"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
After yesterday’s rally I was listening to interviews on Bloomberg and CNBC as some suggested that the bottom was in, and now was the time to buy. They were unusually positive on the financial sector.
While I agree that we are in the midst of one of the best buying opportunities we have seen in over 17 years, I don't think the all clear signal can be sounded just yet.
Like most stock market hurricanes, the eye of the storm passes over giving people hope that the worst is over. After the eye of the storm passes, that final half shortly follows.
For example, we will know the worst is over for the financials when insiders from companies like Bank of America (BAC) begin stepping up to the plate and begin buying large blocks of stock.
This has not happened.
I look at Bank of America as an important bellwether for the industry. Insiders from other banks (WB, FITB, and other regionals) have been aggressively buying, but not the insiders at BAC.
A few weeks ago, BAC feel to an new 52 week low of $33.12 (1-22-08). As the stock price dropped to these unbelievably low levels, you want to know how many insiders jumped in and bought? None, Ziltch, Nadda. Not one insider had enough conviction to buy BAC at these levels despite an incredible dividend yield of 7.7%.
Now I must admit the Wachovia (WB) insiders are singing a different tune. These guys have bought, and bought aggressively.
When the insiders at Bank of America show the same conviction as the insiders at Wachovia, I'll be ready to unload even more cash to my bank holdings. Until then, I am not confident that the financial crisis is at its end.
Today Fed Chairman Bernanke told Congress the economy is close to recession, and the economy may weaken in the first half of the year. I guess he means statistically because from where you and I sit the economy has been on thr rocks for several months.
Yesterday, either fund managers around the globe had mental telepathy or someone pushed a program trading button to create a buying frenzy across the board. Since I don't believe in fund manager telepathy, I'll side with someone pushing a button.
See, these things do happen in the preception of free and open markets. How someone can perceive combined $23 billion in subprime writedown by UBS and Deutsche Bank being postive is beyond me. I guess the button pusher thought the news was positive.
While someone was pushing a button on the overall market, another was pulling the plug on commodities and bonds. I don't believe the long term run in commodities has come to an end. In another month or so, we may be looking at another great opportunity to buy the "stuff" stocks and ETF's.
One of the "stuff" companies, Monsanto, warned that profit this year may miss estimates, and shares closed slightly lower ($112.00, -.95).
For the day;
DJIA: -45.44
S&P: -2.65
NASDAQ: -1.35
The CBOE Volatility Index is back near its low at 23.43 after peaking at 37.57 on January 22nd. We may have a little more upside near term if oil prices can break lower. Today's weekly inventory report put a damper on that as Brent Crude closed up $3.42 to $103.59 for the May 08 contract, and Crude Oil spiked $3.77 to 104.75.
The Energy Information Administration (EIA) said gasoline supplies fell by 4.5 million barrels last week, twice the decline forecast by analysts. According to Bloomberg, consensus estimates for inventories of Gasoline were suppose to be down 2.875 million barrels.
Getting back to the insider theme for moment, I have noticed that insiders at quality companies like FedEx (FDX) and Capital One (COF) also are not very positive in the near term.
Fred Smith, Chairman/President/CEO of FedEx is also less than confident in his company’s prospects for 2008. Fred received his quota of free stock by exercising an option for 300,000 shares at $31.98, and promptly sold 175,800 of those shares at a market price of $92.83-$92.89.
I would trust Fred Smiths' judgment since he is a member of Yale's famous secret society "Skull & Bones". The bonesmen always know something we don't.
Lastly, let's take a look at Richard Fairbanks, Chairman, CEO and President of Capital One (COF). By the looks of these option exercises and sales, wouldn't you think that Fairbanks is attempting to jump from a burning ship?
The lesson in this is very simply. When taking advice from the TV set, what they say is one thing, what they do is another.
You and I work very hard for our money. By buying FedEx and COF when Fred Smith (FDX) and Richard Fairbanks (COF) are selling, we are simply transferring money from our bank accounts to theirs. I find this highly insulting, but this is the way the game has been played for years.
Investment Banks
Do we really need investment banks? Warren Buffett doesn't think so. When acquiring a company, Buffett often doesn't hire an investment bank to do the deal.
In fact, if you think about many of the market debacles in the past, at the center of all the troubles was an investment bank. So, do investment banks and hedge funds need to be regulated? Well, I would say so.
Here are a few comments that Mr. Buffett had regarding investment banks;
On the bankers who designed and sold complex investments;
“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end.”
"Wall St. is very good at selling things and at auctions, they're good if you're selling a business. On the other hand, there are so many products that Wall St. has created and not all of them are good. There's a pervasive sense of 'if you don't do it someone else will'. There's an HBO movie coming out in October called Last Best Chance, it's about a nuclear crisis precipitated by a Russian soldier who is bribed by terrorists stealing a weapon. He almost didn't go through with it but they told him 'if you don't do it someone else will, so you may as well be the one to get the money'. This type of thinking has gotten people into trouble, like CEOs managing earnings".
"In 1985 a Cleveland firm, Scott & Fetzer [a conglomerate that included World Book encyclopedias] was selling their business, First Boston was their advisor and they sent pitches to twenty buyers without anyone biting. Berkshire didn't get a pitch, but I sent the seller, Mr. [Ralph] Schey, a letter saying we were interested and did the deal. Since First Boston was due a fee from any transaction, at a closing dinner they offered Charlie [Munger] their pitch book with pages of analysis, Charlie replied 'no thanks'. We only buy companies where the seller cares about where the business goes".
