Markets Still "Thinking" About A Recession

Despite last week's relief rally and a widespread belief that the Fed and the executive and legislative branches of government are working on solutions to the subprime mess, there are still Street analysts cranking out reports on the probability of a recession.

Today's example: Lehman Brothers. Automotive interior manufacturer Johnson Controls down 8 percent pre-open on a downgrade from Lehman; they're concerned about a weakening consumer. In a long note on the possibility of a recession, Lehman says, "We expect auto sales to fall further in 2008 (to 15.5 mm) and believe that auto stocks are not likely to be supported at their current levels."


1) Electronic payment equipment maker VeriFone down 14 percent pre-open, as they announced they would be restating their 2007 earnings due to "errors in accounting." No word on the impact on earnings.

2) IBM is accelerating its buyback program--purchasing up to $1 billion of additional stock by the end of Feb. 2008. The buyback was orginally planned for March and April of 2008. this is in additional to a $12.5 billion accelerated share repurchase program announced earlier in the year. Why the move? Maybe because it's moved from its recent high of $120 to $105. Trading up 1 percent.

3) MetLife says it has no exposure t asset-backed commercial paper/SIVs or any other subprime exposure. Despite that, they are still giving 2008 guidance below analyst expectations; $5.90 to $6.20 a share; analyst estimates are for $6.26 (Thomson). Trading down 1 percent pre-open.

What's the "Trade of the Year?" I polled a few dozen traders last week and asked what person or firm made the best call last year. To be blunt, there were two that were on everyone's list:

#1--Paulson Capital call to short subprime. Hands down this was the number one trade. John Paulson's hedge fund is reportedly up more than 400% on the call. On Friday, Paulson said that corporate bonds would be the next sector to have trouble.

#2--Goldman Sachs avoiding the subprime debacle. Traders are still not sure how they did it, but even as their rivals took big write-down, Goldman said they would have none. The mystique remains.

Several others were mentioned:
--Jim Rogers shorting commodities midyear.
--Some also mentioned the CGM Focus Fund that is run by Ken Heebner, up about 70 percent this year.
--Finally, one cynic nominated Angelo Mozillo for selling his Countrywide stock at $20 (!)

Questions? Comments?