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.