The Market Ticker

Who's the misallocator?

Of assets, that is.

Steve over at Microsoft? Looks like he took my advice to heart (although I'm not audacious enough to think that he really listened to "little old me") and told Yahoo to get stuffed.

IMHO, that's the right choice. What does Yahoo really bring to the table? Buying eyeballs? Ok, but for that amount of money? Why? Doesn't Microsoft have something else they can spend that sort of coin on that has a better ROI?

You don't buy a business in decline for a premium, and Yahoo has been in decline for years compared to its competitors, primarily Google. Never mind that on a "per pair of eyeballs" basis this looks like a roughly $1000 per deal to me; if Microsoft wants to buy eyeballs they could easily focus on sites where you actually get unique pairs (like Tickerforum!) rather than Yahoo where, especially on their message boards and email system, the sock puppet problem and anonymous nature of their signup procedure means that you're paying double or even triple an awfully large percentage of the time.

This morning everyone and their brother is telling people to buy Yahoo because "they'll do a deal with someone." The M&A stupidity is back; gee, you think these guys might be angling for some of the M&A work? No, they'd never do that, right? Pull the other one guys.

Last night out of the middle of nowhere we had a huge downward spike in the futures market. Much time and effort was spent trying to figure out if it was a fat-fingered trade (as occurred in January), but Globex said no, and the trades stood.

The interesting thing about this was that it didn't have the appearance of a "fat finger" mistake at the time; it was across all markets, including Treasuries and The Dollar, Gold, and the futures in all three primary indices, and was accompanied with real volume.

Was that someone bailing on a long or getting aggressively short ahead of a potential explosion? Its impossible to know with certainty, but we never did see an actual mushroom cloud, so its difficult to know what was in the mind of person(s) involved. But a 15-handle move in seconds accompanied by volume in the overnight session certainly wakes you up fast when you're casually glancing at your computer!

I'll note that the last time we saw this sort of "overnight dislocation", which at the time was claimed to be a "fatfinger mistake" by Globex (and resulted in thousands of busted trades), we started a precipitous decline in the market that spanned several days the next morning.

This morning CBOE had a "problem" with their consolidated data feeds. Why is this important? Because among other things that prevented anyone from seeing the VIX, which incidentally was up a lot on a day when the indices were treading water. A concerted levitation attempt or just random chance?

I don't know, but there is a disturbing pattern here where data feeds have this funny way of disappearing at the most inopportune time, and it never seems to happen when the market is skyrocketing higher, only when it is threatening to tank.

The love-fest was out in force in Omaha this weekend with Berkshire's annual meeting, but those with more brains than fanboyism should pay attention to the results instead of the gushing admiration. Specifically, the monstrous miss that Berkshire posted for its quarterly results, and the forward guidance from Warren that "the easy money has been made", along with his prediction that 10% returns for the business will be difficult to achieve and should be considered "excellent" going forward - for the next several years.

This comment ought to frame reality for anyone who thinks it will all be ok going forward:

"Billionaire Warren Buffett castigated investment bankers, home lenders and regulators for letting the financial system spin out of control and causing a run on Bear Stearns Cos. that almost brought down more of the biggest banks.

'Wall Street is going to go where the money is and not worry about consequences,' Buffett said during a news conference yesterday, a day after his Berkshire Hathaway Inc.'s annual meeting. 'You've got a lot of leeway in running a bank to not tell the truth for quite a while.'

Buffett and investing partner Charlie Munger also lambasted credit raters, bond insurers and policymakers for two days as a record 31,000 attended the annual affair in Omaha, Nebraska. In between scoldings, Buffett told investors more damage lay ahead and dropped hints about where Berkshire is looking for purchases abroad as the dollar falls."

Not tell the truth?

Lambasted the credit raters?

Oh, you mean like Moodys, which Berkshire holds a huge position in? Tell me Warren, if you're so concerned about Moodys, how is it that with 20% of the stock under Berkshire's control you haven't either divested yourself of that holding or started a proxy fight to get the clowns running that joint out of there?

The key is to "watch what they do, not what they say." And in Berkshire's case that means paying attention to the fact that they have profited tremendously from the "intentional inefficiencies" in the market - that is, lying.

That has made Berkshire a lot of money, and I don't see him giving any of it back to those who got screwed. While this may be ok if you're a Berkshire stockholder, its not so good for everyone else. (As an aside, Berkshire stock is off about 2% today; given the size of the miss its surprising the street carnage wasn't worse.)

ResCap says that in June they may default on their obligations:

"ResCap, the eighth-largest U.S. residential lender in 2007, today began offering as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to extend maturities and stave off bankruptcy. To finance the restructuring, ResCap is seeking a new $3.5 billion credit facility from GMAC.

'There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,' ResCap said in a filing to the Securities and Exchange Commission today. "

The credit crunch is over? We've seen the worst of the risk from mortgage exposure to financial companies? Uh, perhaps you can explain why the words "stave off bankruptcy" are in that little ditty?

UBS comes out with a $11 billion first-quarter loss and says they may lay off 8,000 people. Given that last year they made about $3 billion in profit, this is quite impressive - a year's worth of profit in losses in one quarter? That's gotta hurt when you sit down:

"'UBS is scaling down investment banking,' including reducing trading bets and giving up off-balance sheet units, said Frankfurt-based Landsbanki Kepler analyst Dirk Becker, who advises clients to 'reduce' holdings of UBS. It is 'realistic' to estimate that the company will fire one tenth of its 83,000 employees overall, he said."

Getting rid of off-balance sheet exposure is a net positive over time, but the key question for today is "where is the value on these stocks?"

That is, what is the native earnings power of an investment bank when they can't play the games that have goosed returns for the last dozen years?

Federal Prosecutors are turning up the heat in the subprime mess; saying:

"The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud."

Yeah, ok. I'll believe it when I see it.

The fact of the matter is that The Feds preempted state regulation of mortgage initiation during the bubble years, and no amount of attempting to hide from the record will succeed on that count. Nor is the record on the SEC's misfeasance open to serious question; they have turned into a lapdog of the highest order, going from being a regulator to an organization that hands out Lewinskis to anyone on Wall Street who asks.

Indeed the SEC's latest "dislike" of the short-selling hedge-fund community is particularly curious, given that during the entirety of 2007 the game was to start false rumors that were positive, after buying huge numbers of CALL options. This was widely reported almost on a daily basis in the media and yet nothing was done about it.

But when some short-sellers buy a lot of PUT options and then go after Bear Stearns, that's worthy of a criminal investigation.

I personally believe that all market manipulation needs to be investigated and, when the law was broken, prosecuted. This applies to both "short" and "long" rumors, not just those that cause price declines.

Of course that would mean locking up half the hedge fund and investment bank population in New York.

Deutsche Telekom is allegedly looking into buying Sprint/Nextel. I'm not sure how that works out, given the wide differences in the protocol and plant that both systems use. Sprint/Nextel use PCS and iDEN, while DT's T-Mobile is a GSM-based system. While GSM is headed to "3g" (and is in fact being rolled out "silently" now, if field reports I have are to be believed) exactly where this leaves Sprint/Nextel in terms of its plant is less clear. This much is certain - trying to force customers to convert equipment usually is a losing strategy, and those carriers who have attempted it in the past have wound up with huge losses in the customer base, AT&T/Cingular being one of the better examples.

My inclination would be not to do a deal like that, were I at the helm, and instead I'd draw a bead on Sprint/Nextel with the money I'd have spent on an acquisition and go customer hunting at their expense. Given the cost of an acquisition I suspect that DT could raid them quite effectively, especially with the recently-acquired 3G spectrum in the US. Bang-for-the-buck that would likely be a better investment.

One of the problems I continually see among businesspeople is the insatiable appetite for "mine is bigger." Growth via acquisition is fraught with risk, with the most serious being that you piss off existing customers during the integration process and lose them, making your acquisition too expensive - yet if you price for that loss when you make your bid, odds are that you get told to go to hell because the acquired company has those customers and doesn't forsee losing them at all.

This inexorably leads to you overpaying for what you get in order to get the deal done, which is ultimately destructive to shareholder value.

ISM Services came in at 52, which was better than expectations. You'd think the market would rocket higher on this, but it didn't. Why? Commodities - up went oil, more than $2 this morning, and the commodities long trade looks to be back on, dampening enthusiasm. Add to this that the new orders number embedded in the ISM fell slightly while prices paid was up significantly, both going the wrong way.

The internals in that report are pretty nasty, despite the better headline number. 59 straight months of price increases, with the rate of change increasing (bad), and inventory sentiment going the wrong way at an increasing rate - for 131 months straight.

When you take serious price inflation, top it with inventory mismanagement but then wind up with services that aren't totally in the toilet you get a market that isn't quite sure what to make of it all.

Bank of America's deal to buy CFC appears to be in serious trouble. A FBR analyst has cut his target to $2 on CFC and has changed his view of valuation of the deal to $0-2. Yes, the low end of the range is zero! That was my read on the "value" of their business back last year, and again in January. Funny how it took FBR six months to bother to read the balance sheet and apply a few realistic assumptions to both liabilities and assets......

If you want to know why the market has been "levitating" the last couple of months you need only look at the "depth of analysis" that these people apply when they come out with their calls.

It was absolutely obvious back in April of last year that these "liar loans" were going to be worth little or nothing. Recoveries were clearly going to be in the 50-60 cent range on a good day for firsts, and significantly less on seconds. This crap paper was clearly being sold for years into every channel on the planet, including Fannie and Freddie, and was going to lead to serious problems for them.

Yet even today, more than a year after the point in time where no excuse remains for ignoring the truth, we still have six month time lags on "analysis" of a major lender's portfolio and a viewpoint that their liabilities almost certainly exceed enterprise value; ergo, the stock is a potential zero.

Why do people listen to these clowns? Does nobody remember 1999 and 2000, when the likes of Cramer and Blodgett ran around pounding the table on technology stocks that in the end proved to have zero real earnings potential, ran out of money, and went bankrupt?

Last April I started analyzing WaMu's earnings reports, for example, and wrote in the Ticker about their capitalized interest "earnings" game - removing that from their report left them with insufficient earnings to pay their dividend! Yet the "market callers" kept rating the stock a "buy", citing their earnings "beats", even though those "beats" and "meets" were predicated on "earnings" that you can't actually spend.

Ultimately my view was proven correct and the stock price collapsed by more than 50%.

How hard is it guys? We all read the same balance sheets.

Or is the truth something more sinister? Is not the truth the same as it was in 2000, where the game is "access" and if print what you really think you'll get "cut off" from the company? Reg-FD is supposed to prevent that sort of "favoritism" from happening, but we know that is a paper tiger and has never been enforced.

Whatever the case may be we continue to have a market that trades not on hope, which is always present among humans and is part of the game, but outright falsehood.

Let's quickly examine a common claim - "The Market is a discounting mechanism for the economy 6-12 months out."

What did the market tell us being at an all-time high on the SPX in October of 2007?

That six months out the economy would be in great shape and that the "Subprime Slime" would not spread.

Was that prediction correct?

If not, why is the rise in the market off the January lows now considered an accurate prognostication of a recovery by the end of the year?

I rest my case, and would advise that, in my opinion, anyone who believes that "the consumer will be just fine", and therefore we should buy stocks related to either consumer spending or expansion of commercial activity (gee, like, for example, Google, RIMM, Apple and Amazon?) needs to do some serious thinking about the predictive value of the stock market.

Are you buying a historically-accurate prediction or are you throwing darts?

As for the calls of "The Financial Crisis is Over", perhaps you can explain the call out from FBR today for CFC to be a zero (or damn close to it), and today's news that ResCap may default on their debt in the next month.

Over?

That is quite possible for those firms - you can't be dead more than once, right?

But how about the rest of the market?

Now there's something to think about.