TheStreet.com's Jim Cramer says he has no confidence in these hated names, and neither should you.
The financials are flying -- there are finally bids for most of them underneath. Many, including Lehman (NYSE: LEH) (Cramer's Take), are running. What a great time to put the negative cards on the table and put the negatives in perspective. That's right, let's look at the financial Achilles' heels. What could go wrong? In other words, here's the companion piece to Doug Kass' positive conversion. Here's what I am worried about even as Doug thinks everyone's too worried and the bottom is being put in.
To get started, let's look at what's not causing the endless declines in the stocks -- don't worry, we will get to the financial dirty dozen when I finish this preamble.
First, it ain't earnings. Earnings aren't going to be that great. But that's why the S&P is at 14 times. It can go to 12 or 11, or most likely stays at 13-14, but the E goes down (earnings).
Second, it ain't oil. The stocks sensitive to the increase in oil have room to go down, but the price of oil is being factored in slowly but surely.
Third, it isn't inflation or recession. Those two are being baked in each day.
TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed.
We are in the heart of default country, and we knew we would be. This is the toughest moment. You need to go back and look at the calendar to realize the astonishing acceleration in defaults. It's simple: This moment two years ago is when the underwriting standards were the lowest, and this is the moment when the defaults will be the highest because the loans are resetting at high levels and most of the lenders, lenders like Countrywide (NYSE: CFC) (Cramer's Take), are more interested in getting as much out of a borrower as possible before kicking him out than working out the loan.
Think about it.
In the second quarter of 2006, the housing industry was going strong. We were in the 7-million-homes-changing-hands mode, and the vast majority of those homes required little money down, with home equity loans being taken out immediately to pay whatever little interest was being charged. These were the moments of the ultimate no-doc-high-fee loans by New Century Financial, Ameriquest, Resmed (Ditech), American Home Mortgage, Novastar, and of course, Countrywide. This was when the homebuilders' mortgage arms lent the most terribly.
MOST NOTEWORTHY: Ford, Imperial Tobacco and Schlumberger were today's noteworthy upgrades:
Soleil upgraded Ford Motor Company (NYSE: F) to Buy from Sell as they expect improved sentiment towards shares given new product launches, cost cutting efforts, North American capacity reductions, and better than expected performance on the cash side.
Imperial Tobacco Group Plc (NYSE: ITY) was raised to Buy from Hold at Citigroup to reflect FX benefits and pricing in continental Europe.
Morgan Stanley upgraded shares of Schlumberger Limited (NYSE: SLB) to Overweight from Equal Weight following the company's Q1 results, as they expect consensus estimates to move higher over the coming quarters.
MOST NOTEWORTHY: Mortgage Insurers, Thoratec Laboratories and Callaway Golf were today's noteworthy initiations:
Keefe Bruyette resumed coverage of Old Republic (NYSE:ORI), MGIC Investment (NYSE:MTG), PMI Group (NYSE:PMI) and Radian (NYSE:RDN) with Market Perform ratings and a $16 target, $13 target, $7 target and $6.50 target, respectively, as they expect increased capital needs to generate operational headwinds in the near-term.
JMP Securities expects FDA approval of Thoratec's (NASDAQ:THOR) next generation HeartMate II VAD any day now and for the company to meet/beat 2008 sales guidance. Shares were started with an Outperform rating and $20 target.
Callaway Golf (NYSE:ELY) was assumed at Stephens with an Overweight rating and $19 target. The firm is positive on Callaway's leadership position, strong balance sheet, new products and international opportunity.
TheStreet.com's Jim Cramer says you can call him all the names in the book, but he's right, and the shorts know it.
It was a cause I didn't want to take up. I didn't want to take it up because I knew the short-sellers would paint me as a naïve, clueless defender of the bull, and the long owners wouldn't really understand the idiosyncrasies of the subject. It was a cause I knew the brokers would never defend because their best business that is left is prime brokerage, and they need giant hedge funds to trade with them and can't risk alienating them.
I am talking about the uptick rule, the 70-year-old rule put in by the SEC to stop the process of "raiding" stocks, meaning sending them down by knocking all bids down underneath to where panic could and would ensue.
Today's typical. The Journal breaks its seeming 10-year embargo on mentioning me or my show with a piece that basically says I have no idea what I am talking about and am a fool to bring it up. It quotes James Bianco, from Bianco Research right after me saying, "Anyone who thinks the removal of this rule is somehow causing havoc in the financial markets is hopelessly lost in the bark of one tree and may never be able to see the forest." He then goes on to say, "To suggest that the removal of this rule is causing the markets to go down is to loudly announce, "I don't understand the credit crisis and I am incapable of ever understanding it.'"
TheStreet.com's Jim Cramer says Bernanke's laissez-faire "policy" is at the heart of the mortgage crisis.
Spitzer's right. Believe me, much of what is happening in the bond market world in the insurance of bonds is about Darwin and laissez-faire and Ayn Rand. It is about letting the marketplace rule, and of letting capitalism run wild and roughshod. That's why I was so glad to hear Eliot Spitzer say as much on CNBC this morning.
Sure, many of the people who took these mortgages shouldn't have. But we have known since time began that you can fool people who aren't clever and who are greedy, so you have to protect them from themselves.
That's not what we did. Instead, we figured that the marketplace will take care of everything, that capitalism produces the best result.
Barclays analysts say banks that obtained $72 billion in funding to replenish capital depleted by subprime-related losses may need another $143 billion in capital infusions if credit rating agencies downgrade bond insurers several levels, Bloomberg News reported Friday.
Barclays analyst Paul Fenner-Leitao Banks wrote in a research report published Friday that banks will need at least $22 billion if bonds covered by insurers MBIA (NYSE: MBI) and Ambac (NYSE: ABK) are cut one level from the current AAA and six times that if they are cut four levels, Bloomberg said. The capital amount is based on Barclays' estimates that the banks hold as much as 75% of the $820 billion of the structured securities guaranteed by bond insurers.
Meanwhile, the markets awaited word on New York Insurance Superintendent Eric Dinallo's meeting with banks on a bail-out package for bond insurers. Shares of some key bond insurers fell after Dinallo issued a statement that the negotiations were complicated and would take time, leading some in the market to doubt the New York agency's ability to marshal private resources for the initiative.
MBIA fell 79 cents to $13.61, Ambac gained 15 cents to $11.48, PMI Group (NYSE: PMI) rose 17 cents to $8.97, and MGIC Investment (NYSE: MTG) declined 6 cents to $16.68.
U.S. Federal Reserve Chairman now has more leeway to reduce interest rates further and quicker, after concluding that inflation concerns have subsided enough, Bloomberg News reported Wednesday.
However, economist David Wang told BloggingStocks Wednesday that although there's a tendency among some media outlets "to fixate on the Fed and interest rates," investors should concentrate on the multiplicity of tools at the Fed's disposal, as well as the global effort that Wang believes is necessary to prevent both a U.S. recession and a major slowdown in global growth.
"Look for the Fed's term auction facility to play just as important a role as the Fed's rate cuts in the months ahead," Wang said.
Last fall, the Fed established a term auction facility to provide short-term liquidity to banks. Bernanke has underscored that the term auction facility will remain open, "for as long as necessary."
Given the U.S. market's 400-point sell-off in its initial minutes of trading, "a Dow close down just 300-points would look like a moral victory" according to one economist.
"All things considered, from a market standpoint, a 300-point down day is a relatively small consequence," economist David H. Wang told BloggingStocks Tuesday.
Amid the sell-off, the U.S. Federal Reserve, in an emergency monetary policy action, cut key interest rates Tuesday morning - - cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.
Larger matter: mortgage insurers
Of utmost importance, in Wang's interpretation, is the health and fate of mortgage insurers, primarily MBIA (NYSE: MBI), and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI), and MGIC (NYSE: MTG).
Wang said the mortgage insurers "form a critical foundation in mortgage insurance, and as a result, in the mortgage process."
"A failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks," Wang said. "That would prompt another market sell off, possibly resulting in a failure by one or more banks."
Back then, MGIC had negotiated a merger with Radian Group Inc. (NYSE: RDN) but that deal fell apart in September. Both mortgage insurers were on the hook if mortgagees ended up not making their payments. But mortgage insurers hoped they would be able to argue that they didn't have to pay if they could prove there was mortgage fraud.
Last March I hesitated to recommend shorting MGIC since it was generating cash and had ample capital. But since then its credit rating has been downgraded, which makes it hard for it to position itself as an insurer. This after it restructured a subprime-mortgage joint venture without a bankruptcy filing, amid news that it received a request from the SEC to provide information related to the joint venture.
With its stock down 11% today and a 24.2% short interest, it's clear that investors see blood in MGIC's water.
TheStreet.com's Jim Cramer says enough is enough when it comes to a company issuing stock just to cover its preferred dividends.
Someone of some responsibility has to say, "Enough."
I mean, how is it possible that CIT (NYSE: CIT) (Cramer's Take) is going to be able to issue common stock shares to pay preferred stock dividends and interest? But they will get away with it. After all, companies come public because they have too much debt and then use the common stock proceeds to pay down the debt.
So CIT will be "able" to do it. But here's a question: would you ever want to own the stock of a company that does that? How bad can it be there that they can't pay the dividends on recently issued paper?
Of course, though, the goal is to stay alive, to play for another day, because no one ever merges -- other than that pathetic deal that Bank of America (NYSE: BAC) (Cramer's Take) made because it had to and was on the hook. I call it pathetic because, ask yourself, if you didn't have any money "in" Countrywide (NYSE: CFC) (Cramer's Take) or had lent to them wouldn't you just want them to go under?
That's what this CIT move looks like. Desperation.
TheStreet.com's Jim Cramer says it's still too early to get contrarian about the universal negativity on retail.
Squeeze?
DuPont (NYSE: DD) (Cramer's Take) better than expected. Countrywide (NYSE: CFC) (Cramer's Take) puts up numbers that don't seem bankruptish. We could have a day's respite from the gloom. We certainly are owed one, at least in Nasdaq land.
Plus, when you go out with people from the trading desks, you are overwhelmed by the negativity.
Last night at a buy-side/sell-side dinner, a smart guy I know who loves the short side tried to make a case for some down-and-out airlines and retailers. He's a price guy, meaning that he believes everything has a price and that you have to start looking at a Lowe's (LOW) here or a Macy's (M) because if you start buying now, put some on, you will be getting a pretty decent risk-reward ratio.
I thought people were going to throw things at him. He was immediately ridiculed as someone who didn't understand what's out there, the collapse of consumer spending as evidenced by Brinker's (NYSE: EAT) (Cramer's Take) Chili's, AT&T (NYSE: T) (Cramer's Take), Family Dollar (NYSE: FDO) (Cramer's Take) and all of the other usual suspects Tuesday.
MOST NOTEWORTHY: Certain mortgage lenders and Starbucks were today's noteworthy downgrades:
Citigroup downgraded certain mortgage lenders and consumer credit companies, including Countrywide Financial (NYSE: CFC) and MGIC Investment (NYSE: MTG) to Hold from Buy and Radian Group (NYSE: RDN) and Capital One (NYSE: COF) to Sell from Hold, as they believe mortgage and other consumer-related credit challenges will impact share performance over the intermediate term.
Starbucks (NASDAQ: SBUX) was downgraded to Sector Perform from Outperform at RBC Capital, as they believe Starbucks will continue to be pressured given sales weakness, EPS risk and return compression.
OTHER DOWNGRADES:
Caterpillar (NYSE: CAT) was downgraded to Underweight from Equal Weight at Morgan Stanley.
JP Morgan lowered its rating on Westpac Banking (NYSE: WBK) to Neutral from Overweight.
CIBC downgraded UBS AG (NYSE: UBS) to Sector Underperform from Sector Perform.
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U.S. Federal Reserve Chairman now has more leeway to reduce interest rates further and quicker, after concluding that inflation concerns have subsided enough, .gif){kind=logo}
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