly Endorsed by Unidentified Blogger
Ford (F) stock is off another 3% today despite November auto sales beating the consensus number. That's probably due to the company's conference call yesterday.
It wasn't that the conference call was grim. Senior Economist Emily Kolinski Morriss noted that home prices are declining and consumer confidence is below its historical average, and that other "headwinds are rising." But then, companies in turnaround mode are supposed to be cautious.
No, Ford didn't say anything new about the economy or the consumer or automotive demand. So why is the stock down almost 3%? I'm going to say that it might be because the only real bright spot on the call came when Ford Sales Analyst George Pipas read a post by a lone blogger out there somewhere on an unknown blog - I swear, this really happened on the call - who apparently wrote, "Anyone in the market for a minivan or SUV should consider the Ford Edge."
Bottom Line: The company is very cautious going forward, but a blogger somewhere posted that he or she really likes the Ford Edge crossover vehicle.
5. Of Course It's Hard to Buy Right Now!
Below is where the point and figure bullish percent indicators for equities stand (data courtesy Investor's Intelligence). The S&P 500 and Nasdaq-100 are both positive, which means demand is in control of those areas of the market:
- NYSE Bullish Percent: Os (Negative), 38.4%
- S&P 500 Bullish Percent: Xs (Positive), 46.9%
- Nasdaq Composite Bullish Percent: Os (Negative) 28.3%
- Nasdaq-100 Bullish Percent: Xs (Positive), 41%
- Russell 2000 Bullish Percent: Os (Negative), 32.4%
- NYSE High-Low Index: Xs (Positive), 22.3%
I've received quite a bit of email asking how these indicators can be positive and what I am going to do when they fail here... as if it is manifest they are doomed to failure because of ongoing credit market problems.
I will say this. When these indicators reach the levels they reached in November it is by definition an uncomfortable time to buy stocks. By definition. These indicators just don't go down to those levels when things are great. And, in fact, that is where they are best... when they are saying it is time to buy while everything else is saying it is time cash out and bury your money in a can under a tree.
Maybe this time is different. Maybe this time they will be wrong. The good thing is that if they are wrong, then by definition they will reverse down and tell us things have changed.
My experience is that it simply doesn't make sense to put one's faith in market indicators that only tell us what we want to hear. From a sentiment standpoint we want to hear that the market can't go up because we are in the middle of a deflationary credit contraction. From a tactical standpoint, however, these indicators are telling us that right now there are enough large cap stocks in the S&P 500 and Nasdaq-100 universe that are controlled by demand to push these indicators to positive. That may not be the case a month from now, or two weeks from now, but it is the case today so evaluate what your time frame is and plan your moves accordingly.
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