Bill Cara's Blog for Nov 23, 2010 [See post-close report]

http://tinyurl.com/27gr69w

I laughed harder with each new paragraph. What else can you do when confronted with the insanity of Kim Jong-il?

Good morning.

POMO Injection Scheduled Today (1-2 billion).

8:30 - GDP 2nd Estimate
10:00 - Existing Home Sales
14:00 - FOMC Minutes

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COST - Costco initiated with a Neutral at Susquehanna. Target $65

GG - HSBC Initiates with a Neutral. Target $50

TCK - Teck Resources initiated with a Buy at Deutsche Bank. Target $65

TGT - Target initiated with a Positive at Susquehanna. Target $67

WMT - Wal-Mart initiated with a Positive at Susquehanna. Target $66

XOM - PT Lifted from $76 to $85 @ Argus. Buy

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"In a ranking of 35 cities, by 'Travel and Leisure' magazine -- Los Angeles finished second to last in intelligence. All I can say, thank god for Washington, D.C. Thank god for Washington, D.C." - Jay Leno

3Q Prelim Real Final Sales +1.2% Vs Advance +0.6%

For those that glance at BDI http://tinyurl.com/3sm9kd it turned all green this morning. I watch it regularly and yesterday I said I thought it could be basing here.
J

I nibbled some TNA.
Still long UUP and BYD.

BBVA:MCE -3.64%

SAN:MCE -3.93%

(FT delayed quotes)

I'm out of my Gold longs/Gold options. Now playing a short term bounce in the equity markets through long BYD, long GS, long SPY Nov/Dec Calls. Thinking about finally going long BAC because should the bank get through this downturn, you have a company that could be paying over 10% dividends on your current investment. I think this will be a period that people look back on in 5 years or so and regret not buying that stock.

Also thinking about going long ACI and a few other commodities type stocks.

Amen Bill.

Just FYI...

http://www.newyorker.com/reporting/2010/11/29/1011...

Dave - Pretty simple:

1.) eventually the restrictions on dividend payouts will be raised and the banks will be able to up their dividends.

2.) BAC currently has about 60% more in assets than they did back in 2006. Assuming with that asset base they can earn the same they did back in 2006 (so this adjusts downward for the removal of excess loan growth and securitization/cds business), that equates to about $2.3-$2.60/share in earnings (after adjusting Income per share by the much larger shares outstanding).

3.) Assuming #2 above and an eventual 40% dividend payout, which is along the lines of historical standards pre-crisis, then you have a dividend of around $0.90 to $1.20.

If history is any guide, then for a period after the bubble has burst in a particular industry, the stocks in that industry are generally completely loathed and avoided. The stocks languish for a period of time and then gradually move up based on hope that things have turned. Then they fall again and absolutely no one wants them and analysts trash them. It's usually at that point that the stocks should be accumulated. I think we're in that period now where we should be buying the "black holes". It goes against reason and what I currently believe in but I think it makes sense.

TOF - My biggest concern with US banks is the housing market. According to Rosenberg,
CoreLogic just updated its database to show that the complete inventory of unsold homes for sale — including the ‘shadow’ foreclosed stockpile that is not yet listed for sale — has expanded by 200,000 units in the past year to 6.3 million units. That means that the ‘true’ backlog of unsold inventory overhanging the market is close to 23 months’ supply compared with 16 months a year ago.

My trigger was this breakout of recent consolidation, now above the rim of the 'bowl' it formed.

I have margin but am not interested in using it right now. small opening positions everywhere while waiting for the market to decide.

I personally believe the issue is growth, that is directly related to demographics. Any rancher will know how many head his land will support. The same principles apply to humans both micro and macro in scope, but this is a taboo subject. 400 years of steady growth in the new world has come face to face with the results of unregulated expansion. We're going to have problems, and blame them on all kinds of likely suspects but if you step back it's even wildly more complex. I think like Bill said earlier we have to trust in the good people of this country and I'll add have some faith in each other. We can use growth in china and India, everywhere to ease this boundary we've seem to run up against, at the same time we must remain vigilant that there are other peoples who are far further into demographic problems then we are, like japan we need to watch and help where possible

I suspect much of the unsold inventory is McMansions, for which there is little demand for right now. GM failed by building oversized absurdities such as the Hummer - well, McMansions are the Hummer of the building industry.

Anything is good at a price, though. If prices come down enough for McMansions, they will be in demand. The issue is: at what point does the current underdevelopment of houses + lack of credit extension by banks + excess inventory equal rising inherent demand caused by population growth? I believe I looked at this back in the spring and at that time there was about another 2 years of muddling through inventories before we got to a good equilibrium.

So I guess my thinking would be that it's better to buy BAC prior to this point in time because that will most likely already be reflected in the price of the stock. So a buyer of the stock today and over the next 6 to 12 months, if you're disciplined enough to do this, would most likely be very well rewarded in 5 years.

Complaining about the rich getting richer won't help at all, and enforcing standards wouldn't bring back one plant, either. The restrictive regulations and laws that add to cost of domestic production only are being added to, not reduced, and the amount of reduction needed to offset the cost differential is so great that you'd need to reduce wages to 1/2 of minimum wage with no taxes or benefits to be competitive. As a former costs guy, I can tell you its hopeless, and nothing short of requiring balanced trade is going to help at all.

Watch how Obama's "double exports in 5 years" results as yet another 5 years lost and little or no progress, even if the dollar is debased and devalued by 1/2 in the attempt. How many times have we heard that song before?

You can't break into Chinese, Korean or Japanese markets with American made goods no matter what you sell or at what price, anyway. The only companies I can think of that have succeeded in any major way are Boeing and Cat, and I guess the defense contractors selling military toys.

for what its worth, the TED spread is not showing any signs of stress in the banking sector. Back in April the spread shot up due to the Greece issues so I would have expected it to be up at least a little bit with this Ireland/Portugal/Spain issue but it has actually been going down. That is at least a hint that things are not as bad as the media/markets are making them out to be.

said tonight, Dell and HP did well for one reason, and one reason only - all of Microsofts new products.. traders still follow the bouncing jello-bowl..

i hear ya but why wouldn't this be showing up in the TED spread?

TF,
I'd like to see BAC (or C JPM GS MS HSBC UBS ETC) mark those "assets" to market. I think you'd be able to buy their stock for well under $1

http://en.wikipedia.org/wiki/Mark-to-market_accoun...

Bring back FAS 157 & almost all investment banks would be toast. But the US gov't has made the same bad choices as Japan .....keep these banks afloat till they can recapitalize vs. bringing them into receivership and letting the bond and equity holders take their losses.

Here are some great insights on this from your favorite fund manager ;)

http://www.hussmanfunds.com/wmc/wmc090406.htm

"On Thursday, the stock market cheered a move by the Financial Accounting Standards Board (FASB) to relax FAS-157 (the “mark-to-market” accounting rule), allowing nearly insolvent financial companies to use more discretion in the models they use to assess fair value. Of course, the irresponsibly rosy assumptions built into these models have been a large contributor to this near-insolvency, because they virtually ignored foreclosure risks.

Notably, the one thing policy-makers have not done is to address foreclosure abatement in any serious way. The only way to get through this crisis without enormous collateral damage to ordinary Americans is by restructuring mortgage obligations (ideally using property appreciation rights), restructuring the debt obligations of distressed financial companies (ideally by requiring bondholders to swap a portion of their debt for equity), and abandoning the idea of using public funds to purchase un-restructurable mortgage debt (“toxic assets”). See On the Urgency of Restructuring Bank and Mortgage Debt, and of Abandoning Toxic Asset Purchases.

Look. You can play hot potato with the toxic assets all day long, and only outcome will be that the public will suffer the losses that would otherwise have been properly taken by the banks' own bondholders. You can tinker with the accounting rules all you want, and it won't make the banks solvent. It may improve “reported” earnings for a spell, but as investors who care about the stream of future cash flows that will actually be delivered to us over time, it is clear that modifying the accounting rules doesn't create value. It simply increases the likelihood that financial institutions will quietly go insolvent. I recognize that the accounting changes may reduce the immediate need for regulatory action, since banks will be able to pad their Tier 1 capital with false hope. But we have done nothing to abate foreclosures, and we are just about to begin a huge reset cycle for Alt-A's and option-ARMs. As the underlying mortgages go into foreclosure, it will ultimately become impossible to argue that the toxic assets would be worth much even in an “orderly transaction.”

http://www.hussmanfunds.com/wmc/wmc090330.htm

Background

To understand this financial crisis, it is important to consider the balance sheet of a typical leveraged financial institution. The example below is similar to the one I presented last year in You Can't Rescue the Financial System if You Can't Read a Balance Sheet, but makes allowance for the fact that assets continue to be impaired due to policy failures, and that deposit banks such as Citigroup use more bond financing than investment banks. At the beginning of the recent crisis, the condition of U.S. financial institutions was much like the following:

Good Assets: $90
Questionable Assets: $10
TOTAL ASSETS: $100

Liabilities to Customers: $65
Debt to Bondholders: $30
Shareholder Equity: $5
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

Now suppose there are losses in those questionable assets - not all the way to zero, but to $4:

Good Assets: $90
Questionable Assets: $4
TOTAL ASSETS: $94

Liabilities to Customers: $65
Debt to Bondholders: $30
Shareholder Equity: $-1
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $94

The above institution is insolvent. There are several ways to address this situation.

that Mr. Fleckenstein used as an analogy in the fall of 2008, to describe the coming ' Funding Crisis ", ( which wou/was be preceded by the ' financial crisis ' and the ' economic crisis ' ): these first two which people could understand because they were front and center in the news. But with a nation(s) currency value in question, that is a whole new idea that will be hard to grasp, until the " inflation under control " ( thanks for the honesty, Ben = not ) basically bitch-slaps the world into reality on spreads, yields and interest rates.. This is going to get interesting...

VIX levels are low? I beg to differ actually. Take a look at the long term chart of the VIX:

http://finance.yahoo.com/echarts?s=%5EVIX+Interactive#chart5:symbol=^vix;range=my;indicator=volume+rsi;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

The current reading of 20 is nowhere near the sub teens seen in the 90's and 2000's when the markets were bullish.

Ok, Grym, I will use a REAL example of a REAL unnamed product made by a REAL unnamed former client.

Here is the problem in a nutshell. You make widgets that cost you $15 and retail for $30. Your customer sells them for $20 to the stores. One of your US competitors comes along and takes away a customer, selling them Chinese made widgets for $10 each which they then sell for $25 instead of $30, so the store is making $15 each instead of $10 off the ones you were selling them. Since your cost is $15, you can't match the $10 price they are getting on the Chinese made widgets. Further investigation shows that the raw materials ALONE cost $10, so it would be lunacy to try to compete. The quality of the Chinese widgets is shoddy, but people don't have jobs, and will buy the $25 widget even KNOWING that the quality is inferior to save that $5, because if its totally no good they will just return it to the store.

Ok, now what can you do? You have 7 product lines with an average of 3000 products in each and they have already attacked 2 product lines, and are now going after a third. Those were the most lucrative product lines before, but now you almost have to give away widgets to sell them.

You have 3 US plants, on in PA, one in CA, and a third in WI, and are selling nationally, employing about 500 souls.

They tried selling quality, but order volume kept dropping and big customers were being taken away right and left. Pretty soon they couldn't make payroll, and it went under, Chapter 13.

PS: The competitor that put them out of business bought the remains from the bankruptcy for pennies on the dollar and shipped the manufacturing equipment to Asia.

Of the 25 clients I had say 12 years ago, all of which MADE things here in the USA, only ONE plant is still producing, the rest have been closed or are just used to warehouse or customize or fix the Chinese/Asian/Brazil/Korean/Japanese product that replaced ours, and most of the jobs were lost.

Its classic make or buy, and whoever takes the customers away with cheapest, highest profit product wins.

Cheapy,

I know what the problem is, but you're beginning at the end of the process — after the smart guys changed the whole ball game in their favor. This was a lot like the banking scam, a long, well planned scheme. Many of my former clients gave me all your arguments as they lined their pockets at the expense of our economy.

My point is simply that it is what it is due to the unlevel playing field which we allowed the CEOs to construct because it favored them.

1.They moved our jobs to cheap labor.

2. Their cheaply made, sometimes toxic, sometimes counterfeit crap is allowed into the US consumer market largely uninspected and finds the ready market you described because our middle class (who used to make the same stuff) has lost their earning power.

What do you do? You refuse entry to stuff which is not inspected and does not comply to the standards we impose on our own companies.

I watched this take place with my clients who made everything from screws and nails to aerospace items for Boeing and NASA.

We did it to ourselves. Or, more accurately, closed our eyes to it. I began writing to everyone I could think of in 1985 — no one even tried to slow it down. NAFTA was the final nail in the coffin in 1993. US manufacturing was dead and didn't know it until it trickle down to my barber and my dentist whose customers are now going to them half as often.

I don't think inspecting or standards or new ceo's will change it. The jobs are gone. You need:

1. dollar devalued by 2/3
2. asian currencies revalued up 2/3
3. $2.00 hr min wage and no SS or Medicare (actually you need $1.00 hr, but its silly to even ask, isn't it)
4. forced trade balance

ok, which do you choose? Obama is trying 1 & 2. Its not going to work because we import huge amounts of oil that is priced in dollars. 3 is lunacy. You can't live on $7.50 hr here, let alone $2. That leaves 4. I'm open to suggestions...

Interesting conversation, You may be interested in what the BBC shows about California....

http://www.youtube.com/watch?v=CnnOOo6tRs8&feature...

The future of BAC all depends on your view of the US housing market. If the Fed can blow another housing bubble, BAC will do well. If the Fed is unable to move housing prices up, then all of BAC's fraudulently originated loans will eventually come home to roost. There are too many investors who were burned by the fraud, and they have a vested interest in getting paid back for this to simply be left alone.

As for using BAC's rev numbers from 2006 - I'm guessing its not likely that the big banks will get back to the profit level that derived from the rampant fraud from the bubble years. Meredith Whitney has suggested as much in some of her analysis of bank profits going forward. She seems to be a solid analyst - might want to check her stuff if you're interested in a clear-headed risk assessment.

http://tinyurl.com/2b482rd

This is what I define as insider trading:

'...high-powered executives picking up the phone, whispering secret tips about big deals, and trading stock at an unfair advantage. These were the types of cases that ensnared executives such as Ivan Boesky in the 1980s and Enron's Jeffrey Skilling more recently.

'How the alleged scheme may have worked is unclear. Federal prosecutors declined to comment on Tuesday. But what is clear is that the way information is shuttled around the world of finance today is faster, more complex and more shadowy. It involves an increasingly digitized financial world where networks of insiders can share bits of information with blinding speed.

'It can also tap into so-called expert networks of industry analysts, experts and consultants who squirrel details between corporate America and Wall Street about what companies are up to -- potentially giving some investors an unfair edge.'

In fact, I think in cases where the person who profits from inside information keeps it small, it would be almost impossible to detect.

On the other hand, I would have a hard time convicting anyone in the following scenario:

'Federal authorities have traditionally pursued high-ranking executives and their confidants in insider-trading cases. Now, they're increasingly going after the rank and file. In September, for instance, the Securities and Exchange Commission accused a railroad supervisor and a trainman of insider trading after they noticed an "unusual number" of tours of people in "business attire" in a railyard.

'The two workers and their relatives then bet in the stock market that the company would soon be taken over and made $1 million when that turned out true, according to the SEC suit.'

IMO, the two railroad employees made a shrewd deduction based on simple observations while working at jobs completely unrelated to companies involved in the takeover.

Republicans claim to have won a mandate for repealing the new health insurance law, but a McClatchy-Marist poll shows majority support for keeping and even expanding it.

The post-midterm-election poll found that 51% of registered voters want to keep the law or expand its provisions; 44% said they want to repeal it or make it do less.

The survey found broad support for preventing insurers from denying coverage for pre-existing conditions, and equally broad dislike of the mandate that everyone must buy coverage.

http://content.usatoday.com/communities/ondeadline...

Thanks Bill, we aren't losers, but a pep talk and a few simple directions help!

but the other sectors we are watching ain't looking so healthy:

http://tinyurl.com/3a3cwd4

http://stockcharts.com/scripts/php/candleglance.ph...

http://tinyurl.com/3ykjf3g

so concentrate firepower into precious metals sector?

Just wanted to recognize that my JACK trade did NOT work out. Earnings were horrendous and I think management is idiotic for not announcing a spin-off of qdoba while CMG continues to make all time highs. On the conference call I couldn't believe that not one analyst asked about the possibility of spinning off qdoba. I took my loss and am moving on, but I'm really shocked at managements myopia in failing to realize the potential value of qdoba.

Cheapy,

What we are competing against is a totally skewed set of operating parameters. Who could have competed against the cotton plantations using slave labor?

ea32ea32,

I heard those same arguments from some of my clients —"Everyone else is doing it and we won't be able to compete." But, just like the banks, legislation was passed favoring such action. Lobbyists for big business got the ball rolling and soon it was the "gospel" of the tech is in and old tech is for emerging markets.

For small to medium sized companies this became a survival need, but it was joyfully accepted by at least two of my clients whose annual reports I had worked on for over twenty years. The top management more than doubled their own take while laying off hundreds of middle class employees here.

I had a shouting match with the CFO (a former banker) who was cheering the end of Glass-Steagall). He told me I would have to get my suppliers to cut their bills and I told him to stick it in his ear. (There was a lady present.)

The biggest single, obvious bill was the 2004 American Jobs Creation Act. What began as the EU complaint of US price supports (on bananas, I think) Congress replaced with a tax cut on foreign earnings and no need to create jobs here.

ea32a32,

"For humans to survive these coming years we're going to have to find a way to expand our range - or our range will be our limitation. that's where technology will shine in the future and it will."

And what will prevent the same thing happening with any new technology? We are down to agriculture and other natural resources as all we have left to sell. Even our tollways are leased to foreigners.

I live in the US and have been watching the evaporation of our leading in many fields as individuals put themselves ahead of the nation and their neighbors.

We can't afford to save the whole world.