Davis's Thursday Outlook

I thought we’d get a stronger open on pre-Ben exuberance but (MER) came out with earnings at 7 that didn’t win any fans and the markets are still trying to figure out what will happen if ABK goes under. Way back on Dec 19th I said in member comments: "(ABK) and (MBI) downgraded to junk! I can’t even begin to outline the repercussions of that move… Rolling (AIG) callers to Jan now - all financials must be covered. Cash is very important here as I’m not quite sure the financial markets can even function if these kind of thing spreads and it sure isn’t worth risking." Since that day, this is the chart of the XLF.

See, investing isn’t that hard, it’s just a matter of paying attention to some news and thinking about how it might affect the markets… The affects of Ambac, now $12.97 stock projecting net losses of $32.83 a share this quarter are far too devastating to be contained by this company, which makes it’s living backing structured financial products for other financial companies as well as bonds. More shocking than the loss is the fact that a Thompson Financial poll of the 18 analysts, who are paid to follow this company, showed they were expecting the company to earn $1.68 a share. Even after over 6 months of studying the sub-prime crisis, THESE PEOPLE ARE STILL CLUELESS!

As of Wednesday, Yahoo finance still listed the mean price target for ABK at $44.56 or 44 BAZILLION times earnings - keep that in mind next time you see a stock move on an up or downgrade…

To the extent that we survive this mess, we can expect a lot of consolidation in the financial industry as there are clearly winners (GS), (JPM), (LEH) and losers (C), (MER), (BSC). We can also expect a tech rally to be kicked off by deals, like yesterday’s acquisition of (BEAS) by (ORCL) fueled by a combination of great tech value, cheap money and investment banks who are going to be very hungry to get some deals going. There is a real fire sale going on at the Nasdaq and it’s going to end very soon - we’re even getting a little impatient and bottom fishing already.

Asia picked up some bottom (hopefully) fishing this morning with the Hang Seng and the Nikkei each gaining over 2% but China kept the mainland markets down by enacting "temporary measures" to cap prices on food and to tighten monetary policy in general in order to combat 6.9% inflation (an 11-year high). "The temporary price intervention does not change companies’ autonomy in setting prices, is not a price freeze, and will not affect normal business operations," the National Development and Reform Commission said in a statement. "The target of government intervention is inappropriate price adjustments by companies."

Europe had a great open but flew down from there on news of ABK and MER but (9 am) the US markets seem to have decided to ignore them for the moment and retest yesterday’s highs in pre-market. The ECB has been ratcheting down growth expectations in the Euro Zone as UBS adds $10Bn in write-downs to the $19Bn already reported by BCS and RBS.

A very interesting statistic to dwell on is that, according to the ITraxx index, which tracks the cost of such insurance, the cost to insure against $20 million of financial-firm debt for five years has risen to $115,000 annually. That compares with about $16,000 a year ago! We’ll save this for a weekend discussion but think of all the things that’s going to affect (and it won’t be my precious Nas stocks, who generally have cash on the books).

Back home, we got the expected $11.5Bn write-down from MER (yawn!) and housing starts hit a 16-year low, which is a good thing as we have a lot of extra homes already and certainly don’t need any new ones. None of this matters as we all wait for Uncle Ben to say the magic word today but I’ll be covering into the weekend if we don’t get something solid in today’s testimony. Tomorrow is option expiration day so it’s all up for grabs and we’ll be turning out (DIA) Feb $127 calls into a Dow strangle if we get a good run, hopefully getting a good price ($3) on the Feb $126 puts.