Monday, November 26, 2007


I am flying out tomorrow for the Value Investing Congress in New York City.

Will have limited internet access. Have a good week.

Google Masseuse Makes Millions through Options

Dang it - I knew I picked the wrong profession.

Another Bottom Call

Bottom is not here yet in financials. I just read a note (from this morning) from Citigroup comparing what we are seeing right now to August of 2002 as a great buying opportunity. It was entitled something stupid like "blood running in the streets" essentially calling a bottom. As I have previously stated in posts, I am sick of the phrase "blood running in the streets." These people don't know there history if blood is currently running in the streets. We are squirting currently and we may get to full blood flow but stop using an "in" phrase right now.

I refuse to believe sell side analysts on Wall St. can call bottoms like this. How many housing bottoms have been called from these firms. In fact it is only recently (the last two to three weeks) that it seems the tone has drastically changed when discussing housing by "talking heads" on CNBC and such. This change, in my eyes, has really been remarkable. I may be wrong but the time to buy housing stocks may be very close (still not personally buying). Anyway what we went through in housing with bottom callers I think we will go through in the financials. I saw a graph showing that S&P 500 bank index (subset of the financials) showing that it is down like 30% since August. I fully expect that to be down 50% and maybe more before this is all over.

Citigroup is already down like 3% from there call this morning in one trading day.

Tuesday, November 20, 2007

Second Round of Laughter

Strengthening yen hurts exporter stocks in Tokyo. Hong Kong slips as investors learn rumor of U.S. rate cut was false. Australia and South Korea also decline. Shanghai bucks trend, nudges up.

This is the second time I burst into audible laughter at reading a headline today. The above was on cbs.marketwatch a few minutes ago. Did anyone legitimately trade on the rumor that the Fed was cutting rates after two Fed chiefs spoke very strongly against cutting rates in December much less less four days later. We may indeed have an emergency rate cut but the Fed would have lost all credibility (in my mind they have very little if any left anyway) to be scheduling an emergency rate cut today.

Sometimes if you need a smile, just surf through some financial headlines.

Jim Rogers on Fannie Mae

There was an interesting Bloomberg News Video (no link) that was a phone interview with Jim Rogers. He has been short Fannie Mae (also short Citigroup currently) for a couple of years. He believes Fannie Mae is worth less than $8 a share.

He thinks there are many more problems to come over many years.

Interesting Comments

I kind of agree with "Ralph."

Fed Forecast

Okay I am rolling on the floor laughing at the Fed Forecast. I am laughing at the markets reaction which has no clue what to do (as it probably shouldn't) and the forecasts the Fed has given. I may write more on this later but I would sure like to know what they put in their models. They may be right but garbage in typically = garbage out.

Core inflation at 1.5% to 2.0% in 2009 and 2010. Which numbers are we looking at? The doctored I am assuming. This may be right if we enter into a deep recession. It is not right with their second forecast.

Fed cuts '08 GDP to 1.8% to 2.5%.

If we do end up having that rosy scenario of growth (I firmly disagree) then inflation will be much higher.

But it goes with their overall theme. We see risk to inflation and to growth. Translated - HELPPPPP!!!

Monday, November 19, 2007

Pavlovian Reflex

Jean-Marie Eveillard made some fascinating and insightful (at least in my mind) comments in the October 24 First Eagle Funds conference call. He made these comments right before the NASDAQ made a multi year high coming off the August lows.

The second thing that strikes me is that over the past 20 years there have been six financial crises: October '97, 1990, which already was somewhat real estate related, late 1994, the Mexican crisis, '97 to '98, the Asian Crisis, the Russian Crisis and then the failure of long-term capital management, the hedge fund, where the Fed had to organize a bail out, not of a bank, but this time, of a hedge fund. Then, in 2000, there was the bursting of the technology/media/telecomm bubble. And the sixth one, two months ago, was the sub-prime crisis, sub-prime housing crisis.

Now, the first five crises were handled by Greenspan, who flooded the system with liquidity and the crises passed fairly quickly. The last crisis was handled by Mr. Bernanke and he took the same attitude, flooded the system with liquidity. And, the consensus today I believe, among investors, since we are almost—we are back to all time highs in the American equity market then—it’s the consensus of other investors as well, since foreign equity markets are also back to their highs. So the consensus is that the crisis has come and gone, the crisis of two months ago has come and gone.

Now, it’s almost a Pavlovian reflex because if five financial crises were handled relatively quickly with no major negative economic consequences, then the assumption has to be that the sixth one will also be handled relatively quickly and with no major economic slow down or recession. And that may very well happen and maybe the odds are pretty good that it will happen. At the same time, it seems to me that the Fed is walking a fine line. On one side of the line, cutting short some interest rates to the point where the decline in the US dollar gets disorderly, although, it’s in nobody's interest admittedly that the decline get disorderly, and/or that domestic inflation perks up.

On the other side of the line, the risk is that cuts in short-term interest rates—because the housing bubble was so gigantic—that cuts in short-term interest rates would not be enough to prevent the economy from, the American economy, from going into a major slow down or even a recession. Now again, the odds may be good that both risks will be avoided. But at the same time, you know, as Peter Bernstein says, sometimes what matters is not necessarily how low the odds are that something will happen. What matters sometimes more is what the consequences would be if that something were to happen.

I had not thought of the the Pavlovian reflex point. It had me thinking all last night.

Friday, November 16, 2007

Victoria Secrets and Market Implications.

This story caught my eye on cbs.marketwatch and not because it was Victoria Secrets but because of the headline of more conservative lingerie styles. I love behavioral investing psychology and one thing I have read several times over the years has talked about fashion as an indicator of investing (mass psychology of society) moods. These things go in cycles just like housing goes in cycles or steel or anything else. More clothes typically means more conservative mindsets which means less risk taking. I read something a month ago saying it was starting to be evident in the fashion industry about six months ago.

I don't put much stock into all that other than it being one more data point but it is interesting considering the fact that the world may have started a massive delevering two to three year cycle. Animal spirits as Bill Gross calls them are going into hibernation.

Reunited Spice Girls perform at annual promenade that features more conservative lingerie styles this season.


In line with Turney's plans to be more conservative, this year's line of Victoria's Secret lingerie probably could be considered as such by viewers tuning into the show Dec. 4.

Thursday, November 15, 2007

Merrill's Choice of Thain

I meant to do a post on this last night and forgot and was going to do it today but I noticed Big Picture beat me to it.

What are those reasons? Well, according to, Fink would only agree to take the position if Merrill was willing to give a full and complete accounting of it's subprime exposure:

Well after Fink laid down his one and only stipulation (pretty understandable if you ask me, I mean I would want to know what kind of mess I was getting into) the phone went dead. Fink apparently never heard back.

Seems logically it would be for one of two reasons.
1) The write downs are still woefully short of reality
2) There was no way to meet Fink's condition because no one at Merrill has a clue what the accounting should actually be.

Both scenarios seem very bad for investors and the markets alike.

Tuesday, November 13, 2007

And There is Blood Running in the Streets?

Amid the gloom, analysts estimate New York-based Goldman Sachs Group Inc., Merrill, Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. will earn a combined $28 billion this year, down 8.3 percent from the record $30.6 billion in 2006, according to a survey by Bloomberg. Analysts currently estimate the firms' net income will reach $32 billion in 2008.


``When you look to next year, you're back to earning money once these writedowns are taken,'' said Benjamin Wallace, who helps manage $750 million at Westborough, Massachusetts-based Grimes & Co. and owns Merrill and Morgan Stanley shares.

Quick point on this. This is one reasons why I don't think financials are a screaming buys. Analysts still have not realized that the gravy train for now is over. Just because writedowns evntually will cease doesn't mean huge profits are back as volumes will takes year if not a decade to recover.

Goldman's Dollar Take on Several Currencies

Reading this article on Goldman's call to cut back on emerging markets. What I found more interesting was their thought on the U.S. currency in relation to several currencies. Not sure if I agree or not but interesting.

The U.S. investment bank said Brazil's real is 28% overvalued against the U.S. dollar, as are the currencies of India, at 22%; South Korea, 32%; Hungary 42%; Poland, 60%; and Turkey, 74%, according to the report.

Arbitrage Opportunity?

Was reading this article on the best way to short oil and it talked about DCR and UCR which seems way out of whack.

For this reason, the most logical choice to bet on a decline in the price of oil would seem to be the MacroShares Oil Down Tradeable Trust DCR, which tracks the inverse performance of the long-term trend for oil. This isn't quite the same thing as tracking the inverse performance of spot oil prices, but it's still a directional play. DCR, and its twin the MacroShares Oil Up Tradeable Trust UCR, are trusts that hold short-term Treasuries and cash equivalents. They work like swaps in that when the Up Trust increases in value, it takes the money from the Down Trust.

Unfortunately, the Up Trust and the Down Trust aren't the hedges they might be because their share prices tend to trade out of line with their net asset value. As of Monday's close, the Down Trust was trading at a 73% premium to its NAV, while Up Trust was trading at a 20% discount to NAV. Robert Tull, managing director of MacroMarkets, says the products take a long-term view of the market and so aren't the best choices for investors trying to capitalize on near-term trends.

Monday, November 12, 2007

Hussman to the Dark Side

I have not read Hussman's stuff in awhile but was drawn to his latest writing because he has now shifted his view that a recession was imminent. (Something I said in August)

According to the latest FDIC banking profile, FDIC insured institutions currently hold a notional value of $153.8 trillion in credit derivatives. That's not a typo – though GDP itself is only about $13 trillion,

I'll reiterate my view that recessions emerge not because of a general decline in the willingness to consume, but rather because a mismatch emerges between the mix of goods and services demanded in the economy, and the mix of goods and services that the economy has been supplying. Many industries experience continued growth during recessions (even if their stocks trade somewhat lower), while other industries experience profound demand shifts. In the late 1990's, there was clear overinvestment in telecom and information technology, and these sectors suffered disproportionately during the recession that followed. In the current cycle, the overexpansion has been in housing, debt origination, and leveraged finance, so a much different group of stocks will probably be hung out to dry this time.

Thursday, November 8, 2007

Shorting China

The Journal had an article today on the Pro Funds Group that is launching an ETF that shorts the Chinese Stock Market through inversely following the FTSE/Xinhua China 25 Index Fund. It is levered 2X just like SRS I have talked about. A couple of things, the fact this came out is another sign I think that the bubble is not about to pop, it still has a ways to inflate. Secondly I will be invested in this at some point almost guaranteed (What a fabulously way to short the China market) but it will not be anytime soon and it will be after the China market is already down 15% plus. I have no plans of trying to be any type of hero and calling the top of the Chinese stock market.

Commericial Real Estate Slowdown is Coming

Commercial Real Estate I think will be the S&P 500 of the homebuilding bubble. Housing stocks went down 80% (the NASDAQ) and Commercial REITS (and other commercially centered companies) will go down 50% (The S&P). It never plays out the same but I think it is safe to say commercial real estate is entering the normal time in the cycle where they are about to get walloped and the risky stuff that went on as documented below will make it feel very painful for equity holders.

The record price paid in January for the 41-story aluminum-clad office tower at 666 Fifth Avenue — $1.8 billion — was breathtaking.....


Today, however, some real estate specialists regard the 666 Fifth Avenue transaction as a textbook example of the risky practices that were prevalent before the current credit squeeze, when many loans were based not on the actual cash flow of the building from existing rents but rather on optimistic projections of what the space might command once those leases expired.....


What raised eyebrows was the financing of 666 Fifth and other buildings sold late last year and early this year, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm.

A group of lenders led by the real estate unit of Barclays Capital agreed to provide an interest-only first mortgage of $1.215 billion based on an annual cash flow of $114 million, or 1.5 times the debt service, according to a document filed with the Securities and Exchange Commission. But a footnote pointed out that the cash flow from existing rents would actually cover only 0.65 percent of the debt service. ... the building’s shortfall amounts to $5 million a month. A $100 million reserve fund was included in the debt package to cover the shortfall.

Wednesday, November 7, 2007

My Thoughts on Financial Companies Part II

I did not put on those trades I was referring to in my previous post concerning my thoughts on financial companies and it is a good thing I did not considering the blood bath of financials the Monday and Wednesday. One of the trades would have been in CCRT. I could sell a naked Jan call with a strike price of 10, immediately buy the stock at market, and get a 34% IRR. (At the time CCRT was around 18 and that was assuming I could split the bid ask spread in the middle) At the time it looked very safe with the stock having to drop 50% before I was out of the money by January. I looked at it and looked at it and decided to pass and that 50% has almost happened in three days. A couple other trades I am still looking at so will not comment.

Jim Rogers echoed some comments I have thought the last couple of days. This credit thing is truly another bubble. After the big drop in August, some of the value guys I respect were some of the first to dip their toes in on various names. I am not saying they are wrong, but I think the industry may have been in a stealth bubble. In other words, it didn't look like a bubble because earnings was there to make valuations looks reasonable. Ahh, but these earnings were made on instruments that were no where near priced correctly. Essentially with the very low risk premium these financial firms needed to produce that many more widgets to generate income. Well this created a viscous cycle that is now unwinding.

So lets say this risk premium was really a bubble (in the fact that there was no risk premium), well the unwinding of it could really just be getting underway. As I have said, a bubble demands bubble outcomes. S&P 500 was down about 50%. NASDAQ down 80%. Homebuilders are now down about 70%. Financials are down, what, 25 to 30%? Looking at this, it seems like everything has been shrunk down to quicker reaction. The homebuilders started moving down Sept 2005 until Sept 2006. Then you had a five month rebound before crashing again. In financials you had the big move down in August into September before a very big move up and now we are crashing again. David Dreman and Bill Miller both have said bank stocks are interesting with David talking about the scare that comes along every 10 years for financials.

Maybe he is right but historically financials have been around 20% of the S&P. We moved up to 25%. Doesn't this have to correct and almost overswing before the all the clear is out? Also high yield bond spreads haven't even reached their ten year average (This was as of two weeks ago, maybe they have now) which tells me spreads in this area need to widen. From homebuilders, to building suppliers, to banks focusing on subprime, to Alt A companies, to investment banks to mortgage insurers this has spread from one to other in a classic way. It has been very predictable and when I shorted the next step I usually lost 20% on paper first before the market finally was like oh yeah the subprime guys will get hurt and oh yeah the Alt A guys will get hurt and oh yeah the mortgage insurance guys will get hurt. Duh. So isn't it a duh that credit defaults will move back towards normal, that corporate bond spreads need to widen, that this will cause further pain in various financials stocks, that the Fed will continue be forced to cut rates, and the dollar will continue to fall? Once again it seems like a classic pattern that no amount of intervention will prevent. At best it may postpone the inevitable a little longer. The trick of course is making money in all of this until the market realizes that this time is not different.

So back to financials. The market keeps wanting to say oh okay that is the worst of the bad news and it is behind us. Then the news gets worst and the stocks get beat to death and then the market says oh okay so we had a 10 billion write down and the worst is now behind us, we know it is now back to normal. For argument's sake let's say the worst news is behind us. Does that make these things a screaming buy???? I really think the answer is a no. If the losses stopped tomorrow we are not going back to "normal." The pace and the frenzy and the animal spirits, as Bill Gross calls them, are not coming back (at least in this space, watch out emerging markets). What that means is "normalized earnings" that Wall Street has stuck in their head for these guys will not be around for at least two to three years.

The blood running in the streets is a common phrase that is thrown around. write about buying Citigroup and being a contrarian investor almost challenging you to see if you are a man enough to walk the walk and start buying C. To be honest I have considered some various deep in the money calls with C and have passed. I am not convinced that blood is running in the streets. Oh sure Wall St. is acting like it is. They are howling and crying and bemoaning and begging in true Wall St. fashion, but is there true blood? Wall St. estimates on bonuses came out the last couple of days from two separate firms. One estimates it to be flat and another slightly down from last year. Um if anybody noticed last year was a record record year when it came to Wall St bonuses and your telling me blood is running in the streets is flat to slightly down bonuses? Have there been any major bankruptcies? New Century was the biggest but that was subprime related. The Wall St. crowd would like you to believe that the sky is falling (and it may indeed fall) but it hasn't yet.

The question is if we were in a bubble that was just masked by tons of volume of very low risk premium securities making valuations looks normal? If the answer is no and this is just really a 10 yr scare in financial stocks then you should be backing up the truck. If the answer is yes then I think the stocks in financials as a whole may be about (optimistically) halfway done moving down. The great thing about running a concentrated portfolio is I do not have to vote one way or the other. I can look elsewhere.

More Jim Rogers Comments

He has been as right as anyone over the last decade. I think he is right on with his credit comments.

A Comparison of Bubbles

I thought this, though short, was very interesting. I have said repeatedly that the next bubble will be in emerging markets (specifically China) and commodities. Many people are acting like China's bubble is about to pop anyday now. I think it has much longer to go and could be the bubble of all bubbles. Compared to previous bubbles it already has had a great start in a relatively short amount of time.

Sunday, November 4, 2007

My Thoughts on Financial Companies

I have been in the car for many miles and hours driving and listening to music over the weekend as I traveled to Marble Falls for a buddy's bachelor parties. I typically enjoy these lonely road trips because it makes you do nothing forcing me just to think, and think I did. I have not taken the plunge and bought any financial stocks in all this financial turmoil. Since October 2006 I have shorted many names in the space including Bank United (BKUNA), Downey Financial (DSL), Thornburg Mortgage (TMA), Goldman Sachs (GS), Moody's (MCO), and MBIA(MBI). All of these I have made money on (except TMA which I covered at a loss before the huge stock drop, still bitter about that one, lol). Looking at the landscape currently there many names I find interesting to potentially buy and yet I haven't. So most of my ponderments were on why I haven't and if I needed to start moving into some names this week. Have I not because I am being ruled by the emotional fear that is gripping the rest of the market? Right now can I not be greedy when others are fearful? Is there an emotional aspect to all of this that I simply need to overcome? These thoughts and others I kind of rolled around in my brain and the answer I think I came to is no. I have bought (and so far lost money in) things related to the homebuilding space. Not homebuilders yet (found it interesting that Buffett said he thinks the whole space is still not interesting) but things related to homebuilders. Obviously there despite the danger and continued deterioration of prices I have been able to resist the urge to flee with others so what about the financial space?

I think it is different. Unless you are intimately connected, at least for me, I find it almost impossible to handicap various outcomes. I have said numerous times that hurricanes sink even the best of captains and I think no where is the danger higher of sinking great captains caught in hurricanes than in financial hurricanes. The reason is the nature of the business. Everything (unlike homebuilders or oil exploration companies) is based on confidence, trust. The world we live in is terribly dependent on credit, securitizations, derivatives, insurance, etc. If all of a sudden the trust falls apart, the system itself falls apart, it doesn't matter how good you are, you are sunk. A great example of this has been Delta Financial (DFC). I looked at this name numerous times. I read the majority of the annual report, almost bought it several times. It was cheap on every meaningful metric. If you are unfamiliar with them (very rough explanation) they originate, securitize and sell subprime loans but they originate virtually zero floating or adjustable rate mortgages. They are almost all fixed. Their management has been very conservative and stayed away from the froth nonsense of arms and teaser rates and all the other abuses that went with the bubble. They had a great management but in July into August when the hurricane hit, they still were sunk. It didn't matter, down went the ship. Why? Because the market didn't trust the system anymore. Had nothing to do with the management team or the company, the system was thrown out as untrustworthy. As a result financing was essentially cut off from them, their lifeblood, and a huge gaping hole emerged causing the ship to start sinking the stock price going from 12 to 4 in weeks. Maybe their is no permanent impairment of intrinsic value, (I think their is) but here was a great company that was very conservative with a great management team where all of a sudden the system lost all trust with all investors.

Compare this to a homebuilder like M.D.C. Holdings (MDC). I do not own it but here a is a homebuilder caught up in an equally if not bigger hurricane with equally conservative, superior management team but this company has virtually zero % chance of going bankrupt. They have tons of cash and it isn't like there won't be any homes built in America for 10 years. So here, though the price keeps drifting downward, I can handicap the downside much easier than a financial company.

It is impossible to predict "black swans" which is what makes them black swans but it seems to me in the financial system we have a greater probability than we have had in a long time of the financial system breaking down to the degree that even great companies with great management teams still are not cheap. A system wide deleveraging where you have a category 3 hurricane turn into a category catastrophic category 5 hurricane. Please understand I am not by anyway predicting this. I am just saying the probabilities are much higher than they have been in many years and I am having a terrible difficult time handicapping this when analyzing great financial companies selling at what seem to be potentially ludicrous prices. You have your $.50 (even $.20) dollars in quite a few places which appears to be very large margin of safety but like DFC that margin of safety can evaporate in mere weeks as the system completely breaks down. In my mind it is similar to technology. Very hard for guys like me to invest in technology companies because it is extremely hard to predict what the technological landscape will look like even 3 years out. Well it seems to be very difficult for me to predict what the financial system will look like even 3 weeks out right now.

Anyway, with all that said there are many opportunities and I have been thinking alot about how to reduce my risk while taking some exposure. I think I have come up with some fairly creative ways to do this and will probably work some trades in the next couple of days so will wait to talk about them until later. Just thought I would write about some of things that bounced around in my brain over and over as I put miles beneath my tires and the pavement.

Thursday, November 1, 2007


November 1st, 2007 will go down for me as a lifelong milestone. My hedge fund is blowing and going. Been a long time coming and some sacrificies along the way but what a day.