IBKR plus FEAR = Buying Opportunity

March 17, 2008

Interactive Brokers (IBKR) is part of the investment brokerage sector which was trashed and left for dead today after the MF Global (MF) news broke. Monday, the news was not pretty and has taken our some of the quality with the crap. But some of the reason’s behind this stock’sIBKR Logo movement is unclear. With MF Global (MF) was in a virtual free fall and that prompted concern over the entire group, investors are obviously taking their hands off their keyboards and throwing them into the air. Simply, the support (or stomach) HAS LEFT THE BUILDING.

Since FEAR is also an acronym for FALSE EVENTS APPEARING REAL, the real and rumored information surrounding Bear Stearns (BSC) and MF Global today is spreading concern toward any company with market-making operations. The perception is that if there is a cold spreading, the entire sector will catch the flu. This is good news for patient, long term investors.

IBKR does have a market making operation which helps to bring in revenue. Annually, revenue is primarily comprised of 1) trading gains 2) commissions/execution fees 3) interest income. In other words, they are a broker and market-maker. The fear within this sector is that these types of companies have been caught with a huge pile of something toxic that will implode which will then force them to take a huge loss. Yet, in our discussions today with analysts, it does not seem to be Read more

Federal Reserve Actions: Goose Eggs

March 13, 2008

Remember that game we used to play as children? Now the Fed is playing: Cut, Cut, Cut, Cut, GOOSE, Cut, Cut – GOOSE!

Below is a great chart from Investor’s Business Daily that illustrates how the recent actions, policies and interventions have helped(?) the equity markets. While the Fed’s primary goal has been to restore liquidity to the credit markets, the collateral damage from the sub-prime and housing malignancy has negatively effected the dollar and equity markets. Nothing new here.

If we were grading the Fed on originality: A-
If we were to give a grade on effectiveness: D-

So far, as far as the market is concerned, the Fed Plan(s) have come up as Big Fat Goose Eggs !

(Click to Enlarge)

Remarks from the March 4, Independent Community Bankers of America Annual Convention in Orlando, Florida that are rather frightening:

A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance, with legal, sales, and maintenance expenses alone amounting to more than 10 percent of principal.

50%? 50%? So, they are showing a 40% reduction in value for the subprime debt and another 10% for the miscellaneous administration.iTunes Subscribe

With the time period between the last mortgage payment and REO liquidation lengthening in recent months, this loss rate will likely grow even larger. Moreover, as the time to liquidation increases, the uncertainty about the losses increases as well. The low prices offered for subprime-related securities in secondary markets support the impression that the potential for recovery through foreclosure is limited.

The loss rate will likely Read more

A Picture Tells a Thousand Points

March 11, 2008

The quick and the dirty of it: The markets (DJIA, S&P500, NASDAQ) are setting up for an ugly fall and investors are sensing it. The growing indigestion is pointing straight toward the support line of 11,635 for the DJIA. This particular point is a problem as there is no support shown during the past 2 years until it reaches 10,683. Also, a simple Fibonacci retracement (blue horizontal lines) shows that the DJIA has stayed close to the retracement points rather consistently.

That said, unless we see intervention that is decisive and convincing by the Fed, a breakdown is inevitable. Earnings, news and recent policy has not done anything to support the averages. This time, we need to see a full-court press that is a unified effort between monetary policy and government initiatives. Anything less that a miraculous plan pulled from Lincoln’s hat will be met with negativity.

(click to enlarge chart)
Dow Crash 2008 ?