Monday, April 20, 2009

Of Roll-Ups and Markets

Roll-up #1:  BofA, originally a modest Charlotte, N. C.  bank, then the pretentiously-named Nations Bank, then a truly national bank with a name to match after merging with/taking over the San Fran-based BofA, has announced an upside "earnings surprise".  The stock has more than quadrupled since its low point this winter.  How any financial journalist/editor team can use that term "earnings surprise" to refer to a TARP recipient with the journalist equivalent of a straight face is, well, a surprise.

Because with Big Finance it is all politics, all the time, their stocks are unanalyzable and therefore  untradeable, as stated here a while ago.  Having been short financials or long puts these entities on and off since last year and having stopped that behavior with AXP around 10 and BofA around 4, my temptation is to go to the well one more time.  Too far too fast at the very least; but why fight the Fed?  Perhaps systemically less important entities such as AmEx (AXP)?  TBD . . .

To both explicate some current issues and show how confusing matters are with Big Finance, please see the post from last night by James Kwak (h/t Naked Capitalism) at the Baseline Scenario, titled More Accounting Games, which both explains the lack of real importance of converting preferred stock to common stock and then goes on to clarify/correct one of his points.  

Roll-up #2:  Oracle (ORCL) is buying Sun Microsystems (JAVA) for about $7.4 B, or about $6 B after net cash.  ORCL currently has a negative $3 B tangible net worth, after years of profitability and only one quarter of a dividend payment.  Basically, ORCL has used most of its positive cash flow over the years to buy its common stock from people and institutions who no longer want to own it, without rewarding the long-term holder with dividends until very recently.

ORCL has turned into another Citigroup, it would appear, or perhaps a once-superior acquirer, namely Nations Bank.  Yet even Wachovia and Fifth Third were until not long ago viewed as very well run banks that were also great roll-up acquirers.  Wrong!

ORCL stock has, on the heels of well-received earnings, punched above its 50 and 200 day moving averages for the first time since last August.  One wonders if if the company will be viewed as making a material error by acquiring an unprofitable hardware/software company at a premium valuation.  If so, and if the stock collapses in any way similar to what happened to Pfizer when it plummeted much more than the market after announcing the Wyeth takeover, that might be a bad metaphor for the market as a whole.

Other comments:  Following the bear market script, the best chart performers of last year, namely Treasuries, gold and the two Dow 30 winners, WMT and MCD, are underperformers the last few months, with charts that look similar to various falling markets and stocks from last year.  Short term, no asset class looks attractive.  Longer term, the view here is that belief in paper/fiat money will continue to be eroded as everyone sees how easily trillions of dollars have been "poofed" into existence by the strong will of the Establishment.  The greenback is a Federal Reserve note, and the Federal Reserve now holds assets that are increasingly dodgy.

Re the argument that stocks are a good inflation hedge, the truth is that they were in the early-t0-mid 1980s,  but only after immense inflation had driven up the nominal value of various assets and after a commitment to a disinflation/high growth (Volcker/Reagan) economy had been made.  Matters are more fundamental now:  the survival of the central bank absent a bailout, the survival of a now-lapdog FDIC (which should NOT be participating in PPIP), and any belief that the reserve currency of the world is being managed responsibly.

Thus it appears likely that on a secular basis, more rather than fewer people will seek out alternatives to the dollar as a store of wealth.  The Euro?  Too risky.  The Deutschmark?  Yes, but sorry, see the Euro.  The yen?  Laughable.  The yuan/renminbi?  Premature at best.

Except for the dollar, there is only one "thing" that will get one past border guards, out of prison, and that in general will be accepted where feasible in a transaction.  The fact is that everyone reading this knows what that mystery "currency" is.  Case closed.  Longer term investors should consider accumulating on weakness.

Copyright (C) Long Lake LLC 2009

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