MONDAY, AUGUST 11, 2008

UP AND DOWN WALL STREET  

Olympic Fog

By ALAN ABELSON


Keeping the bear-market rally alive. Is it all over for McCain?


JOHN MCCAIN CAN'T CATCH A BREAK. HE MAKES A ROUSING call for offshore drilling, insisting that even the fish like it, and what do you think happens? He barely gets to utter his pitch when he's blindsided by news of a messy oil spill in the Mississippi and, to make matters worse, it's off New Orleans, just the thing to stir memories of Katrina.

Nothing daunted, and still on the energy kick, he gleefully seizes on Obama's suggestion that keeping your tires fully inflated would help reduce gasoline demand (throngs of motorists immediately stormed their nearest auto-parts shop in search of tire gauges). He loses no time in dishing up a lot of jollity at Obama's expense over such a patently dumb notion.

Alas, before he gets to really doing a number mocking the vacuity of Obama's energy-saving proposal, ExxonMobil, hoping to soothe the murderous mood of the populace boiling with pump rage, runs ads on "driving smarter," to save money and "strengthen energy security." And, of course, the No. 1 recommendation is: "Keep your tires properly inflated."

It's too much of a stretch to think that ExxonMobil is part of a giant conspiracy aimed at sinking McCain's bid for the presidency out of pique with some ancient slight, real or imagined, by the senator, if only because the company is too busy counting its billions to spare even a minute to engage in such picayune indulgence. But one has to wonder whether a Democratic mole hasn't burrowed his way into the plush upper echelons of the oil goliath with mischievous intent.

The bad timing and bad luck that have dogged McCain ever since he got the nod as the Republican standard bearer manifested themselves again as he sought to exploit the near-unanimous fear and loathing of upwardly spiraling gas prices. For what seemed a sure-fire political theme a week or two ago, lost more than a little of its zing faster than you can say "fill 'er up," as crude dropped precipitously, accompanied by an inevitably more grudging decline in the cost of a gallon of gasoline.

Triple-digit oil and greatly elevated prices for fuel obviously can still take a monster bite out of working stiffs' paychecks. And we're of a mind that when the stampede to cash in profits in the futures markets runs its course, crude will strut its resiliency. But perception can and often does outweigh fundamentals in the short run and the common perception for a spell is apt to be that the "energy crisis," to use that truly repugnant current cliche, is so yesterday.

In a way, John McCain reminds us of Al Gore in 2000. They're both savvy and seasoned political pros whose only ambition in life has been to grow up to be president. Yet McCain, like Gore eight years ago, is running an incredibly inept and bumbling campaign. The wonder is not that Obama is ahead in most of the polls, but that his lead isn't a lot bigger, especially with the Democrats seemingly on their way to win going away in the congressional races.

That may be a straw McCain can cling to. Along with the fact that, even though it already seems like an eternity, it's comparatively early days in the run-up to Nov. 4 and, at this juncture, despite all the gaffes and his persistent ungainliness on the stump, remarkably, he still seems to have a shot.

IT WAS A BIG WEEK IN THE STOCK MARKET, the obligatory two-hundred-plus point skid in one session not withstanding. The popular notion was that the fresh tumble in oil fueled the latest surge. But our own hunch is that all due credit should go to the start of the Beijing Olympics.

Launched with enormous pomp and circumstance (with 1.3 billion people to pitch in, how can you miss putting on a blockbuster show) and, thanks to TV and the Internet, a spectacle viewed by uncounted masses around the globe, the excitement radiated powerfully throughout the planet, including this little slice of it we inhabit.

Indeed, the contagion of good feeling was more than evident in the good old U.S.A., despite President Bush's scolding of the Chinese government for its tendency to give short shrift to anything it deemed dissent; you know, little things, like freedom of speech and assembly. We should note that unfailingly polite, the powers-that-be gently deflected Dubya's criticism (how do you say "get lost" in Mandarin?).

Besides being infected with the carefully crafted celebratory spirit engendered by the onset of the games, investors here, we suspect, were also victims of the dense fog that passes for air in Beijing for it happily obscured the formidable discouraging negatives looming all around them.

We might interject that a gold medal should be awarded our cycling team for providing an indelible visual memory of the '08 Olympics by disembarking from their plane wearing protective masks. The official apologists -- a.k.a. the International Olympic Committee -- cheerfully gave its seal of approval to the condition of the air, whose pollution content is only something like three times the limit in our own fair lands. And that's after months of vigorous scrubbing.

As an explanation for the spurt in stock prices, Olympian exuberance or fog may not be all that more fanciful than the usual bromides served up by market commentators, especially if they're preening or screeching (their styles vary) on Tout TV. As we intimated last week, there's nothing unusual about a spanking good rally in a bear market; if anything, it's the norm.

As the insightful David Rosenberg of Merrill Lynch points out, since the current bear market began a year ago, there have been half a dozen of these multi-hundred- point bursts upward, but interestingly, there were none -- zip -- during the 2002-2007 advance that preceded it. Be aware, too, in case you're not the counting kind, that there have been 10 days in the current down cycle in which the Dow closed down 300 points or more and, in the bear market of 2000-2002, there were nearly twice as many 300-point up sessions as 300-point down sessions.

David cautions investors to keep very much in mind that sharp, swift bursts upward are characteristic of bear markets and not get carried away by what he terms "an oversold technical rally."

To which we say, right on!

THEY'RE PLAYING THE MOVIE BACKWARDS.

We're talking about the banks, by whatever moniker they go by, investment or commercial. And in particular -- although, gosh knows, almost all of them did it -- those hyperactive types who took to leverage, misleading practice and reckless lending like voracious ants to an untended picnic basket.

For years especially when this century was still pristine, roseate and young, they borrowed and lent like there was no tomorrow, pretty much because they all grew confident that there wouldn't be. And they, and especially the witless or wily rouges who ran them, raked in vast piles of lovely greenbacks or whatever currency the suckers had to offer.

But, behold a miracle: The money is flowing back. Not to every lamb that was shorn -- we didn't say a major miracle -- but to thousands of them. More specifically, Citigroup and Merrill Lynch agreed to buy back $7.3 billion and $10 billion, respectively, of auction-rate securities, those deceptive pieces of long-term paper that purportedly had all the engaging attributes of short-term paper (think commercial paper or even Treasury notes) and were good as cash. Except they weren't -- as became painfully evident to their holders, individuals, corporate and institutional, when the $300 billion market for the stuff froze up.

Many another banking behemoth is destined to follow Citi and Merrill's lead, no doubt out of compassion for their unwary clients, but just possibly also by the spur of lawsuits, filed and threatened by various and sundry parties claiming deep injury.

Merrill, sad to relate, has been much in the spotlight as it strives to unwind the mighty tangle of financial affairs that is the somewhat less than glittering legacy of its former CEO, Stan O'Neal. Among other things, it has sold or arranged to unload a number of assets (some of which actually deserve that label) and the putative sale of which might help to give a more lustrous image to its balance sheet.

Thus, at the end of last month, it agreed to sell $30.6 billion in rather doggy paper for $6.7 billion, or not quite 22 cents on the dollar. However, Merrill is supplying 75% of the purchase price and the only recourse it gets is the dubious paper it's selling. The estimable Barry Ritholtz figures that, all things considered, the actual sales price works out to around 5.5 cents on the dollar.

Merrill also announced it will sell its 20% interest in Bloomberg (the flourishing company, not the excellent mayor) to Bloomberg for roughly $4.3 billion. However, our gimlet-eyed buddy Doug Kass discovered digging into Merrill's recently issued 10Q that the deal calls for Merrill to receive only $110 million of the purchase price in cash and the rest in notes with maturities of 10 to 15 years.

Out of necessity and desire, Merrill is making a game effort to put its house in order. But the devil, as the old saw has it, is in the details.


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