THE BARRONS
Lots of great stuff in Barron's and I will start with various comments in the cover story by Andrew Barry :
"The good news is that barring a deep recession or financial catastrophe, stocks could be approaching a huge buying opportunity. With the Standard & Poor's 500 index down 9.8% this year, to 1325, the index now trades for little more than 13 times projected 2008 operating earnings. That's one of the lowest price/earnings ratios in the past decade. At the market low in 2002, the S&P traded at 15 times forward earnings.
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."
"The S&P 500 now is down 15% from its October high. The average peak-to-trough move in recession-related slides since 1950 has been 25.6%, according to Citigroup strategist Tobias Levkovich. This suggests a further potential drop of about 10%, but that assumes a recession, which is still widely considered to be no more than a 50% probability."
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."
One of the issues hanging over the markets - the bond insurers such as MBI ABK PMI and MTG. Cramer seems to think any of them can file Chapter 11 immediately if not sooner and if one does file, the DJIA would immediately tank 2,000 points. Barron's, however, with a positive article on MBI:
"Still, we find the current price levels of its debt, credit-default swaps and, yes, even its stock to be absurdly low. For one thing, MBIA isn't nearly as troubled as Ambac because it has far less exposure to the really-troubled subprime paper. Also MBIA has already completed raising, or locked in commitments for the additional capital demanded last month by Fitch and the other rating agencies. Ambac wasn't so lucky.
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.
Another favorable sign is that a number of smart value investors have piled into the stock in recent months, albeit at prices three to four times as high as the current trading level. They include Marty Whitman's Third Avenue Fund, Davis Selected Advisers and, most important, private-equity firm Warburg Pincus. The last signed a deal in December under which it will inject $500 million into MBIA later this month by buying 16.1 million shares of its stock at the now blitzed price of 31. Warburg will also backstop a $500 million rights offering that's part of MBIA's $2 billion capital-augmentation program.
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."
Finally, Vito Racanelli looking back at the 00's as a lousy decade for stocks. Just as I mentioned the other day in my Hail to the Chief blurb, Vito notes that so far the decade has not been kind to U.S. equities (note the SPX started on 1/1/2000 near the 1,470 level):
"And bonds and cash are not the only assets that have beaten U.S. shares. Foreign stock markets from the Ukraine to China have topped those "puny" U.S. returns, notes Joe Quinlan, chief market strategist for Bank of America. The S&P 500 index is 57th out of 60 global markets this decade, he notes. Even Oman Muscat stocks outdid the U.S.'
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."
posted by DAVID at
2:53 PM
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