E1 Asset Management

Monday, July 31, 2006

Dogs of the Dow

Last week was a monumental one for the Dow Jones Industrial Average. Despite geopolitical risks, Interest rate rumblings and a general breakdown in its sister average, the Transports—the big boys managed to add over 300 points.

Most of the gains came from companies that have been long written off, mainly General Motors, Merck and Pfizer which managed to tack on 11%, 10% and 9% respectively.

While many market watchers continue to ponder the large bag of unknowns, the smart money has found something far more palatable and optimistic—corporate profits. With earnings season in full swing, be prepared for more volatility.



CLICK TO ENLARGE

The bulls wrestle control from the bears to print a nice weekly candle on the Industrials.

Tuesday, July 25, 2006

A Market without Risk?

Markets are a delicate balancing act. Markets are inherently efficient when they are allowed to work. People that participate in the financial markets go by many different handles, among them: investors, traders, brokers, bankers, speculators, specialists, market-makers and so on.

While these people perform many different functions in the market, they all share one thing in common: they take risk in order to drive returns. If there is no risk, it is not a market.

Now imagine you had the opportunity to turn back the clock over the past decade or so, making all the worthwhile bets while avoiding the pitfalls. Hypothetically you decide today, July 25, 2006 you are going to retroactively enact the following positions:

1. Long technology stocks at the bottoms of the Asian, Russian and Y2K crises
2. Short Technology stocks March 2000
3. Long oil November 2001 ~ $17/ barrel
4. Long S&P 500 March 2003 Bear Market Low

The point here is simple, you took all the work (and risk) out of picking the perfect times to buy and sell in order to maximize your return. This is exactly what has been going on in corporate America and is finally coming to light.

Many executives in a broad swath of companies spanning the economy have effectively “backdated” their stock option grants, allowing them to adjust for optimal lows that will allow for maximum return with little risk (if any at all—depending on the date/price/expiration etc of the option grant).

The news of “backdating” rearing its head in the technology sector was not surprising in the least. Technology companies utilize options as a form of currency simply because cash is typically burned at an extremely high rate supporting capital spending and R&D. What is surprising is how this illicit practice has pervaded a broader cross section of public companies.

Options back-dating is pure greed and it needs to be rectified immediately in order to ensure confidence in our financial markets, regulatory bodies and public corporations.

Thursday, July 20, 2006

The Fed Blinks

In his testimony to Congress yesterday, Fed Chair Ben Bernanke tempered his hawkish take on interest rates. Citing a moderating economy, the lag in monetary policy and a desire to focus more intently on inflation data as it comes in; the head of our central bank left the door open for a pause—should conditions warrant.

As a result, the markets soared, with the Dow posting a gain of over 212 points to put it back over 11,000.

Earnings after the bell were strong, notably AAPL and MOT. Intel reported sluggish demand across the board and signaled the price cuts would continue to dampen their top and bottom lines for the foreseeable future.

While the market was clearly overdue for a bounce, a changing monetary landscape could potentially set up a near term rally.



CLICK PICTURE TO ENLARGE

Wednesday, July 12, 2006

Rates on Hold?

There is an adage on Wall Street that suggests that the Fed usually raises rates until something blows up. The recent softness emerging in economic data, as well as some prominent earnings warnings (mainly MMM, a conglomerate that represents a huge cross section of American industry) may once again prove this to be true. Keep in mind, rate adjustments take time to actually filter through the economy, at times delayed up to a year—meaning for all intents and purposes there is a solid chance only 4% or so is being currently reflected.

While some say that the Fed is often short-sighted in its FOMC operations, others tend to believe the Fed effectively “manufactures” business cycles—with a focus on soft landings and broad recoveries. While this may be well off from the Fed’s mission statement, which basically entrusts them with the job of creating and maintaining price stability (i.e. inflation), it doesn’t mean it doesn’t happen. In fact, under Greenspan when the FOMC started releasing minutes it is far more discernable what the group takes note of in making decisions, most of which extend beyond the parameters of their purpose.



CLICK PICTURE TO ENLARGE

Monday, July 10, 2006

A Cry for Attention

The market came under pressure on Friday as North Korea continued to test their missiles, possibly even directing one toward U.S. soil. As a prominent member of the President’s “Axis of evil,” the Kim Jong Il led totalitarian state has been a nagging pain for their neighbors and the west as a whole—but this latest development should certainly lead to some concrete action. Problem is, the UN (and specifically the Security Council) will drag their feet and issue an unenforceable resolution designed to save face.

While Kim Jong Il is a tremendous golfer (he holds the dubious distinction of 18 holes in one in a round), he clearly is not a diplomat. I am quite certain the package of incentives offered to Iran by our European allies and ourselves piqued his interest in garnering further aid from the rest of the world, leaving him to feel left out and sadly ignored. Simply stated, he should not get it. We should not reward bad behavior.

In financial news, Minnesota Mining and Manufacturing Corp., aka 3M issued a warning of mammoth proportions, sending the stock down over $7 on Friday. This was a large part of the 134 point loss suffered by the Dow Jones Industrial average and may lead to further weakness. Stay tuned as earnings season begins with Alcoa today, reporting after the bell.



CLICK PICTURE TO ENLARGE

Monday, July 03, 2006

Embrace the President

Contrary to what the mainstream media and polling data suggests, I firmly believe that the Republican Party will maintain their legislative majority come November. Up until now, congressional GOP members have been running away from the President and his dismal approval ratings, which in my opinion, have nowhere to go but up.

The White House is often both the official and unofficial spokesperson of the party that occupies the executive branch. As recent polls suggest, the GOP is facing a steep challenge in the fall from their democrat counterparts—but the advent of some recent successes in Iraq coupled with success in the President’s domestic agenda should be more than enough to stave off any last minute push.

The recent personnel shakeup at the White House is encouraging and long overdue. The appointments of Josh Bolten, Tony Snow and Hank Paulson should be enough to stave off the push from the left to stymie the White House’s agenda and retake Congress. These are three of the finest, most articulate and capable selections coming from the West Wing in years and should ensure the final two years in office no longer precariously hang in the balance.

The architect of President Clinton’s ascension from Governor to Arkansas to the Presidency, James Carville, made his mark in American political discourse not only guiding “the man from Hope” into the oval office, but with his uncanny ability to frame the debate. His most well known quote, “it’s the economy, stupid,” is sure to outlive him and is used countless times daily among pundits. If Mr. Carville is right (which I think is the case) and if people truly do vote with their pocket books, there should be little concern on the part of Republicans when November rolls around.

In terms of the current administration, the biggest hurdle has not been the message, but rather the messenger. The first Treasury Secretary, Paul O’Neill was a loose cannon and hardly demonstrated the type loyalty one could expect from the Bush White House. His successor, Treasury Secretary John Snow has done a solid job of getting the President’s message across, but is widely viewed as nothing but a salesman for the administration’s policies. This is somewhat of a conundrum, because the job of any cabinet member is to do exactly that. The problem herein lies, that Snow had no input into policy decisions and often sounded like a broken record on issues like our current “strong dollar policy.” Hence, a credibility gap has existed between the Treasury Department, Main Street and Wall Street for quite some time.

The man responsible for putting a face to the President’s policies, Press Secretary Scott McClelland rose through the internal ranks to his current position and is regarded as an extremely loyal advisor. Once again, his credibility was constantly scrutinized in the aftermath of the Plame case and receives little respect from the press corps in general.

President Bush is wise to follow in the footsteps of President Reagan, who essentially dissolved the “troika” of advisors, which closely guarded him during the first term, following the Iran-Contra scandal—in favor of fresh faces, that brought energy back into governing.

Tony Snow and Hank Paulson are the right people to put in front of the gallery. Both have instant credibility with their audiences and have openly criticized the President before assuming their respective posts. Despite having the luxury of facts and figures backing the administration’s economic policies—the public will not be an easy sell. I think the strategy going forward should address the following problems:

First, the mainstream print and television media have not accurately reported upon the strength of our economy, the successes on the ground in Iraq, the War on Terror, or anything positive this administration has accomplished. The economy is usually portrayed with your typical “rich get richer” bend—despite hard economic data to the contrary. The successes on the battlefield have been numerous, yet the failures (Abu Gharib, possibly Haditha, etc.) command a disproportionate amount of press.

Press Secretary Snow needs to start getting in front of the news cycle and begin to define the issues. Much of the reason behind the perceived ineptitude on the part of the executive branch is a direct result of allowing potentially negative press to manifest itself for days or weeks before they are officially addressed. Many of these problems would simply disappear if the White House not only broke the story, but headed off the myriad of accusations by opponents that usually go untested.

To ensure spin control, the President’s team would be wise go on the offensive on occasion. Charges of racism and ineptitude against the President went unchallenged for weeks before there was a response. Whenever Bush’s policies come under fire, he is consistently tried and convicted in the court of public opinion before there is an adequate response from the oval office. Our economy is in tremendous shape, only 5 years removed from the greatest terror attack on U.S. soil and 1 year from the most devastating natural catastrophe in recent times. GDP growth has been robust, expanding consistently since 2002. Inflation is well contained. Unemployment is the lowest it has ever been— 4.6%!

We have wiped out most of Al Qaeda’s known leadership. We have their operations chief in our custody. We put one of the world’s most evil tyrants on trial. We just killed Abu Musab Al-Zarqawi in an air strike. Iraq just finished putting together their Unity Government and for the first time in a long time is truly democratic. Iraqi soldiers and police are now responsible for the majority of raids and are leading the charge against the insurgency. This is a clearly definable metric that demonstrates the tremendous amount of progress made thus far in Iraq. The message needs to get out!

These are the types of newsworthy items that deserve more than an 8am press conference from the Rose Garden. It is imperative that Republicans get their side of the story in front of the public on a regular basis. Their opponent’s claims have gone uncontested for far too long.

There is an attitude that seems to emanate from the West Wing and the Vice President’s office which views what they do as a job and for them, much of this is “business as usual.” There has been a great reluctance for this administration to go by polls, which is commendable in one sense but nonsensical in another. There has to be a happy medium between President Clinton (whose people put a poll in the field about every single decision) and the current, which places no value in public opinion whatsoever. The Presidents new handlers should focus on crafting a message to accompany his policy that enhances the popularity and perception of such matters, all the while maintaining the “business as usual” posture.

Another strategy sure to be enacted will be giving the press corp. greater access to high ranking officials in the administration, outside of formal press events. The shroud of secrecy that many decision makers cloak themselves and their policies with has led to increased scrutiny, even when there is nothing to hide.

The White House needs to give the GOP a reason to embrace them, not run away. Republicans cannot maintain their congressional majority by distancing themselves from the President. This is the best and only chance we have to govern as we see fit.


Christian Post is currently managing director of E1 Asset Management, Inc., a Wall St based agency only stock brokerage firm. He also serves as editor and main writer of E1’s blog. More information and the blog can be found at www.e1am.com. Chris can be contacted at cpost@e1am.com

The opinions expressed in this piece are the writer’s own, and do not reflect the opinions of E1 Asset Management, Inc.