What the hell are Auction Rate Securities? I suspect a lot of people might be wondering that today when they read through the Bristol-Myers (BMY) quarterly report or coverage like this from Bloomberg. It reminds me of the reactions to the first mentions of CDOs and SIVs.

When I wrote Cash and Cash Equivalents (click here to read it) two months ago, I thought it would really catch a lot of attention and maybe even the “real financial journalists” might pick up on it. It went nowhere. I wonder if this BMY story is going to go nowhere and whether it will just be ignored.

I strongly encourage you to consider the impacts. You may wonder why a drug company like Bristol has taken such a huge loss of $275 million this quarter on something it considered to be “Cash and Cash Equivalents”. You may wonder whether this is just an isolated event. Bristol says they may raise the total writedowns in future periods to $417 million. They say it may just be a temporary impairment. Maybe. Maybe. Maybe.

Maybe BMY is the only non-financial company stuck with bad investments in its “Cash and Cash Equivalents” account. Maybe. Maybe. MAYBE NOT!

The Fed needs to spend less time paying attention to investors.

Investors need to spend less time paying attention to the Fed.

I know the incessant media coverage makes it impossible for investors to ignore FOMC decisions, but be objective. Look back on the past several months and all the Fed watching you may have done or been subjected to. Which investing decisions did you make based upon the speculation? Which investing decisions did you make based upon the actual rate changes? How have those worked out for you?

There’s lots of debate about whether today’s cut or future cuts should be Zero basis points, 25 bps, 50 bps, 75 bps…..Be objective. What impact did the amount have on your actual investing performance? It is impossible to measure how the market will react to any cut for more than a few minutes. How can anyone assure you that a cut that didn’t happen to the degree they wanted made any difference to your portfolio performance? For example, did the September 50 bps cut perform better than a 25 bps cut would have? What about a 75 bps? In October and December, did the 25 bps cause you to make less investing decisions than a 50 bps cut would have? We just cannot know those things.

Next comes the debate on wording in the statement. Is it hopeful enough? Does it leave room for or hint at future cuts? Is it too hawkish? What words were changed since the last statement? What did they mean by saying one thing over the other? I know a lot of people care about such things, but seriously…can you honestly tell yourself that the interpretation of a Fed statement caused you to buy a stock or not buy a stock?

What about dissension? Does it matter whether Poole dissented last week? Is it his fault that we didn’t go up 1,000 points on the Dow vs. only 800?

There is so much time and effort spent analyzing the next Fed move and yet, its effects on portfolio performance are unknowable. What I do know is that spending the same amount of time doing fundamental and technical research will enhance your performance and risk management. Please do your best to ignore watching the Fed.

Last week, I went bearish prior to the Asian and European sell-offs. That was before the SocGen fiasco and more importantly, it was before “Super Stallion Ben” supposedly reacted to economic news (not global stock market declines according to his defenders). I am not sure what economic data he was responding to with that intermeeting cut. Was it the initial jobless claims report that came out two days later? I doubt it, since they declined. Was it an early look at today’s release of durable goods orders? I doubt it, since they increased.

Whatever his reason - Chairman Bernanke did it. And to be honest, I didn’t think he would. I know I should expect that he will drop rates the moment he has an opportunity to screw short sellers or respond to the cries of the “bailout bulls.” I just thought he would have some courage to wait one week until the scheduled meeting. My thought was that we would get a washout last week and then a recovery in advance of tomorrow’s meeting. The surprise cut changed all that and scared people into stopping the selling pressure.

However, despite a lot of improvement in sentiment and a healthy dose of short covering support, I was not overly impressed by the market action. I am still waiting to see natural buying come in. As a result, I only gave 176 new UP signals and I am maintaining my bearish bias. I spent most of my analytical efforts trying to discriminate between stocks I thought would have gone up regardless of the cut and those that went up primarily due to the interest rate shenanigans. Doing that relied more upon their market action and volume in the previous three weeks than it did from Tuesday to Friday.

The V-bottoms that showed up in many stocks are interesting, but I try hard not to react to them unless there is company-specific fundamental data to justify it. That is very rare. Instead, I decided to wait on about 400 stocks that rebounded off thin air. Many of them are up 5-10% since then - in fact, over 1000 of the DOWN signals I had going into last week advanced more than 5%.  Rallies during bear markets are sharp and short-lived.   I am waiting. This one has certainly been sharp and as for short-lived….that is yet to be determined. If this week’s Fed intervention results in a continuation of positive momentum and real buying, I’ll probably be pushed back into a short term bullish stance again. Until then, I am waiting.

Most economists suck at predicting the economy. They don’t seem to make the best investors or portfolio managers either. I am not sure what value they really add but that is for another post. I suspect no one would really want an economist to run a major company and we wouldn’t really put much credibility to them giving advice to a CEO or coming up with an operational strategy.

So why do we care what every CEO says about the economy or what they think the appropriate monetary policy should be? Enough already! Every company is not a broad proxy for whether we are in or will be in a recession. Every CEO is not an expert on economic data. For example, just because 30% of their revenues comes from international markets does not make them an authority on the economy of those other countries or the relevant currency exchange rates or inflation differentials or standards of living or unemployment / wage rates, etc. etc.

Hearing an executive from GM or Ford say they expect the US will avoid a recession does not impress me. How good are they at building cars and selling them profitably? That’s what I concentrate on. A year ago, was Angelo Mozilo telling you that subprime mortgages would create a crisis? Did I miss his economic forecast? Does Jeff Immelt know more about the global economy than how to increase GE’s stock price for the past 3 years?

I try to totally ignore what CEOs say about the economy. Then again, I do pretty much the same thing with most economists!

At the height of the credit crisis last fall, the spread between the 3-month Treasury bill and the Asset-Backed Commercial Paper rate was about 225 bps. Now we are at 110 bps. For most of the 2000’s it’s been about 40-50 bps. Was risk being priced properly then? Is it being priced properly now?  I doubt it, so it’s impossible to guess what the right spread should be. Maybe it just depends upon the yield-chasing demand at the time. There has been improvement in the ABCP market, but remember that the subprime component is not 100% of the ABCP problem. We still have to deal with credit card and auto receivables. Keep your eye on the ABCP vs. 3-month Treasury spread.

For much of last year, the Goldilocks crowd was proclaiming the health and resilience of the American consumer. Every chance to hype retail sales was taken, even a few months ago before the holiday shopping season. They had to do that because when times were good they often reminded us that we wouldn’t have a recession because the consumer was strong and after all, the consumer is two-thirds of the American economy. Now, many of the same bulls are cheering the “emergency” fiscal stimulus plan to give “much needed help” to the American consumer. How did “two-thirds of the economy” get so weak without any of those brainiacs noticing?

Here is what I think of the effects on the markets or the economy of the President’s proposals in last night’s State of the Union address.

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I have very little to say about SocGen and what that whole mess meant (or means) for the markets. Who is the “rogue” trader - Kerviel or Bernanke? Who is a puppet/scapegoat/fall guy - Kerviel or Bernanke? Regardless, it doesn’t really affect what I do with stocks anyway, but I am intrigued a bit. I don’t want to believe the story that SocGen is putting out about Kerviel. To do that, I have to believe that they have no internal risk controls. If it is true and they do not know how to prevent such a huge fraud, their failure to supervise is about as bad as their portfolio management decisions to unwind the trades.  Nothing inspires confidence in this situation.  But what strains credulity the most, in my opinion, is that a company that didn’t know what the hell was going on for as long as it took to set up these losses, suddenly was able to identify everything over one weekend.

Pro golfers need to bring their “A-game” if they hope to compete with Tiger Woods. Similarly, you better bring your “A-game” if you want to compete in this market. Since Super Stallion Ben came to rescue the markets (from what I do not know), the bulls have been emboldened by the concept that a bottom was set through some capitulation event that never happened. Throw in a dangerous (my opinion) fiscal stimulus plan and rumors about monolines getting bailed out and the media commentary made it seem like the world’s problems were solved. Many stocks improved last week - that I agree with. However, the upvolume in many advancers was weak and that is putting it mildly. All that suggests a short covering rally - Ben is great at whipping those up. But when it comes down to market action, last week was all about a reduction to selling pressure. And as I have said, that is one thing I needed to see before believing that we could head higher. Now it’s time to come through with the second component - real buying on the long side and an end to the pattern of selling rallies. The bulls have done well for the past week, but they haven’t been challenged. If they want a rally to continue, they better start showing up with their A-game.   The Fed Rate Cut story has a few more days to play out.  Then what?  The fiscal stimulus plan has a few more days of PR.  Then what?

Bill Ackman of Pershing Square is getting a lot of attention lately for his “timely” shorting and questioning of the risks with the monolines (MBIA and Ambac.) The reality is that Bill has been saying this stuff for many years - since 2002 actually. Check out this article from 2005. It’s fun reading and it’s amazingly sickening. While Bill was hammering away and making his case for the dangers with monolines and more importantly, the ratings agencies, regulators did nothing. Politicians did nothing. Investors spent more time arguing that he was wrong than protecting against the possibility he was right. Since 2002 when Bill started shorting this group, MBI mostly traded between $50 and $75. This week it had a low of $9. For much of that same time, the mess we are in today was being formed and expanded exponentially - subprime, CDOs, ratings agency conflicts - all of it. Ackman was right then, he is right now. We did nothing then, what will we do now?