Friday, February 29, 2008
After only, what four days, the man behind the curtain has revealed himself screaming I am here, I am here!!! Massive efforts by the rating agencies, the government, and investment banks to hog tie and keep the curtain closed worked for less than 100 hours.
Shares of bond insurer Assured Guaranty rose Friday after revealing that investor Wilbur Ross will provide up to $1 billion to strengthern its business, while rival Ambac Financial Group's shares fell on a broadcast report that a deal to boost its capital has hit a snaghttp://www.marketwatch.com/news/story/aig-shares-fall-after-firm/story.aspx?guid=%7B86090D0D%2DCC68%2D441F%2DBFEF%2D619E7505BA99%7D
The fourth-quarter result included a pre-tax charge of $11.12 billion from a net unrealized market valuation loss related to the super senior credit default swap portfolio of the company's AIG Financial Products Corp. (AIGFP) derivatives unit.
AIG is important because these credit default swaps that MBIA acts like are okay forced AIG to take an $11.12 billion loss on. Hmmm
Thursday, February 28, 2008
Bill Gross March commentary - always a great read but this one I thought was exceptional. I highly recommend it!
Price controls are almost universally reviled by economists. The negative economic consequences of price floors or price ceilings are numerous and well-documented. Our current series of hearings have been called to discuss the most important, but least understood, price manipulation in the world today: the manipulation of the interest rate.
By setting the federal funds rate, the rate at which banks in the Federal Reserve System loan funds to each other, the Federal Reserve inhibits the actions of market participants coming together to determine a market interest rate.
I found this mildly interesting. At the risk of getting shot by some of my peers I must admit I love watching Fast Money. I hate Mad Money and I only occasionally watch Kudlow & Company when I feel like I am getting overly bearish and I want to hear the bull story but I watch parts of Mad Money almost daily. I have never put on a trade or invested on anything they have ever said but I think it is a good quick snapshot of overall market news for the day and a good gauge for the overall sentiment on Wall Street.
Anyway this link grades their recommendations. They are actually surprisingly better than I thought they would be.
The California Public Employees' Retirement System, the largest U.S. pension fund, may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records.
``We plan on ramping up the program by hiring additional staff,'' McKinley said by phone yesterday. ``We are excited about commodities, which have performed exceptionally well for us.''
Fundamentally I think commodities still have a ways to go, especially agriculture though it is has gone to far to fast and I am almost hoping for a pullback. Stuff like this though sets up for the next bubble. I think I can say with some certainity that emerging markets will perform better than most expect in the face of a U.S. economic slowdown. This will bring out people who say things have changed causing both emerging markets and commodities to overshoot. We will probably approach fair value in the next 18 months and way overshoot in the following two to three years setting up for a massive value.
Wednesday, February 27, 2008
As you can see from the attached web page listings, that is only the slightest of exaggeration, as there are quite a few house in Detroit for sale at $100 each.
And, if you search for $0 - $5,000 price range in Detroit, MI, you will find 1,397 properties in that range, out of 20,881 properties for sale.
Can't you buy the land, bulldoze the house, and turn it into land for cows or something? I realize Detroit is dying as a city but sheez.
Monday, February 25, 2008
Behind the smoke and mirrors, besides the ABX thing, I just saw this.
As a result, the market for variable-rate demand notes has split in two, with credit-worthy paper at times fetching yields that are lower than the approximately 2.5 percent rate that previously prevailed for most of this debt. Less desirable notes now trade at yields of 6 percent and even higher.
This phenomenon has shocked investors because variable-rate demand notes have safeguards -- letters of credit and standby purchase agreements. Issuers of variable-rate demand notes -- including states, cities and towns -- paid extra fees to give investors those protections, which oblige the sellers of those guarantees to buy the debt back. In contrast, auction-rate notes have none of those safeguards, and billions of dollars of auction-rate notes have failed since late January -- which means issuers have had to pay penalty rates as high as 20 percent. Such auctions fail when there are not enough buyers.
So as a MBIA short and being overall negative bias on the market this show and pony game drives me nuts. It adds stress and forces me to spend at least some time thinking about probabilities of non fundamental events because perception can turn into reality even if it isn't reality. The other part of me sees no alternative. I mean can S&P really cut them?? I mean really. I know some of you disagree with me on this but MBIA and ABK blows up and the results I think are nuclear fallout. Look at the auction market last week. How in the world could that have been predicted? What looks on the surface as something totally insulated and safe suddenly blew up on concerns at least partially driven by these guys. What happens if these fears are realized. So what if most muni bonds are already trading unwrapped? There will still be major fallout. So as an individual living in America where my future for the most part is tied to America shouldn't I applaud S&P's actions even if I know it is a farce? I mean what is the worst that happens from this? The decline continues to be slow and painful and will end up where it would end up anyway? But time buys optionality and optionality buys more time. We probably are headed towards a Japanese slow meltdown that will be long and slow and put us in muck for years but millionaires and billionaires were made in Japan during this time. Isn't that a better option than a complete blow up of our financial system?
From my short perspective, MBIA may end up being a zero 18 or 36 months from now instead of 2 months or maybe I am forced to cover. I was sitting on a huge alpha gain today until 1:15 p.m. and then ended up with a huge alpha loss. Still as much as I know it is a lie, as much as I think it is manipulation, as much as I hate the smoke and mirrors in this case maybe John Lott's utilitarian approach is the right one. The greatest good for the greatest number.
Just a slight observation. While the Dow surged ahead 1.5% and most financials tacked on 3 to 4% at least, the ABX indexes (series of credit-default swaps based on 20 bonds that consist of mortgages, basically measuring the risk underlying mortgage securities) hit new lows in 18 of 20 issues today. Two things matter for more financial writedowns. Mark to models which is based on ratings (Moody's and S&P) which everyone from Washington, to Wall Street is desperately trying to hide the man behind the curtain and things like the ABX and LCDX. Those two are not looking good.
Friday, February 22, 2008
The teddy bears selling for $1.40 in Shanghai's IKEA store may be just about the cheapest in town, but they're not made in China — they're stitched and stuffed in Indonesia.
For instance, American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 to 10 percent for the 2008 holiday season, largely because of rising manufacturing costs.
Costs in China are climbing nationwide, but the greatest pain is being felt in the south, where about 14,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbors Hong Kong.
I thought this was just to good. History doesn't repeat itself but it rhymes. In this case maybe it is rhyming with an HBO series. Never seen "The Wire" but I was very impressed with the author in drawing the similarities.
A couple of quotes from the legendary trader William Eckhardt. I am not a trader but I found alot of wisdom in these three quotes. I often times find more wisdom and get more great ideas from people who are totally different from me, have a totally different perspective on life, and who often vehemently disagree with my viewpoint. It constantly amazes me how many people just throw out others thoughts because they are different. I am not a trader but if you dissect these quotes you realize how much wisdom it has for long term value investors.
Saw these on http://www.thekirkreport.com/
"One common adage on this subject that is completely wrongheaded is: you can't go broke taking profits. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance." - William Eckhardt
"I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it all because they didn't feel the pain when they were losing. In those formative first few years of trading, they felt they could afford to lose. You're much better off going into the market on a shoestring, feeling that you can't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions." - William Eckhardt"If you're playing for emotional satisfaction, you're bound to lose, because what feels good is often the wrong thing to do. Richard Dennis used to say, somewhat facetiously, "If it feels good, don't do it." In fact, one rule we taught the Turtles was: When all the criteria are in balance, do the thing you least want to do. You have to decide early on whether you're playing for the fun or for the success. Whether you measure it in money or in some other way, to win at trading you have to be playing for the success." - William Eckhardt
Thursday, February 21, 2008
Wednesday, February 20, 2008
More on the Ackman plan I referenced in the post below.
So what is going on besides the random walk that rules the short term. Who knows but I have a couple of speculative thoughts. One, yesterday's action was the first trading day after the options expiration so you may have had a repositioning of the markets that did not mean as much as I thought it did. Today I had to think awhile longer to come up with a hypothesis. The only good news at all was the Hewlett-Packard earnings release but that alone should not have propelled the markets. Maybe, just maybe, it was the Bill Ackman news that gave a counter proposal on how to split up MBIA and Ambac. http://www.marketwatch.com/news/story/ambac-mbia-short-seller-proposes/story.aspx?guid=%7BC92741BA%2DE950%2D4E0A%2DA326%2D84C77C2FD826%7D This plan though still not good for MBIA and Ambac shareholders, appears that it may be a better plan than others have proposed in helping limit the writedowns the banks would experience. As the regular readers of my blog know I am putting huge importance on direction of the market over the next few months on the outcome of these guys. The first securities that started to trade in the positive territory was the financials. The market may have ignored all the bad news today after seeing yet another proposal that could be better than anything else proposed for the monolines.
Who knows but like I said, I like thinking about it.
Hussman predicted almost perfectly what is going on now back in 2003 with a piece entitled Freight Trains and Steep Curves seen here http://www.hussman.net/html/debtswap.htm.
He writes his updated thoughts on the link below. Very good read. (Thanks Nathan)
As we enter 2008, the excessive creation of risky debt is beginning – and I should emphasize only beginning – to produce writedowns and losses. Though that “Freight Trains” piece has played out largely as expected, the situation has been complicated by a prolonged housing bubble that has only made the debt imbalances worse.
Last week, AIG was hit hard when it admitted it could not “reliably quantify” its losses on these credit default swaps. One wonders how companies can have much sense about the risks of their counterparties when they cannot reliably quantify their own.
Fascinating post at naked capitalism today saying a couple of things I have said before. That the credit market may be out of whack alot longer than you would expect.
It cites two Fianancial Times peices. One from John Authers who thinks the two markets will converege and one from John Dizard.
I strongly recommend cheacking out the post if you haven't read it.
"This credit crunch is completely intellectually challenging and exciting. If you like to have real problems, this is absolute heaven." - Jeremy Grantham
Don't usually do this but below are several links. The market so far is performing spectacularly today. Though we are down 70 I thought we would have been down 150 plus with all the bad news today.
Auto Delinquinces at 10 Year Highs
http://www.forbes.com/feeds/ap/2008/02/14/ap4657184.html (that was actually from a couple of days ago)
Auto loans at least two months delinquent hit a 10-year high in January, Fitch Ratings said Thursday, signaling the continued spread of consumer weakness to beyond homes and credit cards.
Mortgage Applications down 22.6% From Last Week
Mortgage applications filed last week dropped a seasonally adjusted 22.6% from the previous week, as interest rates on fixed-rate mortgages increased, the Mortgage Bankers Association reported Wednesday.
Single Family Housing Starts Lowest Since Jan 2001
Privately-owned housing starts in January were at a seasonally adjusted annual rate of 1,012,000. This is 0.8 percent above the revised December estimate of 1,004,000, but is 27.9 percent below the revised January 2007 rate of 1,403,000.
KKR Financial Defaulted on Commercial Paper Repayments
KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.'s publicly traded fixed-income fund, delayed repaying asset-backed commercial paper and started restructuring talks with creditors.
As I said, the market is so far hanging in there like a champ. If it wasn't for the huge reversal yesterday from positive to negative I would think this may actually be bullish.
Tuesday, February 19, 2008
8/10/07 6.59% 5.25% 1.34%
2/15/08 6.06% 3.00% 3.06%
Just like you had the Greenspan conundrum with rising FED Funds rate with long term borrowing costs not moving we now have the Bernanke conundrum with the opposite.
So the mortgage rate has dropped 50 bips. That's great but hardly earth shattering and why I think the 2nd half rebound everyone is expecting will be very disapointing.
Thursday, February 14, 2008
Bond insurers have four to five business days to re-capitalize themselves enough to keep their crucial AAA credit ratings, New York Governor Eliot Spitzer said during a Congressional hearing on the $2.4 trillion industry on Thursday. If that doesn't happen, regulators will have to step in and separate bond insurers' municipal businesses from their more troubled structured finance units. "We will need to move in that direction. It is not our first choice but time is short," Spitzer said. "In the next for or five bus days we would like to see a resolution," Spitzer added. "It's time for deals to get done."
UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.
Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst.
Auction bonds have interest rates determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.
Until recently, UBS and other banks that collect fees for running auctions have stepped in with their capital to prevent failures when bidding faltered. These firms have grown unwilling to commit their money to auction-rate securities after suffering at least $133 billion in credit losses and mortgage writedowns stemming from the subprime mortgage collapse.
In my opinion, this is more of a big deal than just the investment banks taking more losses and the credit crises continues. It is another issue that puts major headwinds in the economy. I do not have the statistics in front of me for what municipal cities spend annually on infrastructure and public work projects but I would be willing to bet it is not a small number. All of a sudden these projects are not getting financing and if they get delayed or canceled this is another blow to overall economic growth. Unfortunately the banks have acted like monolines are fine and not insolvent. Well the market is starting to say that is a lie which leads to yet more dominoes falling.
Tuesday, February 12, 2008
http://www.cnbc.com/id/15840232?video=649399285&play=1 - James Chanos - my favorite short seller.
http://www.cnbc.com/id/15840232?video=649400213&play=1 - Bill Ackmen
He is even more bearish than he was six months ago. Just like bankers can become tunneled vision that housing never will go down, Jim Rogers risks becoming tunneled vision on his negative views on the world. However, I agree with him much more than not.
On propping up the U.S. economy
Japanese tried for 15 years to keep propping up, you know, zombie companies, etcetera, etcetera, and it took them 15 years and they’re still aren’t out of the woods. They should just go ahead – recessions are common. We’ve been having them every five or six years since the beginning of time. They’re good. They clean out the previous excesses. They let the system start over with a sound basis.
Oh no, of course he is. I mean he’s laid the foundation for the demise of the Federal Reserve. Between Greenspan and Bernanke, we may see the Federal Reserve fail. We’ve had three central banks in America. The first two failed. This one’s going to fail too. I mean if you really – we could spend a whole program, a whole year of programs, reading quotes from Greenspan and you would realize what a fool he’s been.
He’s worse. All he knows is to print money. His whole intellectual career has been spent studying the printing of money. America’s now given him the printing presses and all he knows to do it to run them. He doesn’t know about markets. He doesn’t know about foreign currencies. We know now he doesn’t even know about economics. I mean, he’s got a PhD in economics and he was a professor of economics, but he doesn’t have a clue about economics.
Inflation damages everything. It distorts all economic planning, all economic decision making. A slow economic profile or whatever he called it – we get over recessions. They end. But once you start embedding inflation into the entire nation’s economy, that’s one thing. Then it changes everything. It changes currencies. It changes foreigners’ perceptions of their own economy, their own currency, their own cost of doing business.
Well, I’ve been buying them in the recent past, a few weeks ago. I bought more ags, yes. Agriculture is the best place – one of the few places - where I would put money in the investment markets right now. I’d buy agriculture. I’d buy the renminbi, the Swiss frank, the Japanese yen, but beyond that, there’s not much I see that I would be buying.
Monday, February 11, 2008
Unfortunately you need a subscription or a hard copy of this weeks Barrons. If you cannot get it but want to read it shoot me an email. Jeremy is right there with George Soros and Will Rogers in overall bearshiness. He is one of the best though always really really early (He started talking about the housing bubble in late 2003 and the equity bubble in 1997. The lateness of the latter almost cost him his firm).
This occurred at a time of what I believe is the first global bubble in pretty well all asset prices, so there is a much greater degree of broad-based vulnerability.
Ten years would be a perfectly normal period of time to go from a peak of a great bubble [like the one in 2000], based on the history of bubbles and their aftermath, to the low. I have long thought that 2010 would be when we hit the biggest discount to fair value. Trend-line value on the S&P, by the way, in 2010 is 1100. (The S&P 500 traded at 1334 late last week.)
By a nice coincidence, those averages suggest the market will decline to 1100 in 2010, which is exactly the number we get to from a completely different technique -- building it from the grass roots through fundamental value. We do that by taking average corporate-profit margins, actually a generous average, assigning a normal market price/earnings ratio, and that gives you 1100 in 2010.
On affordibility of homes
In the end, we, the people, have to be able to afford the houses and they are affordable at something around 2.8 times family income. When they peak in Boston at 6 times and nationally at 3.9 times, you know you are in for tough times.
On the dollar
Personally, I'm long the yen, the Singapore dollar and the Swiss franc. I'm certainly not long the pound: shorting the pound is a better bet than shorting the dollar.
Friday, February 8, 2008
Whitney Tilson speaking on attractive opportunities in the retail space on CNBC.
I tend to agree with him. I am not touching longs in the financial or homebuilding space but I am finding some interesting opportunities in the retail space.
I am probably not being as aggressive as he is because I do not think this is late 2002 buying opportunities. I think this may be late 2001 opportunties which means it will go down quite a bit further. Of course you cannot time these things and you must focus on fundamentals but I am being cautious.
Page B3 of the Wall St Journal today had an article on Burger King taking away the whopper and secretly filming customers reactions. They then used this footage to create commercials crediting the campaign to increase Whopper sales in the latest quarter by double digits. This is increasingly amazing considering the fact the commercials started running in the last month of the quarter.
Anyway I was enthralled with the "deprivation research" Burger King was employing and went and found the footage. The video is not investing oriented at all but tells so much about human behavior and what a clever marketing campaign can do. Besides that, I found the video to be highly entertaining.
Many of you probably have seen this but there was a couple of things that I thought were especially insightful.
Critical points help explain our perpetual surprise at fat-tail events: We don’t see them coming because the state change is much greater than the perturbation suggests. Water does not undergo a dramatic change as it drops from 35 to 33 degrees Fahrenheit, but two degrees of additional cooling changes its state from liquid to solid. Likewise, large changes can occur in markets without visible manifestation in asset price change, while small additional changes can flip the price switch.
After writing my annual letter I have received some feedback expressing surprise that I said I thought a depression was close to a 10% chance. Is that really so surprising? Think about it. If we have the same circumstances 100 times, ten of them will turn into a depression. How often are you going to get such rampart abuse of the foundation of the economic system? As I said in the letter I do not think a depression is coming but the 10% number may be to low. Maybe it is 20% or 30%. Thirty times out of 100, with this much abuse, you enter into a depression. Seems logical to me. How often do you get such abuse? Well looking at the 1900s you had, being really liberal, 1998 with LTCM (I woud argue this doesn't really qualify but I will throw it in), Late 1980s early 1990s and the S&L crises, 1920s, and 1907. You could also throw in the 1970s with an outcome opposite of depression, massive inflation. That is 4 maybe 5 major abuses. One of them turned into a depression. So 25%. Obviously that logic and reasoning is full of holes but just trying to make a point.
As this article points out, when water gets to 33 degrees one slight incremental change in temperature can drastically change the outcome of the state of water.
Thursday, February 7, 2008
As everyone knows the retail numbers were horrible today.
What I bet some people haven't thought of is that they were worse than they appeared. Considering how many gift cards were sold in December this should have softened the pain felt in January. It didn't. I am not a CPA but my understanding is that gift card are not recognized as reveune until they are executed. Many of these were executed in January which means retail sales oustide of gift cards were just horrid.
Not a trader but the retailers showed decent strength today all things considering. In this case probably sell the rumor buy the news. What is interesting though is that volume was not really that impressive. Targets volume was normal which I do not think speaks well for more strength over the next few days. Like I said not a trader (have not executed any orders this week) but was something that caught my eye.
U.S. consumers took on more debt in December, increasing their credit-card balances, but at a slower pace than in the prior month, the Federal Reserve reported Thursday. Total seasonally adjusted consumer debt increased by $4.5 billion, or a 2.1% annual rate.
I have read some commentary that this is a good thing. Other numbers show that bank lending was up in the 4th quarter from 2006 4th quarter. The argument goes that this is a sign that everything is okay. Financial markets are lending.
As Charlie Munger says "invert, always invert." Maybe all that is good news but maybe it is really a sign of bad news. We know banks are not really doing real estate deals. LBO market has long dried up. So maybe these loans are companies who have LOC (line of credits) who are now tapping into them because other financial souring options are closed. Banks may preferr to not lend this money currently but are required under contract to recognize the LOC. With the consumer, maybe the consumer is really struggling and maxing out their credit cards trying to make ends meet.
Like I said maybe that is good news, but unlike some commentary I have read, not necessarily. Time will tell.
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January?
To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
The rest of the article goes on to describe the process of total financials meltdown. This is a little bearish even for me but as I argued in my letter I think the probabilities are higher than what most people think.
Good read so you at least know what the risks are on the downside.
Monday, February 4, 2008
Australia's central bank raised its benchmark interest rate by a quarter point to an 11-year high, saying a ``significant slowing in demand'' is needed to cool the fastest inflation since 1991.
The rest of world is needing to raise interest rates while we just cut our interest rate the most in a week in over 30 years. That is really really scary.
"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected."
"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."
Still bullish on soft commodities, as am I.
The pullback in commodity prices on recession fears hasn't dampened his enthusiasm for resources investments, either. More like a cyclical correction in the middle of a long-term bull market. "Certainly some commodities are going to be affected," says Rogers. "But it's not as if the markets haven't figured this out. Remember the old expression: 'Dr. Copper is the best economist in the world.' Well, Dr. Nickel and Dr. Zinc figured out a few months ago what I thought I had figured out, that we were going to have a recession. Nickel is already down 50%. Other commodities may fall more. But I don't see the economics of agriculture being much affected at all. Maybe there will be a few less cotton shirts bought. Maybe there will be a few less tires bought. But the supply is under more duress than the demand."
Sunday, February 3, 2008
Indeed, as the estimable David Rosenberg of Merrill Lynch, who consistently comes up with some great stuff, points out, in the 2000-2002 bear market, there were no fewer than 16 rallies of at least 5% in the S&P, each lasting on average about a month, and no fewer than 35 bounces of 5% or more in the Nasdaq (which still managed to wind up losing nearly 80% of its value).
We would be in week 2 of the rally though we are already over 5%. I said two weeks ago I would not be surprised to see the Dow test 13,000 and maybe even surpass it. I still think that but the monolines play a huge roll. A collar (option strategy) may be a good bet on the market.
Leading private equity firms are unlikely to participate in any recapitalisation of Ambac and MBIA (NYSE:MBI) , increasing the pressure on banks to come up with a rescue package for the bond insurers.
A number of firms, including Bain Capital, Carlyle Group, Kohlberg Kravis Roberts and TPG, have looked at investing in the cash-strapped groups, which guarantee the value of everything from municipal bonds to the most complicated mortgage securities.
These investors have all concluded that the risks are far too great, according to people familiar with their thinking.
"The financial guarantors pass neither the shadow test nor the ability to understand test."