RCM COMMENT: The following story illustrates an exemplary thought process and one we must replicate if we are going to be successful managing money in this environment.
Peter R.: Sometimes it can really be true that for want of a nail a battle can be lost. Take Secretary of the Treasury nominee Timothy Geithner’s tax and nanny troubles. The Senate has now decided to hold off on his confirmation vote until after the inauguration. This may have real consequences. The Treasury Secretary is the chair of the President’s Working Group on Financial Markets and he needs to sign off on their actions. With the position vacant, the Group could be immobilized. The last time this occurred was when Paul O’Neill left the post at the end of 2002 and there was a 34 day lapse until John Snow took the reins as the new Treasury Secretary on February 3, 2003. During this month gold was up over 10%. The rally started the first day that O’Neill was gone and ended 2 days after Snow took office. It will be very interesting to watch how much, if any, effect the vacancy at Treasury has this time around.
RCM COMMENT: Gold jumped $30 at the open today. Coincidence or …?
RCM COMMENT: The credit markets have been leading the equity markets during this entire bear market, so as a leading indicator this story is very concerning. Feel free to ignore the bubble heads on the financial news networks who continue to miss the real story. They point to earnings stories and economic data as the reason for market weakness when in reality the deteriorating credit markets and hedge fund redemptions rule the day as we at RCM have tirelessly explained. The equity markets will head higher long before earning and economic data turn positive. If you feel compelled to debate this with me I must ask you to recall the ridiculous debate last year that filled a lot of useless air time about when the recession started. By the time that economic news was out the equity markets were already deep in a downward spiral.
Distressed asset indices fall sharply
FT reports indices tracking the value of the trillions of dollars of distressed assets that continue to blight bank balance sheets fell sharply this week as a negative spiral of financial distress and subsequent economic pain continued. The declines — which signal further potential writedowns by banks — are fuelling fears that the first quarter of this year could herald further pain for the financial system, even as many banks reveal sharp losses for the fourth quarter of 2008. After several weeks of stabilisation and even some improvement, there have been renewed falls this week in the value of securities linked to subprime mortgages, leveraged loans and commercial mortgages. The Markit ABX index for triple A rated securities backed by subprime loans has dropped 13% in the past week. The Markit CMBX index for triple A rated securities backed by commercial mortgages was also down 14.5% in the past week. The LCDX index, a barometer of leveraged loans, was down 4.6% in the past week, back to levels it traded at about a month ago. Many of the assets tracked by these indices are hard to value, and banks’ exposures are far from clear.
RCM COMMENT: What is the common thread tying these next three stories together? The world is moving toward nationalization. Countries like Cuba, Venezuela, Bolivia and Russia nationalize assets. Do we really want to be counted among this wonderful humanitarian group of countries? Is this the change that was in voters’ minds in November? In order for a true democratic capitalist system to function entities must be allowed to fail. There needs to be a constant death and rebirth process to maintain a healthy system. By nationalizing and supporting the dead wood, the system will be eaten by termites from the inside and we will be left with a hollow shell.
Rescue of banks hints at nationalization – NY Times
NY Times reports last fall, as Federal Reserve and Treasury Department officials rode to the rescue of one financial institution after another, they took great pains to avoid doing anything that smacked of nationalizing banks. They may no longer have that luxury. With two of the nation’s largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are “too big to fail” and yet unable to function as the sinking economy erodes their capital. Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders. And the new ground rules laid down by Mr. Obama’s top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives. “We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”
Russia considers merger of metal giants – WSJ
WSJ reports the Kremlin is considering a plan to merge some of Russia’s largest metals companies into a conglomerate in which the government would take a substantial minority stake, in exchange for writing off some of the crushing debts of the tycoons who control the companies, according to people familiar with the discussions. A combined metals company would have annual revenue of as much as $40 billion, and give Russia a player to rival global giants like BHP Billiton. If approved by the government and the companies, the plan would mark the first indication that the Kremlin is using the bailouts it is offering the heavily indebted oligarchs to retake stakes in their industrial assets. Under terms of the rescue deals, a state-controlled bank lent the tycoons billions of dollars to allow them to pay off foreign loans, but the bank took stakes in their companies as collateral. The metals plan was discussed at a hastily called meeting late Tuesday between President Dmitry Medvedev, other senior officials and metals tycoons including Oleg Deripaska, the largest shareholder in aluminum giant UC Rusal, Vladimir Potanin, a key owner of OAO Norilsk Nickel, and Alisher Usmanov of iron-ore giant OAO Metalloinvest.
Additional detail on yesterday’s headline about the Irish govt to take steps to fully nationalize Anglo Irish Bank
WSJ reports the Irish government, saying a planned recapitalization was now “not appropriate,” will take control of Anglo Irish Bank to secure its continued viability after taking hits from an accounting scandal and the broader financial crisis. In scrapping the recapitalization plans, the govt said that the position of the bank had weakened and unacceptable practices took place caused “serious reputational damage.” As part of Thursday’s moves, recently appointed Chairman Donal O’Connor will remain in his role, but a new board will be appointed. All employees are expected to remain at the company. The Irish government reaffirmed it would maintain the full amount of all deposits and savings for customers of Anglo Irish Bank. “I would again stress that this government decision safeguards the interest of the depositors of Anglo, and the stability of the economy, given the significance of Anglo in this regard, as already recognized by the European commission,” the Irish government said. (Other Irish banks: IRE, AIB)
RCM COMMENT: There are so few bright spots in the equity markets at the moment, but this has to be one of them. This stock will go on our list of ideas to be acquired when the time is right.
MYGN Myriad Genetics profiled in New America section of IBD (70.11 )
IBD reports is the leader in the relatively new field of cancer predisposition testing. It has six tests on the market that tell patients whether their genes make them more likely that they’ll get various types of cancer. The co’s most popular and biggest selling product is its BRACAnalysis, which stands for Be Ready Against Cancer… Myriad’s BRACAnalysis is priced at $3,120 per test, but it is reimbursed 96% of the time with an average out-of-pocket expense averaging only $54, says Piper Jaffray analyst Edward Tenthoff. “Some say diagnostic testing is a discretionary item,” Tenthoff said. “The test has a low out-of-pocket expense, and that’s why we think the economic slowdown will not have as big an impact on Myriad.” One of the biggest challenges facing Myriad, aside from health care costs and the economic crisis, is trying to get the word out about its diagnostic tests to patients and physicians, especially obstetricians, gynecologists and oncologists. Myriad’s BRACAnalysis is used by roughly 10% of OB/GYNs practicing today, which translates into a roughly $30 million to $40 million business, according to Michael Yee, an analyst at RBC Capital Markets. There is a $300-million-plus opportunity if all physicians are reached, he estimates. “Despite having been on the market for 10-plus years, the BRAC is still in the early innings,” Yee said. “There is still plenty of room to grow.”
