Vince Farrell is a principal of Scotsman Capital, a New York money management firm, and a CNBC contributor. He chronicled his thoughts over one of the must turbulent weeks Wall Street has seen in years, and he shares them with us below.
MONDAY, JANUARY 21
10:00 PM
Hang on. It's going to be ugly. It's Monday 10 PM in NY and markets around the world are being walloped. Futures indicate the US market will follow suit when it opens Tuesday morning. I didn't want to miss out on all the fun, so we are back early from Costa Rica (wonderful place.) The credit crisis has spread and investors are worried that the bond insurance companies (MBIA, Ambac) won't last and another $100 billion in sub-prime related CDO's will be impacted, along with the $2.4 trillion in other debt they guarantee. Fears of recession are palpable and credit card delinquencies are up sharply to 7.63% of outstandings (including charge-offs.) Add to the worry the $43 trillion in credit default swaps I mentioned last week, and you have the makings of a panic.
Keep in mind, a panic sell-off is probably what you need to purge the bad blood. Might as well get it over with. The ideal would be a huge down opening, a Fed rate cut and a recovery on enormous volume. Wishful thinking (probably.) But, "When the time comes to buy, you won't want to." I'll be on Squawk Box from 7 AM to 9 AM, to panic along with you.
TUESDAY, JANUARY 22
12:47 PM
The market just opened and it's ugly. The close today is far more important than the open. I'll be commenting all day while at CNBC, so let's look at happenings up to now.
The Fed cut rates 75 basis points and the market seems not to care. The Fed is way behind the curve, but this is a start at least. With the 2 year gov't bond trading close to a 2% yield, and the 5 year at 3.5%, the Feds cut to 3.5% on the Fed Funds rate still leaves more work to be done.
Secretary Paulson spoke this AM and stated that the administration's proposed stimulus plan would be "swift, robust, broad based, and temporary." Temporary doesn't cut it. Milton Friedman wrote some years ago about "permanent income." Consumers spend that which they believe will be with them tomorrow and not just today. A temporary tax rebate will be saved or used to reduce debt. It will not provide a stimulus to the economy. Sure sounds good coming out of a politician's mouth however.
Bob Doll of BlackRock (they manage $1 trillion !!!) was on the show from Italy this morning and made the very good point that whatever low we set, hopefully soon, will be retested before too long. That tends to be the case. Most lows are tested after a brief, usually substantive, rally.
We are in the process of deleveraging an overly leveraged economy. The fever has to run its course and bolts from the blue will not stop the inevitable. Remember though, when it's time to buy, you won't want to.
4:28 PM
Wow ! What a day. We survived. Now let's see what we can tell from the craziness. The big deal is that the Fed lowered the hammer and showed they have a pulse. I was beginning to wonder. Financials and retailers had a great session. It could have been short covering, but it could be that new leadership is emerging, and, if so, that would be really good. If the 450 point decline at the opening proves to be a bottom, expect it to be tested in the weeks ahead, but it's hard to get too bearish if the Fed has a hammer out for interest rates.
With the decline in rates, 50% of conventional mortgages are refinance-able at lower rates. Don't want to repeat the insanity that got us here, but does give a lot of consumers room to breathe if they need it.
Here's a good one from our friends at Merrill. There have been 18 surprise rate cuts since 1986 and, on average, stocks were higher 1,3,6, and 12 months hence. On average is probably worth noting but I love the message.
Unemployment claims were down last week as was the four week moving average. Recessions "require" a spike up in claims as people get fired. In the 2001 recession job growth was a negative -215,000 for the 8 months the recession lasted, and we haven't seen any thing like that yet.
Will be on the NBC Evening News with Brian Williams later (taped.) Shame on him for using me for a ratings ploy. More tomorrow. It was worth cutting the vacation short. Really interesting day.
WEDNESDAY, 1/23
10:04 AM
Quick note only to start the day as I haven't finished reading everything I'm going to shamelessly plagiarize from. The Dow opened down 250 points which kind of, sort of, counts as a partial test of yesterdays low. The immediate bounce back is good to see and even better is to see that financials and retailers (last years worst groups) are leading the charge. Will be key to see if the markets hold, and I'll be on it all day. Doug Kass, the Worlds Greatest Short Seller, says as go the banks, so go the markets, and we have a green light.
What the markets hate more than young, arrogant, insufferable, know-it-all MBA's is uncertainty. Our Fed is taking a hammer to interest rates. An article on page A23 in today's Journal details why the European Central Bank should lower rates, but the head of the bank, Jean Claude Trichet, made noises at the World Economic Forum in Davos today that maybe not. Sounds like no conversation between the big guys and no coordination, therefore confusing. Becky Quick and Maria Bartiromo are over there. Get this guy and nail him down! Bet he's an MBA type (don't get all bent out of shape. I'm one too. Just no longer young.)
1:04 PM
Let's take a moment away from the madness and look at a broader view of a couple of things.
1) Chain stores have seen a very weak January so far. Earnings estimates continue to come down across the board. Be that as it may, Q1 estimates stand at an anemic +4%, and I would guess will go lower. So......
2) Makes sense that more rate cuts are on the way. Yesterday's move by the Fed, coming one week before a scheduled meeting, would be pointless if it merely shifted a rate cut forward by a week. The aim has to have been to get the rate lower by the end of the month than it otherwise could have been. I expect a 50 basis point cut next week.
3) As important as yesterdays move was, there was one Fed Governor that wasn't there. Frederic Mishkin was skiing and couldn't get to a secure site in time for the conference call. Are you kidding me?! This guy should be fired, and would be if he worked in the private sector.
4) Arguing for a recession are falling stock prices, long term interest rates below the level of short rates (an occurrence often associated with recessions. It indicates slackening business demand), sharply lower house prices, and a higher unemployment rate.
Arguing against a recession are work weeks that have stayed unchanged, initial claims for unemployment have recently dropped (recessions usually bring about a lot of firings, thus more claims for unemployment), and reasonable inventory levels which indicate large production cutbacks aren't needed. Thanks to today's WSJ for this list.
My guess is still that a recession is more probable than possible, but up in the air.
5) Maybe we shouldn't worry so much. Stock prices went up in three of the last four recessions
4:08 PM
What a reversal. Off -250 on the Dow to start the day and now, up 300. Could be short covering, could be the rumor that NY regulators are planning to aid bond insurance companies, or it just could be. If this is a bear market rally it will be short, violent and dramatic. The key for the market to sustain upward momentum will be the volume. If volume stays strong, so will the market,
My bet is that this is a new move. Different leadership- financials and retailers. And, then there is the Fed with a big hammer to hit interest rates with.
THURSDAY, 1/24
3:08 PM
So, where were the grown-ups ? A 31 year old trader went postal and lost a French Bank $7 billion in unauthorized trades. That beats the record of that hedge fund Amaranth that lost almost as much on one guys wrong way bets on natural gas. And that beat Long Term Capital Managements herculean effort to bring the worlds financial system to a halt with their Nobel Prized brilliance. Or was it idiocy ? It certainly was hubris. But, where were the controls ? Where was the supervision ? How could a 31 year old control that much of a major banks balance sheet without anyone knowing ? Next thing you know is that major banks will pursue the alchemy of turning BBB rated subprime crap into AAA "structured finance products" dreamed up by young, arrogant, insufferable, know-it-all MBA's. Did I say that yesterday ? When will Wall Street learn ?
On the good news side. A friends grown kid refinanced his mortgage into a 30 year fixed at 5.375%. That's pretty good. Now, what we can't, as a group, do is to lever up and take cash out. Refinance to lower monthly interest payments.
FRIDAY, 1/25
9:35 AM
The Fed can't win for losing. Now they are being knocked in the paper for catering to the markets with this weeks interest rate cut. Since the rogue trader at Societe Generale was outed over the weekend, it's theorized that the turmoil in the overseas markets on our holiday Monday was caused by SocGen liquidating the positions, thus causing havoc. The Fed, the reasoning goes, got spooked by a one day trading problem which proves they are hostage to wild eyed traders and are not focusing on the economy.
Bull---t. The dramatic overseas market decline started well before SocGen initiated their trades, and the rout was worse in the Asian markets where they had no positions. Ben had said the week before that rate cutting was on the way. The valid criticisms would be the Fed has terrible timing (if you say you're going to cut, why wait), terrible communication skills, and inconsistent application of their policy, which makes you wonder what the policy is. Validation of the Fed will come next week when they lower rates again. Now if they don't, I'm going to slap Ben upside the head.
The stimulus package will allegedly bump GDP by up to 1% this year say the advocates. Bull---t to this as well. I would rather have it then not, but it's a political pallitive. When money/wages/tax cuts/tax rebates/whatever are not permanent (Milton Friedman's theory of "Permanent Income"), the money is saved or used to pay down debt. I hope I'm wrong this time, but it would be a one quarter surge at best. But all such moves in the past have mostly been saved.
Bull---t = Bullshit, by the way.
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Posted January 25, 2008 | 06:24 PM (EST)