From sea to shining sea, the chorus is ringing out. “Wipe out the bank equity holders and bondholders, nationalize the banks, clean them up, and sell them back to private equity”. The movement is so vehement now that you would think that BAC has 3 shareholders, the The Guy from the Monopoly Game, the Planters Peanuts eye-piece logo guy, and Ebenezer Scrooge. I am guessing that all of the pundits that are calling for this mass carnage don’t own equity or bonds in the questionable banks, but who does?

At the macro level, who usually owns bank equity and bank bonds? Well, they are usually very conservative investments, provide a steady stream of income through predictable and stable dividends and their bonds are extremely safe and pay consistently. The perfect holder of a bank stock, preferred, or bond from about 1950 to 2006 would be a retired person, a pension fund, or even 401k type plans. So why should we wipe them out?

Did you know that some of the largest holders of preferred bank stocks are other banks? That is how many banks and people create cash flow and income. If you wipe out the preferred stock of BAC and C, you would cause a domino effect in a number of other banks. Cash flow would be impeded, capital would be required to meet current needs, and government assistance would have to step in at some point. Could there be a run on the banks if you wiped out BAC and C equity and bondholders? If the bondholders are other banks that rely on those funds for operations then yes, you could see scary headlines.

Second, the baby boomers are the world’s largest retirement class in history, how many of these people directly or indirectly hold bank stocks and bonds as part of their retirement? I am guessing that since, up until 24 months ago, they have worked like clockwork to generate income and pay dividends, that a lot of people who require income from sources other than a job, may be holding these positions. With the viability of social security already being questioned as the baby boomers age, do we really want to knock out another leg of what was once considered a very safe retirement strategy?

Third, the domino effect of killing the preferred shares and bonds will create a Lehman type ripple across the globe. Just what we need know, right? Also, I am sure that the Obama Admistration has broadband internet by now, and if nationalizing the banks was going to happen, I think they would have moved on that path before the Stimulus package was passed. Obviously someone looked at the bank nationalization plan, fed it through the super-computers like Constellation at UBS, and said “WOW! I guess we better not go down that route!”

Fourth, never bet against Jamie Diamond. The guy is a good, “Hall of Fame” good. When he tells me JP Morgan is doing fine and bank nationalization is never going to happen, I want to believe him. GS and MS want to pay TARP money back yesterday because they could be crushing it in the market right now. Ken Lewis is buying millions of dollars of BAC stock with his own money. I don’t think he would be doing that if nationalization is right around the corner.

Okay, so how does this all play out? It is pretty simple really, although the timing off it is where people will be caught off guard. All the banks will be bailout out by world wide taxpayers. Each government will take on their trillions of dollars or Euros of debt, and the banks will be allowed to function. Each government will then run a deficit and take time to pay it off. Since this will end up being a “zero sum” game, with everyone taking on massive debt, the US will still be the best of breed out there. The dollar will still be a safe haven compared to the risk of other countries’ currencies. The US will be the first out of the recovery gate. Decoupling is a myth and the rest of the world has to take the nosedive first, and then feed off the US recovery. Did you see that European banks were FAR MORE leveraged than US banks? They have an estimated $25 trillion USD to work through, while the US has about $7 trillion? Anyone want to go long the Euro?

The gold play is a fool’s errand at this point. We are stuck in a massive deflationary cycle. Do you see Warren Buffett touting gold? Nope. He is buying corporate debt like a wild man at this point. He isn’t playing the “guess the equity price” game; he is playing the “I bet these guys will still be in existence in 3 years” game. Granted, he is getting a juicy yield for biding his time and having more money than God, but still, look at what people are doing, not what they are saying. In the past few months he has bought debt in Tiffany and Co. (10% yield), Goldman Sachs preferred with 10% yield, and high yielding debt in General Electric, Swiss Reinsurance, and Harley Davidson. His yield and bonds will do well in a deflationary time, and he has the kicker to convert to stock in all his deals.

In conclusion, look at what people are doing, not what they are saying. There will never be a bank nationalization of BAC or C in the US. The government couldn’t afford the fallout of such a move. It will create a bad bank, aggregate bank, IOU bank, taxpayer bank, whatever you want to call it, and help the banks survive. Once pricing of toxic assets stabilize, even at extremely low levels, we will all know what “stuff” is worth and be able to sell and buy it again. If you read your weekend edition of the WSJ, you might have noticed that distressed debt buyers are stepping up and buying toxic assets from pension funds and banks for a few pennies on the dollar. Not a great price for selling, but still a price, and from there, more and more toxic debt can be priced out to normal buyers of debt. The recovery in the bond and debt markets has begun. Look at the debt issuance of BBB rated and above companies recently. Look at LIBOR. Look at distressed debt buyers starting to buy toxic assets, although it is at very low prices. These things would not be happening if bank nationalization is right around the corner.

I recently watched Tim Geithner’s speech with an Obama supporter and made the comment, “Wow, it’s official, you have to say that Obama’s first 21 days have been a complete disaster. That may be the most disappointing, empty, vague speech I have ever heard. I can’t believe Obama hyped it up the night before on his national speech.” He disagreed and said he liked a few things Obama has done in his first 3 weeks. We had a few minutes to spare, so I asked him, “Really, other than Guantanamo and torture, which a few people in America will argue hurt national security, what do you like?”

1. “I like a few of his nominations” – Really? Four of his major nominations had tax problems, as in “they didn’t pay them”. The only reason lucky number 4 got through, Tim Geithner, is that the country is in a financial crisis, we needed someone, anyone, at the helm. So unless we are talking about the Ambassador to Guam, I am not sure who we are really talking about.

2. “He is at work; Bush took a vacation until September 11 so he had a rough start at the Ranch.” Really? I didn’t want to get stuck comparing him to Bush and what Bush did, but are we now giving Obama a “check plus” for being at work? Really? The fact he gets up everyday and goes to work gets him a point? It reminds me of the Chris Rock skit where Dad’s say “Hey Man, I don’t beat my kids, that makes me a good Dad” and Chris responses “You’re NOT SUPPOSE TO BEAT YOUR KIDS” (i.e. You don’t get credit for that)” Sorry, Obama doesn’t get credit for “going to work”.

3. “He is admitting his mistakes.” As Glen Ordway would say on sports talk radio on WEEI in Boston, “You are proving myyyyyyyy pointtttttt!” He is 21 days into office and he gets a “check” in the box for “Admits Mistakes”? Isn’t that my argument? I think I am arguing he has had a dismal start and has made tons of mistakes. I don’t think you get credit for “admitting mistakes”. I mean, how low are we setting the bar here when “admits mistakes” and “shows up for work” get you two thumbs up?

4. “Went to the Hill and talked to Republicans” – I agree, but did he have a choice? What was he suppose to do, not talk to Republicans? We will call this a draw.

5. “Talked to the 911 victims about Guantanamo” – Very classy move and I like it, but he was talking about closing Gitmo on the campaign trail. I don’t think talking to families helped shape his policy or decision. Again, a nice act, but if we are giving out “star stickers”, does he get one for that? I will call it a draw out of respect for those families and leave it at that.

I am no Obama basher. I told my friend to take the emotion out of it and lets call the president is John Smith. So now, there is no baggage and no emotion around John Smith the president, he is just John Smith, faceless, colorless, and ageless. Would you say John Smith, president for 21 days, has done a good job or is off to a dismal start?
John Smith’s vetting process has been an embarrassment. John Smith’s nominees have been dismal. John’s Smith financial system plan, which he has been working on for 90 days, since he won election, still has no detailed workings or ideas. The biggest financial speech of this year turned into vague references and clichés, and the Market noticed.

From today’s Wall Street Journal article “Junk Funds Dabble in the Best of the Worst”

Source: http://online.wsj.com/article/SB123422518352665619.html

Why did this catch my eye? Value investors, like Mohnish Pabrai, love Sears stock now, and if value guys love the equity, the bond must be a steal.

Some managers, like Thomas Price of Wells Fargo Advantage High Income, are going for B-rated credits yet are avoiding the next rung down, triple-C. “The likelihood of bonds surviving there is lower,” he says.

One way managers like to pick bonds is to subject them to a stress test. The ideal they look for: issuers whose total debt is three times or less earnings before interest, taxes, depreciation and amortization. If the multiple is around 4.5, that is still good.

What managers call “the line of death” is six times. Thus, casino owner Harrah’s Entertainment Inc., whose multiple is 8.2, and retailer Michaels Stores Inc., at seven, are way too risky for all but the most intrepid of value hunters.

Mr. Vaselkiv holds bonds in the dicey retail sector — from Sears Holdings Corp., maturing in 2011. This retailer, like others, has seen same-store sales plunge lately, and its bond prices have been punished.

The Sears bond now changes hands for around 72 cents on the dollar. But the debt/Ebitda multiple is just 2.0.

So Mr. Vaselkiv’s bet is that the price will bounce back and meanwhile he will collect its rich yield, 21.5%. He is confident that Sears will weather the storm.

Sears’s Cash
“They’ve got $1.1 billion in cash and they’ve been buying back debt,” he says. The cash on hand is enough to buy back the 2011 bonds, and by then he figures the company will have an easier time raising capital.

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Care to get updates when I post a sarcasitic comment?

http://twitter.com/StockMarketSage

The latest…

“The Oracle of Omaha should be called the Oracle of Astrolube for getting 15% out of Harley Davidson..nothing like a good business deal!”

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Good to know that so many of our elected officials cheat on their taxes. It only comes to light when they try to get appointed to a presidential position.

Bill Richardson - withdrew nomination due to past tax issues and inquires into his administration

Tom Daschle - withdrew from nomination due to past tax issues

Nancy Killefer - withdrew from nomination due to past tax issues

Next, you will tell me that Congress isn’t honest!

The Doctor Evil Financial Report – January 2009

The world is about to end…I just checked with Dr. Evil Financial and we are going to need one ga-jillion dollars to bail out all the insolvent banks around the world.

The world is about it end…unemployment will shoot past 20%, bringing down the “average working hours a week” to an unheard of number, otherwise known as 2.6 more hours a week more than France has averaged since World War II.

The world is about to end…one of George W’s last acts as president was to put a 300% tariff on Roquefort cheese. Protectionism will lead us down a scary path, but at least now it will smell a whole lot better.

The world is about to end…over the past 7 years the absolute yield for a European company to issue debt has averaged 5.04%. Today, it is at the “end of the world” rate of 6.20%.

The world is about to end…Nokia, that cell phone maker that some of you who don’t own IPHONES or BLACKBERRIES, still use issued 1.75 billion Euros of debt, and orders for 9.0 billion Euros of that debt.

The world is about to end…the gall of companies like Amazon, Google, Netflix, Barclays, McDonalds, IBM, and Apple reporting decent earnings. How dare they!

The world is about to end…the consensus now estimates it could take between $2 and $4 trillion dollars to clean up this mess, and yet no one must have told the market because it moved 20 points.

The world is about to end…bond default insurance prices has been dropping like a stone and yields on investment grade and junk bonds have been contracting quicker than Jessica Simpsons waistline will need to contract before the next tour. Seems the people with Black Swain money and shadow banking money know that companies actually will exist in 2010.

The world is about to end…Coke just scrapped the use of “classic” from their cans and bottles to “take one source of confusion away (that younger consumers may have)”. Really, the “classic” label was added in 1985 after it introduced New Coke. That means anyone born circa 1985 only knows Coke as Coke Classic since New Coke only made it long enough to be a footnote. We should bring New Coke back and call it “Thriller Coke”.

The world is about to end…Obama is scathing Wall Street for bonuses in a time like this, when his new right hand finance man Tim Geithner just got a $500,000 severance for leaving the NY FED, in addition to his $500,000 salary.

The world is about to end…Do you think Blagojevich’s recent purchase list at Amazon includes “Jedi Mind Tricks – Focus and Happen It Shall”.

The world is about to end…Jim Goldman almost wrote a critical sentence about Apple. 462 blog posts and we almost got him to question his BFF Steve Jobs and how Apple handled the Jobs illness. Wow, what is the world coming too?Good Luck Chuck download Riff-Raff download

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Morgan Stanley
Senior Floating Rate Notes due 2012
Non-Callable U.S. Inflation Index Linked Range Notes

This looks like a serious no brainer. We have CPI at or below 1% and crashing down.  We have Bernanke talking in London about how he will raise rates quicker than you can say “Paulson’s Plan” as soon as a recovery has started to show its early face.  The government and Wall Street are clearly worried about deflation (ie massive stimulus) than inflation right now.  So you are telling me we are going to go through a deflationary cycle, turn it around, show enough growth to start raising rates, and then have CPI shoot through 7%…all in 36 months?  That is the life on the note.

All you are betting on here is Morgan Stanley doesn’t go out of business, which with there recent bank holding company status and merger with Smith Barney, seem like a pretty good bet.

I got a call today asking what I thought about using the last few trading days of the year for buying stocks.  Although no one can time the market, remember it is all about “time in the market, not timing the market.”. 

On one hand we have the Obama presidency coming up and thinks are so bleak that IS it the the time to buy?  On the other, things ARE so bleak, why jump in now, as opposed to a few weeks or months from now?

Here is what I think.  A few notes, one, the US consumer is still contracting, so that is bad.  (I.E. see the retail sales figures from Christmas and the “now poplular - Who is going to close their doors” game).  Credit is still frozen, starting to show a few drips here and there of thawing, but still very frozen.  Unemployment is still going up, and I think the estimates at a 9% peak are too low.  Home prices are still falling (Can they still do that? Aren’t we at zero yet?). Retail space and commercial real estate is very much starting to show signs of trouble, starting with the malls and working its way up to office space, but…

The one reason I would not invest this week is hedge fund redemption.  All the billions of dollars in hedge funds that investors have decided to pull out get priced at the closing price of the fund on December 31.  Although many hedge funds have liquidated positions, no one knows how many more need to free up money in the next few days to pay out to investors.  Is it only a few that need to sell?  Are there some that liquidate on the last possible day based on algorithms and computer trading? Maybe.  I have no idea, and neither does anyone else really.

I think there is much more downside risk to jumping in now than waiting a few weeks.  Are you going to miss a 1000 point move up based on the above reasons?  No, probably not.  Could you get in the way of a 1000 point move down based on world wide hedge fund redemption computers selling and allocating cash? Maybe.  Why risk it over the next few days.  Relax, enjoy the new year, and get back at it on Monday.

How is your financial advisor doing? Check out the video at Financial Advisor Scams

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