Monday, March 31, 2008

The Start of Quarter Number 2 in 2008

Man talk about a way to start out the new quarter. We haven't even opened up for trading tomorrow and the news flow after the bell is just awful for tomorrow's setup.

First Lehman reports they are offering $3 billion in preferred convertibles to raise capital to "reassure investors it has ample access to capital." Yeah so they don't need it and will dilute the common equity holders just to point out they can get it. Please.

The deal terms seem pretty good.

Lehman Brothers Holdings Inc's $3 billion of convertible preferred shares are seen having a dividend of 7 percent to 7.5 percent and a conversion premium of 30 percent to 35 percent, according to people familiar with the deal.

Right after that though Moody's downgrades ratings on 270 trances from 27 Alt-A transactions issued by Lehman XS Trst Series.

I think these downgrades were annouced after the preferred deal was annouced. If someone knows differently let me know. Anyway Lehman was down 2.25% after the bell even after everyone was "reassured it has ample acces to capital."

Here is a question for you, when has the first request for capital by the financial firms every worked for investors in this current crises? Anyone? First Marblehead, Ambac, MBIA, Citigroup, Merril Lynch, Washington Mutual, etc. etc. etc.

Oh here is another for you, UBS which raised billions in capital. Guess what other news hit after the bell? (once again I think this news technically hit after the bell, I didn't see it during the trading day)

UBS is poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) only weeks after shareholders approved a similar-sized injection from outside investors.

Yep, the conservative Union Bank of Switzerland after writing down $18 billion dollars last year and raising billions in capital will be holding out its hand again begging for billions more as it starts seeking capital.

Seems like investors would learn. Part of the optimism that is still permeating the market.

Market may be able to digest all this for tomorrow but looks ominous to me. However, we digested Bear Stearns total collapse to be able to finish up for the month of March in the broad indexes.

Losses in Money Market Funds

Legg Mason Inc. said costs to bail out a money-market fund will cut profit by $195 million, or $1.38 a share, in the three months ending March 31.

So far the money market fund industry is willing to take the losses rather than break the buck on their money market funds. They are not required by law to do so. I am more comfortable not having any cash in money market funds and relying on somebody's "goodwill" to keep my dollar a dollar. At some point the economic equation could change and you are taking losses in something "safe."

Saturday, March 29, 2008

The Feds.....Scared to Death

I have a few friends in small town local banks. What I am hearing is amazing. The yearly audits by the FDIC is nothing like it has been the last few years. The demands being placed on rock solid conservative banks are incredible. Unlike the Washington Mutals of the world most small town banks stuck to their bread and butter. They are doing the same thing they did last year and the year before and five years ago. Simply relationship banking. When they made a loan they knew who was on the other side of it, rumors about whether they have started drinking excessively, how their jobs are going, what is going on with their families etc. Small town conservative know thou customer banking. Now the FDIC is running scared ********. The bank failures coming will be massive and so they are cracking down on everyone. This of course means that those who behaved themselves will also get punished. It always does. You get a special privilege from a teacher in a high school class, someone abuses it, and the privilege is gone for everyone. The way the world works.

The greater danger this implies in my mind, is the impact it has on credit availability. Even though money is becoming cheaper, it is becoming harder and harder to get it. Those loans that are good risk reward scenarios are not getting made. Only those loans that have zero % of defaulting are being made and the truth is those loans are probably not needed by those who are taking them. When money gets really cheap but really scarce, people who don't need the loans are the ones who will take advantage of the cheap money. They could finance it themselves but by borrowing it lowers the cost of capital, so they borrow. Those individuals who have a great idea with great risk reward prospects but who cannot finance it on their own are getting left in the cold. This is not good for the economy. The over reaction correction phrase will cause more pain than would otherwise be felt. We are right in the middle of it and from an economic perspective you will not feel it for 6 to 12 months out. Another reason in my mind we are not at a bottom in the stock market.

Bond Insurers / Market Thoughts

Standard & Poor's on Friday cut its ratings on FGIC Corp and its bond insurance arm to junk status, saying the insurer has failed to come up with a plan to remain viable and write new business.

This was really no surprise as Fitch did it on Wednesday but this brings back to light the ugly reality that these bond insurers issues are not resolved. There may be another shoe to drop somewhere between now and the end of April when they start reporting earnings but if there isn't I would argue very strongly that Ambac and MBIA will be dropping their other shoe. When everything was blowing up with these two firms a month ago a band aide was applied and it disappeared from investors minds. I believe these two companies are still the most toxic thing in the market out there. Filings with the SEC over the last few weeks indicate that massive losses are coming. MBIA's reinsurer rating has been cut substantially which will create large losses for MBIA. My understanding is neither is writing any new business. You have Wilbur Ross backing Assured and Warren Buffett with his own company. These two companies is still what keeps me up at night when it comes to major worrying about systematic risk.

Looking at the market this week, if your a bull, you had to be disappointed. I thought the rally would have more legs than it had. I trade around my short book and hedges around my longs and for the most part I sat on the sidelines seeing how things would unfold. After the large rebound from the lows of two weeks ago heading into the end of the quarter from a technical perspective I was expecting much more strength. We did not get it. You still have the bottom callers everywhere. You cannot turn on CNBC for 5 minutes without hearing somebody calling a bottom. My personal conviction is that we are nowhere near a bottom but was expecting a stronger rally than we got. That leaves you with what happens heading into April? The markets will most likely finish positive for the month of March. That is amazing if you consider we lost Bear Stearns. I have been saying since January though that we were due for a month higher. You just can't go down every month. In late December heading into January the market drifted south and once the quarter and year ended the market tanked at the beginning of January. Is that what is happening again? Once we roll over into a new quarter will portfolio managers dump? Maybe. If you are near a bottom the start of a quarter can also be the spark that starts the buying. Portfolio managers hold their winners into quarter end (called window dressing) and then sell them at the beginning of the quarter and start buying what they think is actually undervalued, the beat up groups. i.e. financials. I don't know. To difficult of a short term call for me so I will stick to the status quo. I will probably start looking to add S&P 500 puts 6 to 8 months out in the next week or two. I took them off the day after Bear Stearns hit. It has been a small bet. I would short individual names.

Thursday, March 27, 2008

Meredith Whitney on Financials
If any of you know me well you know my total apathy for sell side equity research analysts. They serve some purpose but people use them not to think and in general they tend to crowd together which makes their opinions less useful. I have hanging on my wall a New Century Financial Corp upgrade by UBS two days before they declared bankruptcy. I typically do not like to read sell side research reports or talk to analysts. If you have never looked at an industry they can be useful to talk to.

Anyway Meredith Whitney is a sell side analysts who has not walked with the crowd and has been the first to call the financials debacle. She received death threats when she said Citigroup's dividend would be cut last fall. It was cut a couple of months later. Great interview with her on CNBC. She is saying we are no where close to bottom and is calling for massive dividend cuts across the board.

Wednesday, March 26, 2008

Jim Rogers and China's Currency

After my post yesterday I thought this was a good follow up. Apparently you can open a Chinese bank account and have a maximum of moving $50,000 U.S. dollars a year. I think this link starts at part 2. If you watch it will automatically go to Part 3 and Part 4. I didn't spend the time to figure out how to get part 1. All the videos have great insight and unlike quite a few of Jim Rogers interviews he isn't just railing against the U.S. markets and Bernanke. Thanks goes to Pete.

Tuesday, March 25, 2008

Investing in Chinese Renminbi (Yuan)

Morgan Stanley last week launched two new ETNs. One of them track the Chinese Renminbi (CNY) and the other tracks the Indian Rupee (INR). To my knowledge these are the first financial instruments available to get exposure to both currencies. If I could put 100% of my cash into Chinese Renminbi I would unfortunately these ETNs have some hair. One is that they are unsecured debt of Morgan Stanley. I would put Morgan Stanley up there with Goldman Sachs as the strongest brokerage houses on Wall St but do you really want to be taking on what is essentially unsecured debt of one of the big brokerage houses? Also I think you may only be earning the treasury yield in interest payments. Thanks goes to Jared for bringing this to my attention.

Morgan Stanley announced today that it will issue two exchange-traded notes, Market Vectors-Chinese Renminbi/USD ETN (NYSE Arca:CNY) and Market Vectors-Indian Rupee/USD ETN (NYSE Arca:INR), which will be traded on NYSE Arca.

Market Vectors Currency ETNs are senior, unsecured debt securities of Morgan Stanley that deliver exposure to the exchange rate of a specific foreign currency.

Also Wisdom Tree is apparently bringing out etfs that would allow you to invest in the Indian Rupee, Chinese Renminbi, Brazilian real and others. I don't know when these would be coming out.

The new WisdomTree currency ETFs would open exposure for the first time to U.S. investors to the Brazilian real, the Chinese yuan, the Indian rupee, the New Zealand dollar, the South African rand and the South Korean won.

By the way, Iceland raised their interest rate to 15% overnight. I do not know if there is opportunity there but a 15% interest rate sure seems appealing. Iceland has some problems like everything now days seems to have but the risk reward return profile could be very appealing.

Monday, March 24, 2008

Hussman on Bear

I only read Hussman on and off but he is dead on here which is why I have continued to short Bear (and been wrong might I add). I have avoided going off on the Fed and the travesty of everything that has happened but Hussman does it for me. In the end it doesn't matter so I try not to get upset about it. You got to make money within the system and its current rules not the systems old rules or how it should be. You have to evolve so when the system changes illegally and you take losses lick your wounds and adjust to work within the system. I do strongly recommend reading this whole thing though. As readers of my blog know, I agree with him in that we are not done heading down.

Alarmingly, immediately after the pixels dried on last week's comment (noting “the Fed is emphatically not taking the default risk of the mortgage market onto itself” with these term facilities), details emerged that the Fed had agreed to a very different deal in its attempt to rescue Bear Stearns. This is a major and ominous departure from historical Fed policy, and from legality.

I'll cut straight to the chase.

Bear Stearns is trading at $6 instead of $2 because unelected bureaucrats went beyond their legal mandates, delivered a windfall to a single private company at public expense, entered agreements that violate the the public trust, and created a situation where even if the bureaucratic malfeasance stands, the shareholders of Bear Stearns will either reject the deal or be deprived of their right to determine the fate of the company they own.


Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”


No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.


Again, this is not water under the bridge, and the deal struck last week should not be allowed to stand if we care at all about the integrity of the capital markets. The Long-Term Capital crisis was resolved by a consortium of financial institutions providing capital in return for ownership. The panic of 1907 was resolved the same way. This deal should be busted, and fast.


If the market was “certain to crash” in the event that Bear Stearns failed, then the market is certain to crash anyway, because Bear Stearns wasn't the last shoe to drop – it was one of the first. Unfortunately, we're standing in a shoe store. Wasn't the market “certain to crash” without the Fed's surprise rate cut in January too? At what point will investors figure out that the liquidity problems are nothing but the precursors of insolvency problems? At what point will investors stop begging the government to save private companies and recognize that the losses should be taken by the stock and bondholders of the offending financial institutions? If the Fed and the Treasury are smart, they will act quickly to figure out how to respond to multiple events like we've seen in recent days, to expedite turnover in ownership and quickly settle the residual claims of bondholders, without the kind of malfeasance reflected in the Bear Stearns rescue.

Bear Stearns Part III

The Days of Our Lives soap opera just took a new turn. The producers decided throw a new twist that caught as least me by surprise. You have got to love drama. Unless you have been under a rock you know JP Morgan raised its bid from $2 to $10 over the weekend. That isn't the important part of the deal in my opinion. JPMorgan is now on the hook for the first $1 billion in losses. The Fed had originally guaranteed the first $30 billion and now the way I understand it is that JP Morgan is taking the first billion in risk and the Fed gets the next $29 billion.

This begs all kinds of questions. I can understand the logic (though I didn't expect it) on why JP Morgan would raise the bid. The equity portion of the cost is a small piece of the total cost when you start looking at liability and legal expenses. Why would the new deal consist of JP Morgan taking on credit risk? Why would JP Morgan agree to that after all ready agreeing to the previous deal? Of course some would argue they got a gift from the Fed so how could JP Morgan say no in the Fed asking to take on some of their risk they orginally agreed to? It also raises the question if another firm could buy it at a higher price without the Fed's backstop or whether it is worth more than $10. If things normalize you don't need the Fed backing. There is no question it is worth more than $10 with the Fed backing it. It is worth alot more but it was bankrupt, worth $0, nada, until the Fed stepped in. Should there be a bidding war on the Fed's ticket of paying the check and taking on the risk? All you have to do is look at JP Morgan's market cap gain to see that the market is adding over $20 billion dollars to JP Morgan value as a result of this deal. Of course the Fed's implicit picking of JP Morgan shows that at least the Fed thinks JP Morgan is safe so it is an easy for fund managers to justify buying JP Morgan stock. "It is safe." So I think quite a bit of that market cap gain has nothing to do with the Bear buyout but an easy buy for fund managers protecting thier jobs in buying JP Morgan who need exposure to financials.

As I said last week. Buckle your seatbelts. The soap opera has more twist and turns than the Rattler at Six Flags Fiesta Texas in San Antonio.

Sunday, March 23, 2008

Bottom Callers......EVERYWHERE!!

Need a subscription

AFTER WATCHING THE TALKING HEADS ON FINANCIAL TELEVISION, we would all be crazy not to take buckets of cash down to the local brokerage office and buy everything with a ticker. Rarely have I watched so many professionals proclaim unequivocally that the bottom is in.

Bulls are all of a sudden everywhere. This really reminds me of last August. Cover story of Barrons is titled Hitting Bottom arguing financials are done going down. (Of course last week their cover story last week was a bearish article on Fannie and Freddie and this week theyboth were up over 30 to 40% last week.)

Yes, after being down on financial stocks for more than a year, we find ourselves unable to resist some real springtime optimism

though at the end of the article they did give a paragraph for the bearish argument.

"Equity guys are completely clueless as to how bad it is in the credit markets. They're as bad as they've been since the Great Depression." Banks and brokers, who have written off almost $200 billion in assets, will need to raise hundreds of billions in new equity so that they can make loans available.

All of this reminds me of last August. That was after the lows the markets went on to rally to new highs into mid October before coming crashing down. Barring any major news I think we are headed higher for the foreseeable future even if fundamentally I think we should be headed lower. I will probably be taking defensive action with my shorts.

If you didn't see this on Friday you may want to watch Whitney Tilson on the Housing Crises on ironically Fast Money. Seeing the utter look of confusion and lack of understanding by the fast money traders typifies the well bought belief that the market and financials have bottomed. Besides the fundamental aspects this is extremely strong evidence that I think we haven't bottomed for good.

Who knows, I take on and off protection (hedges) based on what I think the market will do in the short term. I keep my positions anchored based on what I think fundamentally. Either way I will continue to hoard cash. Are we at the bottom? Maybe, I still don't think so but I am one opinion among millions.

Thursday, March 20, 2008

Have a Great Easter

Can't take anything from the markets today. It was expiration day and in bear markets the market tends to explode higher on expiration day for technical reasons. Stick to fundamentals. Still think we are in for a decent rally as the Pavlovian response is that the worst is behind us since Bear failed but who knows.

I am leaving for Easter weekend shortly. Going to the Texas Hill Country to catch up on some much needed sleep and reading and maybe catch a bass or two.

Wednesday, March 19, 2008

Another day, more credit problems

Man the rallies are becoming shorter in duration with more dramatic pull backs.

All kinds of things going on today. Rumors surrounding big losses at Merrill combined with the lawsuit they filed with one of the smaller bound insurers. Also heard that after the Bear Stearns debacle the prime brokers are taking in credit they have offered hedge funds. Forcing liquidation in all asset classes. Starbucks CEO Howard Schultz talking about how the economy is in a "tailspin." Also the credit crises has not abated. I figured after the latest Fed move it would take a breather if only for a few weeks. One thing I heard was that the mortgage market actually started trading again today but the return of trading actually brought prices down. Exactly what the Fed wanted right?

The link below shows that the third wave of the liquidity crises continues.

Tuesday, March 18, 2008


A 400 point rally. Second one in two weeks. After yesterday and hearing all the talking heads, really no surprise here. So my thoughts going forward. First, Wall St. are idiots. There is no reason we should be rallying but I thought last week listening to what the talking heads said that we were headed for a bounce and that got postponed by Bear and now that is past there is even more evidence of a good bounce. For the most part I ignore technical indicators but we are playing a probability game and when things become so extreme, when they get so out of whack, if you own puts to protect a name it can make sense to take off that protection. The probabilities get so far in your favor. All of 2006 I did not look at the VIX or put call ratio. They never go so extreme to scream so loudly that you could add and take off protection or short exposure.

The game plan seemed to work pretty well for me. I said if the market opened down between -100 and -500 to do nothing. That is what happened and besides covering about 40% of my Lehman short (wish now I would have covered it all) because it opened down 40% I did nothing. I watched. I also said probably sell any major rallies but that is where the art comes in. As the day progressed you could tell by the tape, the breadth, the overall confidence returning to the system that it was not a good time to sell and to start buying or pulling back the protection. Like I said this is where the art of investing comes in. I wish things were more normal but you are getting moves in massive companies that you don't see in six months or a year much less a week. They are more like technology penny stocks than blue chip companies. If you are short Lehman, boom in two days you are up 60% (Lehman is down). You got to start covering. If you bought Lehman after the down move in 24 hrs you had an 80% move up. You have to sell that 24 hours later. Does that make you a trader? Not really because if you thought it was a fifty cent dollar you received almost full valuation in 24 hours. I could name name after name like that (less extreme). Guys like me struggle with this. We buy something with the expectation that we will be holding it for a year, two years, five years and feel amost dirty if we sell it two days later. Well if you buy something and it moves up 20% two days later, you do not have to sell all out but it makes sense to take profits. These are just massive moves.

Fundamentally I do not think anything has really changed. The Fed is finally living up to its reputation in dropping loads of cash from helicopters. That is restoring enough confidence where money is starting to return to the market. That Pavlovian response is good for a decent rally I think but in my opinion it is a wrong response. Commercial real estate still has not started to blow up and corporate defaults also have not started. The mortgage mess is still in mid innings at the very best. Ambac and MBIA (remember them?) are going to have serious problems which will create the second round of saga with these guys. The Fed is addressing the liquidity issues and the market is focusing on that, the solvency issues are not done with however. Time will bring them back to the forefront.

In these types of markets the artistic skills of adding protection and taking off protection and shorting and taking off shorts are invaluable. The main thing is if you make a wrong call you are conservative enough where it does not cripple you.

Bear Stearns Part II

This is fascinating!!!! Did not think of this angle. Thanks goes to Doug.

Why is Bear Stearns (BSC) up nearly 70% Tuesday, to a price about $6 a share above its $2-a-share buyout agreement with JPMorgan Chase (JPM)? Two groups are piling into the company’s stock so they can vote in favor of the deal, a trading source tells Fortune’s Roddy Boyd.

Man, pass the popcorn. The street fight just started.

Bear Stearns?

This is taking some brain power. Who is buying the stock and why? Deal is done at $2. Now at $7.00. The April $10 and $12.50 calls are sky high.

Some thoughts.

First of all from a practical standpoint it looks very difficult for another deal to get done outside of JP Morgan. No matter what happens the building, maybe the most valuable asset at Bear Stearns goes to JP Morgan. My understanding that is done, non reversible. Maybe it could get tied up in court and somehow get revoked but that is a long shot.

Okay so maybe you could argue that without the building Bear is worth more than $2 but who could possibly buy it? What other major U.S. bank could take it over? The $30 billion backstop is only promised to JP Morgan. Maybe the Fed would consider giving it to someone else but who could do it? A non U.S. Bank could, but the FED won't offer it to them. A private equity firm may be interested but they also would not get a backstop.

Then you have the whole Joseph Lewis factor. Remember he is the wealthy currency trader who put a billion dollars in Bear several months ago above $100 a share. He said yesterday the JP Morgan offer was "derisory." Interesting piece below.

That guarantee remains in place until the acquisition closes and Bear is subsumed into J.P. Morgan's operations. However, if Bear shareholders reject the deal, they have to vote on it several more times over the next 12 months. During that time, the guarantee from J.P. Morgan remains in place, executives from the bank indicated Sunday.

Okay so you have some option value in the stock. Here is a thought. There is a whole thing of loss aversion. Joe Lewis has a fortune greater than $5 billion. He could easily buy the whole company himself. He could be buying up the stock even irrationally. Or maybe make a coordinated effort with other shareholders or the employees.

The great hope for Bear in my opinion is that this did indeed mark the bottom. The gives the year call option alot of value as things normalize and reject JP Morgan. I firmly do not believe that. This could be very interesting going forward.

Get comfortable in your sofa, pop some popcorn, and get ready for soap opera of a lifetime.

Switzerland Money Market is Frozen

Thanks goes to Justin

Interesting article on Switzerland money market. UBS is in trouble from what I have been hearing and reading. That may be the action that gets the Europre central bankers moving. Who knows right but I think we may be in for a multi day / multi week rally.

Swiss franc money markets were virtually frozen ahead of an SNB repurchase agreement auction scheduled for 0800 GMT, dealers said on Monday, as fear following the weekend rescue of U.S. bank Bear Stearns spread.

"The situation is very extreme. Beyond one month there is no money market. There is a loss of trust. What is needed is coordinated central bank action -- rate cuts and intervention," said UBS money market trader Peter Thor.

Monday, March 17, 2008

Abby Cohen Out as Chief S&P 500 Forecaster at Goldman

This will not mean much to many of you and really does not mean much overall but this was a shocker for me. Britt (one of my mentors) talked about her alot because of his relationship with Goldman Sachs when he was President of Verizon Investment Management Corp. She was also a member of the bi-annual roundtable at Barrons. She is well known and well respected on Wall Street. Rather amazing.

Abby Joseph Cohen, the second-most bullish Wall Street strategist at the start of the year, was replaced by Goldman Sachs Group Inc. as the bank's chief forecaster for the U.S. stock market.

Hussman on Solvency Issues

Thanks again goes to Nathan. He is on fire. I read Hussmans stuff on and off. This writeup I really liked.

What we observed last week is clearly a liquidity problem – the solvency problems are only beginning

Yep the solvency issue has a ways to run.

But don't be too hard on Bernanke. The lending binge of recent years (both in the mortgage and private equity markets), coupled with enormous growth in the Federal debt, has left the Fed in a no-win situation. Bernanke's problem is that he came into his role as Chairman believing too strongly in the ability of the Fed to affect the real economy.

Yeah and people still have undying faith in the Fed. You will get capitulation with the Fed does something dramatic and Wall St. finally says who cares.

This below was my favorite part.

Good investors may change their investment exposure substantially over the course of a market cycle, but they don't imagine they can forecast short-term outcomes. Good investors put themselves in the position of being able to respond instead of being forced to react. We'll take our evidence as it arrives. For now, we remain defensive.

JP Morgan in Trouble?

Thanks goes to Nathan.

This link (which I have not done the work and verified) shows that the number one commercial bank with exposure to derivative contracts is.....JP Morgan.

U.S. Insane?

The world now knows we are insane or delusional. The DOW is up now an hour after the open. If there was any doubt that we as a country are ignoring the obvious, the doubt is now gone.

Sunday, March 16, 2008

Other Blog Comments

I have been perusing various blogs tonight and some of the comments are just hilarious. I picked out some of my favorites. I know I am a nerd but I burst out laughing on everyone except the last one. I included the last one because I thought it had some great insight. At some point it will be time to buy financials.

1) This was my second favorite. I think I am good on all of these in some form or fashion.

Weapons check
Ammo check
gold check
silver check
cash check
no debt check
farmland check

Ok carry on

2) This one is seriously amazing. We have a floor on the markets? Well if you like people being broke. He actually manages $77 billion? That is why people like me can make money.

``It'll be perceived as a positive for the markets,'' said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ``It puts a floor under all the financials. The longer-term thesis is that the Fed won't let good companies fail based on lack of liquidity and a crisis of confidence.''


Rockets already won and NCAA brackets announced...this is a little bit crazier, without the scantily clad cheerleaders

4) This is the one I laughed at the hardest. Referring to the Japan's open after their lunch break.

Japan opens in 5 minutes, pass me some more popcorn...


March Madness, it's not just for Basketball anymore .....


I want to find someone that shorted this garbage and get a non-recourse loan at the bar tomorrow.

If your beer isn't green, just look at it with some poor brokers face on the other side of the mug, that ought to do it.

6) This I found very interesting

Anybody have any idea what kind of subsidy this is to the banks if the Federal Reserve were to loan the 400B dollars it's announced?

Check my math...If we assume that the primary dealers are borrowing money at 3.25% and the collateral pays 8% the spread is 4.75%.4.75% spread on (announced) 400B dollars is 19B dollars per year. Not much...But, if we assume that banks NIM is 3% and there is 13T dollars of assets on the banks balance sheets we get 390B dollars.Total losses are estimated at 300-500B?So, banks should be able to start expanding balance sheets again in 8-12 months from August?

Of course, that assumes continued "robust" demand for long term loans from a strong economy. A severe recession would depress long term rates and cut NIM. Japanese banks NIM is closer to 1.5%.

Game Plan

Well the world has changed dramatically since S&P issued the all clear on Thursday. No surprise they were the last ones to know. The crazy thing is not their total incompetentcy but how much power the ratings agencies have. One little reported nugget in this whole thing was that S&P cut Bear Stearns on Friday to a level above junk and this cut pushed Bear into a bankruptcy position for Monday. If this cut would not have happened apparently they would have had more time to broker a deal. A couple of things should jump off the page. One is that the rating agencies only cut them to a notch above junk! Once again everyone knows this is retarded. You have a Fed bail out of your company and the debt is still supposed to be investment grade?? Yet even this cut pushed Bear over the edge in 24 hrs. That is huge power!! Everyone is picking up on this and Congress will be moving before long. I do not think the rating agencies business model will be the same 2 years from now. I have been short Moodys since last summer and will probably add to the position before long.

So what do you do now? Bear gets bought out for $2.00, Fed does all kinds of things, the Asian markets are down 3% plus, the dollar is plunging against every other currency, and commodities are soaring with gold up above $1025. It has been one of those weekends where I have been on the road a lot and so thinking a lot. Before I knew all this I came to the conclusion that the probabilities scenarios are a big soup bowl and almost undeterminable. The chance for a depression has to be moving up to the 25% level, at the same time severe inflation possibilities is picking up, while we are in extreme oversold territory with VIX hitting highs not seen since January signaling fear is back in the market and the put call ratio is at all time highs. The variant roads the U.S. economy could take over the next 12 months are many making valuations very very difficult. Over the next few days, weeks, months, and maybe even years is inherently unpredictable. So what do you do? We are teetering on the unthinkable. We could fall one way or the other and at least in my opinion, the probabilities are either impossible to figure out or to close to make any investment decision on your estimate. The main thing of course is to be rational taking advantage of others irrationality. You have got to create some kind of game plan before the craziness of tomorrow and this week. So for example.

If the market is down more than say 500 points (just making up a level, whatever sounds good to you) you start smartly buying.
If the market is between -500 and -100, you do nothing.
If the market is down less than 100 or up you start smartly selling. In general you probably sell any significant rally.

You focus on names you know and do not try to be some kind of hero. If the market is down by more than 500 points hopefully you have cash. You can start buying smartly and that may mean only buying leaps conserving cash in case this is the beginning of the end as we head to a depression. That way you may lose 100% of your leap but only put 20% of your cash to work where as you would have put 80% of it to work. You lose less if a depression comes; you win more if things return to normal. These moments in history create huge shifts of wealth. Millionaires become penniless while at the same time it creates the opportunities for people to make millions. Take advantage of the opportunity to capture wealth!

Here is a question for you? The Great Depression put the last nail in the coffin moving the center of the financial world from London to New York City. Does this crisis create an equivalent shift to Tokyo or Hong Kong or Dubai? Banks in these countries are getting slaughtered. Someone wins huge and should not be going down. Who is it? Two big Australian investment banks Macquarie Group and Babcock & Brown are down 9% each right now, opportunity?

By the way, the low for the Dollar against the Yen in the mid 90s was in the low 80s.

Also, right now the futures point to a 250 point open lower in the Dow. That could change dramatically up or down by tomorrow morning.

Thursday, March 13, 2008

S&P Piece

This is what I was referring to below

Writedowns from subprime securities will probably rise to $285 billion, New York-based S&P said today in a report. The ratings company previously estimated losses of $265 billion in January. S&P raised its estimate because of increased loss assumptions for collateralized debt obligations.

So this estimate compared to January's is right? It won't be revised to 300, or 400, or 600 billion? Oh and Ambac is still AAA? What jokers.

S&P Rally

Got to love it, S&P comes out and says it see light at the end of the tunnel and that writedowns at banks may be done and the market rallies 150 points. HELLO!!! NEWS FLASH. When has S&P been right on anything in the past 18 months??? Anyone??? Just asking.

Wednesday, March 12, 2008

Depression #2

If the videos below didn't get you depressed this should. This is real.

The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.


``Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

I really don't know what to say. Just like every super power before us, Medes, Romans, Napoleon, British, eventually are time will pass. Nothing is new under the sun. I think we have some time left though.


Videos in the order I enjoyed them about the blues in the markets. Worthless unless you have some time and need a laugh.

Agriculture News

From the Chicago Board of Trade

The world stocks/usage ratio for corn is already at the lowest since 1973, and with planted area down in the US this coming year, continued tightening of stocks is a concern. China exports for the 2007/08 season were cut in half to just 500,000 tonnes, the lowest since 1995/96.

The USDA believes that palm oil stocks will rebound due to increased production in Malaysia and Indonesia and that soybean oil stocks will tighten due to strong demand from China and increased use in Argentina due to bio-diesel. With palm oil at a record discount to soybean oil, soyoil export demand from the US could slow. While the USDA raised their estimate for soyoil exports significantly in the report yesterday, usage for biodiesel was lowered to just 2.8 billion pounds from 3.4 billion last month.

Saw this right after posting what was above. Key points below, VeraSun (ethanol producer) is still slightly above breakeven even after the run up in corn prices in the 4th quarter (may have had some of it hedged, don't know), increased production substantially, and are still building facilities to expand production. I said a little over a year ago that I do not think that ethanol plants will start thinking about cutting production until corn reaches $6.50 a bushel. It may be even higher.

VeraSun Energy Corp.'s fourth-quarter net profit fell 81% in the face of lower ethanol prices and higher corn costs, even as revenue more than doubled, the biofuels maker reported Wednesday.

The Brookings, S.D.-based company Verasun Energy Corp (VSE) said income dropped to $4 million, or 4 cents a share, down from $21.4 million, or 27 cents, earned in the year-earlier fourth quarter.

and increased production

In the final three months of 2007, the company sold 134.4 million gallons of ethanol, more than twice the amount sold a year earlier.

and are still expanding prodcution

Aside from the three plants opened during 2007, VeraSun noted that it's kicked off construction on facilities in Welcome, Minn., and Hartley, Iowa, and expects to begin start-up operations at both plants by the end of the second quarter. In addition, the company expects to start up its Bloomingburg, Ohio, plant by the end of the first quarter.

Tuesday, March 11, 2008

Hocus Pocus

Bloomberg had an article about the rating agencies not downgrading anything AAA. It is not only the monolines but the smoke and mirrors extends to mortgages. How can we ever get things back to normal if all these games keep getting played.

Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.


``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners....... ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.''


Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks.

I disagree because that means that all of a sudden the collateral that the Fed is not accepting can't be accepted. The rating agencies have proven that they can drag their feet long after whatever seems reasonable and sane.

Considering what was said above and elsewhere in the article this is scary.

A bank would have to increase its capital against $100 million of bonds to $16 million from $1.6 million if a bond was downgraded to below investment grade from AAA, under global accounting rules.

This is what I am saying.

The prospect of losses may be holding the ratings companies back, said Frank Partnoy, a University of San Diego law professor and former Morgan Stanley banker who has been writing about the impact of credit ratings companies since 1997.

``If the 800-pound gorilla moves, it's going to crush someone, so it's not going to want to move,'' Partnoy said. ``They know they will trigger a price collapse. They are understandably reluctant.''

Market Thoughts

What a rally?? Wow, looking at everything today I think it could have some legs to it. We ended very strong on huge volume. Also many talking heads on CNBC are doubting the rally which in my mind means it could continue. Finally we have little important economic news and in this mode all news is turned into good news. The second largest shareholder of Bear came out and said he had not sold any shares and the stock pops $1.50 afterhours. Great, it is the same shareholder who bought in over $100. Tomorrow the CEO of Bear Stearns will be on CNBC before the bell opens trying to calm the waters. People will probably listen to him and it will cause financial firms to continue to rally even though it is the same CEO who has driven Bear into the ground. Retail numbers will come out weak but everyone will be saying eww it isn't that bad. My point is that I would not be surprised for the Dow to rally another 400 points or so over the next week and shorts will be sweating bullets. I still think absolutely nothing fundamentally that actually matters has changed. It may just take 4 to 6 weeks for people to realize that again and people start selling aggressively. I am not really trading any of these thoughts though I started increasing some short exposure today. I think I was probably early but you just have to be a seller with days like these and a buyer when you have down 400 point days. Only thing that makes you sick enough to know your probably doing the right thing. :)

Sell Sell Sell

This has to be one of the more ridiculous rallies I have seen. Well maybe not totally. We were oversold and due for a bounce and this increases the optionality value for many companies as it is yet another band aide that creates more time. However, this does not appear to change anything fundamentally as it does not address the solvency issue or start housing prices moving up or suddenly create money for consumers. It is a great time to be selling smartly. We may get a day or two of a rally and the Dow may try to make it up to the 12,300 level but as Albert Einstein said the definition of insanity is doing the same thing over and over again, and expecting different results. I think by that definition the Fed may be insane.

The craziest thing which someone pointed out is that now the monolines are now insuring the Fed collateral. Boy we live in a mixed up world.

Also, anyone want to speculate that this was meant to save Bear Stearns?? All kinds of rumors out there about potential failure of Bear Stearns yesterday. Of course flatly denied but the Fed's actions today directly addresses the supposed Bear Stearns liquidity problem. HMMMM

Monday, March 10, 2008

Whitney Tilson Presentation

Many of you have seen this, if you haven't go and check out Whitney's presentation entitled “Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles – And the Implications for MBIA and Ambac." You will have to fill out some information to access it. The presentation explains why we are just getting started in the downturn. A great presentation with alot of valuable information.

Interesting Piece from Barrons

In Up and Down Wall Street in this week Barrons it quoted Jay and David Levy of Jerome Levy Forecasting Center. I thought it had a piece of great insight.

"Never, they point out, "have such broad and severe credit-quality problem preceded a recession. Recessions cause burgeoning financials problems to intensify, not recede. Credit problems lag the business cycle, not the other way around."

MBIA - More Games

If you haven't been following this whole thing, last week MBIA asked Fitch to withdraw its ratings of MBIA. They had their excuses seen below but basically they don't like the fact the MBIA isn't walking to the same beat as the other rating agencies. (They are walking pretty close and still being way to easy, they are just raising a few more issues)

So Fitch responds here calling their bluff

Since it is not public here is some of the response from Fitch. It was posted on Calculated Risk in one of the notes section.

I am writing in response to your letter to Fitch Ratings delivered to us this past Friday requesting that we withdraw MBIA's Insurer Financial Strength (IFS) rating, but maintain MBIA's debt ratings.

Regarding the commercial relationship between MBIA and Fitch, as I suggested to you in our meeting on Friday, we are empathetic to the financial and operational stress MBIA is presently undergoing and are aware of the significant cost containment measures you are initiating. We are, therefore, willing to continue our ratings without charge to MBIA. I assume, in the interest of your stakeholders, that you will be seeking and will receive equal concessions and/or sizable fee reductions from both S&P and Moody's.

In addition, I would like clarification of your intentions regarding cooperation with our rating process. You stated in your March 7 press release, and in your letter to us of the same date, that you would like us to withdraw our IFS ratings, but continue rating MBIA's debt securities. Separately, by email sent a day later on March 8 (a copy of which is attached hereto) you requested that we return or destroy key portfolio information and discontinue all use of that information in proceeding with our rating analysis. It seems disingenuous at best to assert in your letter to investors published yesterday, March 9 (footnote 1), that you "intend to work with Fitch to perform the analysis needed to rate [MBIA's] debt securities", while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years.

It would appear that rather than "work with Fitch" your intention could be to emasculate our opinion by withholding information and subsequently discredit our opinion as being uninformed.

Friday, March 7, 2008

Have a Great Weekend

I have alot of thoughts but it will have to wait another day. I think the market is hanging in there on the hope of an emergency rate cut potentially on Monday along with some short covering buying. The employment number was just horrible. Unemployment is going to make everything much worse.

Anyway I got to save my thoughts for later. I am headed the airport for a quick trip to Colorado. Fly out today, ski tomorrow, fly back Sunday. Everyone have a great weekend.

Thursday, March 6, 2008

Agriculture, agriculture, agricutlure

Below is a great article laying out the bullish thesis on agriculture. There is nothing I am overall more bullish on over the next few years. Unlike oil, gasoline, and hard commodities inventories are down. I am not playing the commodity story at all except through agriculture. With that said I have told several of my friends I expect gasoline to reach $4 a gallon by December 31, 2008. Even if that happens you have to make several more assumptions than you do about agriculture. The commodity boom is ongoing. Oil in the decade of the 70s was up 1800%. We are up 300% from the lows currently. There is much more room to run as we develop the next bubble but oil inventories are sky high. Agriculture commodities is where I see the value. With the said I think we have a real possibility of a 10 to 15% correction in agriculture commodities and agriculture stocks. I actually increased my hedge today on MOO which is near a 52 week high.

Experts say the world is now facing down the barrel of the worst catastrophe of all: famine.


The very idea that the modern world could run out of food seems ludicrous, but that is the flip side, or cause, of the tremendous recent increase in the cost of raw wheat, corn, rice, oats and soybeans. Food prices are not escalating because speculators have run them up for sport and profit, but because accelerating demand in developing nations, biofuel production and poor harvests in some areas have made basic foodstuffs truly scarce.

On social unrest

Thai, Philippine and Indonesian officials are warning of civil unrest if the flow of rice does not increase.

On it being worldwide

Most unusual about this phenomenon, according to BMO Financial Group strategist Don Coxe, is that until now, food crises in world history were regional concerns .........What's happening now is a lack of supply everywhere at once.

On inventory levels

Shortages are real. The Financial Times reports that rice stocks have fallen this year to about 70 million tons, the lowest level in 25 years and less than half the total held in global inventories in 2000. Wheat inventories, called "carry-overs" in the trade, are at 30-year lows even though world wheat production was actually up 1% last year. In the past year, reports show, wheat inventories in the European Union have plunged to 1 million tons from 14 million tons.

A leading Canadian fertilizer executive told analysts recently that according to his company's calculations, global grain reserves are "precarious," at just 1.7 months of consumption, down from 3.5 months of reserves as recently as 2000.

On supply in the Midwest

the U.S. Midwest has enjoyed 17 straight years without significant crop failure, the longest winning streak on record.

On ethanol

The bill, intended to boost America's energy independence, is expected to push as much as 31% of the U.S. corn crop into biofuels production, up from 24% last year

Useless Commentary

The market may only be down 150 points (as compared to down 300 points) but I have never seen my screen so red. I track probably 100 companies plus in watching what the stock price is doing and I have a grand total of 4 companies in positive territory. (Archon, Wal Mart, Apollo, and Freeport McMoran) I don't know what the official gainers to decliners is but based on my watch lists it can't be good.

We are right at that 1310 level. For the worthless commentary I think we will settle right at it or right below it at the close today just before the big employment number tomorrow. If that number disappoints in anyway, perceived or otherwise, we will crash through this 1310 level. Rumors of emergency rate cuts will start circulating again. Banks have already broken the January lows and they typically lead the market. I am not trading this in any form or fashion. Not my game. I just got done working out and had some extra energy and thought I would write something useless for everyone to read.

From Munis Back to Mortgages
The credit market's eye of Sauron has shifted, providing a temporary respite for the ailing municipal bond market, where investors like Wilbur Ross are scooping up assests.

This is insane leverage

Carlyle Capital Corporation -- a unit of private equity firm the Carlyle Group -- missed a margin call on its $27.1 billion loan portfolio and may be forced to dump assets to pay back lenders. The company has just $670 million in equity supporting the portfolio, or a leverage ratio of 32 times.

Wednesday, March 5, 2008

Are We Entering a 1968 era?

Found this very interesting (Thanks Andrew). Not sure I agree with their end conclusion. New prospective / idea for me so I am going to have to mull over it.

Starts out defining 3 eras since the Great Depression.

The United States has had three economic eras since World War II. The first was the period from about 1948 until about 1968. It was marked by tremendous economic growth and social transformations, rising standards of living and cheap money. Then, there was the period between 1968 and about 1982. This period was marked by intensifying economic problems, including much slower growth, increasing commodity prices, high interest rates and surplus labor. The third period, which began in 1982, saw extremely high growth rates, rapid technological change, increasingly cheap money and low commodity prices. The first era lasted 20 years. The second lasted 14 years. The third has lasted 26 years. None of these eras moved in a straight line; each had cycles.

Then asks a very important question.

The important question is this. Have we really been in a single era since 1948, with the 1968-1982 period representing merely a breathing space in a long-term, multigenerational expansion? Or are we in a period of alternating eras, in which expansionary periods alternate with periods of relative dysfunction and economic stagnation?

The rest of document talks about the various eras and where we are at. Like I said, not sure I agree with the conclusion though not sure I disagree either.

One other very interesting thing that jumped out on me. I have never heard it put like this before when discussing taxes. Basically low taxes destroy moats as it increases entrepreneurism and competition. Many of you are probably like, duh Jason. Probably obvious, just never thought of it that way.

Low marginal tax rates weaken the hand of existing wealth and strengthen the possibility of creating new wealth.

ABK -Finally Done

Have not seen all the details, but it looks like $2.5 billion of private financing and it looks this will be patch and not a solution that will work for a few months. Finally, we have this past us. I think it will be buy the rumor sell the news type of thing so the market will start heading lower.

1310 is critical for the S&P if you are a technical guy. I am not but important to know what matters to others. We tested it yesterday and got saved on the ABK rumor. Now no more CNBC ABK rumors and we should be moving down.

Wages Moving Up

To get true inflation you need wages increasing. That is finally starting to happen.

Compensation for each hour worked increased at an annual rate of 4.6 percent, from a 3.4 percent rate the prior quarter.

For all of 2007, productivity rose 1.8 percent after a 1 percent increase the previous year. Labor costs rose 3.1 percent. Labor expenses account for two-thirds of the cost of producing a good or service

Tuesday, March 4, 2008

This article talks about the money flooding into munis. By far this is the biggest no brainer I am seeing in the market right now. I have just started moving a large amount of cash into this area. Not going to make you rich but a great way to preserve wealth. This is cash that was sitting in short term treasuries that at some point I plan on moving into stocks. I am buying three closed end funds and looking at individual muni bonds. I normally do not talk about my trades on here but because these are funds and not individual stocks I will mention them once I am done buying them.

Below is the main takeaway you need to get from the article above.

``We're telling everyone we can to sell Treasuries and buy munis,'' said Robert Millikan.

Monday, March 3, 2008

Warren Buffett Morning Chat

Warren Buffett was on CNBC on Squak Box all morning. Alot of wisdom as always. Couple of highpoints, we are in a recession, S&P is note cheap above 1300, and he tepidly admits in his lifetime he has bought and sold a stock in the same day.

6 am hour

7 am hour

8 am hour