The Fed acts, or did it react?

Headliner of the week is the decision by the Fed to cut back on the discount rate by 50 basis points from 6.25 to 5.75. The discount rate is the rate the Fed charges banks to borrow funds from it.
In doing so, the Fed said it was "monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." It also added that "financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

Just earlier this month, they had emphasized that fighting inflation was more of a primary concern than focusing on economic weakness which had been accelerated by the sub prime fall out. We should question the sound judgement displayed by this team of highly revered economic pundits. It comes as no surprise anyway since previous boards have also shown the tendency to lag between monetary policy decisions and the changing economic dynamics.

This move will not impact consumer interest rates, a reduction in the more important federal funds rate will do that trick and it is now widely expected that the Fed will trim that rate by at least 25 basis points from 5.25 to 5 percent when they meet on September 18th. Friday’s decision however did give a lifeline to many businesses facing credit and liquidity crunches, chiefly mortgage companies which have been hamstringed by severe lack of short term financing needs.

The markets, as expected, ingited on the good news sending the Dow back up to close at above 13,000 but still more than 1,000 points off its July 20 closing high of 14,121. The S&P 500 index rose 2.5%, the most in 4 years to 1,445.94. Bond markets were calm, the benchmark 10-year note closed at a yield of 4.68 percent.

I am of the conviction that the Feds belated move will calm the storm and investors will go back to focusing on fundamentals and buying earnings. I have since bought back into the market through my 401K and allocated as follows.

• 28% Tagret 2040
• 30% international
• 10% S&P 500
• 20% Fixed income
• 2% Small Cap
• 10% Value

Year to date return is a measly 6% but could have been worse if I hadn’t fled to the safety of bonds when the market begun its downward spiral!

Of Politicians and the bid to scuttle the Safaricom IPO

We know that the proposed Safaricom IPO has generated droves of interest from various parties.

Gargantuan investment banks like Goldman, Merrill, and Law firms like Clifford Chance are seeking to establish investment banking and advisory relationships in this formerly unexplored market, local investment banks & stock brokers are jostling it out amongst each other to win favored spots as lead brokers for the transaction, institutional investors hope the allocation is weighted heavily towards themselves, Safaricom employees can hardly wait to be rewarded for their efforts and lastly there is the general public; salivating in anticipation of the huge monetary gains, a possible repeat of the Kengen scenario where a few were lucky to their triple loot in the first day!

Ah but wait....., there are those that want to halt the machinery even before it starts. These opportunist naysayers aka our politicians want to throw a spanner in the works because of one small unresolved issue. Mobitela. That is the name of the mystery company registered in the islands of Guernsey that reportedly owns 5% of the gravy train that is Safaricom.

I have, for many reasons, been eagerly awaiting this IPO since the government announced the intention to float its 25% stake to the public a few months ago. My intent and desire to own a piece of this wonder cannot be measured numerically, only emotionally and that’s why I shuddered the other day when I read about the parliamentarians intention to block the sale until the shroud on the mystery ownership veil is lifted.

These pompous imbeciles whom we voted to represent their interests and whose only legacy in the 9th parliament shall be their gluttonous appetite for awarding themselves CEO like perks at the expense of the Mwanainchi and fanning tribal politics now want to block the planned privatization of East and Central Africa’s most profitable company? In doing so, consequently denying the government revenue to fulfill its budgetary allocations and the people of Kenya the chance to partake in the growth success of this local wonder whose services we use everyday? Not!

The web of complex transactions between Vodafone, Telkom, Safaricom and Mobitela, play out like exactly like the famed Kansas city shuffle, a classic con twist in which a combination of distraction and subterfuge cause the mark to turn their attention away from the plot which proceeds in the opposite direction move.

That Mobitela pulled a fast one and duped Kenyans is a fact. Someone (read the Moi-Kulei axis of evil) is getting dividend checks of 800 million plus a year, a fact that Micheal Joseph, the Safaricom CEO vehemently denied when he came out strongly other day to discredit claims of the existence of a third leg in the ownership structure.

Mars Kenya has written extensively on the issue and fact is that yes, Mobitela did acquire its position by strong arm fraud tactics and manipulation but we cannot change that now. The government has nothing to do with Mobitela since it’s seeking to divest its 25% share to the public. The Parliamentary Committee Report on Public Investments wants the Director of KACC to immediately institute investigations on the circumstances and manner in which the shares were transferred to Mobitelea with a view to taking appropriate action against any persons found culpable. The PIC also wants the Director of KACC, to include a progress report on the investigation in the Commissions quarterly report to the House for the next immediate period. What will this accomplish?

Raila “the Hummer” Odinga, who once claimed that the NSE was infiltrated by drug money proceeds has now found a new issue to politicize for political mileage. He and the ODM camp allege that there was no privatization commission to formulate and implement a programme to ensure transparency and accountability hence the privatization proceeds will find their way into the “election gravy train" Since when did these narcissistic MP’s look out for the interests of others besides their own? Have they suddenly had a fit of morality and bought back their conscience from the devil in this last minute bid to scuttle the largest IPO East Africa has ever witnessed?

If those egotistic scoundrels really want to protect investors and the general public, a good start would be to cough up the billions of shillings they have looted from coffers in the form of dubious allowances and benefits…and perhaps pay up all the back taxes they owe. Instead of political witch-hunting marked by staging euphoric tribal rallies where hate and propaganda is fanned by incitement, how about attending parliament to debate on legislative matters and enact good laws reflective of the people’s collective aspirations which are the fundamental cornerstone of our nation.

You morons, Leave THE SAFARICOM IPO ALONE!

Weekly round up

Tuesday’s Fed meeting left investors with more questions than answers, which they had the Fed would provide through its policy statement.
Wall Street had hoped that the central bankers would focus on economic weakness especially with the sub prime fiasco that has rattled the markets in recent weeks. Instead the Fed continued to emphasize on inflation, while only acknowledging that “credit is getting tighter” like we didn’t know that!

The marked dropped sharply but then recovered to end the day in positive territory. A lot of investors will however continue to remain bearish on instruments that are tied to mortgage backed securities.

On Wednesday, Cisco (CSCO) reported- not only did it post impressive numbers but it raised guidance for next quarter. John Chambers was quoted as saying that he believes that this was the strongest economy he had seen in years. This bullish sentiments and guidance for raised the technology sectors overall outlook and all boats were lifted by the Cisco’s rising tide.

Bond yields have dropped further, lifting prices. The 10 year yield is now down to 4.75% as investors flee to safety.
Looks like the Yen carry trade is unwinding as the yen continues to raise. Investors who scooped up the Yen on the cheap and reinvested in higher yielding markets across the world are forced to unwind as the yen rises, consequently drying up liquidity. Remember back in February, unwinding of the Yen carry trade was a one of the factors that caused a slide in the Asian markets.

On Thursday, news of the suspension of withdrawals from three funds at France’s BNP Paribas did not angur well with the markets. Apparently, those funds valued at some $2 billion cannot be valued due to the mess in US credit markets.

This week saw the largest cordination effort by central banks worldwide to inject liquidity into their money markets in an attempt to soothe ongoing woes. The ECB alone dished out $131 billion to aid troubled firms with the Fed adding $35 billion in reserves to buy mortgage backed securities in an attempt to divert the looming crisis.

Friday: US stocks still closed higher for the week albeit the volatile run.


Heavy week ahead: Major reports expected to signal the health of the US economy. Retail sales, PPI, CPI, housing starts and initial jobless claims all being reported. I think the numbers will indicate that the mortgage crisis might have slowed down the US consumer but not stopped them. Watch out for the CPI & PPI data which are a good measure of inflation trends and might provide some clues to the outcome of next months FOMC meeting.

Recession or just another correction?

The last two weeks has seen US stocks suffer their worst loss in nearly 5 years!
While Some reassuring economic data helped lift the market earlier in the week, the market ended the week with a broad based sell off. The Dow has lost over 800 points since it flirted with 14,000+ a week ago! The flight to safety following this massacre has lowered yields but lifted bond prices. The yield on the benchmark 10-year note fell to 4.71% from 4.96%. Good news for fixed income investors.

This sharp drop isn’t inlike others we have witnessed during this 5 year bull run. Afterall, February saw a 6% decline, sparked by an international sell off and there has been at least one decline of 5% or more each year since 2003.

This drop however was driven by different forces than previous market declines. Continued trepidation facing the mortgage industry specifically sub prime lenders has sparked credit concerns thus causing a liquidity crunch among lower quality issuers. As mortgage defaults and delinquencies rise in tandem, investors are worried that this liquidity problem will eventually spill over to larger mortgage companies and banks as consequently affecting the whole stock market. Summer trading volumes are traditionally low so this will intensify the volatility problem with uncertainty and fear dominating the hearts and minds of many.

Synopsis:

The worst has yet to come. One sub prime lender American Home Mortgage (AHM) announced on Thursday that it was shutting down its doors and laying off several thousand employees in the process. The stock lost 90% in one day! Expect many companies to follow suit. Top on my list is Accredited Home Lenders (LEND) and Novastar Financial (NFI). Also Look for shares of housing companies eg Tol Brothers (TOL), Centex Homes (CTX), DH Horton (DHI) and businesses that tangentially rely on home sales such as improvement companies like, Home Depot (HD), & Lowes (LOW) to be negatively impacted by ongoing woes in this sub-prime fall out. I am short LEND.

Overall, the outlook isn’t rosy. Weakness in lenders and homebuilders extended to the other 10 economic sectors with the materials and financial sectors performing dismally.
On Financial stocks, I expect the downward trend to continue in the summer. Of particular concern in Bear Sterns which has been overexposed to sub prime lending through one of its Hedge Funds. Lehman Brothers (LEH), Bear Stearns (BSC) and Merrill Lynch (MER), have all recently dropped to below their 52 week lows! Base fundamentals haven’t changed significantly but expect credit risk concerns to overshadow corporate earnings news.

Busy week ahead- the Feds open market committee convenes and investors will be all ears seeking guidance on the state of the credit markets which the Fed is likely to touch address on its statement. Productivity and consumer credit economic numbers will also be out this week.