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March 5, 2007
Obviously context is key: since last years correction stock prices have broadly rallied without any major setbacks. In other words, forget about debating what sparked last weeks correction - stocks do not go straight up forever!
Will Words Lead To Actions? What was most remarkable about last week was how many times Henry Paulson chimed in with words to the effect of ‘Don’t Panic!’. To be sure, you would think that the US markets were in freefall and the Fed was slashing interest rates by the way Paulson was going on. Unfortunately Paulson’s words led some to speculate that the PPT was gearing up to save the day, including NYP’s Crudele: “Treasury Secretary Henry Paulson last week said a number of times - as others did - that they were "watching developments carefully." Well, what exactly does that mean? If the stock market should happen to collapse, does anyone think that Paulson - who heads the Plunge Protection Team - is just going to sit idly by and marvel at the catastrophe.” I am all for speculating that the PPT will enter the marketplace in an attempt to provide some support during a full-fledged crash. However, if the PPT was really trying to support stocks last week their nickname should be changed to MMT (market manipulation team). Regardless, appearing on ABC “This Week”, Paulson did not let up. Below are some of the most fascinating quotes since the secretive 1987 team was formed. “And I'm very pleased that we have a strong team. And the president's working group, Ben Bernanke, Chris Cox, Reuben Jeffrey, and I have spent a lot of time just thinking through — none of us are predicting. All of us believe we have a strong global economy, a strong U.S. economy. But we spend time getting prepared. We spend time talking with our colleagues overseas, our counterparts overseas. I have a strong team here at the Treasury. Bob Steel is an undersecretary. He's had a lot of time — spent a lot of time at financial markets. So rather than trying to forecast or project where a problem may come from, what we want to do is just make sure we're ready if one does happen to come.” How ABC’s George Stephanopoulos did not respond to above comments and ask Mr. Paulson exactly how the PPT would respond to a crisis is unknown. After all, Ben Bernanke lying and saying the markets are working great (after a 70-minute fiasco) doesn’t exactly take a great deal of preparation. Needless to say, Paulson – who (from AFP) apparently uses his shirt as a napkin and has a difficult time walking and eating grapefruit – didn’t do the media circuit because the markets were operating smoothly. For the record, his words, despite a long career on Wall Street, carried little if any weight.
Another One To Watch One stock that may be worth a look in the US is Coca-Cola. Having seen no share price appreciation over the last decade, Coke’s dividend yield is currently almost 3%, and the company generated $4.5 billion in free cash last year ($1.63 billion after dividends were paid). Given that shares are trading at nearly 10-time tangible book and 23-times free cash, Coke is hardly screaming undervaluation. Nevertheless, Coke is a recession resistant company with an above average yield and an exceptionally wide ‘moat’ (Buffettspeak). In short, Coke below $40/share would be tempting, as would writing covered calls after taking the position and pocketing what could be a solid 8+% (Jan 08 covered call premium + dividend). Obviously if playing the Coke covered-call angle you would ideally like to buy on weakness and write out of the money covered-calls on share price strength. If only we knew Mr. Paulson and the PPT’s real threshold for market pain.
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