The obvious risk is that 2008 earnings disappoint and that profits actually could fall from 2007 levels if the economy sinks into recession. Collective earnings per share for the 500 companies in the S&P were $88 in 2006 and for last year were expected to hit around $93 before banks and securities firms began taking huge mortgage and credit-related charges in the fourth quarter. The final 2007 number could be in the range of $87. Even if S&P earnings for 2008 fall to $85, from the current projection of $100, the index is trading for a moderate P/E of 15."
A bullish Levkovich carries a 1675 target for the S&P 500 for year-end 2008, which would mean a 27% gain from Friday's closing level. If the upside for the S&P 500 is 25%-plus and the downside is 10%, the stock market's risk/reward looks pretty favorable.
Among the few prescient Street seers is veteran Byron Wien, the chief investment strategist at Pequot Capital. At the start of 2008, Wien predicted that the S&P 500 would drop 10% this year, that earnings would decline and that the country's first recession since 2001 would prompt the Fed to cut short-term rates to below 3%.
"We're beginning to see some bottoming signs," he said Friday. "We've switched from complacency to concern but not to capitulation yet."
Likewise, MBIA's triple-A rating seems to have passed muster with both Fitch and S&P even after the latter ran a new stress-test on its 2006-vintage subprime exposure using the 19% cumulative default rate. MBIA said it's now working closely with Moody's to resolve the agency's concerns. Moody's worries seem to arise more from the uncertainty that exists in the housing market than MBIA's capital levels, according to one third party. Without Ambac competing for new business, MBIA and the other bond-insurer survivors should be able to grow faster and strike more attractive insurance deals.
Barron's confirmed that Warburg Pincus remains committed to the deal despite the fact that when it closes, it will have lost all but about $130 million of its $500 million investment based on the current stock price.
The Bottom Line:
MBIA's shares were savaged anew last week, and now its stock looks cheap. It trades for about 8, well below a conservative liquidation value above $30 a share.
A Warburg official says it expects to lower its cost basis by participating in the rights offering and taking into the account the value of long-term stock warrants it will be awarded. The firm, he noted, helped recapitalize troubled Mellon Bank in the early 1990s, which produced similar strains prior to a huge return. "We'd love to buy the whole company if we could because of its humongous book of business and profitability even given the less-than-satisfactory business they wrote of late," he said.
Before Warburg cut its deal with MBIA it brought in outside consultants to stress-test the company's portfolio, subjecting it to Armageddon-like housing and other economic assumptions. It found that annual loss expenses -- actual checks written -- came to no more than about $250 million a year under the harshest of conditions."
With 2008's poor start, things are looking even worse. As of Jan. 11, the S&P index's annual average total return is a paltry 1% since 1999. Years later, equities have not yet recovered from the bear market of 2001-2002, in which stocks were halved."