How much are we spending?

"On Tuesday, the Federal Reserve pledged $540 billion to make sure [money-market mutual funds] really are [safe]."

Add that to the $700 billion plus that the Treasury department has already spent... Representative Carolyn Maloney (D-New York, 14th District: Manhattan, Astoria) summed it up nicely at the The Causes and Effects of the Lehman Brothers Bankruptcy meeting with the House of Representatives Committee on Oversight and Government Reform on Monday, October 6, 2008 (lines 864-871 of the Preliminary Transcript):

"We are facing what has been called the most serious financial crisis since the 1930s. And the potential cost to [the] taxpayer is staggering: $29 billion to J.P. Morgan to buy Bear Stearns; $85 billion to AIG; $200 billion to Fannie and Freddie; $700 billion rescue package; $300 billion to the Fed window opening it up to investment banks; $50 billion to stabilize the money market funds. A staggering $1.7 billion potential cost to taxpayers."

Plus whatever has been spent between then and now. How much is all of this going to cost us? Can we really trust the Federal government to get us the best deal for our taxpayer dollars? Check out Frontline's report on the Resolution Trust Company and how some people profited by putting out offers on houses, such as $1,200 for a house worth $80,000 and getting the deal, without any kind of a counter offer by the government. The story goes on to say that these people submitted over 20 offers ranging from $50 to $8,000, and getting them all.

Sources:
1. NY Times Dealbook blog
Fed Adds to Its Efforts to Aid Credit Markets
October 22, 2008, 7:56 am

2. The Causes and Effects of the Lehman Brothers Bankruptcy
Monday, October 6, 2008
House of Representatives,
Committee on Oversight and Government Reform
Preliminary Transcript PDF available here.

3. Frontline 1991: The Great American Bailout

4. Fed Chairman Endorses New Round of Stimulus
By EDMUND L. ANDREWS
Published: October 20, 2008

"The government announced last week that it would invest $250 billion directly into the nation’s banks as part of a $700 billion bailout package to ease the financial turmoil and loosen the credit markets. In addition, the government has helped bail out the mortgage finance giants Fannie Mae and Freddie Mac as well as the insurance giant the American International Group."

5. JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount
By ANDREW ROSS SORKIN and LANDON THOMAS Jr.
Published: March 16, 2008

"The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s 'less-liquid assets.'"

No really, the sky is falling

This time it's for real. If you want to see someone squirm, watch the White House Briefing with Secretary Paulson from 1:45 PM on 9/15/2008 on cspan.org. I wouldn't be surprised if he resigns soon.

Market sells on Fed mixed message

As I write this, stocks are up, but they should close down and lead to a down few weeks. The GDP came in line, not negative, but still indicates a general slowdown with no clear end in sight. The banks and financials (XLF) will not be able to break through the downtrend as the market uncertainties that lead to the rally are gone with the GDP and Fed data now known. The only remainder is the job numbers, which are a lagging, rather than a leading indicator of the economy. Many economists believe businesses will face a slow 2nd quarter before improving in the 2nd half of the year. The leader out of this pseudo-recession/slowdown will be the banks, and with Citigroup's announcement of a $4.5 billion stock offering to raise funds, after the company said it would not, and projections of more to come, it appears that there is still weakness and not enough confidence to bolster up the recent gains. (1) Looking for S&P to retrace end of March/mid-April lows. Holding May SDS and QID calls.

The rising dollar will be halted and start to fall again with the Fed's recent cut, as well as no promises against further easing. The Fed gave the market what it wanted in a 25 bps cut, but commodities are showing signs of inflation, and the unclear/non-existent language of an end to the easing will make it harder for the Fed to signal a reversal, if one is indeed coming. Criticism that the Fed is making rush judgments comes from Allan H. Meltzer, Cargegie Mellon political economy professor, who says:

"My view is that the Fed is back doing the silly things it did in the 1970s, of trying to make judgments that have long-term consequences based on short-term data... It should get back to the period of 1985 to 2003 known as the Great Moderation."

Looking for gold to reach Mid-March or Mid-April highs. Bought GLD.

Sources:
1. Citigroup Increases Stock Offering to $4.5 Billion
2. Fed Cuts Rate by a Quarter Point, to 2%

The above essay is for the purposes of discussion only and should not be taken as investment advice.

Negative GDP

We could see the first negative GDP in awhile, insuring that we are in the midst of a recession. I think the recession started in August with the credit crisis, but most likely, economists will say it started in November and will end this fall, with some growth in the fourth quarter if we're lucky. The President spoke this morning about the state of the economy and finally admitted that we are in tough times (everyone is waiting for confirmation before they say the word "recession"). A reporter asked if he had seen the GDP numbers yet, and he said he had not. However, I think he was tipped off and took the opportunity to blame Congress for the state of the economy and high oil prices (incidentally, I'm more apt to believe that high prices are being caused by a production bottleneck).

Sources:
1. Saying Times Are Difficult, Bush Presses Congress to Act
2. Amid High Oil Prices, Danger Signs in Production

Apple Earnings Call

In the Seeking Alpha Apple Earnings transcript, Peter Oppenheimer answers a question about delayed iPhone revenue recognition:

"We are doing this -- as I said in my prepared remarks -- because we announced specific new features that will be included in the iPhone 2.0 software that we plan to provide for customers for free who purchased after our announcement on March 6th. So we will delay revenue recognition on phones sold between March 6th and the date of the delivery of the software."

Apple announced the iPhone 2.0 beta on March 6th and stopped recognizing revenue on iPhones sold from that date forward. iPhone 2.0 is focused on 3rd party and business applications. It includes the SDK as well as support for Microsoft Exchange ActiveSynch and Cisco IPsec VPN. Apple will offer this as a free software upgrade to all iPhone users in June. They will probably release the software during their Worldwide Developers Conference on June 9-13. I wouldn't be surprised if they announced the 3G phones at the same time. I wonder if Apple is also delaying revenue recognition of the $299 per year Enterprise Program.

Another good question, from Andrew Neff, of the soon to be gone Bear Stearns:
"Any further thoughts on cash use, what you are going to do with all that cash?"
To which Peter Oppenheimer responded:
"We're going to buy Yahoo."
Just kidding.

More on the iPhone supply (or lack thereof), from Timothy D. Cook:

"iPhone again, we really outstripped our supply toward the end of the quarter because we sold more than we had expected. We thought there would be a -- more of a sequential decline there than there was. It was reasonably strong throughout but March in particular was strong."

That's good news. If March in particular was strong, and they are not recognizing the revenue of iPhones sold since March 6th until June, we may see a large boost in the third quarter to account for all the iPhones sold after the 2.0 announcement.

Shaw Wu, the Yahoo board's infamous analyst, asked for comments about Apple's recent purchase of PA Semi and was given a non-answer. He promptly disappeared.

Sources:
1. Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript
2. Apple Announces iPhone 2.0 Software Beta

The rearview mirror has the best view

Apple beat EPS estimates by 10 cents, but guided 10 cents lower for the 3rd quarter.(1) The stock went up to 167 as the news was released, but is now trading down, currently below 159. It's a mixed bag as to what it will open at tomorrow. Some of the disappointments may be that expectations were so high, Apple would have had to announce $1.50 per share, over $8 billion in revenue, and $1.20 EPS guidance for Q3 for the stock to go up. Also, gross margins fell, from 35.1% to 32.9% when comparing quarters year-for-year. But the positive news is goode enough to justify an entry point in the next few weeks, if Apple stays at these prices:

Apple shipped 2,289,000 Macintosh® computers during the quarter, representing 51 percent unit growth and 54 percent revenue growth over the year-ago quarter.

iPod sales increased by 1%, and did not fall as expected.

It looked bad for Apple yesterday as the stock dropped as much as it rose on Monday, but at midnight, Apple revealed that it agreed to buy PA Semi (2), a small microprocessor design company, which will give the computer company tighter control of its supply chain, as well as an edge on smartphone and MP3 competition (although Apple seems to be moving away from the MP3 space and into mini-computers).

PA Semi makes ARM processors used in small devices.(3) The Apple Newton and Palm PDAs used Advanced RISC Machines (ARM) processors (4, 5) as well as Digital set-top boxes, cameras, TVs, and gaming machines. ARM was spun out of a collaboration between Apple Computer and Acorn Computer Group in 1990.(6) One of their strengths is creating low power chips, such as a 64-bit dual core microprocessor developed last year that they claimed was 300% more efficient than any other on the market. This may signal a departure by Apple from its recent exclusivity with Intel, which is notorious for driving profit margins down while increasing their market share. Intel is promoting their new Atom chips for handheld devices. Apple is said to have purchased PA Semi for $278 million in a deal negotiated in Steve Jobs' home. The acquisition didn't seem affect the stock, except to possibly keep it above water during the day.

Next up: Visa earnings on Monday. Might be a good straddle play. Also, Saturday is the deadline for Yahoo to accept or decline the Microsoft offer.(7) It looks like they already made their decision, but you can't know for sure until Sunday. If the answer is still no, Microsoft will take the offer to Yahoo shareholders.

Sources:
1. Apple Reports Record Second Quarter Results
2. Apple Buys Chip Designer
3. ARM Powered Products
4. Apple website: MessagePad 120: W/Newton 2.0 OS Specifications
5. Palm -- About Palm, Inc
6. ARM Milestones
7. Microsoft CEO willing to walk away from Yahoo bid

Apple Earnings

Andy Zaky has a good forecast for Apple earnings of $1.33 in EPS and $7.587 billion in revenue.(1) Apple's run up has gotten people nervous, some guessing that there will be a sharp fall if they miss, others making good and bad comparisons to Google. Veldemir on Yahoo Finance says it's a setup.(2)

Google high was 747 and got whacked down to 412. (45% decrease).

Apple's high was 200 and got whacked down to 115 (42.5% decrease).

Now GOOG is at 540 which is 28% off it's high.
Apple is at 161 which is 19% off it's high.

He argues that Apple will be knocked down to 28% off it's high, or somewhere around 144 after earnings.

Fortune's Apple 2.0 blog has a nice spreadsheet of analysts who have recently upped their estimates for Apple EPS and revenues.(3)

My guess is that Apple will follow the market for the next two days, closing down to allow for profit taking and uncertainty before earnings. Apple will blast through earnings, lead by international iPhone sales and a surprising beat on U.S. iPhone sales and a large beat on total Mac sales around the world. And the stock will reach 205 or higher by the end of the week. Then it will slowly dribble down again through the summer, only to reach new highs when the new iPhone and iPhone applications are released sometime in June. Overall, a rollercoaster ride, hard to time, but fun to ride.

1. Apple Set to Significantly Beat Analysts Q2 2008 Earnings Estimates
2. It's a setup folks
3. Analysts scramble to raise Apple estimates