Market Comments for March 14, 2008
1) Put buying on Bear Stearns (BSC) increased tenfold yesterday and so did the stock volume. In every financial crisis it seems that one major institution has to be offered up to the market gods for sacrifice before it ends. Bear Stearns is the most likely candidate this time. Goldman Sachs (GS) and Morgan Stanley (MS) have already ceased dealing with Bear for fear of counter party risk. Alternating rumors of bailout and collapse caused an intraday range of 500 points in the Dow today. Look for something to happen over the weekend.
2) As a Latin scholar you will immediately recognize that tutefu valui means ‘fair value’. That is what the tattoo says on ‘Kristen’s’ stomach.
3) When the credit markets recover, one big play will be the publicly traded private equity firms. Fortress Investment Group has seen its share price drop from $32 to $11, while Blackstone has plummeted from $32 to $14. Collapse of the credit markets have shut these firms out of their most profitable business lines. To show you how desperate they are Fortress just arranged a $25 million private refinancing of Michael Jackson’s Neverland property to head off foreclosure. Not exactly prime business.
4) The government’s tax receipts are falling sharply indicating that the recession may be sharper than expected!
5) The consumer price index for February came in unchanged versus an expected rise of 0.2%. With inflation temporarily under control the Fed now has a green light to cut interest rate by 0.5% on March 18. Your cost of financing is about to drop further.
6) Cattle futures have collapsed as ranchers accelerate slaughters due to the high price of corn, which has doubled to $6.30/bushel in 9 months. This will lead to sharply higher beef prices and shortages by the beginning of next year.
7) Junk stocks are an area where you can run a small back book. Buy ten of these. If half go bankrupt and the survivors increase fivefold you get a return of?? 250%. These are firms that were taken private, loaded up with debt, and then refloated at the top of the market last year. A good example is Idearc (IAR), the yellow pages spin off of Verizon. The company kindly loaded up IAR with a bone crushing $9 billion in debt before the spin off. In the past year the stock has cratered from $34 to $3. The stock now has a PE multiple of 2 and a dividend yield of 25% (no typo here). But the company also has huge cash flow giving it an interest coverage ratio of 2:1. There are a dozen more of these out there.
Google, last year’s darling of the market, has nearly halved in four months. With a 70% market share in internet search, the company has basically become the toll taker for the internet. At $420 GOOG is now selling at a multiple under 20 times. The company is a cash machine almost as efficient as the US Treasury, and has almost as many reserves as Fort Knox. Even though economic conditions are dire, it is still increasing sales as advertisers accelerate their epochal shift away from traditional print and broadcast media to the Internet. Its only potential competitor is Microsoft (MSFT), which first ignored the Internet, then was hobbled by the Justice Department, then finally stumbled over its own big feet with a series of small and meaningless acquisitions. Its latest attempt to break the Google monopoly with a takeover of Yahoo (YHOO) came to naught. Although Google is excessively wasteful on things outside its core business, like space travel, it still offers a rare chance to get into a best of breed company on the cheap.