Wednesday, April 1, 2009
(Cont'd from above)...

Jim (cont'd):   

See the market is a real smarty… they know that you have to start somewhere… and that somewhere… that somewhere is not equities… if this recession started in 2007 because of housing… and then escalated into a Garden Variety Depression after the Lehman collapse froze all of the capital markets… then it will first have to get out of the depression… paddles clear… thru a combination of improving credit markets, that is bonds… and then a return to house price stabilization… the underlying cause of the bad assets that plague the system… I think a recovery will start in the credit markets and in housing… they are what control the stock market right now… not what you read in the paper, which is incredibly negative… and will want you to hang yourself if you bother to read it.

See, it is not what most people watch, the stuff that I am talking about tonight… I think that is why some home gamers, most home gamers, continue to misinterpret the signals that this market continues to send today… I mean, won’t we supposed to be down big… I got up at 4:30 to watch Obama to talk to Gordon Brown, futures were down full percent… I mean, um, I don’t want you to be confused… I want you to know exactly what the real signals are to watch… what they really mean… the most important stories that I read in the last 24 hours aren’t the bad housing sales in Phoenix, or the crummy auto numbers, or the lack of new IPO’s… not all that relative.

What is really meaningful… how about new issuance in the convertible bond market… how about some big hedge funds gearing up to buy some toxic assets… how about huge buyers of auto loan backed bonds from the Fed that are jump starting future auto sales… this behind the scenes bond world is where the important action is… and there the action is quite good… when I went to work for Goldman Sachs 25 years ago, I was shocked, shocked, shocked to learn that the stock market was just a minor league team vs. the majors… that I was following the Toledo Mud Hens, the proud Triple A farm team for the Detroit Tigers… or the Redding Phillies, the Double A version of the Philadelphia Phillies… or heaven forbid the Lodie Dodgers, Single A stepchild of the real deal… by the way, I won a drawing to throw out the first ball and couldn’t reach home plate because they said that I threw like a girl… although these days that means that I throw like Jimmie Finch, and I am always happy to be on the receiving end of that pitchers arm.

Now, I learned quickly from John Corzine, the New Jersey governor no less, and at that time the king of bonds… which is like the king of beer, at Goldman Sachs… the action was in what he called fixed income… it is what we all call it but I didn’t know… and that you monitor the health of the economy not just thru the stock market but also looking at the availability of credit… of things like Ford Motor commercial paper that I was selling, or things like Streuss bonds for different cities… consider the bond market one gigantic credit card or mortgage… just like how most people can’t buy things at the mall without a credit card… and can’t buy a house without a mortgage, who has all that cash… most companies can’t buy what they need without functioning credit markets to borrow from… that is why fixed income is like the score card for the Boston Red Sox… and stocks are more like the Potohawk version.

Now, one thing that most common stock players don’t recognize about fixed income securities is that they are almost never bought for cash by any large fund… particularly the hedge fund… instead the hedge funds buy them with borrowed money, that is called leverage… so that the returns will be magnified… and the funds can make a lot of money within the time frame… where their performance matters, which is usually 3 to 6 months when they report to their investors… because they have clients breathing down their necks demanding short term performance… if you see a toxic bond selling for .40 cents on the dollar, a lot of them are, and you manage $500m like I used to… you might very well want to magnify your returns by taking $100m of that $500m and then going and borrowing $600m to buy the asset… well, if it goes up 10 points then you would make a lot more money than if you just got $100m outright right… well, that is without leverage, $600m with leverage.

The problem since the collapse of Lehman is that there has not been anyone willing to loan you that money… no bank, no broker, to do the trade… consequently all the kinds of securities that are for sell are of no real interest to funds… because they can’t borrow… and the brokers don’t want to lend… because every time anyone who has brought this stuff anytime since the depression started… the buyer has lost money and the broker has lost money lending… that is the problem that we need to solve first… the one that was created by the collapse of Lehman… and if we fix it, which Ben Bernanke’s Fed is doing right now by lending that money in absence of the brokers lending… then we are on the road to a real stock market recovery… which is what I am seeing… once you see that lending happening… and it is happening already in the last 4 weeks… and you see the kind of… isn’t it funny isn’t that where the market bottomed… the stock market… and you can see the kind of asset backed bonds being bought… bonds backed by car loans this week, for example… that is the thawing, that is another word that sounds hard to believe, but it means that there is more money coming… that is what I call better than expected in the fixed income markets… just like the better than expected earnings in the stock market… if you see convertible bond issuance, that is better than expected for the convertible bond market… just like seeing a company beating the estimates in the stocks.

You have to think of it that way because that frees up lending… more loans, including mortgage loans, will equal house price stabilization… what we are looking for by June 30th… that will ultimately create better than expected stock earnings 3 to 6 months from now… hence, the rally now that anticipates the better than expected earnings… not next month… all we heard about today is how the first quarter is going to be bad… well, so what… we look 6 months from now… that is the time that the stocks usually forecast turnarounds… why tell you this… because I don’t want you to succumb to the people that are looking in the wrong places… the ones who are focused on the worst than expected near term returns of real companies… rather than the better than expected fixed income markets… even though fixed income is more important.

I find it very unlikely that you can get better than expected credit markets now… and still wind up with worse than expected reports from stocks going forward… because the credit markets are the real cause… the instigation of so much that is wrong with equities… but the newspapers don’t understand it, many of the reporters don’t understand it… all you hear about, I mean the paper today, I really did just want to hang myself after I read it… this is just one page after another of bad… but it was all backward looking, it was all rearview mirror… the fixed income market is the windshield… in other words, this is not a chicken and egg problem… we know what comes first in this business… it is a cart before the horse problem… and the horse’s improvement in all sorts of bonds, from auto loan backed bonds to convertible bonds… while the cart is just the stock market.

Now, there was some genuine bad news in the Vegas papers… the one real story that I am trying to get my arms around… we just learned Hooters is skipping an interest payment… but you shouldn’t put the hooters before the horse either… and what happens in Hooters in Vegas… I hope that it stays in Vegas.

The bottom line…

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The Bottom Line!:     This is why it is time to climb on the stock cart and not get off of it before it crashes… hey bears guess what… it already has pretty much crashed… as witnessed by the 54% decline from peak to trough we saw in the lows in March… and by the way, the worst since the Great Depression of ‘29 in its aftermath… watch the credit markets, watch the bonds, watch housing… they are the key to everything… and they say things are getting better… that is why we rallied today… not because first quarter earnings will be anything to write home about... Keep an eye on housing & the credit markets, they are the real keys to a lasting rally...    Anyway, it is personal and I agree with that guy so I said it alright… the Dow is up 153 points… I want you to keep your eyes on, no matter how boring it is…. and man is it boring… and I am doing my best to try to make it interesting… you have to keep your eye on the credit markets, on mortgage bonds, on auto bonds… those are driving the market… not the worst than expected near term earnings.

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:    I have a question about General Motors stock. You know the company is in some trouble. And you had recommended lots of weeks ago about buying General Motors preferred stock, and I bought a bunch of it. And it paid its dividend today. I was wondering if we should hold onto that preferred stock? Or take the dividend and run?

Jim:    Take the dividend and run… you know we have got a new regime in there, I recommended that during the old regime… the new regime is going to cram down that preferred so you will not have anything to look at… and I really believe that that GM trade is over… I think that the GM securities will largely be wiped out, and that is why I have been saying over and over again that they are speculative… so I am going to sell, sell, sell… with anything that has GM starting it.

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Q:    I was horrified to see some analysts at Deutsche Bank downgrade Freeport McMoran yesterday to sell. I don’t think he knows what he is talking about. You know, it took a little bit of a hit yesterday afternoon, but it came up real nice today. My question is about this partnership that they are in with London and a state owned miner from the Congo, they are apparently responsible for financing their share costs overruns at this Tangi project. Is this a good arrangement for them? Or did they get the short end of the stick?

Jim:    Here is the deal.. that guy downgrades Freeport because it literally has more than doubled… I think that the downgrade is wrong, because I am looking at copper $1.85 going higher… but it is not the partnership… what people are focused on is China… we have got some of the Shanghai indicies up 30% and 40%… we have to believe that China is going to start importing… we say we have to because the Baltic Freight Index which I follow because I am really a boring guy… is going down… so there is a little dichotomy between the short term and the long term… but I think that FCX is fine… I sold some in the $30’s for AAPMCT… I am anxious to replace it in the $20’s… I hope that the Deutsche Bank guy is right just so I can buy it cheaper… but I don’t think he will be.

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Q:    I know your feelings on gold, but what about for the smaller investor like myself. But what are your feelings on silver bouillon, especially like sliver bouillon coins and that type of thing?

Jim:    I have no problem with silver bouillon, I think that it is fine… I reiterate that I like gold… my friend Bert Dohleman has a terrific piece in RealMoney.com where I am chairman, saying that gold is right… I do prefer gold to silver because gold has kept its wealth better than silver… silver has a lot of industrial applications that I think could be slowing down… but I am never going to get in the way of someone owning a precious metal in their portfolio… because I think that everybody should.

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Q:    With all the recent discussion regarding CEO compensation being out of control, my proxy statements also suggest that members of the Board of Directors are also being overcompensated. Help me understand, why are the Board of Directors so benevolent with salary, bonus, stock awards, etc. when less than a 100% of the senior management personal and corporate strategic goals are not achieved. Shouldn’t pay for performance mean pay for performance, not mediocrity?

Jim:    I completely agree with you… personally, I am chairman of TheStreet.com, I was appalled by how the stock did… I usually don’t talk about TheStreet.com, but I took myself a pay cut… I didn’t have to call some joker and ask them if is was right… I looked myself in the mirror and said hey joker, you didn’t do that well, take your darn pay cut… and I can’t believe that there is not more common sense about this… why can’t people do that… and it was a real pay cut… it wasn’t like I ended up getting more money, I cut the pay… and I feel like you are dead right… the compensation committees they are over compensated… all these consultants, they look at one company, they look at another… why don’t they look at their Mom, hey Mom I did really badly but I made a lot more money… I mean think about yourself, I don’t know how these guys live with themselves.

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[verbatim recap]

[end of segment]

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