Commentary and Stocks for Monday

The municipal bond death spiral was blamed for Friday's tumble in U.S. equity markets as hedge funds stampeded out of positions. The latest seizure is proving to be problematic for many cities and states:

• Credit-market mess poses opportunity in muni bonds
  When the state of California tries to raise $1.75 billion early next week in one of its periodic sales of general-obligation bonds, it is likely to have to pay the highest interest rates in four years, at least on securities maturing in 20 years or more.
• Billions of dollars of sales slam muni bonds
  Prices have dropped for the past 12 days, partly due to the problems borrowers and investors are having with short-term municipal markets. Two of these markets, auction rate and variable demand note obligations, have frozen because investors fear some bond insurers that backed this debt are no longer credit-worthy as a result of their bad bets on subprime mortgage investments. These dislocations have hurt tender option bond trusts, which buy long-term muni bonds and finance them by selling floating notes. But now they are losing money — or are about to — because their borrowing costs have skyrocketed. At the same time, the value of their long-term municipal bonds has plunged.
• Holders cash in city bonds
  About a quarter of Vallejo's municipal bonds have been cashed in during the past week, likely in response to the city's serious budget crisis, city officials said Friday. One of Vallejo's lawyers, John Knox of San Francisco-based Orrick, Herrington & Sutcliffe, LLP, said however, that describing this - as some have - as reminiscent of the run on the Bailey Building & Loan in "It's a Wonderful Life," is "way over-simplified."
• Bond crisis hits Tenn. cities
  Tennessee cities and counties have managed their way around the problem so far, although even communities with good credit are paying higher rates. . . . The turmoil is notable because the municipal bond market is considered one of the safest on Wall Street. It hasn't felt a shock of this magnitude in more than 20 years. In one of the worst cases in a neighboring state — in Birmingham — a freeze-up in bond trading has the government there contemplating selling off its sewer system to get out from under interest expenses that have shot up by several million dollars. In Middle Tennessee, local communities have been able to keep raising money — at least so far.

Thoughts on the IBD 100

At our client's behest, we started monitoring the IBD 100 list of stocks. Over the past few weeks, we found an interesting pattern. First, there is heavy turnover each week. Second, the majority of the stocks removed from the list were losers in price on the week while the majoirity of stocks added to the list were winners.

For example, the first week saw 12 stocks replaced. Removed from the list were 11 losers and 1 winner. The replacement list featured 8 winners and 3 losers. This week saw 22 out of the 100 removed, of which 18 were losers and 4 were winners. The replacement 22 featured 18 winners and 4 losers on the week that closed last Friday.

More on the list vs. real life later this week.

Butter: It's Truly Golden

The magazine featured my fave, the Straus Family Creamery. I clarify their butter and cook (sparingly) with it, mostly combined with olive oil in the pan. Around here, we refer to vegetable oil as biodiesel, so you can imagine how funny it must have been to shoppers when my boy asked why the store stocked fuel for cars in the grocery isle.

Attention Futures Traders

The minimum tick size has changed for two U.S. Treasury futures (US, FV):

• 30-Year U.S. Treasury Bond futures from 1/32nd to 1/2 of 1/32nd (from $31.25 to $15.625)
• 5-Year U.S. Treasury Note futures from 1/2 of 1/32nd to 1/4 of 1/32nd (from $15.625 to $7.8125)

And the Winners Are…

The stock scan conducted after the close on Friday found 16 winners and 80 losers.

The winners are listed in alphabetical order below. Click on the column headers to sort the list. Our scan criteria incorporates price movement, range and liquidity (500,000 shares on the day, 20-day average of 1.5 million).

Get your All Access Pass to our research and find out which ones to buy, sell or hold.

Market Digest

• Economy in Focus: U.K., ECB Interest Rates, U.S. Jobs
  The European Central Bank, Bank of England and Bank of Japan announce interest rates. The U.S. Labor Department releases payrolls for February, and economic indicators from Europe include purchasing managers indexes for services and manufacturing. Bloomberg's Sarah Shannon and Richard Dean preview economic highlights for the week of March 3. HSBC Holdings European economist Astrid Schilo and David Wyss, chief economist at Standard & Poor's, comment.
• Hatzius Sees Mortgage Credit Losses Slowing U.S. Growth
  Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., talks with Bloomberg's Michael McKee in New York about a study he co-authored forecasting mortgage credit losses of around $400 billion, the impact of those losses on U.S. economic growth and the outlook for Federal Reserve monetary policy. Policy makers should encourage banks to raise capital because of the losses Hatzius and Morgan Stanley economist David Greenlaw wrote in the paper, presented to a conference today attended by Federal Reserve officals and Wall Street economists.
• U.S. stock funds take in $2.5 bln in week
  Stock funds that invest mostly in U.S. stocks had an outflow of $614 million compared with an outflow of $4.802 billion in the prior week. Stock funds investing mostly in non-U.S. stocks had an inflow of $3.069 billion compared with an inflow of $98 million in the prior week.
• Buffett May Target Smaller Purchases as Cash Pile Grows
  Billionaire Warren Buffett's Berkshire Hathaway Inc. is moving into bond insurance and expanding overseas after third-quarter earnings from insurance underwriting declined 47 percent and the U.S. housing slump reduced profit at its construction-related businesses. The company agreed in December to buy 60 percent of Marmon Holdings Inc. for $4.5 billion from the Pritzker family. Buffett built Berkshire over the past four decades through dozens of acquisitions. Along with insurance and reinsurance operations and a stock portfolio valued at $78 billion as of Sept. 30, Berkshire owns businesses ranging from candy making and jewelry to utilities and corporate jet leasing.
• Treasury's Paulson Says He Favors a Strong Dollar'
  U.S. Treasury Secretary Henry Paulson speaks at the Economic Club of Chicago about the outlook for the U.S. economy and housing market, the dollar and trade with China.