Some Interesting Tidbits
Mar 1, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As I wrote last weekend, “I expect a turbulent trading week”. Every single day last week saw the DJIA trade in a range of at least 4%. To put that number into prospective, if we go back to the market peaks in the fourth quarter of 2007, this would equate to the DJIA trading in a daily trading range of roughly 650 points per day. For the week, the DJIA fell over 300 points, or just over 4%. Year to date, we are now down almost 2000 Dow points, or over 20%. The S and P 500 index is down even more.
As expected, the government announced that it was expanding its’ stake in Citi. Essentially, the US is exchanging preferred that pays a dividend for common shares that pay no dividend at all. All told, the US now owns 36% of a company with a market cap of just over 8 billion. So, for a $45 billion capital investment, PLUS guarantees on 90% of the losses on a $300 billion asset portfolio, we got stock in a company that is currently worth about $3 billion. Sounds like a great deal, doesn’t it? Is there any wonder that the market views Geithners’ plan of some sort of public/private equity partnership with extreme skepticism? BTW, this investment doesn’t even include any future capital investment in the bank, which is almost certain to be coming soon. Based on this lovely deal, the financials continued to drop in sympathy. AXP closed just above 12, as did Wells Fargo. BAC closed below 4.
Here a few other interesting events:
1. GE finally cut its’ dividend after much speculation. Beginning in the third quarter, the dividend will go from 31 to 10 cents per quarter. Prior to this cut, I had two relatively successful traders tell me that they thought this would be a signal for the market and GE to finally move higher. Unfortunately, GE closed at 8.51, just 11 cents above its’ 14 year low.
2. Warren Buffet announced results of his worst ever year for Berkshire Hathaway. The book value of the stock had been one of the wonders of Wall Street for the past 44 years, with compounded annual returns in excess of 20%/year. The stock closed at 78,600. A year ago, shares peaked at 147,000.
3. AIG is due to report earnings tomorrow. The current expectation is a loss of an incredible $60 billion. They are currently in negotiation with the US for bailout number 3.
The markets have basically been falling consistently for some time, but the losses accelerated, as I predicted, when we broke the 800-810 level on the S and P. Despite this, I do expect some sort of rebound, simply because I believe we are oversold short term. However, it is really hard to even begin to predict a bottom when we are in almost complete free fall. What makes this market different from all others is that the rallies never seem to last very long, and prices on most securities continue to drop far below levels anyone ever dreamed of. If you look at the market as a whole, you either believe that you are getting the bargains of the century, or that there are real issues here that are still not resolved. Of course, those who believe these are bargain prices probably felt the same way several months ago, and the markets have continued their collapse since then. Even since January 1, “blue chips” (whatever that means today!) Like Alcoa, American Express, Wells Fargo and Dow Chemical have lost huge percentages of their market capitalization. In fact, Dow and Alcoa (clearly non-financial basic materials) have lost about half their value this year, and this was on top of the steep drop in 2008. It is quite scary for owners of almost every common stock and equity mutual fund. Which ever direction we go, I expect the volatility to continue.
