Nokia's lemonade stand next to Apple's, good for everyone

Been very busy as it appears from my vantage that things are soon going to get very interesting. Comments to follow in coming weeks. In the meantime, there was breaking news within one of my favorite sectors that I beleive is setting itself for a mighty fall-- handset and PDA makers. Nokia (NOK), the world's largest mobile phone maker, rolled-out a new online music store along with "new top-end handsets," with Apple's (AAPL) popular (but so far disappointing) iPhone in its cross-hairs. Of course, Nokia's setting-up a lemonade stand next to Apple's was deemed to be great news for the entire universe as not only did Nokia's(NOK) shares shoot to its highest levels since 2001, but Apple (AAPL) and Research in Motion (RIMM) shares also recovered all and more of their previous days decent-sized losses. In fact, Apple investors were so excited about the pending pressure on its own iPhone margins, that its shares were bid-up over 7-points....P.S.--Monday's blowout of China's Shanghai Composite Stock Index certainly felt like a final blow-off move for that spectacular bubble.

Mozilo fire sale = "diversification" ---- Merrill downgrade = "disgraceful"

Wachovia’s (WB) banking and finance analyst upgraded Countrywide Financial (CFC) following the $2-billion loan by “Fed discount window” pen pal, Bank America (BAC). The Wachovia analyst said, "We believe that Countrywide Financial still faces many near term challenges. But the influx of cash & capital reduces the potential for a catastrophic liquidity event, in our view." Deducing, of course, that prior to the Bank America loan, the Wachovia analyst indeed feared for a “potentially catastrophic liquidity event,” but never published such concerns prior to news of Wednesday's Bank America loan to Countrywide. I’m not picking on the Wachovia analyst per se, as said analyst has actually made some prescient calls on the stock, downgrading shares to an “underperform” in March. Nevertheless, Angelo Mozilo, Countrywide’s founder and CEO went on CNBC USA to berate the Merrill Lynch (MER) analyst, Kenneth Bruse for what Mozilo described as yelling “fire” in a crowded movie house, and called his downgrade to a "sell" and his accompanying verbiage that suggested a possible bankruptcy for the nation’s largest mortgage underwriter as “irresponsible” and “deplorable.” Of course, Mozilo’s liquidation of 736,000 shares between June 19th and August 13th (3-days before collapsing as low as $15/share) wasn’t his own way of yelling “fire?” I read excerpts from Mr. Bruse’s report on Coutrywide Financial and nowhere did he say emphatically that Countrywide will fail. He said in his own words that such an event was now possible. Ya know, if an analyst actually believes that a company could possibly fail, they should say so. He or she owes it to his bank's clients. In fact, in order to maintain integrity within the analyst community, it’s incumbent upon them to say as much—if they really believe it. Why is the inverse any different, which is far more common, to delude investors into believing that growth rates of particular companies are sustainable infinitum? I actually believe this brutal honesty, if it were actually capable of blossoming unencumbered by conflicts of interest within the “sell-side” analyst community on Wall Street, would even the playing field and even help to prevent bad ideas and bad operators from being funded through the rich retail and institutional Wall Street distribution systems. It would also prevent many smaller less informed retail investors from being lulled into what is often a web of lies usually costing Wall Street untold fortunes (in the long run) in lost "goodwill." The logic of this is no different than equating patriotism with dissent. It’s necessary and absolutely vital within a democratic society just as skepticism and doubt is and should be a vital ingredient, almost an innate characteristic, for any good financial analyst. So for Mozilo to berate Ken Bruse for simply expressing an educated opinion is disgraceful in itself. Okay, I’ll get off my soapbox…..By the way, Countrywide’s stock faded nearly all of its initial 4-dollar gain yesterday seen initially after hours on Wednesday when news of the Bank of America loan hit the wires and proceeded to drop another $1+ today. Baring the rush to prop-up this ailing mortgage company, I believe it to be fairly likely that the Merrill Lynch analyst would indeed be spot-on with his call. But given that we have become much more like China than China has us, the central planners on Wall Street and in Washington will exert as much muscle behind this effort as humanly possible stopping just short of being labeled a total bailout for Countrywide Financial. It’s a shame that those that profess to be the biggest proponents of free markets are often the ones that seem to despise it the most.….Another fairly important semiconductor company issued poor results; Marvell Technology (MRVL), a customer to Apple’s (AAPL) iPhone with its Wi-Fi lost baseband chip, lost money last quarter and showed sizable increases in Account’s Receivables and Inventories year-over-year. This is on top of Analog Devices' (ADI) punk guidance earlier in the week. And again, the operating environment from here forward only gets more difficult for this industry due to events witnessed over the past several weeks. ... Japan's central bank kept interest rates on hold at the end of its two-day policy board meeting Thursday, keeping borrowing rates for yen essentially free. And the Federal Reserve, in its behind the scenes bailout of the U.S. financial system, posted a notice on its web-site that said it would now accept “investment grade asset-backed commercial paper” as collateral at its discount window. In a world where we’ve seen paper rated AAA/Aaa by both Moody’s and Standard & Poor’s, trade like junk, this move by the Fed gets us closer to what I believe will be full throttle for the Fed’s printing presses. Got gold? By the way, gold bullion was up over $9/ounce today. It moved nearly $6/ounce within minutes of this being posted on the Fed’s web-site today.

Fed now in the syndicated loan business

I want to backtrack to an event from yesterday. The Wall Street Journal (aka Fox News = Faux News) reported that Warren Buffett was eyeballing Countrywide Financial (CFC) as a potential acquisition citing “investors speculating on what Buffett might do with his company's $47 billion in cash.” The story was based solely on what “speculators” apparently think Buffett could (key word) do with his huge $50-billion cache of cash—in their dreams. Later yesterday, Buffett told a commentator on CNBC USA that talk about a Countrywide takeover was pure “speculation.” It’s humorous to watch how speculators use Buffett’s name for its own convenience. On one hand he’s a drooling old man that needs to be fed by boy scouts any time he says something sobering about financial markets. Yet, he’s the greatest value investor ever to wear pants when these morons need to cite one of his investment moves (like his recent purchase of railroad stocks) as being proof positive for the entire universe….So let me get this straight; Citigroup (C), J.P. Morgan Chase (JPM), Wachovia (WB) and Bank of America (BAC) each said they borrowed $500 million from the Federal Reserve's discount window. That’s $2-billion in total (I was always good at math). Furthermore, I guess in a show of support and solidarity, according to the Wall Street Journal (Fox News) the banks all agreed that while they have ‘substantial liquidity and the capacity to borrow money elsewhere on more favorable terms, the companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions.’ Sweet guys. You know it’s a momentous occasion when a bunch of guys who would sooner eat their young than help an elderly woman across a busy Manhattan street are performing a task out of concern for others (or are they?). But what's this I spy? Bank of America is making a “substantial investment" in Countrywide Financial? That was how Bob Pisani of CNBC USA announced the news tonight as he sat in for the vacationing Larry Kudlow's Goldilocks Cheerleading Hour; almost giddy like a little girl. Was that $2-billion that’s being invested (loaned)? Where else did I hear of that nice round number? Oh yea, that’s exactly how much those four big U.S. banks borrowed from the Fed’s discount window. No, could it be? Naaaww. Okay, admitedly, I may be sounding a bit conspiratorial. Even still, it would be a stretch to call this an “investment,” as in “equity investment” like Bob Pisani so emphatically proclaimed. Sure the private placement of $2-billion worth of convertible preferred stock is convertible into stock (with certain restrictions), but at $18 per share?? I'm still unclear as to the structure of this deal, but initially its my understanding that its been priced a bit over 3-dollars in the money ($21 - $18). But it seems to me that Bank America is also now exposed to potentially seeing that premium slice-off part of its initial PAR value if shares begin to dip below CFC's closing price of approximately $21/share. If so, this is a sweetheat loan that also entails some equity risk, attached with an obligation of paying Bank of America (and probably the other three banks) a rate of 7.25-percent. I could be wrong about the structure of this deal, but this is my initial take. Nevertheless, a 7.25-percent rate is far lower than Countrywide Credit could have otherwise raised on its own at this juncture after exhausting its $11-billion line of credit last week. In fact, I know of an A2 rated bank that today announced a junior subordinated debt offering that will have to pay approximately 8-percent to raise a currently undisclosed amount. That’s a debt offering structured as a “Capital Trust Preferred.” This issuer, though I'm not enthusiastic about its prospects is at least not on most short lists of impending bankruptcies like that of Countrywide Financial (CFC) (see Merrill Lynch report). Why the sweetheart deal Bank of America (and Citigroup, JP Morgan and Wachovia)?

RIMM paper shuffle equals nearly $2-billion in more market-cap

So Research In Motion (RIMM), $82/share, split its shares 3-for-1 today. At is high today, its stock had rallied another $4+/share (post-split), the equivalent of a $12+ point rally at pre-split levels. Didn’t anyone learn from their experience of 1999 and 2000 that stock splits are nothing more than a paper shuffle? This does not mean that the company will sell even one more Blackberry than it would have otherwise. Its market-cap is now roughly $43-billion on Revenues of $3.037-billion annually (trailing 12-months). Shares now trade at 14-times Revenues!!! And keep in mind, that if you were to subtract the sequential growth in its Accounts Receivables last quarter, Research In Motion saw zero sequential Revenue growth. Research In Motion, in my opinion, is running out of gimmicks (stock splits, balance sheet shell games) at their disposal that they’ve substituted for the illusion of being a long-term growth story.

RIMM says, “What credit crash?"

I’ll be "short" tonight. But ponder me this riddle: On one hand, some folks are so concerned about the integrity of their money market funds that they’ve pushed 3-month Treasury paper down to yields below 3-percent—a full 2.25% below the overnight Fed funds rate. Managers of money market funds are so concerned that they might "break the buck" on their firm's money markets that they are opting for 2.5% yields, denominated in a currency that will probably drop several multiples of that yield over the next few years, over what used to be AAA, "money-good" commercial paper. Yet, on the other hand, some folks on the equity side have interpreted the recent sell-off in shares of Research In Motion (RIMM) and its ilk as a “buying opportunity.” Since last Thursday afternoon, shares of the easily commoditized Blackberry maker has rallied over 50-points and actually pegged a fresh new all-time high today based, as far as I can tell, on nothing more than RIMM's ensuing 3-for-1 stock split (paper shuffle) scheduled to go "post-split" tomorrow. As we sit tonight, the collective wisdom's among equity traders deems the gadget sold by Research In Motion to be "GDP-free." There really is no other way to frame this absurdity because at this juncture there is now essentially a zero-percent chance of avoiding a recession that is likely to cut very closer to the bone. And if this doesn't ultimately effect the kind of folks that think they need a mostly discretionay gadget like the Blackberry, then I suppose subprime is also "contained?" Its as if we have a category-5 hurricane hitting credit markets while some equity owners are literally out flying their kites.

Fed throws U.S. banks a temporary life preserver

By now, we all know that the Fed (U.S. central bank) cut its "discount rate" from 6 1/4% to 5 3/4%. This is the rate at which the Fed itself is willing to loan out to qualified financial institutions. It's not as sharp of a tool as the Fed's Fed Fund rate, which is the rate at which banks charge each each other for overnight liquidity needs. So naturally it sparked a rally in stocks especially among financial issues. Interestingly, in the midst of Thursday's huge 300-point sell-off, before nearly closing unchanged, it was the financials and brokerage stocks that caught a curious and furious bid long before any other sector. I noticed Bear Stearns (BSC) was even solidly green even as the Dow gyrated between being down 200 to 300-points. Clearly, someone had been tipped-off that the Fed would pull this stunt before Friday's opening. Who did the Fed bailout? A conference call among bankers and Ben Bernanke reportedly had apparently taken place sometime between Thursday afternoon and Friday morning. Someone was either short a massive number puts on S&P futures or long calls on S&P futures that were about to expire worthless. Or, this was a chance for some financial institutions in dire need of some free cash to pile into a trade that was essentially guaranteed to payoff. Obviously, I'm not totally confident that these bankers, knowing what was in store for Friday morning, didn't tip-off trading desks at their respective firms. We would like to believe that free markets are a little more free than that, but I'm not so sure. So someone was bailed out. And others, not being as well connected as Goldman Sachs (GS) CEO, Lloyd Blankfein or Lehman's (LEH) Richard S. Fuld, were inadvertently annihilated. But as good as the bounce might feel, the Fed has shown its hand and a clueless group of bankers that are now panicked means its most definitely lights out for condo speculators and margined hedge funds. The move was an admission that things in the credit market had deteriorated to the point of needing a bailout by the central planners at the Fed. Not that this wasn't the spark that will likely carry a rally in the Dow back into the mid 13,000s, it probably will. But this just gives the institutions a few more weeks and maybe months to off-load their impaired financial instruments onto John Q. Public who don't know Ben Bernanke personally and cannot arrange a discreet, impromptu and confidential conference call to discuss the wilting value of their currency and to propose things that are in their best interest.

Again, I'm passing on some pretty clever and entertaining observations forwarded to me by Stephen Giauque in his Friday e-mail. I don't make a habit of watching Larry Kudlow or Jim Cramer on CNBC USA that often. But I'm aware of Larry Kudlow's modus operandi, so I thoroughly enjoyed Stephen's slant given the recently unfolding events. Enjoy:

"Jim Cramer, on Bubblevision July 16th: 'Subprime' is totally meaningless. I am now saying that if every loan in 2006 that was subprime blew up - $500 billion - if they all blew up, you would still not notice....It has no relevance whatsoever." Later that day, the Dow Industrials closed at a new high of 13950 and just 50-points from its eventual high of 14,000 on July 19th.'

Jim Cramer on Bubblevison August 3rd: 'Open the darn Fed window.....He (Ben Bernanke) has no idea what it's like out there - None!....They (the Fed) know nothing. The Fed is asleep....My people have been in this game for 25 years . . . They are losing their jobs -- these firms are going out business....Bill Poole (St. Louis Fed President) is shameful....Cut the rate. Relieve the pressure.....In the fixed income markets we have Armageddon!!'

Mmmmm? Seems Larry Kudlow has also transitioned his rhetoric from describing the U.S. economy as 'The Greatest story never told' to something akin to: 'We need our asses bailed by the Fed!!' How is it possible that we have transitioned to 'God Help us!!!' from 'The greatest story never told,' in a matter of roughly 18-days? From July 19th's new all-time high for the Dow Industrials to August 3rd---360 hours, we have watched the world's economy and financial system strutting around on steroids and getting all the girls to literally cowering in a corner and sucking on its thumb. It's pathetic!!! Now, Larry Kudlow's nightly 'Greatest story never told' cheerleading hour has been reduced to him and his anti-free marketeers, pro-welfare-for-the-super-wealthy guests pleading with Ben Bernanke and the Fed for an immediate rate cut (read: bailout). When we see financial markets become so impaired in such a short order, it's not because the symptoms hadn't been brewing and were unrecognizable. The fact of the matter is that Larry's 'Greatest story never told' economy was simply a mirage or an intoxication brought about by massive amounts of debt, leverage and ill-conceived investment strategies designed to 'max-out' the surfeit liquidity (debt) environment that for a while was deemed to be 'money-good' when in fact it was acting as a short-term prop for asset values provided that most of Wall Street and all of its co-conspirators (CNBC, credit rating agencies, et al.) could delude themselves and others into believing that this debt was serviceable infinitum and the environment was not totally out of the ordinary. And now that those props are collapsing so too are asset values by which it all had buttressed. It was probably the biggest ponzi scheme the world has ever seen. A financial system based on lending money to people and institutions that can't pay it back for things they don't need or for the purchase of exotic leveraged financial products that they don't even understand, just might not work.'"

Touché!!

Thanks for the heads-up

Again, the burgeoning consensus fallacy being engaged by the clueless is that you can take shelter in technology related stocks as the world's financial structure implodes around them. Yet, for many, especially in the semiconductor arena, there can’t be a sector that is more levered to real “non-financial” economic activity. And for those that believe that a popping of the world’s credit bubble, which in many ways had become the economy, will not affect aggregate consumer demand for gadgets like iPhones, Blackberrys, and flat panel televisions are essentially living in denial. Last night, Applied Material (AMAT) was the latest semi-related company to issue mostly bad and worse-than-expected news. The company reported that orders for the quarter had dropped 15-percent. And even though revenues came in as expected, 1-percent higher than the same quarter 1-year ago. I noticed a decent sized increase in its Accounts Receivables to $2.24-billion versus $2.12-billion as of April 29th and $2.03-billion at the end of October 2006’s quarter end. Applied predicted that orders in the current quarter would be flat to down 5% from the third fiscal period, which ended in July and that revenues would decline 5% to 10% over the same period. Although weak demand in its display products did translate into weakness for companies like ASML Holdings (ASML), another major capital equipment maker, KLA-Tencor (KLAC), actually traded green for much of the day before succumbing to a bit of “forced selling” pressure as well as the Dow Industrials suffered yet another triple-digit loss. I continue to shake my head in amazement as I see folks on the margin begin to worry about their ability to get money out of their money market accounts, while the market treats much of tech as a “flight-to-safety.” It’s the current abhorrent display of malinvestment that many folks will regret in coming quarters. Since June 1st, well before the most cluelessness among us had any inkling that what they had perceived as a stout “liquidity-driven” bull market was in fact a debt-ladened pyramid scheme, a number of issues are still up fairly substantially since their June 1 closing prices. Including: Nvidia (NVDA), up 9-points, KLA-Tencor (KLAC), up 2 ½-points, Amazon.com (AMZN), up 7-points, Apple Computer (AAPL), up 4-points, Under Armour (UA), up 12-points, Crox (CROX), up 11-points, and most absurd among them, Research in Motion (RIMM), up 39-points. These are all either consumer discretionary-based companies or highly levered to the ebb and flow of economic activity. Since June 1st, in spite of whatever good news these respective companies have revealed about there specific operations, they are now confronting an environment that beforehand had been totally unaccounted for just 75-days since. TOTALLY!!! For readers that were around to experience the last massive bubble to pop, technology stocks, it was the credit market that tanked before the underlying stocks caught on that something was amiss. The reason credit issues are a tell for equity is because bond holders tend to be far more concerned with return of capital and not return on capital. The latter is important, but it takes a back seat to the former. When credit markets begin to adjust for the possibility that the return of their capital is at risk, you can rest assure that the equity component is at dire risk. But the equity players tend to be the dreamers and gamblers and they are also, unfortunately for their own well-being, the most clueless….. You might think its odd that I obsess over the happenings among tech when the real fireworks are occurring in credit markets. Well, its no longer a secret that credit markets are essentially imploding. At this juncture I can only recount the gory details. Countrywide Financial Corp (CFC) was downgraded to "sell" from "buy" by a Merrill Lynch (MER) analyst, who said bankruptcy may be possible if liquidity worsens. Not that I disagree with the Merrill analyst, I’m just surprised that more Wall Street firms didn’t put a "sell" on shares of the nations biggest mortgage lender before it had already dropped 48-percent since early January. The analyst added that, “If liquidations occur in a weak market, then it is possible for CFC to go bankrupt.” Merrill had rated Countrywide a “buy” since April 2005. Thanks for the heads-up.

More clues, more cluelessness

So its no longer a secret that the world's entire credit and financial system has problems. What it now comes down to is the degree of severity. Is this a minor issue concerning just "subprime" paper that is only being exacerbated by opportunist short-sellers as game show host, Ben Stein proclaimed to be the case in his apologist's op-ed in the New York Times yesterday? Or are we witnessing the crumbling of an ill-conceived financial system built upon paper that only had collateral value so long as the bubble enablers at Standard & Poor's and Moody's Investor Services said so? Indeed, it may not be as dire as the latter, but it is most certainly not as polyanish as the former Nixon speechwriter opines. Unfortunately, at this juncture I'm being reduced to recounting the day's gory details. And today was again a win for the bears. And for those with cognitive abilities, the day's news places serious doubts on any thesis' that suggests the credit problems are "contained" and that the current problems will not translate into a weakening consumer and a weaker "non-financial" segment of the world economy. Again, the ECB found it necessary to pump another $10.48-billion into money markets overnight. The Euro has given back nearly 2-percent against the woeful dollar since early last week thanks to the massive Euro print job. Euro broker powerhouse UBS hit its 52 week low calling the current environment “turbulent” and said that market conditions may reduce profit for the rest of the year. Also, Sanford Bernstein analysts issued a report today spelling out losses at Citigroup (C) that may accrue to as much as $3-billion this quarter due to current credit conditions and the marking down of some loans on its books by as much as 20-percent. The two largest retailers in the U.S., Home Depot (HD) and Wal-Mart (WMT) also both issued weaker than expected quarterly revenues. Home Depot "beat" its earnings estimates. Wal-Mart did not. Still, both companies were forced to admit that the crashing housing and mortgage bubbles would impact operations through the end of the year and lowered guidance accordingly. Also, probably the most disturbing news on the day was word that Sentinel Management Group Inc., an Illinois-based firm that manages $1.6 billion of mostly short-term money/equivalents for commodity traders and hedge funds reportedly asked regulators for permission to freeze client withdrawals due to being unable to liquidate some of its commercial paper without taking a substantial haircut. Also, in addition to my mentioning of the problems encountered by Canadian diversified financial concern, Coventree Inc., in being unable to float fresh commercial paper yesterday, reportedly, as many as seventeen Canadian issuers of asset-backed paper have reported liquidity concerns to Canada's version of Standard & Poor's, DBRS yesterday and today. All seventeen reportedly are having severe difficulty in tapping the CP market for liquidity needs. The CP market in Canada is roughly 15-percent the size of the $1-trillion size of the U.S. CP market. Also, Japan's Norinchukin, a major credit provider that "acts as a de facto central bank for nearly 5,000 agricultural, forestry and fishery cooperative systems nationwide" reportedly tapped the BOJ (Bank of Japan) for some Yen last night. Still, as a proxy for how seriously folks are taking all of this, it didn’t stop the best performing IPO of 2007 from taking flight. Shares of software maker VMware Inc. (VMW), a spin-off from data storage, EMC Corp. (EMC) soared 84 percent on its first day of trading making it the biggest IPO winner of 2007. At $51/share, its closing price today, VMware already trades with a $20-billion market-cap, backed by just $1-billion in trailing annual revenues (albeit growing). As many clues are being unturned, there remains a plethora of cluelessness.

Still not spreading

After reviewing some of the key technical and sentiment indicators over the weekend, I had concluded that we had reached a point where it is quite possible for stocks to stage a rally over the coming days and weeks that may get us back above 13,600 on the Dow Industrials and 1500 for the S&P 500. Of course, this would be contingent on a high-profile blow-up not occurring over this span and it would also be nothing more than a failed short-covering variety. Its a given that we will hardly go a day for some time now that a hedge fund here or a mortgage lender there won't a announce a freeze/failure/bankruptcy, etc. But today's lackluster attempt to rally in light of fairly robust bearishness (Investor's Intelligence Survey) has to embolden the bears. And again, the signs left wafting over today's action feels ominous. Goldman Sachs (GS) took a page from Bear Stearns' (BSC) playbook and chose to avoid mark-to-market for securities held in two of its quant funds that had suffered massive losses just since the beginning of August. The firm reportedly pumped $2-billion of shareholder capital into its sucking funds alongside another $1-billion that included Hank Greenberg, someone else whose wealth is intimately dependent on the current structure of the world's financial system. Also, Conventree Inc., a Canadian financial services firm, was rebuffed when it went to market to sell asset-backed commercial paper making it the first company I know of to actually delay payment on asset-backed CP. Adding to the angst was word of yet another submerging subprime operator, Aegis Mortgage, which reportedly ranked among the top thirty mortgage lenders in the U.S. And for you "contained" fans out there, Aegis is also 80-percent owned by Cerberus Capital Management. Cerberus is the private equity firm headed by former U.S. Treasury Secretary, John Snow, which recently closed on the massive Chrysler deal. By every conceivable measure, that is a losing deal already just two weeks old.

“We just don’t know why”

Gold has yet to get into gear, and in fact suffered another bout of “forced liquidations” today. But I believe it has more to do with being caught on the books of some of these leveraged operators now being forced to sell whatever still has a bid. Gold can get a bid whereas much of their nearly worthless CLOs and CDOs essentially have no buyers. I fully expect gold bullion to extricate itself from the clutches of these forced sales as we progress, but it is likely to be turbulent for a while. Meanwhile, futures markets are pricing-in a near certainty of a Fed rate cut in September. As this date approaches, I expect this to buoy bullion given the message this would send to currency markets. A rate cut now or soon would be tantamount to the bailing-out of a loose money crisis with even more loose money (Read: Crank-up the printing presses). On its face, that would only move gold up another wrung of the “real money” ladder….Of course, the sell-off in gold bullion today stemmed from another subprime blow-up that continues to “not spread.” The world’s sixth largest banking concern and France’s largest, BNP Paribas, said that it had frozen redemption's from three of its funds due to exposure to the U.S. credit markets. The company issued a press release that said it had become impossible to value mortgage related securities in its portfolios due to "the complete evaporation of liquidity." CEO, Michel Papiasse said that since last Friday “liquidity in some parts of the U.S. credit markets has dried up..... To be honest, I don't know why,” Certainly four words you normally would rather not hear from the CEO of world’s sixth largest banking concern. Of course, being a Paris-based company elicited all kinds of xenophobic jokes and gaffes on CNBC America. I find it amusing that so many Americans get worked-up over French culture. I’ve spent a considerable amount of time in both countries and I can attest that this learned muscle reaction among some American’s is strictly out of ignorance and the U.S. media-educated repetition. I digress. The ECB injected $1.3-billion liquidity into money markets to help cushion the blow caused by the BNP Paribas news….. U.S. stock futures got progressively worse as news of PNB’s problems spread in the morning. For what its worth, the last time I recall S&P futures down nearly 30-points in the morning was on a few occasions between 2000 and 2003 as the excess from the tech bubble was being unwound. And I remind readers that it took nearly 3-years for that to unwind. I simply find it amusing that so many folks in this business believe that an excess probably multiples in size relative to what the tech bubble was, can exorcise itself in a matter of weeks. Lost in the shuffle to some degree was news that U.S. retail sales were predominantly on the weak side. Being that many analysts and strategists in my business seem incapable of deductive abilities when in fact that is a trait that should almost be innately inherent in a good economist or portfolio manager is baffling. You simply can’t drag the earnings or performance from the previous 12-months and use these same numbers for your models going forward given what we now know about the housing, mortgage and financial sectors of the world economy. There is no way that these issues do not have a sizable impact on consumer behavior going forward. Again, with my ear glued to CNBC America here in London, which acts as probably the world’s best proxy for the level of unabashed cockeyed optimism, I heard more declarations of “bottoms” and “buying opportunities” than “hmmm, this might be serious stuff.” Years from now, so many folks are just going to shake their heads in disbelief and wonder to themselves what the hell they were thinking. Again, to see markets take seriously KLA-Tencor’s (KLAC) well-timed announcement this morning of an increased buyback making it among one of the few green trading stocks in the early going and all day along with an assortment of other semiconductor related issues is tantamount to markets still being incapable of connecting dots. Throw in Altera (ALTR) as being yet another semiconductor touching new 52-week high today amidst a backdrop of very seriously deteriorating fundamentals.

I believe I can explain this affinity for semiconductors stocks in this way:

These names have arrived on the radar screens of technicians due to an initial false premise that these can be bought on the merits of NOT BEING HOUSING or MORTAGE related. This false premise got legs among the investment community pushing prices higher even as earnings and revenue growth have been largely dull, to say the least. Now, seeing these names popping-up on screens of quants and technicians based on the fore mentioned false premise has made them attractive to yet another brand of “investor,” technicians and quants. Now they’re on the screens of technical traders due to their “relative outperformance” and nothing more. Technicians do nothing but try to divine the meaning of pictures of stock charts without any regard for the company’s product, customers or financial situation. This is quite literally how “fertile fallacies” form as described by George Soros in his writings. Technicians live in the fool hardy world that presupposes that markets are an efficient voting or discounting mechanism whose price is an amalgamate of all knowable information on the company, both public and private. They don’t care how a stock or a group of stocks finds their way on their radar screens, they just know they’re there and they are programmed mentally to view the event favorably. Unfortunately, when money is being moved lighting speed predominantly in a world consisting of so many “like-minded” picture watchers, I believe “fertile fallacies” are capable of propagating and perpetuating like wildfire. They’ve been fooled into taking the baton and pushing them even higher, yet this was all based from fallacious origins to begin with. I see this migration from the housing-mortgage-structured credit complex and into semiconductors as being akin to one dislodging himself from the tightly-gripped jaws of one hungry alligator and into the wide-open mouth of another. Back to the events of the day, even as the Dow was still well over 100-points lower before noon in New York, the Nasdaq actually went positive for a brief moment. The notion that tech and especially semiconductor stocks offers some kind of shelter from reverberating worldwide credit problems, that are quite serious mind you, is again simply the height of folly. Also noteworthy, the Shanghai Composite Index is also up 22-percent over the last month hitting a new all-time high last night. This bubble in Chinese shares compares favorably with both the Nasdaq tech bubble and the U.S. real estate bubble as measured by the Amex Homebuilding Index. The prior two, now popped, had been three standard deviation moves. Chinese shares have now duplicated these prior bubbles in proportional moves which makes all three the most extreme advances of entire asset classes in recent history. The prior two crashed in dramatic fashion. Taking shelter in Chinese shares is also like hiding out in the mouth of a hungry alligator—or dragon. My opinion.

Absent alcohol (private equity-put), party back on

Today’s action was as wild as seen in recent memory; partly due to Cisco’s (CSCO) John Chambers helping the most delusional among us to extrapolate his personal thoughts on the economy, “the strongest he’s ever seen,” to that of the same for the entire universe of stocks. Never mind that Chambers was also quite exuberant on or around March of 2000 based on quotes you can easily find by doing a Google search. Regardless, stocks shot out of the gate this morning; powered even higher by around 2:30 PM EST in the U.S. (Dow up over 160-points and Nasdaq up 64-points) and then surrendered all of the Dow gains and nearly half of the Nasdaq gains by 3:30 PM EST before regaining nearly every point by the close of trading. This is the same market many of your parents and grandparents might be riding into retirement. It was just the furthest from any semblance of normalcy one could imagine. But a big gain is a big gain as far as the bulls are concerned. Yea, excess and speculation has been wrung out of the system. Knowing what we know now versus just three weeks ago when “liquidity” and private-equity were all the bulls needed to know in order to assemble a retirement plan the logic of for S&P 500 and the Dow Jones Industrials to be resting roughly 3-percent from their respective all-time highs is simply the height of folly. Regardless of this lightning speed rebound of nearly 3/5ths of the prior three week’s sell-off, in essentially three trading days, it eludes the delsusionists that the horse we rode into calendar year 2007 may not be dead, but its pretty well maimed. Again, either this is a resounding display of resiliency or one of the most acute cases of collective delusion witnessed in the annals of modern finance. I suspect it’s the latter. But time will tell. To wit: Research In Motion (RIMM), is back within 2.9% of its all-time high today; Fannie Mae (FNM), in midst of the scariest mortgage crisis in decades, was within 3-percent of its highest level last seen in January 2005, even before the most delusional of bulls had even an inkling of what an absurd and distorted bubble had formed in housing--which probably did not even peak until later that summer; Applied Material (AMAT) traded within 9-cents of its 52-week high today and its highest price since April 2004. Are we really on the cusp of a dramatic pick-up in economic activity that might be the driver for businesses wanting to ramp-up capital investment compared to the horizon ahead of us in April 2004? Same for Cypress Semi (CY), seeing its highest price since August 2001. Also, somewhat noteworthy was China’s counter punch to Hank Paulson’s urging that they be more like those cuddly benevolent Yankees. They quickly obliged by reminding the U.S. Treasury Secretary that they probably held the card that would trigger the collapse of the dollar given its cache of $1.3-trillion of U.S Treasuries.

Fed's game theory

While growing-up, when in dire need of a well crafted fib to save your hide from a real beating, how wonderful would it have been for your parents to sit down with you to assist you with concocting of the lie that you are about to tell them? Both on the telly and in print over the last 24 -hours we’ve been treated to the opinions from strategists, analysts and portfolio managers as to the best possible way to craft the Fed's lie so as to regurgitate it right back on us so that we can gladly lap it up. Fed watch is such a humiliating farce. Granted, the post-meeting communique wasn’t necessarily what the bulls wanted, but I’ll note the obvious, these guys never acknowledge that a housing bubble ever existed in the first place and now they mention subprime and credit markets in passing as if its an insignificant sideshow. I'm thinking that the current folks at the Fed are either truly clueless as it concerns the current credit situation, or applying a bit of “game theory,” they may have concluded that the situation is beyond their powers to save a problem this big and wide and that its best to go ahead and let the excesses, that was Alan Greenspan’s doing anyway, to just let run its course instead of also being labeled a serial bubble blower. This may even be a convenient tack given that the alternative, slashing rates and/or exceedingly doveish talk, would most certainly cause the Dollar Index to slice through the important 80-level like butter. Maintaining some influence over the currency is something they might actually still have at least some control over. I don’t believe it does much either way in coming weeks and months given the precarious interplay between the dollar and credit markets. In fact, I believe the dollar will eventually slice through that important support level on its own accord, but today’s no-move and moderately more hawkish tone in its post-meeting communique appears to be the safest tack for a Fed that has to be concerned for its own “career risk.”……Fannie Mae (FNM), trading within 3-points today of its highs over 2-years ago in January of 2005, is among the most glaring disconnects I can see out there. The possibility of the GSEs (government sponsored agencies) being given a green light to expand their portfolios with of this crap hardly seems something Fannie or Freddie shareholders would be rooting for. But folly is still in bloom in spite of the slightest bit of sobering-up over the past two weeks … Bear Stearns (BSC) tapped the pretend credit markets for $2.5-billion at 245 beeps above the Treasury rate. Thank you world central banks for trying to perpetuate our global imbalances. I attribute this even more than what the Fed did or said for the bouncy market in the afternoon. Don’t ever let bad behavior suffer consequences, it might actually encourage prudence.

Goldilocks, and other fairytales

I know nearly 300-point rallies are common during bear markets as we witnessed some of the largest nominal point gains in market history as the Dow was in the process of purging the excess from the late 90s tech bubble between mid-2000 through late 2002. So today’s largest point gain since 2002 for the Dow should not come as a big surprise. The unfortunate part is that most don’t see it that way. Most feel a sense of relief and a return to normalcy of ever rising stock prices. It just adds to the complacency. Again, a two-week correction that saw the S&P drop 7-percent from its all-time high is not even close to sufficiently purging accrued excesses over the last five years. A period that encapsulated the most absurd period of egregious irresponsible lending this world has ever witnessed? After today’s close, the Dow Jones Industrials now rest essential where it closed out the month of June. Given the incremental chunks of wisdom garnered since then as it concerns the “private equity put,” leveraged hedge funds and the clear signals being sent by the conduits of this credit orgy, the major investment banks, things have taken a decidedly nasty turn for the believers of “Goldilocks.” For those that didn’t get a chance to tune into the chatter on CNBC USA today, it was quite amusing. These folks are so incredibly predisposed to want to believe in Easter Bunnies, Santa Clause among other fairytales that you would think that last week and all the data confirming some pretty serious issues within credit markets never happened.

Fed: Trapped

Obviously, my posts have become less frequent this past week as I do have a major client that pays me a tidy sum for my services. Given that credit markets were in a near freefall, monitoring and advising took precedence over most other aspects of my life in recent days. I do think all of this mind-boggling madness of mispriced credit indeed has the potential to create a scenario that unfolds similar to a depression era. But I also think its very odd that just a 7-percent drop in the S&P 500, after a near 30-percent 12-month rally, is eliciting screams for a Fed rate cut. I know its much much worse in credit markets. People have lost billions and will lose billions, maybe trillions more. But people have totally lost touch with what real risk, when it works against them, actually feels like. Some of these folks deserve to get wiped out and more institutions will also see their equity purged. The unfortunate thing is that some innocent folks will go down with them. And this can be credited partly to an environment of egregiously lax oversight and lose regulation. In years to come, the word, "regulation," that "pro-growers" had essentially been successful at coining as a dirty word, will no longer be greeted with hisses and boos. Which brings me to another point, we need to remove these folks from office that believe unconditionally, that regulation of any kind is bad for business and consumers at large. How many deregulated mishaps will we have to bail-out before folks realize this. Remember Enron? It was just a few years ago. Now there is a poster boy for how deregulation has the potential to defraud and ruin otherwise innocent folks' lives. In case its not obvious by now, business does not always have others best interests in mind when gone unchecked. It floors me when these folks take that tack of the "regulation v. deregulation" side of the argument. When "free markets" are left alone and go unchecked, its amazing how often we find the "free market's" invisible hands in our pockets. I'm saying this even though I have made a nice life for my family and myself from the fruits of the capital markets. I'm really very pro-business. Most of my friends and acquaintances that make their living from capital markets are fantastic forthright individuals. But its the small fraction that aren't that we all need some form of protection from. And we've simply overshot to the "deregulated" side of the equation. Again, I say all of this because what we're witnessing in capital markets can be attributed to a very lax oversight environment.

But I digress. It's Fed-watch Eve. I really am sensing that Ben Bernanke, the Fed and Treasury Secretary, Hank Paulson are hanging onto just a thread of credibility. Their protestations of the obvious in recent years ("No housing bubble, no inflation, subprime is contained") have made them pretty much irrelevant. I think the best case scenario this coming week for a Fed that is essentially trapped, is for them to again play on markets gullibility and not act overly concerned (again). They'll change their tune on inflation and say something like they've lowered growth expectation due to the "ongoing adjustment in the housing and mortgage markets." They might even hint at somekind of cut in the near future if they feel its necessary to stimulate credit markets "as mortgage markets continue to adjust." They'll use the words "adjust" or "adjustment" probably more than once in lieu of crash or financial dislocation. It just sounds better and keeps folks from slitting their wrists. But if they cut on Tuesday, it will look too much like panic. I think markets would bounce initially and then absolutely crumble when they see the dollar index heading for 75. Expect nothing, again, from the woefully trapped U.S. Federal Reserve.

Subprime largely contained....within our galaxy

Just last week, Treasury Secretary, Hank Paulson's, declared during a Bloomberg interview that, "Subprime issues will be largely contained." So far, his comment rings true provide we're talking about a very large container. Mortgage lender American Home Mortgage Investment (AHM), whose clients are considered to be prime or near-prime credit histories warned investors yesterday that it had been forced to drastically write down the value of its loan and security portfolios, thus triggering margin calls on its credit facilities. Barclays PLC (BCS), UBS AG (USA), Bear Stearns (BSC) and Bank of America (BAC) were among the banks listed in its filings with the SEC that had provided a combined $9.7 billion in loans to back American Home's mortgage underwriting efforts. When shares finally opened for trading this afternoon after being halted all day yesterday, the first tick was $1 and change--a nearly 90-percent plunge from Friday's closing price. In more "containment" news, after the close of trading in the U.S., The Wall Street Journal reported that Bear Stearns (BSC), the Wall Street philanthropists who had already been forced to shutter two other hollowed-out hedge funds is now struggling to contain (there's that word again) "big losses in a third fund" that is believed to control assets previously worth roughly $900 million in other mortgage related investments. The Journal story says that this fund, the Bear Stearns Asset-Backed Securities Fund, has just "a small slice" of subprime exposure. Using deductive logic, that would mean that this is indeed spreading. Fortunately, just within our own galaxy.