bizzXceleration: Performance, Value and Profit

Reality Checks ? 

When will the market face reality? Oil prices are soaring, inflation is raging, a recession is taking
hold, and Wall Street continues to pretend the worst is over. But these problems won't just disappear. Recently, I remarked that the stock market action has been echoing a familiar theme, whereby nothing seems to matter except the action itself. Some days, near euphoria on the part of bulls has trumped negative macro/corporate news and, more importantly, an economy that struggles as a result of the burst credit/housing bubble. For a sense of that fantastical thinking, look no further than the recent spirited action in tech stocks. Their upside performance, as I have noted often, suggests a resurgence of the all-will-be-well mind-set. Or, consider how all dips in oil inspire spikes in equities generically. Last Tuesday, as oil dropped a dollar to $134 a barrel, one would have thought -- judging by folks' giddiness for buying stocks -- that oil was closer to a six-month low than to an all-time high. Eventually, though, reality will hit the stock market hard, just as it has hit the real- estate market, after much denial. When that happens, the market will head lower -- just how much lower is impossible to predict but certainly below the lows for the current cycle set in March.

• Goldman Cuts Financials, Admits Upgrade a Goof Goldman Sachs & Co strategists urged U.S. stock investors to "underweight" the nation's financial and consumer discretionary sectors, admitting that it was mistaken when it upgraded both sectors just seven weeks earlier. The downgrades sparked selling in stocks in both sectors, as investors feared that weakening consumer demand and deterioration in the credit markets would weigh on profitability. "We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalizations and fiscal stimulus," Goldman strategists led by David Kostin wrote. "Our thesis was clearly wrong in hindsight." Goldman had previously urged investors to overweight consumer discretionary stocks, and maintain a neutral weight in financials. Analysts Backtrack on Banking Stocks Two Weeks After Saying Worst Is Over
• Credit Markets: "It's never been this bad."

No Fear One might think that the chart above would give the usual cheerleaders some pause. One would be wrong. WSJ: "The good news is stocks typically snap back from a bear market in relatively short order." Apparently, good news is good, bad news is good -- its all good! That seems to be the philosophical approach some people are taking to the market's turmoil. When things are going swimmingly, you should be a buyer because (of course) markets tend to go up over time. When things are ugly, well that apparently is also a buy signal.  A brief look at the papers this morning has the usual suspects talking up what a buying opportunity this market is. To those of use who have spent decades studying contrary indicators, this stuff is laughable -- and quite dangerous. At least Barron's has an interview with Peter Schiff -- as penance for their disastrous June 2nd 2008 "Buy GM" cover story a month ago. S&P500 investors are on the verge of experiencing something not seen for a very long time -- a losing decade. If markets continue their losing streak for a few more months, that is a realistic possibility. The S&P500 is now down 4.8% since June of 1999. To hit the decade mark, the SPX would need to be below the 1998 close of 1,229 -- less than 50 points below Friday's close of 1278.38 come December 31st. This has not occurred since the 1930s. As we noted twice this week, the VIX is not showing the sorts of fear typically associated with either tradable lows or lasting reversals. Most people assume that 1929 was when all the damage was done; it wasn't -- the rally and subsequent collapse was the most dangerous period. Trying to buy cheaply all-the-way-down is where nearly all the pain came from...

Investors take risks, then blame Wall Street The credit crisis has hit everyone hard. It's crippled the economy. It's put people out of work. It's blighted neighborhoods. It's erased years of profits at big banks, wreaking havoc on shareholders and our 401(k)s. We're all victims. And what do most victims like to do? Get better. If they can't get better, then they do the next best thing: blame someone else for causing their pain and grief. Someone, after all, had to be making money from all of these overrated, never-should-have-been-built collateralized debt obligations. More than $382 billion stemming from these toxic securities and bad loans have been written down by the world's banks. But rather than go after some of the small fish and their supervisors who knowingly built these fraudulent securities, federal prosecutors… have charged some higher-profile people, Wall Street hedge-fund managers already linked to a symbol of excess: Bear Stearns Cos. Ralph Cioffi and Matthew Tannin are two guys who had been making money for themselves and for their investors with these funds for years. The bankers I've talked with don't really think of this case as an indictment of the whole system. After all, Wall Street is an easy target when fortunes are lost. Backlash comes with the territory. But maybe the industry should be upset. Two lives, careers and reputations have been ruined for what could very well be turn out to be reasonable, if flawed, conduct. Had these markets turned the corner, even just briefly, we would have never heard of these guys. Now, it seems as if anyone who's ever expressed doubt about the work they do or discussed mistakes with colleagues is in danger should the bottom fall out.  It's as if we all could be witches someday.

Key  Markets/Instruments

Junk Investors, Look Out if Defaults Rise (WSJ) Investors in loans made to junk-rated U.S. companies could be surprised by how little they get back if borrowers start defaulting. A report to be published Tuesday by Moody's Investors Service argues that the explosion of loans issued by junk-rated companies in the past few years means that if they default, the recoveries on these loans might be less than in the past.The highest-priority loans, called first-lien senior secured bank loans, will likely recover on average 68 cents on the dollar upon default in this downturn, compared with a historical average of 87 cents, Moody's said.Typically, loan holders are considered the senior creditors when a company defaults, so they are the first lenders in line for a company's assets. But because companies issued so much of this debt, the loan holders will likely get back less than they have in the past, according to the report. Companies issued so much of this debt because it was popular with investors after the tech bubble burst, and the loans held up well during the previous downturn.

GMAC's $60 Billion Debt Deal Losing Confidence as Bad Mortgages Burn Cash The 300 bankers gathered at New York's Waldorf-Astoria Hotel last month faced a stark choice: Accept Sam Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk pushing the lending arm of General Motors Corp., the largest U.S. automaker, to the brink of insolvency. ``There was not room for slippage,'' said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago. Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters. ``ResCap presents a very significant risk,'' said Mark Wasden, the lead GMAC analyst at Moody's. ``There is no easy exit from their difficulties right now. We think the company will yet again find itself in need of additional cash.'' Credit-default swap prices give ResCap a 100 percent chance of default within the next five years, based on a JPMorgan model. It was 98 percent before the debt agreement was announced.

Corporate Profits Seen Off More Than 10 Percent The U.S. corporate profit outlook is deteriorating rapidly, with S&P 500 earnings for the second quarter now seen falling at a double-digit pace from a year earlier, according to Thomson Reuters Proprietary Research released on Tuesday. Second quarter profits are expected to fall at a rate of 10.2 percent, compared with the Monday estimate for a drop of 9.6 percent. At the end of May, analysts expected a 7.3 percent drop. A worsening outlook for consumer discretionary and financials was behind the bleaker earnings view. Soaring gasoline prices and a limping economy have hampered the outlook for consumer discretionary companies such as General Motors (NYSE:GM - News) and electronics retailer Circuit City an Stores (NYSE:CC - News). Among the most recent of major victims reporting impact from soaring crude oil, United Parcel Service Inc(NYSE:UPS - News), the world's largest package-delivery company cut its second-quarter profit outlook citing high fuel costs and a slack U.S. economy. At the same time, the credit crisis brought on by subprime mortgage failures has left the banking sector searching for new ways to create revenues now that several of their most profitable businesses have been all but shutdown

Lehman, Bank of America, Barclays Say Sell Corporate Debt as Economy Slows Lehman Brothers Holdings Inc., Bank of America Corp. and Barclays Capital are telling investors to sell some of their holdings of investment-grade corporate bonds in anticipation the debt will slump for a second straight year as the economy slows. Lehman, whose fixed-income research group ranked first for eight straight years by Institutional Investor magazine, advised clients to cut holdings on concern companies will report ``softer'' earnings. Bank of America says yields may rise as financial institutions flood the market with debt. Barclays analysts said they ``remain cautious'' because consumer spending is likely to slow. Company bonds lost 0.7 percent this year and are underperforming Treasuries for the second straight year, the longest losing streak since 1998, according to Merrill Lynch & Co. index data. While corporate bonds rose in April after the Federal Reserve brokered the bailout of Bear Stearns Cos., investors are focusing on slowing economic growth and rising defaults. ``The U.S. economy is in the midst of a significant credit recession,'' said Jack Malvey, Lehman's chief global fixed- income strategist. ``We're not done readjusting the price of credit risk.'' Defaults rose to the highest in 31 months last quarter, Standard & Poor's said. The number of U.S. companies facing credit-rating downgrades is rising at a faster pace than before the recession in 2001, according to S&P. The tally rose 24 percent since last June, compared with a 10 percent increase between June 2000 and June 2001.

Commodities Indicating Bubble Bursting Following Best First Half Since '73 Commodities are heading for their best first half in 35 years. The next six months may not be as rewarding because record prices for oil, copper and a dozen other raw materials may crimp consumption and encourage growth in supply. The 19 commodities in the Reuters/Jefferies CRB Index jumped 29 percent this year, the most since 1973 and more than any second-half gain in at least five decades, data compiled by Bloomberg show. High costs are slowing the pace of demand for gasoline in the U.S., and gold purchases in India, the biggest buyer, plunged 50 percent from a year earlier. Producers are expanding supplies of wheat in the U.S. and steel in China. Demand is slowing for copper after the metal jumped 28 percent this year and reached $4.2605 a pound May 5, the highest ever, partly because of temporary supply disruptions in Chile, Peru and Mexico. China said June 10 its copper imports fell 19 percent last month to the lowest since August. Commodities' Bubble May Burst in 2nd Half

Other

SEC Chief Under Fire (WSJ) SEC Chief Christopher Cox is facing criticism for not taking a higher-profile role during the Bear Stearns crisis and aftermath, just as Congress prepares to conduct hearings on how to oversee financial markets. A Brave New World for Financial Regulation