Microsoft Playing Hardball - Part 2

Posted by Bull Bear Trader | 4/05/2008 09:27:00 PM | , , | 0 comments »

As reported in Bloomberg, and discussed earlier in this blog and elsewhere, Microsoft is finally putting the screws to Yahoo!, giving the search company three weeks to make a decision. Microsoft has furthered threatening to reduce its $44.6 billion offer, and, adding insult to injury, threatening to replace Yahoo!'s directors if they reject the negotiations. (As a side note: as good a businessman as Gates is/was, it is hard to image him taking this position, but it does not surprise me with Balmer - it must be the frantic "Dancing Ballmer" video that is still burned in my brain). If the negotiations break down, Microsoft will propose its own slate of directors and take the proposal directly to the Yahoo shareholders.

Once again, I think Jerry Yang has little choice, unless he can find a white knight from an ever shrinking pool. I am not sure anyone really wants to suit up to do battle against Microsoft in this case, even a somewhat weakened Google that would have too many anti-trust hurdles to jump over. Given that Microsoft took the NewCorp strategy (bid high enough - like in the WSJ acquisition - so that no one bothers to even consider stepping in the waters), also makes it unlikely that another bidder will appear.


JPM Has The Shares

Posted by Bull Bear Trader | 4/05/2008 11:20:00 AM | , | 0 comments »

Based on recent filings, and acquiring 95 million shares of Bear Stearns, JPMorgan Chase should own a little less than 108 million shares, or 44.86% of Bear shares outstanding. Additional planned buying should raise the common stock total to 49.5%. Yet, BSC stock still trades above $10 per share. Maybe it is time to check the option's market.

Tickers: JPM, BSC

Dividend Increases Falling

Posted by Bull Bear Trader | 4/05/2008 11:12:00 AM | | 0 comments »

According to the S&P's Dividend Record, only 598 of the approximately 7,000 companies tracked by S&P increased their dividends during the first quarter. This number was 19.2% less than in the first quarter of 2007. Another 83 companies actually decreased their dividends. Only 19 had done so during the same period in 2007. The decrease is the highest since 1991. Larger companies with market caps greater than $10 billion have raised their dividends 27.2% of the time, while those with a smaller cap only raised their dividends only 18.7% of the time.

Recession Returns

Posted by Bull Bear Trader | 4/05/2008 08:39:00 AM | , | 0 comments »

The length of a recession (assuming we are in one), is critical for subsequent gains in the market. This week's Barron's states: "In post-war recessions lasting less than 12 months, the S&P 500 has gained an average 9.85% a year after the recession started, according to PNC's Stone. But if the slump dragged on more than 12 months, the average stock-market return a year after the recession started is -22.64%." Past bear markets have also historically been followed by an average compression in P/E multiples of 22%. Bespoke Investment Group also finds that the cumulative return of the S&P 500 since late 2002 (when the bull market began) has been -8.1% during earnings season (starting next week and ending in mid-May). On the other hand, market returns between earnings announcements (once they end and before they begin again) has netted +61.6%. Not necessarily unexpected during a bull market, but interesting nonetheless. No doubt some of the negative returns during earnings season may involve buying on the rumor and selling on the news, especially when companies beat previously lower expectations.

Banks Gaining From Their Declining Debt

Posted by Bull Bear Trader | 4/05/2008 08:26:00 AM | , , , | 0 comments »

An interesting article in this week's Barron's about how fair-value accounting is allowing companies to boost earnings by recognizing "gains" from being able to buy back their declining debt at cheaper prices. As mentioned in the article: "When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value." Given the level of exposure, the gains are not insignificant. For the first quarters, widening credit spread allowed Morgan Stanley to report $848 million in gains, Lehman Brothers reported $600 million, while Goldman Sachs reported $300 million. Of course, given that most of the long-term debt matures at par, any gains realized will reverse over time. But in the short-term when losses need to be covered, fair-value accounting allows for higher reported earnings, even though these earnings do not really justify the P/E ratio generated. As the market starts to move up, a reversal of recent accounting gains will be necessary.

Tickers: GS, LEH, MS

Microsoft Playing Hardball

Posted by Bull Bear Trader | 4/04/2008 10:14:00 PM | , | 2 comments »

Microsoft is evaluating its bid given that Yahoo! has lost value since Microsoft made its offering price. The lost value has not only been in share price, but also in lost personnel. Of course, what share value has been lost is to date only the value Microsoft injected into the market when it proposed a takeover for $31 per share.

As mentioned on Fast Money this evening on CNBC, Microsoft is taking the Oracle approach: 1.) make a hostile bid, 2.) wait for no other bidders to show up, 3.) apply pressure, 4.) threaten a lower bid, 5.) or even threaten to possibility walk away and simply buy the stock cheaper at a later date.

Jerry Yang is in a difficult position since his company is losing value everyday (lower share price and lower share of the market). While Yahoo! and its founders may hate to be taken over by Microsoft, shareholders will have a legitimate complaint if Microsoft gets frustrated and walks away, which will cause the stock to drop back into the teens. While Yahoo! may be delaying things in order to further examine their options, they are likely to find that they really don't have any, and are just left with a lower bid and frustrated shareholders. The chances of another company bidding against Microsoft are remote.

In the mean time, some traders have been writing $31 and higher calls against the Yahoo! stock that they already own. This allows them to generate income while they wait, and provide some additional downside cushion. The move seems safer everyday given that Microsoft seems less likely to substantially raise its bid (and if it does, they still get to sell their shares for $31). Of course, as with any covered call position, there is always the risk that the covered position will lose value. Such downside may be up to Jerry Yang, more than Mr. Softie, or the market.

Tickers: MSFT, YHOO

Perception Is Reality, Or Is It?

Posted by Bull Bear Trader | 4/04/2008 09:55:00 PM | | 0 comments »

About every week we get a new survey about how terrible things are in the country. While the numbers change slightly, they often have a similar characteristic - things are bad, but not necessarily for me. A recent NY Times / CBS News poll is a good example. From the poll, 81% of the respondents felt that “things have pretty seriously gotten off on the wrong track.” Only 21% felt that the overall economy was in good condition. On the other hand, when asked about themselves, more than 70 percent said that their financial situation was fairly good or very good. Granted, the questions are not exactly the same, but I always find this interesting, nonetheless.

Maybe even more disheartening, the poll also found that Americans blame government officials for the housing crisis more than banks or home buyers. Breaking down the statistics, 40% of respondents said regulators were mostly to blame, while 28% blamed the lenders, and only 14% named the borrowers themselves. While it is easy to argue that the blame should be spread around, at some point you have question the decisions some homeowners were making, along with others in the system. When pressed for more details, a clear majority also said they did not want the government to help the banks, even if the measures would help limit the depth of any recession. I guess the question "Would you prefer to lose your job for 0, 6, or 24 months" was not asked.

Apple Technicals Look Good

Posted by Bull Bear Trader | 4/04/2008 08:52:00 AM | | 0 comments »

Nice analysis over at the Afraid to Trade blog on the technicals of Apple (for those of you that pay attention to technicals). Bottom line, while a pullback can always occur, it should find some support at short and medium moving averages.

Ticker: AAPL

Mosaic Q3 Net and Revenue Up

Posted by Bull Bear Trader | 4/04/2008 08:18:00 AM | , , , , | 0 comments »

Mosaic Q3 net income increased to $520.8 million from $42.2 million, while revenue is up 68%. Sales increased 68% to $2.15 billion from $1.28 billion. Mosaic recently announced a long-term potash capacity expansion in Saskatchewan, Canada.

As a side note: An analyst on CNBC, discussing the Mosaic numbers, recommend Compass Minerals International (CMP) as another play in the area, in addition to Potash and Agrium.

Tickers: MOS, POT, AGU, CMP

Hedge Fund Investors Bailing

Posted by Bull Bear Trader | 4/04/2008 08:15:00 AM | | 0 comments »

Hedge funds are seeing an increase in redemptions, causing some funds to liquidate assets at unattractive prices in order to meet cash withdraws. Some larger funds are reacting by restricting withdraws, or outright restructuring. Given that hedge funds have a hard time operating when either investors leave or credit drys up, this is certainly not good news for some funds.

Of interest is how many funds use a "gate" to limit how much can be withdrawn each quarter. Unfortunately, investors who fail to put in a redemption requests early are placed at the back of the withdraw queue. Furthermore, investors that did not get paid in full for the previous quarter get priority with a “stacked gate” structure. Knowing this, some investors, who may otherwise stay put but are nonetheless getting nervous, make redemption requests to avoid being last in line, just in case they decide later to withdraw their funds.

Oil Windfall Profits Tax ...... In Venezuela

Posted by Bull Bear Trader | 4/04/2008 08:01:00 AM | , , | 0 comments »

Venezuela is preparing a windfall tax that would take 50% of oil revenue above $70 per barrel, and 60% of revenue above $100 per barrel. The country is already in legal battles with Exxon Mobil and ConocoPhilips.

Ticker: XOM, COP

KKR Selling More Equity

Posted by Bull Bear Trader | 4/04/2008 07:56:00 AM | | 0 comments »

KKR Financial Holdings is selling shares in an attempt to meet $3.5 billion in obligations to holders of its commercial paper. KKR invested in Alt-A loans (between prime and subprime), funding those purchases largely with commercial paper. When the commercial paper market dried up, KKR began restructuring debt, thereby explaining the current issue of equity.

Ticker: KFN

Bankers Moving to Private Equity Firms

Posted by Bull Bear Trader | 4/04/2008 07:49:00 AM | | 0 comments »

Given the recent problems on Wall Street, especially with regard to investment banking, many private equity firms are having success luring investment bankers into their fold. Of course, one banker may have had it right when saying "I'm jumping from the frying pan into the fire."

Microsoft and Yahoo! Meet

Posted by Bull Bear Trader | 4/04/2008 07:45:00 AM | , | 0 comments »

Senior executives at Microsoft and Yahoo met this week to discuss Microsoft's proposal to acquire Yahoo!. Reports are that Microsoft is still holding firm on price, while Yahoo! is still looking for a higher bid. Given that the bid has went from $31 to $29.92 a share based on market movements, increasing the bid back to $31 a share may be enough. Time will tell.

Tickers: MSFT, YHOO

Payroll Numbers Down 80,000 In March

Posted by Bull Bear Trader | 4/04/2008 07:29:00 AM | | 0 comments »

Payroll numbers down 80,000 in March, after falling 76,000 in both January and March. Government hiring kept the number from falling below 100,000 in losses. The unemployment rate was up 0.3% to 5.1%. Average hourly earnings increased 0.3% to $17.86 per hour, up 3.6% from last year. Futures are selling off after an initial spike right before the number (probably some nervous shorts covering positions).

Underemployment Rate

Posted by Bull Bear Trader | 4/03/2008 09:50:00 AM | | 0 comments »

CNN Money mentions that while an unemployment rate of 5% has historically been referred to as full employment, the media and economists now consider it a sign of a recession. The change comes mainly from the way people are now employed. More people are taking part-time jobs, and while not technically unemployed, they may be underemployed.

The unemployment rate is also based on the household survey. When people simply give up, they are taken out of the pool of people "looking for work", thereby affecting the unemployment rate number. Another change is the number of contractors and those that are self-employed. Recently there has been a decline in the number of independent contractor employees. These employees are counted in the household survey, but not the payroll survey (they are not on the employer's direct payroll). They are also usually the first to be cut in a downturn, since they are cheaper to layoff, given severance and benefit issues. In total, it is believed that there were 565,000 additional part-time workers looking for full-time positions, compared to last year, giving a 21.1% jump in the number of underemployed people. This brings the broader measure to 8.9% in February.

Mark to Model, Not Market

Posted by Bull Bear Trader | 4/03/2008 09:02:00 AM | | 0 comments »

There is an interesting article at the Accrued Interest blog regarding mark-to-model, as opposed to mark-to-market. AI mentions that while the approach of mark-to-model and the term itself are vilified, nearly every bond portfolio is marked-to-model. Data taken from Bloomberg was used to show that there are over 150,000 different US dollar denominated corporate bonds outstanding. There are also over 1.2 million munis. TRACE data shows that less than 3% of corporates trade each day, and only about 1% of munis. Since many of the bonds do not trade frequently, there is no current market price to use for marking the bonds. Many dealers will try to find a price to keep customers happy, leaving pricing matrices with inconsistencies. While CDOs and the like are more complicated in their modeling, their use of a mark-to-model process is similar to what is often used for standard bonds.

Of course, during credit crunch times, marking is also somewhat dependent on the desperation of your neighbor. If others are getting margin calls, and need to liquidate, they may be selling at fire sale prices (or "puking up" the bonds in the delicate speak of Wall Street). Later, you come in only to find you are being marked to an artificially low price, now causing your margins to be squeezed. Maybe in this case a model, even an imperfect one, would be better than the "rational" price discovery of the markets.

The Hedgies Are Stumped

Posted by Bull Bear Trader | 4/03/2008 08:14:00 AM | | 0 comments »

Dealbook is reporting that many hedge fund managers, in recent letters to shareholders, are conceding that they have little idea what is in store for the markets. Some are directly conceding that "We do not know what will happen with the economy or the markets." John Bogle at Vanguard, and other like firms, should probably put quotes like this on their index fund product brochures.

Moving From BRIC to Africa

Posted by Bull Bear Trader | 4/03/2008 08:04:00 AM | , | 0 comments »

U.S News and World Report has an interview with Jon Auerbach discussing potential new BRIC-type countries. Nigeria is mentioned as being an important market given its lead in banking in Africa. Zimbabwe, discussed in an earlier post regarding their inflationary problems, may also present opportunity depending on upcoming election results, and their ability to contain and control hyperinflation. Opportunities exists in Kenya as well, after resolving many of the problems that occurred early in the year.

Asian Decoupling

Posted by Bull Bear Trader | 4/03/2008 07:49:00 AM | | 0 comments »

There is an interesting article from Bloomberg on the issue of decoupling of the Asian global markets from the US. YTD, the Chinese and Indian markets are among the 10 worst performing global markets. One possible explanation is the increased selling from hedge funds in the US as they meet margin calls and put money to work elsewhere. Commodity inflation has also prevented these economies from employing a looser monetary policy. Many company shares in Asia are also coming out of lockup, allowing nervous investors to lock into gains in an uncertain environment. Taiwan, Pakistan, Thailand, and Sri Lanka have posted positive gains YTD, between 2-8%, but given the political and economic issues in these countries, risk premiums are certainly higher.

BRIC Returns Like a Falling Brick

Posted by Bull Bear Trader | 4/03/2008 07:43:00 AM | | 0 comments »

The BRIC countries are down collectively this year (Brazil -11%, Russia -13%, India - 40%, China-26%). On the other hand, Pakistan, Peru, and Chile are up 9.5%, 7.1%, and 6.6%, respectively YTD. It looks like new "emerging markets" are emerging.

Ebay Selling Skype to Google?

Posted by Bull Bear Trader | 4/02/2008 11:03:00 PM | , | 0 comments »

Google may be interested in buying Skype from Ebay. Ebay initially purchased Skype as an effort to allow buyers and sellers to hook up by voice, but things never really took off. A deal would make sense given that Skype never really produced for Ebay, and Google still wants to expand into the voice space. Skype would give Google another avenue. Not sure the selling price will come close to the $3.1 billion Ebay paid back in 2005.

Tickers: GOOG, EBAY

Solar Projections

Posted by Bull Bear Trader | 4/02/2008 10:54:00 PM | | 0 comments »

Reports from the PV Technology Conference in Munich, Germany are discussing how the cost to currently produce electricity with solar power (now about 3 times more expensive then natural gas) could approach 1-1 as early as 2009 as natural gas becomes more expensive, and solar cells become more efficient and less expensive. Many of the solar plays, including the chip makers supplying the industry, are seeing the benefits of continued interest in solar.

Gold Rush, or Flush?

Posted by Bull Bear Trader | 4/02/2008 08:50:00 AM | , , | 0 comments »

At the same time gold prices fall below $900 (off 10% in a few weeks), Newmont Mining is reporting that it plans to spend nearly $250 million on exploration this year - and the increase is not just because gold is commanding a high price. Apparently there has been a shrinking number of gold finds above five million ounces, a key number to make a mine worth the trouble, or at least produce better margins. About 4 percent of reserves meet this benchmark. Apparently Newmont is depleting its reserves at 10 ounces a minute, but needs a replacement of 14 ounces a minute (I assume to keep up with supply and maintain reserve capacity). Currently, Newmont has about 86 million ounces of gold in reserve. In comparison, Barrick Gold Corp held about 124 million ounces in reserve, as of last year. Like other industries, commodity prices (i.e., energy), are increasing the cost of production.

Tickers: NEM, ABX

Apple Out Of iPhones?

Posted by Bull Bear Trader | 4/02/2008 08:41:00 AM | | 0 comments »

It appears that Apple stores do not have any iPhones in stock. Gene Munster at Piper Jaffray apparently called 20 Apple stores and found that none had iPhones. Paul Kedrosky over at called 6, with the same result. Munster is giving an 80% chance that the 3-G version is coming out sooner than expected, with a 20% chance that there are production problems. Apple is trading down slightly at the open.

Ticker: AAPL

From prepared statements, Fed Chairman Bernanke plans to tell Congress today that the U.S. economy is unlikely to grow much, if at all over the first half of the 2008, and could even contract slightly. He expects strengthening in second half. Futures dropped on the news. At least the "strengthening in the second half" is a nice carrot for the market.

ADP Report Better Than Expected, Sort Of

Posted by Bull Bear Trader | 4/02/2008 08:31:00 AM | | 0 comments »

The ADP employment report showed an 8,000 job increase in private hiring during March. While not a reason to throw a party, it was better than the expected 70,000 job decrease. ADP has been hit and miss over the last year - sometimes right on, other times wildly different from the Friday employment numbers. Futures traded up slightly on the news.

There's Gas In Them There Hills

Posted by Bull Bear Trader | 4/02/2008 12:01:00 AM | , , , | 0 comments »

Natural-gas producers, many from Oklahoma and Texas, are converging on a thick wedge of natural gas-bearing rock called the Marcellus Shale, located from West Virginia to Pennsylvania. Chesapeake Energy, Anadarko Petroleum, and EOG Resources are either already drilling, or planning to drill. The find could be significant, with estimates from 1.9 trillion cubic feet to 168 trillion cubic feet. As comparison, the U.S. consumed a little over 23 trillion cubic feet last year. The locals, while not happy about the gold rush invasion from outside companies, are excited about the leasing prices they are receiving, with acre leases increasing from $5 to $2,000 in the last four years.

Tickers: CHK, APC, EOG

We Don't Need The Capital, But......

Posted by Bull Bear Trader | 4/01/2008 08:16:00 AM | | 2 comments »

Lehman Brothers is offering 3 million convertible preferred shares in an effort to sure up their balance sheet, even though, as stated by their CFO: "We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets." The convertible preferred shares being offered have a 7-7.5% coupon. The terms of deal also include a conversion premium of 30-35% above the current stock price. Demand was oversubscribed three times greater than the amount on sale. Probably not a bad return in the current market - as long as you can handle and quantify the market and credit risk.

Ticker: LEH

Less Corn Being Planted

Posted by Bull Bear Trader | 4/01/2008 07:46:00 AM | , , , , , , | 0 comments »

The U.S. Department of Agriculture is estimating that U.S. farmers will plant 8% fewer acres of corn this year. Farmers are shifting to higher-priced soybeans (us 18%) and wheat (up 6%). The journal is reporting that "A smaller corn crop is good news for farmers who could reap $6 a bushel this season, up from around $2 a couple years ago, if prospective corn acreage remains at the forecasted level and if a soggy spring keeps farmers in the Corn Belt out of the fields until later in the season."

In a previous post we mention how rain could caused soybeans to be planned instead of corn since they can be planted later. As such, the long corn, short wheat spread is still in play. As expected in the market, the seed and fertilizer companies are doing well, while those that need corn, such as the food producers, are taking a hit. Ironically, the ethanol companies are also finding margins squeezed as their feed-stock cost increase. Maybe Washington will final see the current folly of putting corn in our tanks, and not in our stomachs.

Agriculture Tickers: MON, POT, MOS, AGU

Small Banks Attacking Paulson Plan

Posted by Bull Bear Trader | 4/01/2008 07:35:00 AM | | 0 comments »

The WSJ is reporting how small banks and credit unions are attacking the Paulson plan. This was to be expected, as the proposal was probably a surprise to them - with the move from state to federal regulation that is being proposed. Given that each district has numerous banks and credit unions, many with donors, it is likely that Congress will need to address these concerns. With other issues on the table, not to mention election year politics, it is doubtful that Paulson will see approval during his tenure.

Microsoft Not Polishing The Shine

Posted by Bull Bear Trader | 4/01/2008 07:26:00 AM | , | 0 comments »

We recently mention Yahoo!'s roll out of its Shine website for women, but apparently this is not affecting Microsoft. Given the market downturn, and Yahoo!'s recent roadshow that failed to impress, Microsoft does not feel the need to bid against itself. Given the decline in Microsoft stock, the once $44.6 billion dollar deal is now worth about $42 billion. Given that Yahoo shares are still under the bid price (now around $29.25), it also does not appear that the market is expecting a higher bid - or at least not putting their money where their mouth is. Nonetheless, I would not be surprised if the deal closed slightly higher, allowing both sides to claim victory. Both sides really have no other choice (options, or bidders).

Tickers: MSFT, YHOO

Changes and Charges At UBS

Posted by Bull Bear Trader | 4/01/2008 07:09:00 AM | | 0 comments »

Shares of UBS were up in Switzerland. The move is being attributed to investor relief over the Chairman's (Marcel Ospel) departure. The company is also asking shareholders to approve approximately $15.07 billion US dollars in additional funds to support its shrinking capital base. S&P cut its rating on UBS from AA to AA-.

Apparently, the Q1 loss is driven by $19 billion in write-downs in illiquid real-estate assets. This brings their total to around $33 billion in total write-downs. Of interest is how UBS plans to place these losses in a separate unit, initially funding the unit, while exploring the option of a spin-off or outright sell.

US futures are rising this morning (up close to 1%), apparently on the belief that the recent write-downs from Deutsche Bank at $3.9 billion (and UBS today) would be the last of the major credit-related problems.

Update: Of interest was a report that the Swiss Exchange is not allowing short sales of UBS today. The move today - a 10% pop instead of an expected 10% drop. Probably not the entire reason for the move, but I am sure it didn't hurt.

Ticker: UBS

M&A Bankers Suffer Drop In Fees

Posted by Bull Bear Trader | 3/31/2008 12:50:00 PM | , | 0 comments »

Bloomberg is reporting that M&A Advisory fees have fallen about $8.7 billion in Q1 2008 from $13.4 billion during Q1 2007. Goldman Sachs, the leader in M&A, has reported a 47% decline in fees from Q4 2007 to Q1 2008. Given potential lower trading returns (due to the market and less hedging/shorting of subprime as with last year), Goldman could have a more challenging year, even without the exposure and write downs some other banks are taking. Nonetheless, it may still be better position. The stock itself is testing support (double bottom), so we should get some clarity shortly.

Ticker: GS

A Microsoft Shine

Posted by Bull Bear Trader | 3/31/2008 12:32:00 PM | , | 0 comments »

Yahoo! is rolling out its new website ( focusing on women's issues. Probably a smart move, given the demographic, and the increased number of women surfing the net. Not sure it will have an impact the Microsoft deal, especially given the market reaction.

Tickers: MSFT, YHOO

Credit Crunch Hits Private Equity

Posted by Bull Bear Trader | 3/31/2008 12:15:00 PM | | 0 comments »

Investment bank fees from private equity firms have fallen from 22% in the first quarter one year ago, to only 9.1% in the first quarter of 2008. The WSJ is reporting that "Total fees paid by private-equity firms globally fell 79% to $1 billion in the first quarter, led by Apollo Management, which paid out $74 million." Even big players, such as the Blackstone Group and Goldman Sachs Capital Partners, paid less than $5 million in fees in the first quarter, compared to $198 million and $208 million, respectively, in the first quarter of last year. "Crunch" may be an understatement.

Stop The Presses

Posted by Bull Bear Trader | 3/31/2008 07:26:00 AM | , , , | 0 comments »

The exchanges have long been considered to be printing presses for money. As volume has increased in recent years, the presses have been rolling along. Today the Wall Street Journal discusses the impact that the recent Treasury proposal (see previous post) may have on their ability to continue printing money. Paulson was apparently not happy when dealing with multiple regulatory bodies while at Goldman, so it makes sense that he would want to "streamline" things. Of course, as mentioned in a previous post, the best laid plans, especially with regard to regulation ........... well, you get the point.

Some exchanges, such as the NYSE that are involved in a number of products, could possibly see some benefit. Others, like the futures exchanges (such as the CME Group), may not, and will now have to deal with a larger regulator. The existing relationship the futures exchanges have with the CFTC will not be as strong. This may be good for the markets, but not necessarily good for a futures exchange that has enjoyed quick approval of new products. Of real concern for the futures exchanges is the impact on their clearing operations, another large profit center. Opening up the clearing operations may allow for more competition and lower prices. This is certainly not something these exchanges, or their investors, would welcome. On the other hand, the NYSE, which is involved in numerous products and is increasing its international expansion, should find working with one agency a potential benefit.

It will be interesting today to see if the CME group and NYMEX trade down on the news, and for how long. Given the amount of approval needed, any move may be short-lived. (Update Noon Central: Looks like both CME and NMX are down about 1.5-2%. Time will tell if the moves are short-lived. Paulson is already saying it will take a few years.)

Tickers: CME, NYX, NMX

Hedge Funds Rolling Along

Posted by Bull Bear Trader | 3/30/2008 10:43:00 AM | | 0 comments »

DealBook at the NY Times is reporting that despite news of problems with hedge funds, the industry publication Absolute Return is suggesting a slow pace for fund shutdowns. The data could nonetheless be skewed given that Absolute Return does not include hedge funds with less than $25 million in assets under management. Of course, when you have a few Amaranth Advisors going down (in 2006) with $9 billion assets under management at its peak, it tends to skew the data as well.

Say It Isn't So: A Commodity Bubble?

Posted by Bull Bear Trader | 3/30/2008 09:28:00 AM | , | 0 comments »

The Barrons cover story this week tries to uncover the reasons for the current commodity boom. Immediately mention is how index funds account for approximately 40% of all bullish bets on commodities, with cash commitments running about $211 billion on the buy side. Given the growth in ETFs and funds in the area (growing but still a small percentage overall), they have no doubt added to the buying pressure on commodities as they build a sufficient position. We certainly saw some of this with gold ETFs.

On the other hand, commercial players (those that sell the actual commodity grown/extracted/mined, and buy the actual commodity for use ...... imagine that), are "heading for the exits," with "net short positions .... running more then 30% higher than their previous net-short record, in March 2004."

A regulatory anomaly may also be fueling the bullishness. How so? Much of the index money is not traded on the exchanges, but goes through dealers that belong to the International Swaps and Derivatives Association (you know where this is going). The swap dealers lay off their risk by buying futures while operating as market makers for the index funds. Since the swap dealers are theoretically hedged, they are currently exempt from position limits. An ISDA letter to the CFTC highlighted that the top four swap dealers account for over 70% of trading, with only one dominate trader in some lower-volume markets. With this level of concentration, it may be difficult for these dealers to make margin calls given a sudden sell off or correction.

What could trigger a sell off? Possible catalysis include lower international demand (China and India), a US recession, or a turnaround in the dollar. The market itself could also be the trigger. A rally in the market may produced a shift from commodities to stocks. A further drop could cause margin calls, forcing commodity selling.

Steve Briese sees a possible 30% drop from current levels, with up to a 50% swing as commodity prices overshoot while correcting. On his website (, Briese further points out that small investor trading in commodity index funds may a minor part of the problem. He is estimating that less than $40 billion is in these index funds, leaving $300 billion unaccounted for. Pension funds, endowments, and the like may be making up some of the rest.

Briese also makes and interesting analogy on his site: "The total open interest (market cap) of US commodity markets peaked out recently at less than Microsoft stock reached during the tech boom ($600b). What would happen to Microsoft stock today if you tried to accumulate $200b in stock on the open market. It would go through the roof, just as commodities have done. These markets are just too small to absorb the “investment” they have attracted."

Unfortunately, commodities may not be the whole problem. Derivative trading is concentrated among a few US investment banks. The Comptroller of the Currency noted:
“Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 97% of the total industry notional amount, 78% of total trading revenues and 87% of industry net current credit exposure (" Briese estimates the derivative holdings of these banks aggregate to more than 30 times capital. Since most of it is OTC, it is hard to accurately price (just ask the sub-prime players). Briese estimates that "exchange traded futures ..... is $16 trillion notional value, for which they [banks] typically put up 5% or less margin deposit."

Commodities may just be the start.

Giving The Fed More Power

Posted by Bull Bear Trader | 3/30/2008 07:28:00 AM | , , , | 0 comments »

The NY Times and Wall Street Journal are reporting that the Treasury Department will propose giving the Federal Reserve broad new authority to oversee the financial markets and insure their stability.

As one step, the plan would merge the SEC with the CFTC (Commodity Futures Trading Commission). This will no doubt raise some objections. As a carrot, these agencies would also be given greater flexibility to regulate themselves and streamline the approval of new products. I can just see all the new ETFs. EFTs of ETFs anyone ....... but I digress.

The Fed would also be granted greater power, allowing it to examine the practices and bookkeeping of brokerage firms, hedge funds, the commodity exchanges, or for that matter, any institution that might pose a risk to the system (Does this include Congress? Just a thought.). There is also interest in allowing the Fed to have additional access to information from those securities firms and investment banks that might borrow money from the central bank. Maybe this will make it easier in the future to tell whether Bear Stearns is worth $2 or $10 dollars ...... but I digress again.

The proposal also calls for a Mortgage Origination Commission to evaluate state governments in regulating mortgage brokers. It would also eliminate the distinction between banks and thrift institutions, close the Office of Thrift Supervision (which regulates federal thrifts), and merge it with the Office of the Comptroller of the Currency (which regulates national banks). Given that the lines between these two are close already, this change may offer less debate.

But we are not done yet. The proposal would also create a national regulator for insurance companies, something currently done at the state level. Like with mortgages, there is a trend in the proposal to move regulatory authority from the states to the federal level. Somewhat of an unusual move for the current administration, but given the current mess, probably not totally unexpected.

It is believed that the proposal will take years to implement, given the depth of change and debate that is likely to ensue, so who knows what will become of it. There is already an expectation that some in Congress will want investment banks to fall under some of the same oversight currently placed on commercial banks. I imagine this debate will begin/continue in earnest.

Finally, most of the proposals are pitched as being geared toward streamlining regulation, but as we know, just because you take two or three existing agencies and create one larger one, you don't always get more efficiency. Unlike companies, which hope to cut waste after mergers (not always successfully), government agencies rarely do. Since they cannot typically layoff the employees, where would they go anyway? You often just get bloated agencies with even more layers of approval. I hope I am wrong, but I am certainly not optimistic.