Entries for December 2008

Cooler heads are prevailing on the last trading day of the year.

Wall Street's "fear gauge," the VIX, looks like it might close below 40 for the first time in three months.

Shipping stocks have been absolutely beaten up during 2008, but will 2009 be the year of the rebound?

Sensitive to both the global economic slowdown and the drop in energy prices, shippers may still be suffering. But keep them in mind as an early play when the economy (hopefully) recovers sometime in the New Year.

The WSJ looks at a nice run by DryShips and Eagle Bulk Shipping.

Andrea Kramer at Schaeffer's Research eyes Euroseas.

Bill Luby at the VIX and More blog says watch the Baltic Dry Index in 2009 for confirmation that shipping (and trade) are returning to more robust health.

It's prognostication week for market watchers as we limp toward the finish of a terrible year.

Predictions -- fun to read, but most often wrong -- are rarely as difficult to formulate as they are right now. Investors are struggling to assess a continually jarring mix of terrible economic data and the ongoing threat of undiscovered landmines placed throughout the financial sector during the last decade or so of easy credit. But that won't stop people from trying. Below, we take a quick look at what could be around the corner in 2009:

Did house-flippers in economically depressed areas like Detroit or overheated markets like Tampa still make better investments than your average index fund holding equity investor last year, provided they kept their payments up and their properties out of foreclosure? Maybe.

Today's Case-Shiller home price index was dismal again for October, with prices in 20 major cities falling 18 percent year-over-year. Some lowlights:

• Phoenix  down 32.7 percent
• Las Vegas down 31.7 percent
• San Francisco down 31 percent
• Miami down 29 percent
• Los Angeles down 27.9 percent
• San Diego down 26.7 percent
• Detroit down 20.4 percent
• Tampa down 19.8 percent
• Washington down 18.7 percent
• Minneapolis down 16.3 percent
• Chicago, down 10.8 percent
• Atlanta down 10.5 percent
• Seattle down 10.2 percent
• Portland, down 10.1 percent
• New York  down 7.5 percent
• Cleveland down 6.2 percent
• Boston  down 6 percent 
• Denver down 5.2 percent
• Charlotte down 4.4 percent
• Dallas down 3 percent

Still, those returns actually look appealing compared to stocks during the same period:

• Dow Jones industrial average down almost 33 percent
• Nasdaq down 39 percent
• S&P 500 down 36 percent

And yes, I know it's comparing apples and oranges, but if your new house in Dallas lost 3 percent while your neighbor's portfolio of small caps or international stocks sank like a stone, who made the smarter move?

With just over two full trading days left, 2008 is on track to be the worst year for stocks since 1931 when Herbert Hoover was in office and the Great Depression raged.

From the AP:

The ongoing recession and global economic shock pummeled stocks this year, with the Dow Jones industrial average slumping 36.2 percent. That's the biggest drop since 1931 when the Great Depression sent stocks reeling 40.6 percent.

The AP also says the S&P 500 is headed for the biggest drop in the index's history and that paper losses in the broadest measure of U.S. stocks, the Dow Jones Wilshire 5000, totaled $7.3 trillion.

AllThingsD's Kara Swisher  predicts "the socializtion of everything" will be one of the big stories of 2009 in the Tech Ticker video bleow (also, she's a "Gossip Girl" fan).

On a related theme the IPO market gets a new entrant this week: TechCrunch says FriendFinder Networks (formerly Penthouse Media Group), which bills itself as "the world’s largest sex & swinger personals community," is planning a $460 million IPO. Socialization indeed.

Remember Chinese Internet stocks? Think back on the heady days of 2007 when companies like Baidu were being heralded as the Google of the East...

Obviously, that was before the crash and even though Chinese shares suffered some of the worst damage of all during this global bear market, investors remain wary of that once-hot sector.

They still can't get a break today.

This morning Sina, a popular Chinese search engine, bought a big chunk of Focus Media, which specializes in digital outdoor advertising. Its shares promptly slumped more than 18 percent.

Oppenheimer's Jason Helfstein had this to say in a morning note, where he likes the deal but questions the lack of a shareholder vote:

Investors wishing for a slightly less-awful portfolio for Christmas have just a fifty-fifty shot despite the fact that December is traditionally a good month in markets, according to Merrill Lynch strategist Mary Ann Bartels. She writes:

... S&P data shows that, despite the fact that December and January are historically the two strongest months, investors should not count on a Christmas rally. Using the index’s behavior from the Friday before Christmas to the Friday after New Years as a guide, there have only 13 holiday rallies over the past 25 years. In the last eight years (2000-2007) there have been four rallies.

What to watch for:

By one measure, it appears the Fed's whatever-it-takes policy towards backstopping the financial sector is inspiring some confidence among lenders. The TED spread has returned to levels not seen since the failure of Lehman Brothers.

From Bloomberg:

The TED spread, a gauge of banks’ willingness to lend, slipped below 150 basis points for the first time since before the collapse of Lehman Brothers Holdings Inc. amid speculation U.S. borrowing costs near zero and promises of further government cash will help unfreeze credit.

Central banks are pumping money into the financial system to combat the worst economic slump since the Great Depression. Credit markets, which seized up after Lehman’s bankruptcy, remain locked amid almost $1 trillion in losses and writedowns tied to mortgage-related securities. The Federal Reserve cut its benchmark rate to as low as zero last week and said it will flood the economy with cash.

The TED spread may be better but it's still around 148 basis points, well above the 38-point spread it averaged in the year prior to the credit crisis' start in August 2007, Bloomberg notes. So it may not be exactly back to normal, but the improvement so far is welcome.

Related:

What's the TED Spread?

Bloomberg's TED Spread chart.

It's been all over the place today, but you've got to read the Harry Markopolos' letter.

He once worked for a Madoff rival, and called Madoff Securities "the world's largest Ponzi Scheme" in a letter to the SEC.

In 2005.

Link is here from the WSJ.

Is there any longer-standing music business tradition than promoters, record companies or crooked managers taking advantage the talent? From radio payola to Lou Pearlman, writers and musicians getting a raw deal is a timeless feature of the landscape. But are the tables starting to turn?

U2 appears to be holding all the cards in its agreement with concert promoter Live Nation, where the company is on the hook to pay the band $25 million in a sweetheart stock deal it made to sign the artists as part of a 12-year contract in back in March. (Live Nation pays hundreds of millions of dollars to superstars like U2, Madonna and Jay-Z in exchange for multi-year contracts for revenue from performance and other areas like digital and merchandise sales.)

U2 moved to sell its shares, which means Live Nation will be forced to pay out $19 million to make up a deficit created by its falling share price, according to SEC filings.

From the WSJ:

The company had held up the stock component of the U2 deal as evidence of the band's faith in Live Nation, as well as confidence in its new business model.

But that faith was shaken Wednesday when the band moved to sell the shares, forcing Live Nation to make up an estimated $19 million in losses.

Live Nation had guaranteed that U2 would receive $25 million for 1.6 million shares. But the current market value was just $6.1 million at the close of trading Wednesday. That leaves Live Nation on the hook for the balance, which the company said Wednesday in a SEC filing it would pay with cash on hand or borrowed money.

There could be more bad news coming from another of the company's marquee acts: Madonna. In April, Madonna is eligible to sell $25 million of stock under the terms of her contract, even though the stock's market value has plunged 83% since she struck her deal in October 2007.

The Live Nation business model has been questioned for some time, but the real significance of the U2 news is a shifting power dynamic between artists and the recording and promotion industry. Digital music is in the process of killing CD sales, and concert revenue and branding matter now more than ever. While music sales may be hurting in general, U2 and others are continually leveling the playing field between artist and distributor (of content, concerts, merchandise, etc.). Eventually, that will be good news for musicians and music lovers if not for Live Nation's shareholders.

Stocks are bouncing around today despite news the Obama Administration is considering an absolutely huge stimulus package that could be worth some $850 billion.

A bit of context from Bloomberg:

Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said.

Obama’s transition team believes the amount, about 6 percent of the U.S.’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

Pelosi and Reid were kicking around spending plans worth between $400 billion and $600 billion, and that gave investors a buy sign back in early December. So, if we now expect stimulus to be substantially higher (and still have no concrete evidence of where exactly that money will go other than vague discussion of roads, healthcare, renewable energy, etc.), shouldn't we be seeing more of a rally in stimulus-related stocks?

A few possibilities: First, the market may have already priced in the stimulus bump. Oft-touted infrastructure plays like smart-meter maker Itron (ITRI) are up more than 40 percent in the last month. Heavy engineering and construction firms like Jacobs Engineering (JEC) and Fluor (FLR) are up 62 percent and 48 percent respectively. Second, while the stimulus payout may be growing, the economy is getting worse. Picking stocks based on government spending alone can't be done without considering how the economic woes that caused such massive intervention in the first place will translate to lower profits overall, even for companies who reap the stimulus benefits.

On Thursday, Research In Motion (RIMM) reports earnings amid a huge amount of uncertainty. That's because during the same quarter the company launched its high-end touch screen BlackBerry Storm to great fanfare, RIM also issued a rare earnings warning.

From the Dec. 2 press release:

"Initial sales of new products have been very positive and we believe we have the strongest smartphone portfolio in the industry by far, however product launch timing, general economic conditions and foreign exchange volatility have tempered our results in the third quarter," said co-CEO Jim Balsillie, who cut earnings and revenue forecasts. Now, RIM sees revenue between $2.75 billion and $2.78 billion, well below earlier forecasts $2.95-$3.10 billion for the quarter ending Nov. 29. Earnings forecasts were slashed from 89-97 cents to 81-83 cents.

RIM's struggle is emblematic of the difficult dynamic in the market right now. Basically, the question is: Can good companies with new products in growing markets manage to fend off the ongoing recession?

Analysts are scrambling to figure out an answer. What they're saying ahead of the earnings call is instructive on how the company and the rest of the economy is actually faring.

Steve Jobs won't give his keynote address at the Macworld conference and Oppenheimer's Yair Reiner
draws a line in the sand:

We don't know why Steve Jobs has pulled out of his annual address at Macworld on January 6. Maybe he's not feeling well, or maybe he just has nothing new to say. Whatever the reason, the unexpected announcement has underscored the greatest risk to Apple's long-term success-its dependence on Jobs' health and its apparent lack of a succession plan.

Six months have passed since Jobs appeared at the Apple Developer Conference, looking drawn and unwell. It's past time for Apple to either disclose the state of his health or elaborate a viable plan for eventually transferring power. Until such time, we can no longer continue to recommend Apple as a long-term investment. Downgrading to Perform; and removing our $145 PT.

Apple's shares are below $89 today, off about 6.8 percent. Barron's Eric Savitz has more analyst reactions here. Boomtown's Kara Swisher decodes the press release here.

Barclays stays cautious in its global outlook for December:

We are in the midst of the most severe global recession since at least the early 1980s, if not the Great Depression. It is difficult to find an economy anywhere in the world that is not being hit hard, and the downward momentum underway virtually ensures that activity will continue to fall significantly through Q1.

If fiscal stimulus plans and market supports do their job, Barclays says this contraction could bottom around mid-2009 but warns:

Plenty of nasty surprises lie ahead, as economic performance in the fourth and first quarters is set to be considerably worse than anything in the current cycle thus far. This will take its toll on income statements, balance sheets, and liquidity around the globe. We thus suggest keeping relatively sizeable portions of portfolios in liquid instruments to allow investors to take advantage of opportunities as they arise.

We could get an early 2009 rally off recent lows, but the rest of the year remains largely uncertain. So what to buy? Barclays recommends the following (bold is mine):