April 8, 2008

Market Comments for April 8, 2008

1) Earnings announcements started with a resounding thud today with Alcoa (AA) coming in worse than expected. 'Less than expected' will be the most commonly heard expression on Wall Street for the next four weeks. The Dow fell 36 points.

2) The market is starting to take the view that the Fed rate cuts are over, or that there may be only 25 bp left. The Fed wants to hold further rate cuts in reserve in case the current dose of medicine doesn't work.

3) The homebuilding industry tax credits to be earned by the proposed Senate bail out bill are enormous: Lennar-$573 million, DR Horton-$609 million, Pulte Homes-$598 million. Insider buying in these stocks has accelerated, and Hovnanian is now the top performing stock in my model portfolio, up 67% since January. Homebuilding stocks historically start rising 6-9 months before a turnaround in the new home market, so the sector will have a lot to run from here.

4) Pending home sales in February were down 21.4%, the worst on record. The biggest hit was in the West, the region most affected by the seizing up of the jumbo loan market.

5) You may need to go to Russia for your next chemotherapy. Russia has approved Antigenic's kidney cancer drug 'oncophage' which is able to significantly extend patients' lives. With a market cap of only $150 million the microcap couldn't afford to go through expensive FDA trials to win approval here. Thus Antigenics will be in effect be testing their drug on the public in Russia instead of on volunteers. The shares of other microcap biotech shares jumped on the news.

6) The terms for the Washington Mutual (WM) bail out are public and they are nothing less than draconian. The net net is that private equity fund TPG Partners (no typo here) is getting 47% of the company for $7 billion at $8.75/share, with a guaranteed yield of 8.75% (yesterday it traded at $13.50). The dividend on the existing common will be cut by half to pay for this. This continues the existing pattern of punishing existing shareholders and excessively rewarding new equity investors as the price of a bail out. The alternative is for the stock to go to zero a la Bear Stearns. Anybody who owns this stock should view this rescue as a gift from Heaven and get out now. WAMU doesn?t resell its originated loans, it keeps them on its books. And even TPG probably does?t know how many option rate ARMS WM really has.

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