Can't You Hear the Clamor?

Forget glamour.  "Clamor" is in.  Supposedly, the results of money-printing have investor's hearts atwitter to buy, buy, buy:

April 1 (Bloomberg) -- For the first time in six months the market for convertible bonds is open for business as companies whose credit was shut off turn to the securities to refinance debt. . .

“There’s a lot of pent-up financing demand in the U.S. market and people have been waiting for the window to open,” said Robert Aberman, the co-head of convertible origination at Jefferies & Co. in New York, in an interview. “If companies are able to sell securities and investors are clamoring to buy them, it’s definitely a sign that credit markets are healing."

Meanwhile, criminals, or alleged criminals, are dominating the financial news.  Perhaps that represents some true light at the end of this economic tunnel, but for now this sort of stuff appears to be in its own bull market.  Just from Bloomberg.com today:

April 1 (Bloomberg) -- Texas billionaire R. Allen Stanford, accused by the U.S. Securities and Exchange Commission of running a “massive” fraud through his investment businesses, said he has no money to hire an attorney. . .

Last week, Stanford asked Houston criminal defense lawyer Dick DeGuerin to represent him, although he couldn’t pay him a formal retainer. DeGuerin said at the time he wouldn’t represent Stanford for free. . .

DeGuerin declined to say how much he would charge to defend Stanford, saying his legal services are “cheap at any price."

This quote from Mr. DeGuerin is just what you would have heard from a Master of the Universe not long ago.  Cheap at any price!  Meanwhile, the Madoff scandal is enlarging:

April 1 (Bloomberg) -- The assets of Fairfield Greenwich Group and other so-called feeder funds that steered investors to Bernard Madoff were frozen by a Connecticut judge along with those of Madoff’s family members, a lawyer said.

“Everyone has filed suit alleging the feeder funds were negligent,” Golub said. “This is the first complaint to say these feeder funds were involved in the criminal activity.”

In EBR's opinion, not enough attention has been paid to how a supposedly sophisticated fund could have put, kept, and reinvested funds with Bernard Madoff, given his lack of documentation of how he outperformed the market and where his securities actually were held.

Rather, as with the AIG bonus matter, too much attention has been paid to which famous name lost how much rather than the fundamental issue of how a co-founder of the NASDAQ could have attracted institutional money on nothing more than his word. 

Meanwhile, parallel with the above and many other revelations and accusations, the global economy continues to shrink:

March 31 OECD: Economic activity is expected to plummet by an average 4.3 percent in the OECD area in 2009 while by the end of 2010 unemployment rates in many countries will reach double figures for the first time since the early 1990s. international trade is forecast to fall by more than 13 percent in 2009 and world economic activity to shrink by 2.7 percent. The big emerging economies will also suffer abrupt slowdowns in growth. The global recession will worsen this year before a policy-induced recovery gradually builds momentum through 2010.Forecast for U.S.: -4% in 2009, 0% in 2010; Japan: -6.6% (-0.5%); Eurozone: -4.1% (-0.3%). Brazil’s GDP is expected to decline by 0.3 percent in 2009 while Russia’s is projected to fall 5.6 percent.

AND:

April 1 (Bloomberg) -- Companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market amid the longestrecession in seven decades, a private report based on payroll data showed today . . . (Ed:  ADP survey)

This is what we saw during the evolving Watergate scandal.  The economy fell apart at the same time.  Nixon was forced out in August 1974, and the stock market had a double bottom in October and December 1974, ahead of a sharp cyclical upturn in the economy and stocks.  (By the way, did you note the euphemism "seven decades" to avoid the correct term, "since the Great Depression"?)

Finally, American business continues to hardly burnish its reputation.  Two more bits of news from Bloomberg.com today relate to IBM and Intel.  IBM, which recently filed and withdrew a patent application to efficiently outsource jobs, is shrinking, which may call into question its earnings guidance, and Intel is not put in a good light with the following headline:

International Business Machines Corp., the world’s biggest computer-services provider, reduced as many as 5,000 jobs last week, according to a person familiar with the matter. That added to 4,000 cuts already made since the beginning of the year.

“I don’t believe this is the end,” said Lee Conrad, coordinator for an employees’ group pushing for union recognition. “We’re losing jobs at a record rate inside IBM.  (Ed:  Many of them to India)

AND:

Intel ‘Unthinkable’ Exit Robs Philippine Cooks’ Jobs 

While the stock market has been rallying into the bad news, Nouriel Roubini continues to point out that assuming that the bear market will end one day, at some point such a "predictive" rally will be correct.  In the meantime, he has correctly identified all prior rallies since the fall of 2007 as sucker rallies.  He identifies this one similarly, saying that consensus economic estimates are still too optimistic.

Right now, the strongest charts belong to gold, Treasuries (all durations) and mortgage-backed securities.  These have to be where the billions/trillions that the insiders have taken out of the system over the last 10-12 years have been, to large, measure, parked and continue to be, quietly, parked.  The public remains uninvested in gold, and everyone and his sibling "knows" that Treasuries are in a bubble.

Somehow I just don't hear the "clamor" for convertible bonds over the quiet din for high-quality crisis assets as this historic period plays out.

Copyright (C) Long Lake LLC 2009

The Dow and the Economy

Let us look at the Dow Industrials that have reported earnings so far and what they indicate about the economy.

First, Alcoa reported. 'AA' lost money. Its working capital position is not strong. The stock continues to sell above tangible book value, and since it is a mature but money-losing company, with the economy definitely worse this quarter than last quarter, it is very possible if not likely for the stock to decline below tangible book, which is obviously declining due to the losses.

Next, J.P. Morgan Chase (+ Bear, Stearns Washington Mutual etc.) reported. Absent a one-time gain related to the WaMu acquisition, and other net gains such as $627 MM from dissolution of a joint venture (Paymentech) 'JPM' lost money. Tangible book value is about $18 per share, $8/share less than the stock price. Given the fragility of the financial system, the uncertainty of the value of Tier 3 assets, the certainty that this quarter will stink, the likelihood that the entire year will stink, it is easy to see the stock trading down to or below tangible book value. (The entire concept of a financial company having "tangible" assets is oxymoronic.)

Last, Intel announced virtually break-even earnings today. The stock has gone nowhere for over 12 years. Given prevailing risk-free interest rates in the late 1990s, it is clear that the stock was, with benefit of hindsight, drastically overpriced then. The Company trades at over two times sales per share. Sales growth has lagged nominal GDP for a decade or more. So, even the largest and most successful semiconductor company, which has destroyed its main competitor AMD, can't even grow sales as fast as nominal GDP. One can look for this stock to gradually trade down close to one times sales per share. The stock is $13-14 per share. The long-term chart shows 8-9 years of lower highs. The dividend was increased recently, just as operations were tanking. AIG did the same thing. That didn't reward shareholders well. This stock can go flat to down for years to come.

SUMMARY:

Here are 3 relatively well-run companies. All are large and highly cyclical. Alcoa and JP Morgan Chase are very old companies and Intel acts old and mature. None of them have any pizzazz. There is nothing new. These companies are reflective of the economy as a whole. It's creaky. They are at best marginally profitable going forward, smoothed over an "average" economic cycle.

Right now, things remind me most of the US economy in the early 1930s. There were 2 years, 1932 and 1933, when I believe that corporate America had no net profits. Could the same thing happen again? Oil companies are not going to make much at current oil prices and gasoline volumes; financials and GM are disasters; and Intel and Alcoa are collectively perhaps break-even going forward. Presumably IBM, HP and P&G will save the day, but Citi, BofA, and GM could lose many tens of billions of dollars.

The pattern is that unlike Intel's optimism that after the recession, there will be strong growth, I think that the U.S. is in a secular slow-growth phase. Corporate America can't keep promising growth year after year, not deliver it, and expect its stock price not to reflect the reality that this is a slow-growth economy at best. This is a Japan post-bubble flat-to-down stock price scenario if it is not a fast-crash 1929-32 scenario.

Copyright (C) Long Lake LLC

This could be Great Depression 2 from a profit standpoint.