April sales brings May fairytales

The April retail sales figures were among the most highly anticipated economic figures released this week in the U.S. It was reported by Retail Metrics Inc., that April was the best month for retailers since last November. Their index showed an increase of 3.3% year-over year. However, since we saw the earliest Easter in 95 years, thus falling in March this year, it probably makes sense to average the last two months together. Total sales are generally lower in the month during which the holiday falls so some of last month’s sales were probably deferred and pushed into April. March sales results, you might remember, was an abomination. So on the two-month average basis, same-store sales would have increased just 1.1%. Also, the reportedly surprising and robust 3.3% year-over-year gains in April also masks the fact April same store sales included an extra day this year versus the 2007 numbers. This extra day, versus last year, essentially gave retailers an extra 3.3% of "sales time". Therefore, sales were actually flat on a “per-day” basis versus last year's data. When you again take into account that inflation is now clipping along at a pretty rapid pace (just don’t tell the U.S. government), real sales adjusted for inflation, are clearly running negative. Also, remember that sales at gas stations is included as retail sales. My hunch is that more money is being spent on gas and less on designer jeans. Given the rising costs of operating a business on a daily basis, this report, regardless of the rejoicing it elicited among the bulls, cannot be good for margins and earnings. I did not find anything in the retail sale figures, even among those companies that reported "good" results, that instilled a lot of confidence that suggests anything positive for the health of the U.S. economy.

There was much adieu surrounding Wal-Mart's (WMT) better than expected same-store-sales number. But again, this is Wal-Mart, a palce where people that used to shop at Macy's (M) might find themselves if they've since fallen on hard times. So I don't believe we want to root for good numbers out of Wal-Mart. Besides, did anyone notice the ominous quote from its CEO immediately following the release of its same-store sales number? Eduardo Castro-Wright, CEO of the world’s largest retailer, Wal-Mart Stores (WMT), said, "The economy continues to get tougher and the 'paycheck cycle' is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past." With April sales, brings May fairytales.

A bull market in selective perceptions

My postings have dwindled to a mere trickle in recent months. Its just not as enjoyable discussing things that have become obvious to even the most delusional market participants among us in stark contrast to the environemnt of last summer and through year-end 2007. But I believe this 1000+ rally in the Dow Industrials, and an even more stout rally in the Nasdaq on a percentage basis, has helped to again move fiction and fantasy to the forefront pushing logic, diligence and facts again to the backseat. Not good.

There was no more clear evidence of this evolving theme when Intel (INTC) released earnings on Tuesday after markets closed in the U.S. It's "better than expected" report and its usual cheerleading by management was quickly construed as being indicative of the worst being behind us and that a shallow drop in asset values from last year's highs to recent lows is all that is required to cure the most obscene, out-of-control, credit bubble in history. To that, I say, not so fast my friends.

Below, I've sliced and diced the total hoodwink pulled off by Intel this week, the most obvious of all misinterpreted earnings reports of the week, that combined with others, gave apparent cover for the delusional bulls to throw a party not seen since last fall when the fumes of the LBO bubble were still fueling markets. But before I concentrate on Intel's disingenuous report and cheerleading, Google and JP Morgan deserve at least some credit for last week's manic ramp job in stocks. Google's (GOOG) revenues beat analyst estimates by $110-million in its latest quarter and said that "paid clicks" grew 9-percent versus just 2-percent expected. They also beat earnings estimates. Fine. Just as Intel did (see below), the company successfully lowered the bar just enough to easily leap over it. However, the company's quarterly tax rate, which had ranged from 25 percent to 27 percent last year magically dropped to a just 24-percent accounting for a good portion of the bottom line beat. Clearly, Google's growth in coming quarters is banking on its international business, which now totals 55-percent of revenues. International business, in my opinion, is going to just lag the massive problems being encountered by the U.S. economy and banking on the rest of the world being unaffected by the severity of the prolonged problems in the U.S. (decouple) will be a losing wager. Furthermore, testament to how quickly rampant speculation seems to have been revived thanks partly to the Fed's recent largess, based on this single report, whether it was there slowing, but not as bad as expected growth rate; its better-than-expected bottom-line, gratis partly due to an unusually low tax-rate; or its $110-million beat on its top-line, thanks entirely to currency translation, Google's was rewarded with an increase in its market-cap with an additional $28-billion--253-times the $110-billion that revenues surpassed expectations!?!?!

So Google played a part last week in getting the bulls unduly lathered-up, but so did JP Morgan (JPM), after its bad number was simply not as bad as expected and new financier, extraordinaire, Jamie Dimon, said the credit-market crisis is nearing an end. Of course, anyone that gets a $29-billion "stop-gap" from the U.S. Federal Reserve must be pretty smart, right. Let me just say that anyone that has used the self-serving talking-points of Wall Street titans in recent years as an investment guide has also suffered pretty catastrophic losses. Remember Bear Stearns' CEO Alan Schwartz' protestations of a liquidity problem days before essentially needing to be bailed out by the Federal Reserve? I would expect nothing different from Mr. Jamie Dimon, business partner of Ben Bernanke and the U.S. Federal Reserve. Needless to say, markets are still pretty gullible as you can see.

But back to Intel-- Intel leapt over its lowered bar on Tuesday and markets went on a pretty wild ride along with the shares of Intel. Before recounting what the company said this most recent Tuesday night, April, 17th, 2008, let's recap what the company revealed to us roughly five weeks prior on March 4th, which had obviously been long forgotten:

Intel lowered its profit forecast on March 4th, "blaming a steep drop in prices for memory chips for the shortfall." It said, "Slumping prices for NAND flash memory had depressed profits more than anticipated. " The company also warned in its March 4th press release that its gross profit margins would come in at 54 percent instead of the previously forecast of 56-percent. The company said its other guidance had not changed, including its expectation of $9.4 billion to $10 billion in revenue for the quarter.

That was March 4th. On Tuesday, April 15th, Intel essentially matched what they had warned us about 42-days prior. The world's largest maker of microprocessors posted a 12% drop in its first-quarter profit, year-over year, as warned. Earnings per share came in at 25-cents per share versus last year's 28-cents per share, as warned. Originally, in February, Intel estimated earnings of 34 cents for this quarter before its March 4th warning. Margins came in even lower than what they previously had warned at 53.8% versus 54% expected. Okay, close enough.


But again, perception is more important than reality on the Street of Dreams. The company predicted that margins would recover to 56%, plus or minus a couple of points, in the second quarter. Intel also projected second-quarter revenue between $9 billion and $9.6 billion. The $9.3 billion midpoint of that range compares with average analyst estimates of $9.23 billion. Also, as CEO Paul Otellini exemplifies how hope springs eternal and trumps reality, when he said that his company was seeing "absolutely no impact from economic headwinds." Apparently by warning on March 4th that earnings and margins had deteriorated was just his way of not showing-off, given how humbled his buddies in the financial sector must be feeling.

So the 25-cents per share number reported on Tuesday, April 15th, was 35% lower that what folks expected as recently as March 3rd (pre-warning) when the stock closed at $20/share. For his masterful handling of what appears to be a deteriorating business situation, Otelli and shares of Intel were rewarded with a 10% gain in his stock's price since before its March warning.

Moreover, it appears that Intel is back at its balance sheet shell game: Cash, Cash Equivalents & Short-term Investments have dropped from $15.36-billion to $13.69-billion; Receivables increased from $2.57-billion in December to $2.722, even as Revenues dropped from $10.7-billion to $9.67-billion, sequentially. Inventories had been coming down for most of last year but were essentially flat since its last quarter. Also, mysteriously, it's balance sheet item, called Other Long-term Assets, perhaps some of which includes factored receivables, are now going Chernobyl, mushrooming from $3.75-billion a year ago to $5.7-billion last quarter.

Given Intel's record of mis-forecating, and half-truths, it's amazing to me to see how markets still give any credence whatsoever on their forward guidance and Otelli's predictions. Again, the reaction this week in shares of Intel and by extension the entire market is further evidence that what we really have is a bull market in selective perceptions and an inclination to want to believe in fairytales, such as Goldilocks while simultaneously crowding-out logic and diligence.

Ambac + Tech = BULL

I've been particularly silent in recent months due to a very busy schedule helping my paying customers survive the crash of this epic credit bubble. Also, the fact that, well, what else can I say? I don't want to be blamed for piling on---as easy as it would be. But I felt compelled to comment on a couple of occurrences today to help anyone a bit new at this game understand the kind of high stakes shenanigans that continues unabated even after nearly every shred of self-respect has been eviscerated by the parties involved.

Markets were headed for another total shellacking today when again, it was reported on CNBC USA that the consortium of banks meeting now for something like 45-days straight are again very close to hammering out a bailout of monoline insurer, Ambac Financial (ABK). I'll address that never ending Broadway presentation in a moment. But in addition to this was word that John Chamber, CEO of tech behemoth Cisco Systems (CSCO) declared that he has grown more confident in the company's long-term revenue growth target of 12 percent to 17 percent, despite prior worries about the U.S. economy. Of course, news of his euphoric utterances was deemed fabulous for the tech sector in general even if it failed to help shares of his own company finish in the green today. Chambers reportedly threw markets a bone at a Morgan Stanley (MS) conference when he said that his company will hit some "bumps" in the U.S. economy, but such bumps would likely be both short-lived and "shallow." Given Chambers' track record of being two-parts market cheerleader/bubble enabler and one-part, CEO, It never ceases to amaze me that his mindless drivel is given even an ounce of credence by grown men and women whose job it is to "manage" other people's money.

Let's take a trip down memory lane where the same Chambers made similar market-moving declarations:


On August 8th, 2007, John Chambers, following his company’s 4th quarter earnings report says: "It's the strongest global economy I've seen in my career." Chambers says, "I know there have been a number of mixed views about the strength of the U.S. IT spending, especially in large accounts. I am very pleased to share with you not only that our U.S. business was very strong, but the balance was good across all customer segments." Of course, since Cisco's August highs in the low $30's, shares have dropped by over 25% as the tech sector, especially semiconductors, have experienced a near free-fall. Anyone using Chambers' self-serving posturing on that day last August as a reason to buy shares of Cisco or even tech in general has now suffered a meaningful financial set-back.


But than, just six-months later on February 6th of this year, following his company’s 2nd quarter earnings report, Chambers described the current business environment this way: "It's the most cautious I've seen CEOs in the U.S. and Europe in many years." How can that be? From "best" to nearly worst in 180-days?!?! During that post-earnings conference call last month, Chambers warned that orders slowed rapidly from December to January in the United States and Europe.

Naturally, the enabling U.S. financial media (CNBC USA) clung onto those euphoric comments by Chambers last August as if it were gospel. But Chambers, merely a fallible human, whose comments are likely more self-serving than predictive of future business conditions or stock prices has hence helped lull countless numbers of CNBC viewers into a pretty vicious technology bear trap. So again, today's comments probably had more to do with the fact that fellow tech behemoth, Intel (INTC) warned on its prospects and that the tech-heavy Nasdaq was again flirting with breaking thru its' 52-week lows.

Lastly, I've concluded that the best plan for a bailout of moniline insurer Ambac (ABK) is to never actually reveal a plan--just always be close to hammering one out. Today seemed to be yet another page from this single page playbook--or pamphlet. Announce how close you are every Friday around 3:30 PM or if markets are on the verge of breaking some major support. That's the Ambac bailout plan as best as I can tell. The anticipation of a potential deal has to be worth more to markets than any half-baked concoction the world's premier financial engineers can possibly foist upon us.

"Parade of denial"

Absent stating the obvious, as you can tell by my less frequent blogs, there is little to add. I could mention AIG's (AIG) revelation today that the insurer had a "material weakness" in its internal controls over financial reporting and oversight of its hedging portfolio resulting in four-times the losses previously reported. But we are now in an era where the cleansing process of the world's financial sphere will continue unabated for some time and should it really be all that surprising? With that said, ironically enough, the prvailing theme here in London and in New York is fear--fear of being left behind when that sure to come rally lifts-off like a rocket!!! Paradoxically, investors remain pretty well entrenched in denial with only a smattering amount of acceptance of the kinf of animal we're up against. But this is miles and miles away from "revulsion;" that final phase of a bear market where investors quite litterally ask to be taken out of their holding, no matter the price and cost.

No sooner had I been podering the above, did I receive a rather poignant chronilogical encaspulation of the unwinding of this credit behomoth from my acquaintance, Stephen Giauque, over in the States. Better than most summaries I've come across, he lets you see how grudgingly the "bulls" have been pulled into even acknowledging the problems at hand. This process of "price discovery" has been exasperated by the very institutions that profess to be the biggest admirerers and proponents of free markets and its solutions for most anything under the sun. Enjoy:

"Parade of denial" (Source: Stephen Giauque, 2/8/08):

• Goldischlocks: “No housing bubble”


• Goldischlocks: “A mere leveling-off” of real estate


• Goldischlocks: “Soft landing” for real estate


• Goldischlocks/ Dots connected: Problems emerge, but “contained” to subprime, commercial real estate still booming


• Dots connected: Two Bear Stearns (BSC) hedge funds collapse due to leveraged bets on mortgage paper


• Treasury Sec., Hank Paulson, rep for Goldischlocks: “I believe this country has very strong economic fundamentals. We are making what I believe to be a successful transition from a rate of growth in this country that wasn't sustainable to one that is sustainable.”


• Goldischlocks: “Tech and a looming cap-ex boom will offset subprime problems”


• Goldischlocks: “Private-equity activity is sustainable (not a bubble) and will supplant the real estate slowdown”


• Goldischlocks: “Problems spread a tad, but contained to Alt-A (low-prime)”


• Goldischlocks: Credit problems are isolated to U.S. shores, international and emerging markets will not be affected. “Decoupling” theory takes hold (foreign markets can thrive even if U.S. slows)


• Ben Bernanke, Nov. 2007, rep for Goldischlocks: “The slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate, and the labor market has tightened further.”


• Dots connected: Derivatives such as CDOs and CLOs collapse


• Dots connected: SIVs (structured investment vehicles) are unable to “roll” essential commercial paper


• Dots connected: Commercial paper seizes-up, hedge funds in Australia, Canada and the U.K. collapse


• Dots connected: 100s of subprime and Alt-a mortgage lenders file for bankruptcy


• Bailout I: The Fed and Treasury promote a rescue plan for SIVs—Super SIV


• Bailout II: The U.K. is forced to bailout one of the countries largest mortgage lender, Northern Rock


• Bailout III: Countrywide Financial (CFC) gets emergency funding from Bank of America (BAC)


• Dots connected: “Independent” credit rating agencies come under scrutiny for their apparent reluctance to downgrade billions of derivatives and mortgage backed paper. Questions emerge concerning conflicts of interest between “Independent” rating agencies and their compensation from the very companies being issued a rating


• Bailout IV: The Fed surprises markets with a surprise cut in the discount rate


• Bailout V: Fed cuts its Fed funds rate from 5% to 4.75%


• Bailout VI: Fed cuts its Fed funds rate from 4.75% to 4.5%


• Dots connected: SIV bailout plan collapses. Banks balk at committing capital to definite money losing endeavor


• Dots connected: LIBOR rates continue to rise even after Fed’s rate cut as banks cling to capital reserves, causing costs of adjustable loans linked to LIBOR to also increase


• Dots connected/ Bailout VII: Countrywide Financial appears to be on verge of collapse, Bank of America (BAC) announces buyout


• Bailout VIII: The Federal Reserve along with the Bank of Canada, the Bank of England, the European Central Bank, the, and the Swiss National Bank announce the establishment of a temporary Term Auction Facility (TAF) as a means to temper liquidity constraints among banks


• Dots connected: Rating agencies downgrade billions worth of derivatives and mortgage paper, long after everyone and grandma already know said securities are actually junk


• Bailout IX: The ECB injects the equivalent of $½-trillion into the European banking system


• Bailout X: Fed cuts its Fed funds rate from 4.5% to 4.25%


• Bailout XI: White House and Treasury announce “Hope Now” plan as a life raft for current subprime borrowers


• Dots connected: Citigroup (C), Merrill Lynch (MER), UBS AG (UBS), Morgan Stanley, et al., announce massive write-offs


• Bailout XII: Dubai, Singapore, China and Kuwait sink billions into U.S. financials to plug holes, take equity stakes


• Goldischlocks: Bulls promote foreign sovereign wealth funds as willing investors (saviors) of struggling U.S. banks and brokers


• Dots connected: Monoline insurers of CDOs, mortgage paper and municipal bonds suffer massive price drops on credit scare


• Dots connected: Stocks sell-off, tech and international are among the hardest hit. “Decoupling” theory in doubt


• Dots connected: 31-year old trader for Societe Generale blamed for massive $7.2-billion trading hit


• Bailout XIII: Fed panics, slashes Fed funds twice in eight days


• Bailout XIV: White House and Congress agree on tentative $155-billion stimulus package including $600-$1200 tax rebates


• Dots connected: Research reveals “Hope Now” mortgage bailout plan has helped as few as 100 borrowers


• Dots connected: FBI raids 14 mortgage companies investigating fraud and insider selling


• Bailout XV: New York Attorney General holds closed-door meetings with banks, hopes emerge for a monoline bailout


• Goldischlocks: Stocks recover over 1000-points on hopes of Ambac (ABK) and MBIA (MBI) bailout


• Dots connected: Non-farm jobs report shows first monthly loss since 2003


• Goldischlocks: “If we do have a recession, it will be short and mild”


• Dots connected: Bailout of monoline insurers is DOA, stocks crumble


• Dots connected: Rating agencies threatened with class action lawsuits


• Bailout XVI: Reportedly, discussions on bailout of monoline insurers tentatively back-on
  TO BE CONTINUED…………………..

Precious bullets

It's been humorous to hear the likes of Larry Kudlow and Ben Stein (since when did this guy become a market expert? Didn't he write speeches for Tricky Dick Nixon and play an Economics professor in Ferris Bueller's Day Off?) blast away at Ben "Helicopter" Bernanke for being to tight with his monetary policy. Bernanke has now caved on every occassion. I had friendly bets with a number of friends after yesterday's close here in London that he would do an emergency rate cut before this morning's opening in New York. He did. EZ-money!! I wish betting futball was this easy. This was first emergency rate cut since Greenspan's more obvious slash prior to the first day of trading following the 9/11 terrorist attacks. I'd be remiss if I didn't remind readers that stocks continued to get thrashed for another 18-months following that rate cut--which was followed by even more rate cuts all the way to an eventual 1-percent Fed funds rate. That episode was meant to save us from a crashing technology and dot-com bubble. This rush to free money is in hopes to save us from an even more ominous and far more dangerous mortgage/real estate/derivatives/hedge fund/private equity bubble. I would place the probability that today's not-so-surprising Fed rate cut also happened to cooincide with a low in stock prices at somewhere near zero chance. Even as panic among retail investors was palpable (according to some friends that manage money for retail clients), the institutional side saw today as nothing but a great buying opportunity. I listened to CNBC US in the afternoon here in my London office as one by one, nearly every commentator tried to sooth viewer angst, "This is normal and healthy and we've gotten through much worse in the past," they said. Folks, if you take any advice from CNBC, your totally doomed. These folks are pretty much clueless.

So as Ben Bernanke was throwing bails of hundreds out of his helicopter, stock futures in the U.S. were nearly at their lows by the time markets opened in the U.S. I told a colleague that I had never seen such a muted response to a supposedly blunt tool. Although stock indexes in the U.S. closed not to far from their highs on the day, the last time stocks closed lower on the same day of a Fed rate cut was that day in September 2001. Of course, Ben Bernanke and his other impotent FOMC members did not want to have to cut prior to its meeting next week. The fact that they could not hold out for another 6-trading days is indicative of sheer desperation. The Fed just sunk a couple more precious bullets into this unwieldy beast and the beast did not go down. We're in deep.

Less than zero

Its no coincidence that on the same day, Countrywide Financial (CFC) was bought out by Bank of America (BAC) and JP Morgan (JPM) was said to be a rumored suitor for Washington Mutual (WM). As I said, news of both occurred on January 11th. Both companies are set to announce earnings this month which will be accompanied by more massive write-downs of mortgage related debts; and both are in dire need of fresh capital. I had said on my January 10th blog, the night of January 9th EST in the states, that barring an announced bankruptcy by either of these, my top two candidates for some kind of confidence shattering bankruptcies, markets may have indeed set themselves up for at least some kind of bear market bounce. Most disturbing was the heavy slide into the close on Friday, even after the pre-arranged, forced marriage of Bank of America with Countrywide and a rumored JP Morgan save awaiting Washington Mutual. Given the ugliness of the close on Friday, more market managing news was released iafter the close in hopes of a avoiding increasing odds that a dislocation was in the cards when markets open on Monday, January 13th. The Wall Street Journal reported that Citigroup (C) was close to squeezing China and Saudi Prince Alwaleed bin Talal, already a major shareholder, for somewhere between $8 to $10-billion combined. My contacts that are well versed in the dark matter of the financial universe have indicated to me that barring a buyout, Countrywide Financial (CFC) was destined for ZERO and probabilities of the same fate for the largest S&L in the U.S., Washington Mutual (WM) had also increased substantially. What deal did the Fed's make with Bank of America to buy an asset that is worth less than zero? Regardless, its a shell game. Transferring the toxic assets on the books of Countryfried to that of Bank of America does not make them disappear. Its the summation of these assets that sit on the books of financial firms throughout the world that matters. Repackaging them won't make them go away. Especially as confidence deteriorates making a credit spiral even that much more difficult to arrest. And with gold now at a fresh new all-time nominal record, monetizing these assets is looking to be increasingly difficult for the world's central planners, Mssrs Bernake, Paulson, Trichet and King.

Bounce

Baring an announced bankruptcy by either Countrywide Financial (CFC) or Washington Mutual (WM) in coming days, markets likely began its first bear market bounce of 2008 today. But with so much shrapnel flying amongst the likes of these, Ambac (ABK), MBIA (MBI), PMI Group (PMI) and even little regional banks such as BankUnited (BKUNA), any bounce seems likely to be short-circuited.