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February 13, 2008
False Dawns and Bear Market Rallies
Citigroup shares ended yesterday at $26.21/share, or more than $5/share below (-17.6%) Abu Dhabi’s lowest conversion price of $31.83/share. Given that the decline in Citigroup shares have more than offset the attractive 11% yield on the equity units purchased by Abu Dhabi, Robert Rubin’s timely trip overseas to attract capital last year appears to have been timely indeed.
Yahoo shares ended yesterday at $29.57/share, or $1.43 below Microsoft’s $31/share takeover offer. Given that Microsoft is vowing hostilities if Yahoo’s board doesn’t accept the takeover, and that a higher offer may be in the cards, is it safe to assume Yahoo is the most attractive arbitrage opportunity in the marketplace?
Warren Buffett’s plan to reinsure the municipal bond exposure of the monoline insurers was widely credited as sparking the rally in the markets yesterday. However, beneath the surface shares in monoline insurance plunged as Buffett’s plan helped highlight the failure of previous monoline bailout efforts. As the NYT noted, “While the banks and the guarantors continue to meet daily with each other…the Berkshire Hathaway reinsurance plan is seen as a backup solution if those talks are unsuccessful…One analyst said that Mr. Dinallo could be using the Berkshire offer to put pressure on the banks to come up with a plan that addresses both the municipal debt obligations and the mortgage-related securities insured by the bond guarantors.”
The common theme between the above storylines is that each was responsible for injecting optimism into the marketplace. Upon close inspection was this optimism really warranted?
Needless to say, one thing is certain: There will (perhaps starting right now?) be a bear market bounce in stocks. However, rather than become consumed by such a short term rally, it may be important to remember the storylines mentioned above. To be sure, it is entirely possible that Citigroup shares will remain challenged as its earnings power is greatly reduced by the U.S. economic and credit market slowdown, that Microsoft is willing to pay $31/share for YHOO but not a penny more, and that Buffett is simply trying to take advantage of an industry in desperate need of capital. In short, it is entirely plausible that any bear market rally will remain exactly that…
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