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Slow News Day

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April 02, 2008 – Comments (4)

This morning appears to be a slow news day after all the April Fools jokes of yesterday, perhaps the largest being the 3.59% rally for the day.  As I predicted fairly close to the top in the fall that smart money was selling into the rallies, I doubt that few buying yesterday will end up happy with their purchases.

Canada has to come out of this mess better than the US.  Constrast Canada's central bank on buying risky assets compared to the US:

"ABCP Conditions

The Bank of Canada laid out conditions yesterday for accepting bank-sponsored asset-backed commercial paper as collateral for loans to banks that need to raise short-term money.

Bank-sponsored paper is, for the most part, still trading, unlike the non-bank sector of the market, which is frozen and in the midst of a restructuring led by Purdy Crawford.

Nonetheless, the conditions for the loans are designed to keep the Bank of Canada from accepting any risky assets, a marked departure from the moves the U.S. Federal Reserve Board is making in the United States as it tries to solve the problems in the financial system.

Under the new rules, the Bank of Canada will only accept ABCP that has:

The highest-possible rating from two credit ratings companies.

Almost no exposure to "securitized" or repackaged assets.

Backup liquidity credit lines that have few restrictions on payouts.

A high degree of disclosure about underlying assets"

Canada also has a pretty good record on saying no to all the sectors demanding the government do something for them at everyone else's expense.  The biggest problem I see is that taxes have been reduced to what I think will prove to be unsustainable levels.  We were used to our taxes, so why not let well enough alone?  It is so much easier and cheaper to leave it alone rather than have to raise taxes again later.  

I am not sure why some are thinking the US dollar is going to get stronger.  I see little foundation behind it, just smoke, mirrors and good talkers.

Best reading this morning was Mish on the Lehman equity offering.  I especially like the piece he took from Minyanville:

 "Lehman (LEH) is announcing a $3 billion convertible preferred to 'institutional investors'. In other words, retail will never get their hands on the paper and it is likely a way for LEH to pay back some clients with a cheap deal.

If everything is so rosy, and just a few months back, LEH announced it was going to buy 100,000,000 shares at around $65 a share (stock it never bought) then why would it dilute itself at $37?

Because it has to.

Expect more of this folks. Lots of it."

Which reminds me, I have the portfolio I set up of companies, dwotbuybacks, that had done these buy backs that I entered straight from an ETF that had a purpose of buying only stocks with large buybacks.  It is doing dismal.  I think it was at 3.47 last week when I checked it.  I also did a bit more looking at some of the stocks in there and at this point even though this looks like it was a bad idea on caps, I think it is more an issue of timing than theory.   Out of the first 60 companies I looked at they were already down way in excess of what the market was down.  

The other part of my theory is that companies doing these buybacks have been loading on the debt to do so.  That is what I was seeing in the companies that I had looked at closely, but I never checked out whether the companies in the ETF had taken on debt to do the buy backs.  I can't see how buying your shares, even without debt, a few years into a bull run, is ever a good idea for your shareholders.  I can only see buybacks benefitting shareholders in a bear market, and only if they can be done without debt.  So, executives sell into a buyback and get filthy rich at the expense of investors while the investors cheer the short term rally.

I expect interest rates to eventually reset to reflect risk, and that is already happening to a certain degree.  Didn't Lehman just pay around 7% to raise capital and aren't 30 year mortgages still less than that rate?  Just looking at that alone is scary.  Muncipalities are finding they have to refinance for 1-3% more right now despite the lowering of rates by the fed.  Debt reset has to happen across the market and it has to hit these companies that did buybacks with debt.

I am willing to bet if anything, right now "smart debt" is doing their best to get into financing all debt long term, even if today they are paying 1-3% more than they were paying just 6 months ago.

4 Comments – Post Your Own

#1) On April 02, 2008 at 11:55 AM, devoish (98.57) wrote:

I am not betting against you.

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#2) On April 02, 2008 at 12:11 PM, kdakota630 (29.58) wrote:

"I am not sure why some are thinking the US dollar is going to get stronger.  I see little foundation behind it, just smoke, mirrors and good talkers."

I agree with your analysis for the next 2-4 years, although because Canada and the U.S. rely so much on each other for trade, I see our dollar keeping in close proximity to the U.S. dollar as it continues to fall against other foreign currencies which isn't necessarily a bad thing if you're in the export business because it helps keep companies competitive against other foreign markets.

I AM curious what you think of the U.S. dollar in the long-term (5 years+).  Do you think the U.S. dollar will stay weak compared to other currencies long-term?  Would a buy-and-hold strategy work for someone who had 10-20 years to wait, or do you think it would be best to just stay away from the U.S. dollar as much as possible until there is a sustained turn-around? 

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#3) On April 02, 2008 at 2:34 PM, dwot (66.58) wrote:

I think debt is the death of economies long term.  I think practically all the financial crisis had debt in common.

Hard to say long term how it goes.  I do think the US has really hurt its international relationships.  The US "spread" its risk around but dumping on unsuspecting people in other countries and I think the consequences are only starting to show up.  Right now there is enormous fear in the markets and there are way more people buying into the return of capital rather than the return on capital, yet treasury sales are weak, at least that's what I believe I've seen in the news, the US not being able to find enough money to fund its debt.  I'm not going back right now and searching and making sure I'm interpting what I thought I read correctly, but what I think I've read is a weakness started in December and has gotten stronger since.  Yet people are on the side with money in "cash?"  People are motivated to be in cash and treasuries and there is problem.  

Other countries are losing interest in funding US debt, and the US lacks enough internal resources to fund their own debt.

I doubt the US can hold rates down.

When Canada got into debt problems rates were higher and we had the advantage of rates declining to help us out.  The US has no such help.

I do believe our economy will suffer from a US downturn, but we simply have a much stronger foundation and regulations and laws that work much better.  The US has a 30 year debt problem with its mortgages that simply aren't funded long term.  Everytime rates go up, the US financial system is in trouble because all that debt starts to cost the banks money rather then them making money.  Canada has matching deposits to debt as far as I know.  We require rates to reset to market rates thoughout the life of the mortgage so even if we had a problem, the rates would reset.  We know this when we spend money, so we are more motivated to pay off debt.

The US has a 30 year problem, so no I don't see a 10-20 year strategy working.  

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#4) On April 02, 2008 at 6:49 PM, dwot (66.58) wrote:

Yesterday's slow news day was saved for today...

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