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Franck Prissert's  Instablog

Thirty years of experience as an institutional investment advisor, both on the Buy and Sell side. A graduate from Columbia Business School (MBA) and Chimie Paris Tech (MSChe), I started my Wall Street career with Brown Brothers Harriman & co, went on to work with Montgomery Securities and... More
My business:
Capital Max, Inc.
My book:
Anatomy of the Meltdown - 1998-2008. The Worst Decade in Stock Investing, or Was It?
  • Jon Corzine - The Fox in the Hen House?
    I am flabbergasted. Here is an excerpt of my book, page 43, “Anatomy of the Meltdown – 1998-2008. The Worst Decade in Stock Investing, or Was It?”.
     
    “As a result, among others, Jon Corzine, Senior Partner of Goldman Sachs and closely involved with LTCM, was sacked by no other than Henri Paulson, then President of the firm. Corzine, a Chicagoan by education and professional training, went on to become Senator of New Jersey in 2001 and Governor in 2006. Having spent a cumulative $100Mn of his own money on these two races, after having been at the helm of Goldman while it was fueling the Bubble, Corzine is one of my favorite characters of these times – as in culprit.”

    Who is watching the Hen House?
     
    Disclosure: I own no position in either BAC or GS.
    Tags: BAC, GS, Banking, Politics, Investing Ideas
    Nov 12 01:59 pm | Link | Comment!
  • Cold Front - S&P 1081 - Redux at 1064
    I thought I would quickly update my blog of last week, which fits with the one I posted two weeks ago. Rule # 1: when stocks gap up on crappy earnings, the market is more liquid than you think. Rule # 2: when they don't follow through and reverse within a couple of days, the market is not as liquid as Rule # 1 suggests.

    This is exactly the mode we are in. Even the big Microsoft lift, or the IBM buyback are not helping - we are left with reversals. The first support was 1082, the second one was 1071, and we are now flirting with 1063 - the next one is 1053. In Europe, ING was halted due to a sell order imbalance. I am in Dick Bove's camp, the next wave of banking write-downs are at hand. I am still market neutral, tilting toward net short. In the meantime, event driven is still tempting - my winners this week were Radio Shack - which I sold on the news - and Ion Geophysical - which I also sold and replaced with January $5 calls. Barring some more bad news on 11/4, they solved their main balance sheet problem.

    Below is my last blog at 1081:


    This has been an interesting week. One of my favorite rules has always been, regardless of the news, see how stocks react. I think Jesse Livermore said that too. Well, on the positive side, we have seen some stocks go up 10% on crappy earnings. Of course, there were those would go up on good earnings too, but I am more interested in the former. When stocks gap up on bad news, it means the market is more liquid than generally thought. So the moves were encouraging but strangely enough, not forceful enough to break through the psychological level of 1100, let alone the well know resistances of 1120-1150 which retrace 50% of the Great Leveler. Strangely enough v2, with the S&P weighing in Tech (18.5%), Industrials (10%) and Energy (11.4%), and with oil breaking $80/bbl, it could have happened – it did not.
     
    The culprit – Financials. Wells Fargo has been my bell weather, and it took at hit today. Dick Bove or not, the fact still is – why do the banking system hoard excess reserves, $800Bn or so? My answer, all along, is that Banks are going to need those excess reserves to write down the next wave of consumer led provisions. Wells is interesting to watch today as Chris Mutascio of Stifel, in a pretty good piece, defends his buy rating. PNC's earnings reaction will also be a data point.
     
    Here is my scenario. Now that Q3 earnings are in the bag, the next thing is some more bad loan headline news. With it comes the sense of lack of financing, i.e. the Money Multiplier, i.e. consumer and small business spending. Q4 is upon us, and I don’t see it beating the past three quarters surprises.
     
    That being said, inferring a correction, Washington is still at work. My working assumption is that the Administration and Congress will do what it takes to maintain a majority in November 2010. The only way they can do this is by creating jobs, and the only way they can do this is by spending money on infrastructure. Because of the lag effect, this spending needs to take place in Q4/2009 or Q1/2010.
     
    When I mix it all up – liquidity, banking, politics – I am confused and market neutral, on and off. This mainly applies to the group I call the 10 Percenters – they can go either way, and Industrials have been the winners thus far. The good news is I still have candidates for doubles – a small list, but a list which does not seem to carry undue risk -, and a much longer list for 50 Percenters. These are stocks which need patience, despite their volatility – I sold Sallie Mae and Maxwell on a spike last week, I have not been able to get back in.
     
    So the good news is that there are some stocks out there with – I hate to say – outstanding potential. The bad news is that the Banking system is weighing down the economy. My answer: market neutral, event driven.

    Disclosure: I am long IO and SDS.
    Oct 22 09:22 am | Link | Comment!
  • S&P 1030. Now what - 980, 880 or 1060?
     
     
    Ok, what do all these numbers mean? When the market ignores fundamentals – pointing to an improvement in the economy – look to technicals for a clue of the drop. Today’s decline of 2.6% was a big drop, so I did a simple trend line analysis. A couple of support levels were broken and one held. The question is, what’s next?
     The March low was around 680 (666 on 3/6/9 at 3:30 to be precise). The July low was at 880, the August low at 980, and the September high at 1080. This makes it easy to compute the 50% retracement levels. From the March low to the September high, 50% = 880. Strange, we hit this support in July. From the July low to the September high, 50% = 980. Hum, strange, we hit this support in August. And now, from the August low to the September high, 50% = 1030. We hit it today, closing at 1029.85. Will this be the new support?
     If it is, it’s pretty weak. Today’s move broke two more important levels: the trend line from the July to the August low, at 1050, and the line which is one standard deviation from the regression line from the July low, at 1036. This is taking place while complacency has been on the rise, and while Industrials are leading the down move. In addition, while Financials were hanging there, I did not like the September double top in Wells Fargo – which finally broke today, down a big 5.6%. I single this one out because it is kind of a leader, the other big ones being more “story” stocks – BAC, C, and even JPM.
     Why does the weakness in Industrials bother me? One, they all have forex exposure – the weakness in the dollar should help, not hinder. Two, they are the ones with the earnings leverage – indeed, this is where I made most of my Q2 performance. Three, while the jury is now out on all Q3 earnings, I do not see many other sectors with potential good surprises – it’s not going to be Housing, Consumer Discretionary or non, Autos (adjusted for the one time cash-for-clunckers). It could be Financials, who keep gouging whomever with huge interest spreads – but then, why the double top in WFC?
     Now, Technicals are one thing, but Fundamentals ultimately prevail. Here is what I think may be happening. As I said in my note of 9/23:
     “The crux of the debate is are we in a rally in a bear market, or are we in the early stage of a bull market? Quite frankly, I do not know. So much damage has been done to Household Net Worth that I can’t help but think we still are in a Bear Market – with the Credit Card Debt issue being the straw that breaks the camel’s back. At this point, I would not touch any bank or alike. I still like Industrials, but they too spiked. I loved September, and I am now watching.”
     The key words are “Credit Card Debt issue”. I don’t want to extrapolate the tea leaves, but this may have something to do with WFC Chairman Dick Kovacevich’s decision to retire, confirmed on 9/22, and BAC CEO Ken Lewis’ same, announced today. What I know is that there must be a reason why banks are holding so much excess reserves - $760Bn, roughly the same as the increase in the Monetary Base since September 2008 (which was a doubling). Check the series EXCRESNS on the site of the St.Louis Fed. So much for “we are lending”.
     To put things in prospective, Consumer Credit is $2.6 trillion and Mortgage Debt $10.4 trillion. We know about the later. Re the former, in August, the major banks said their default rate ranged from 8.5% (AXP, JPM) to more than 12% (C, BAC). That was then. Assume we get to 15% on average – this equates to $390Bn. Here we go – this will mop up half of the banking system excess reserves. Add to this a bit more mortgage write-offs, we’re done. The banking system may still be in an excess reserve position, but by a Weight Watcher’s Dream margin.
     What does this do to the economy? It’s stuck, unless the Fed embarks on another wave of Money Creation. This, by the way, may explain the reappointment of Chairman Bernanke. Who else is going to take the heat for increasing the Fed’s balance sheet any further? The same guy who in November 2002 said “Deflation stops here”. To quote his speech, as I did on page 113 of my book:
     “Indeed, under a fiat (that is, paper) money system, a government […] should always be able to generate nominal spending and inflation, even when the short-term nominal rate is at zero. […] The US government has a technology, called a printing press […] that allows it to produce as many US dollars as it wishes at essentially no cost”. So there.
    However, we must go from point A to point B. To come back to the Market, it seems to me we are at point A – look out for these write-downs. They may happen in Q3, or maybe in Q4. I do not know, and the Invisible Hand will guide us once more. If the Market fails to hold the 1030 support, it may happen sooner rather than later. If the Market bounces from here, I do not think the upside is worth taking the risk.
    On the other hand – we always seem to have more hands than the normal human body - as usual the question is liquidity. Plenty of excess reserves out there, and plenty of cash on the sidelines. We could have a repeat of Q2, when earnings were saluted by the ensuing Q3 rally. This would be for traders only, as the big difference is the now prevailing complacency. The net of it, I am anywhere from 30% cash to Market Neutral. Barring an immediate bounce above 1060, led by Industrials, the next support levels on the S&P are 1020, 1000, 980 and 880. Some stocks to watch: WCC, EME, PH, JCI, ARG, HON, WFC.

    For disclosure purposes, I am long WCC, EME and JCI, and short WFC.
     
    Tags: WCC, EME, PH, JCI, ARG, HON, WFC, Macro, Sectors
    Oct 02 03:43 am | Link | Comment!
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