Wednesday, April 30, 2008

Bunch of Nothing

What happened today? A bunch of nothing. That is the problem. The FED cut by .25% and signaled maybe a pause depending on how you interpret the statement. On the markets side you had a bounce once again stretching that 1400 level but not getting any sort of meaningful breakout. After that test the market quickly retreated but didn't break strongly down being an overall wash for bulls and bears. If your a dollar bull you have to be severly disapointed. The hope across the street was the Fed would come out much more hawkish putting a dagger in the heart of the short the dollar and long commodities trade. That did not happen. As a result the dollar reversed course across the board. The dollar against the Brazilian Real fell almost 3% from its highs earlier in the day!!!! That is a monstrous move for a currency!! The Yen also reversed course. On the commodity front everything also reversed with gold moving up. Corn was up close to new highs before the cut and soybeans had a very nice move upward. All this probably means more of the same and once again that is the problem. Dollar will not meaningfully strengthen in the short term and commodities won't meaninglfully weaken (talking 20% to 30% moves which is what needs to happen if your a U.S consumer fan).

Anyway to sum up another very weak pansy type of move by the FED that doesn't seem to really change anything. The next two days into Friday will be very interesting to see how the markets react.

A couple of side notes. Citigroup closed at $25.27 which was the stock offering price for the secondary offering. Huge bid at that price kept it from breaking that level. In the aftermarkets which really don't mean much it is below that $25.27. Also XLF once again hit $27 just like the S&P tried to break above 1400 and both got beat down.

Bill Gross and his reaction on the Fed cut.

I have alot more little stuff but I need to get on the road to Austin. Should be interesting the next few days.

Tuesday, April 29, 2008

Citigroup to offer $3 billion common stock offering
Citigroup says it will sell about $3 billion of its common stock in a public offering.

The New York-based bank says the offering will include an over-allotment option to buy more shares.

That's not the big news. The big news is that a dilutive transaction to raise capital did not cause the stock to rise 30%. In fact it is down 3% after hours. Imagine that? Something damaging to shareholders doesn't excite investors to buy buy buy. Don't worry, it will be up 5% tomorrow. lol

Okay caustic comments aside I think it shows that at least Citigroup management think this latest rally in financials may be overdone. Citigroup is up over 30% from its low. What a great time to raise an additional $3 billion in financing to strengthen your balance sheet that will probably need more capital after your stock has rebounded on the hope that the worst is over worth.

Bill Gross and Pimco at War

Bill Gross monthly letter is always interesting and this time is no different. I often find myself at odds with Bill ideologically but that does not mean you should not consider his ideas. Remember, don't drink your own cool-aide.

Barron's Review

Most weeks I go through Barron's and use a highlighter mark things that jump off the page. It is not every week and I usually do not get Barrons until Monday or Tuesday. Anyway below are some things that seemed interesting to me.

April survey conducted by Merrill Lynch, 50% of global money managers said the greenback is undervalued, up from 30% three months ago, while a whopping 71% found the euro overvalued.

Mobile Telecom was the best performing sector last week. It is ranked 96th out 99 from a year ago and 97th ytd.

Consumer Electronics is ranked 99th out of 99 (not banking or mortgage) year to date.

Paper is 91 year to date, 93 from a year ago, and 90 last week.

NYSE stock volume was 6.5 million shares last week compared to 8.0 last year the same week.

In the last twelve month Russell growth is down 1.5% while Russell value is down 11.24%. YTD however Russell growth is down 4.9% while Russel value is down 4.4%

Money market funds for the second week in a row had a draw at a rate of $839 million. (over a 44 billion inflow in the beginning of February)

From March 1st to April 15th NYSE short interest increased .3% while NASDAQ short interest decreased .7%. Both short interest ratios jumped dramatically on the volume disappearance.

Last Friday's 3 month Libor was fixed at 2.912% up dramatically from 2.537% on March 18th.

In a recent study, Dredner Kleinwort found that 120 Japanese stocks, or 7% of those included in the Topix index, have market caps that are less than their net current assets. Among smaller companies, that percentage jumps to 10-15%.

Fujumura notes 60% of Japanese companies trade below book values, P/Es are historically low and stocks yield 2%, versus a benchmark interest rate below 1.5%.

U.S. demand for oil is expected to drop 410,000 barrels a day in '08 but China growth alone is seen rising 500,000 barrels a day.

GFI and Cummins were both individual stocks mentioned I found interesting. (Cummins was mentioned by Defiance Asset Management)

Extreme Networks and Avnet both pointed to slowing technology sales in the month of March.

Big Money Poll - 12% of poll participants now call themselves bearish, down from 18% in the fall. Not a one felt compelled to tick of the very bearish box. Those same managers softened their stance toward real estate; about 70% were bearish in our fall survey, compared with 48% now. Just 8% consider property an attractive investment these days. More than 55% of the poll participants think the market is undervalued, while just 10% say it's overvalued. 87% expect to be net buyers in the next 3 to 6 months while 13% intend to be net sellers.

That is the Barron's recap. There was other things I highlighted but that is the stuff I found interesting. Interpretation is up to you. In general I think this once again showed how bullish everyone really is. I love looking at the Dow Jones industry groups and see who is underperforming. That is where you can find value.

Monday, April 28, 2008

Jeremy Grantham Quarterly Letter

I have been eagerly waiting Jermey's latest letter. In general I find my thought patterns in overall theme recognition investing pursuing value in those themes closest to him. Jeremy has been bearish for years but he is arguably the most respected bear on the street. Even if you are a raging bull you need to know what Jeremy is saying.

This letter he completely blasts Greenspan. Sheez I have not seen anyone so bold in his overall distaste for Greenspan's polices. He also praises Paul Volcker. As a side note if you have never read Changing Fortunes by Paul Volcker you need to. It is an absolutely amazing book and a great understanding for how the financial world goes around. Not surprisingly he is still bearish talking about Mr. Hyde (the equity market) and Dr. Jekyll (the fixed income market) and how it will take time for the animal spirits of the equity market to disappear. He also discusses what primarily makes me bearish and that is the absurd earnings expectations. Also he believes the emerging markets are still the place to be and headed for a bubble. Finally as always he talks about the presidential cycles which in general I don't find very useful. Either way I think for all investors Jeremy's quarterly letter is a must read, enjoy.

The animal spirits of the stock market have been nurtured by strong fundamentals and generous credit globally and fertilized by increasing quantities of moral hazard since 1982. Stocks refuse to worry that this is indeed the end of an era, as we believe, and apparently as much of the fixed income market believes.

Look at the amazing earnings estimates for the S&P 500! On January 1 the first quarter estimate was +12%. It is now -8%. Was the credit crisis still hiding on January 1? Even now the forecast for this year is +15%. Plus 15%! What is going on? With denial skills of this magnitude it is surely not a surprise that subtleties within the equity market such as quality versus junk have been misjudged.

Commodities - The four hoofed kind

I have started pruning my agriculture future positions and started to move to the other soft commodities, cattle and pork bellies (my personal futures account not my fund). It is the next natural iteration of the commodity bull market and what you saw in the 70s and 80s. Last week I sold out of half my rice position and a two months ago I bought the first cattle future I have ever owned in my life.

The meats have not kept up at all with price appreciation. If you have been in the meats industry it has just been horrid. The last few months have been especially bad as the large meat processors have been slaughtering cattle as fast as possible so as not to have to feed them having the side affect of keeping overall prices down. This is quickly dwindling supply. If you don't have a futures account the way to play it is by buying the etf COW. It is 68% live cattle 32% lean hog. One stock I have thought about is Tyson. They are the largest chicken producers who have just gotten slaughtered with feed prices moving up but chicken prices are finally starting to move up and Tyson appears to be the cheapest of the bunch. There is a debt issue which makes me nervous.

Below is a great summary of the little tidbits I have been picking up over the last few months. Nothing new if you have been following the story but a great recap if you haven't.

"With virtually all commodities soaring over the last several months, the meats have been a disappointment - until about ten days ago. I think we finally broke-out.

"Live cattle and lean hogs have been poor inflation-adjusted investments or speculations since the bull market in raw materials was set afire in 2002.

"Over the last six years, live cattle and lean hogs have gained just under 30% in nominal terms, or up barely 4% adjusted for inflation. That pales compared to the huge gains logged by the base metals, precious metals, the grains and other commodities.

On the increasing slaughter rate

According to the USDA, the weekly slaughter rate of hogs was up 7% in March from 12 months earlier.

"Farmers are culling more hogs and live cattle because input costs are threatening not only their margins but their operational viability. It's no understatement that feeder costs are literally skyrocketing as grain prices have tripled since 2006. So for livestock producers, it's either downsize or go out of business.

Warren Buffet on Wrigley and the Economy

Part 1

Part 2

Friday, April 25, 2008

Interview with Robert Rodriguez of FPA Captial

I think this is probably one of the more interesting things I have read over the past couple of months. I like reading Bob's stuff and his speech last June could not have better predicted what would happen over the next nine months if he was writing about something in the past instead of the future. It is bearish but whether your a bull or bear I think there is alot to glean from it and highly recommend you spend the time to read it. Thanks goes to Britt.

On relying on models.

I have seen more crap come out of the Excel spreadsheet than Carter has pills.

My point is that you don’t need these models. I’m a pretty mundane and simple analytical type person.

On inflation

If you don’t think inflation is going to be a problem over the next 12 to 24 months, I could argue that’s probably a reasonable expectation. But over a period of five or ten years, I don’t think it’s a reasonable expectation. Because I see a further degradation in the penalties for unsound risk-taking.

On a second half recovery

What is Fed Chairman Bernanke banking on? A second-half recovery— even if it’s a subdued
one. So that’s also what the stock market is hoping for. But I think that this recovery will prove to be rather wanting.

Well, that probably means that earnings expectations are still too high, by a long shot, in the
stock market and that we have a long period of earnings disappointments ahead of us.

On the recent economic activity. By the way, you saw this in many calls. Economic activity came to a halt in March. All kinds of commentary in the corporate conference calls about March.

When I was talking with my logistics guy over the weekend, I asked him, “What are
you hearing around?” And he says, “Bob, it’s as if things fell off a cliff three weeks ago.” I said,
“What do you mean?” He said, “I’ve been talking to people all across the country, it’s all the same. It’s fallen off a cliff. It doesn’t matter, by industry. You can get maybe a load going across country, but then you’re going to have to deadhead back. You can’t do it.”

Thursday, April 24, 2008

For the Bulls

Thanks again goes to Pete.

I have tons of respect for Richard Pzena. He is one of my favorite value investors. He has been painfully early and I think he is still early. Over the long term he is almost always right.

It really is a good read and essentially I don't really disagree but I think he is early.

As a side note the market seemed to surge today but nothing really happened. Volume was decent but the market once again failed to surpass that 1395 to 1400 level in the S&P. Financials shot up today but the ETF (XLF) is still in that range between 24 and 27 it has been in for months. Don't get me wrong there should be no doubt that the bulls are in control. Overall nothing still has been proven and we continue to stay in the ranges.

On financials

This is a once in a generation opportunity to get franchises like Citigroup at five times their normal earnings power. You just don't get those opportunities. You only get them when there is panic. And the last time there was panic was 25 years ago.

Right, the idea that people will never use a bank again, or that the whole financial system is now different than it was, is crazy.

Bear Funds - Safe?

Thanks goes to Pete

This March, as the market stumbled over the Bear Stearns collapse, ProShare Advisors posted a small notice on its Web site: "Bear Stearns is not a counterparty to any of the financial instruments held by ProShares." That's about the only information customers of the Bethesda (Md.) manager's most popular exchange-traded funds can get about what investment banks ProShares does business with, however. And it's these banks, or counterparties, that most "bear" funds rely on to take the other side of the complex financial deals that underlie their performance.

Counterparty risk is what MBIA and Ambac bring to the market that everyone is ignoring again. I honestly had not really even thought of the risk associated with the short ETFs.

Bearish Report of the Day

I am not looking for this stuff. It is just what I am finding interesting because it is so counter to consensus and what to me seems obvious and what history would say. As a side note if the S&P breaks that 1395 to 1400 level in any meaningful way I do think we are probably headed to 1440 and 1450. The markets are trading on techincals and hope right now.

This is a debt shop and so alot of macro discussion. If you have interest in that stuff dive in. Two basic takeways.

Long economic downturn.

The point for investors is not what type of recession we are experiencing, but rather how long the downturn will last. Our conclusion is that our present economic difficulties will persist for at least two years.

Inflation will end up not being a problem.

A related question is whether the higher CPI readings, combined with poor economic growth, will result in stagflation, a condition last witnessed nearly three decades ago. Four considerations suggest that these fears are not likely to be realized.

Wednesday, April 23, 2008

Agriculture Mania

Thanks goes to Travis.

I do not think we are in a general bubble yet though these multiples on the newest agriculture IPO are definitely bubble territory. Just ridiculous. Overall I think agg stocks need to take a breather. Either way there aren't any U.S. agg stocks that I have interest in. There is no margin of safety. You have to go overseas to find anything interesting.

Intrepid Potash Inc.'s initial public offering may mark the start of a bubble among fertilizer stocks, which have soared during the past couple of years along with demand for all kinds of crops.

After surging 58 percent in its first day of trading, Intrepid -- the largest U.S. producer of potash, according to its IPO prospectus -- is valued at 201 times last year's pro-forma earnings of 25 cents a share.

This makes the Denver-based company's shares more costly than those of Cisco Systems Inc., the world's biggest maker of computer-networking equipment, when the Internet bubble reached its high point in March 2000. Cisco peaked at 193 times profit, according to data compiled by Bloomberg

Bear Stearns Affect

What a day. This is the type of day that makes me wonder sometimes if technicals matter more, just how inefficient the market really is, and if computers are dictating trading versus humans. I have said many times that things don't matter in the market until they do. Something will be ignored and ignored and then something out of the blue causes the whole market to focus on it. Today it was ignore Ambac and MBIA.

I am calling this the Bear Stearns Affect. We have moved from panic to complete complacency on the expectation that if things do go bad again the Fed will be there to save us all. This is just stupid and the very moral hazard so many have warned about. I am going to go so far and say the market was flat out wrong today. That is a dangerous statement because the market over time will be right and my analysis could just be wrong. I usually don't care. I take the philosophy that the market is what it is. Either way the price action was just insane. I am not just talking my book. I do not have any exposure to major indexes on the short side. I am short individual securities and a couple of very focused etfs so I really have no skin in the game whether the general market goes up or down since I don't own anything like S&P 500 puts. In my opinion the market and the financials completely ignored one of the biggest news items since Bear Stearns. These two companies are the nuclear trigger that could send the nuclear bombshell throughout our financial system. They are leveraged over 80 to 1. If Bear Stears was scary in the counterparty risk they represented Ambac and MBIA has to be the nightmare of a serial killer in the offices of Wall St. best and brightest.

If that wasn't all stupid enough something more insane came across the wires around 2:30 right before the close.

15:40 ABK AMBAC Fincl: S&P says Q1 results won't result in rating change - Bloomberg (3.29 -2.74) -Update-

I have not seen a news story on this yet. I heard from a day trader friend of mine who sent me a text message that said S&P said that Ambac's earnings were in line with expectations and that S&P would not downgrade Ambac. Ambac's earnings were in line with expectations???? Whose expectations??? The stocks was down 40% plus. Before the S&P news 50%. Does S&P downgrade them if they declare bankruptcy?

Once again I must give a sigh. S&P can't really downgrade them. As ironic as this is they may be one of the few who actually understand what is at stake with downgrading them several notches. We are held hostage by the need to create a mirage of thinking everything is okay so that the market ignores the potential nuclear fallout of Ambac and MBIA potential failure. As I have said time creates optionality and optionality creates more time.

Maybe I am being to cataclysmic with what Ambac and MBIA represent to the market. In February what I was saying the market agreed with. I don't really think anything has changed. The market assumes it all doesn't matter because the Fed will be there. Maybe there right, maybe there right. I think the government is going to have to get somehow involved.

It won't matter until it matters. Maybe that is tomorrow. Maybe next week, maybe when MBIA reports. I don't think we have seen the last of this.

Rice Rationing

What just a simple horrible day for news.

Wal-Mart Sam's Club announced limit to the amount of rice customers can purchase. This is voluntary (government isn't telling Wal-Mart to do this) but food rationing in it infancy may have just started in the U.S. I do not think it is that bad yet but one bad harvest year and we will be there.

It's funny to listen to all the CNBC talking heads over the last few weeks. "Oil, food, gas, are all way overdone and overextended and are in a bubble and are driven by speculators" while at the same time we need to "buying bank stocks and the worst in the market is behind us."

What sounds like the contrarian plays to you?

Wal-Mart Stores Inc.'s Sam's Club warehouse unit is restricting purchases of some types of rice to four bags a visit as prices reached a record in Chicago futures trading.


"The warehouse clubs are doing it to protect their business customers, like smaller restaurants, caterers, nursing homes, day-care centers,'' said food consultant Jim Degen. ``The business members are the most important members in warehouse clubs because they generate so much more revenue per member.''

Definition of Insane

This has got to be the definition of insane.
The first-quarter net loss was $1.66 billion, or $11.69 a share, New York-based Ambac said today in a statement. The company's operating loss of $6.93 a share was more than three times the $1.82 estimated by six analysts surveyed by Bloomberg.


Ambac staved off the loss of its AAA rating at Moody's Investors Service and Standard & Poor's by raising $1.5 billion in a March stock sale.


The $1.5 billion sale of stock and convertible units nearly tripled Ambac's outstanding common shares to 285 million. The company this week said it's seeking shareholder approval to increase authorized shares to 650 million from 350 million.

Okay let me get this right, they lost another $1.7 billion, five times more than the market expected. They raised $1.5 billion in February so they lost more than they have raised. Wants to almost double there share count which assuming they could get $3 buck a share (bigger discounts occurred at national city) would raise just 900 million. Ambac is down 20% before the open, MBIA down about 10% and the market looks like it will open up!! NOT ONLY THAT, the financials look like they are going to open up!! That in my mind has to be the definition of insane.

One thing to note was that these insures became center stage a few days after Ambac reported earnings in February. There was a delay even though the stock was plummeting. Wall St. unfortunately may start focusing on these guys again. I would love nothing more than some permanent solution to fix these guys so the the systemic risk disappears with the rest of the market and I could become much more aggressive on individual U.S. stocks.

Tuesday, April 22, 2008

AAA Downgrades!!!

This is big. Personally this may be the biggest piece of news that I have seen in several weeks. It was on calculated risk blogspot but I wanted to editorialize a moment so included it here as well.

Moody’s Investors Service has decided that it’s finally time to downgrade investment grade subprime RMBS — you know, the Aaa-rated stuff? Between Monday and Tuesday, calculations by Housing Wire show that the rating agency has slashed ratings on 1,923 tranches from 232 separate subprime RMBS deals from 2005-2007 vintages.

The downgrades surely tally into the multiple of billions worth of subprime debt, and portend additional earnings pain for many market participants — write-downs on the value of RMBS in a portfolio usually aren’t marked up until a downgrade takes place.

I think I posted the link below awhile back but everything has been getting downgraded except the AAA rated stuff. It looks like this may be changing. This is very important for many reasons. The first is that the Level 2 and Level 3 assets on investment banks books are typically marked to model which is based on these ratings. A security may not ever get traded and have a bid of 85 and ask of 98 and it gets marked on the investment banks book at 98 because it is still AAA. Now that these downgraded have started that probably means more writedowns. More importantly is the fact that this could limit the collateral the banks can bring to the FED. The FED only accepts AAA mortgage paper so as that disappears that could cause another wave of liquidity issues. The market reaction to all this may not be seen for weeks or months but fundamentally I think this is a very big story.

The Bloomberg piece awhile back talking about the AAA rated paper not getting downgraded.

Monday, April 21, 2008

Market Getting it Right

I have been fairly bearish thinking the market is not pricing in correctly the coming and continuing economic slowdown and what that means to corporate profits. I will have to concede that for first quarter earnings the market does appear to have done a good job of pricing in earnings. You can see this from insight in Barrons column "The Trader."

Consider the evidence: Out of almost 189 companies that reported earnings by Friday morning, 57% beat estimates, and these "have performed significantly better to the upside than stocks that missed have performed to the downside," says Bespoke Investment Group. In particular, companies beating targets have amassed average one-day gains of 4.11%, while those missing gave up just 2.86%. Even companies that merely met their marks have rallied 2.49% -- a sure sign investors were expecting worse.

In my mind this is significant and shows the market has priced in the problems so far fairly well. My argument continues to be the very anticipated second half economic recovery will end up becoming a mirage that will move to the first half of 2009 and probably to the second half of 2009. In the short term it looks like so far the market has got the earnings picture right.

Eye of the Storm

There was what I though a very interesting commentary in the very back of this weeks Barrons titled "In the Eye of the Housing Hurricane." It was from a Florida real estate broker who compares the current period to the eye and relative calm period between the front and more damaging backside of a hurricane.

THIS IS EXACTLY WHAT'S HAPPENING IN FLORIDA'S housing and financial markets. We are in the eye of the hurricane, and the back half will hit us twice as hard as the front.

Recently, however, there has been a lull in the windstorm. Would-be buyers are returning to the market. Over the past few weeks, we've been seeing 300% increases in traffic at our open houses from a year ago. Builders and real-estate agents report that offers are up, along with traffic.

But this is not the end of the hurricane; it's still the eye. What the builders and agents neglect to report is that most of the traffic couldn't qualify to buy a moped. Nor do they report rising rates of pending contracts that fail to close. And they don't mention the damage being done by falling prices, which put more and more homeowners into negative-equity positions and make it more likely that more property gets pushed back to the lenders.

This is what I have been talking about with the disapearing credit. Just like Fed rate cuts it takes many months to work through the economy. He sees the second half of the hurricane the result of lenders who own the defaulting homes.

Almost nobody is reporting on how the inventory problem of 2006 has moved from builders to lenders, and how the lenders have no clue about what to do with the surge of defaults and foreclosures.


Commercial and retail property are also becoming casualties in the back half of the hurricane.

I found the whole article very interesting. How often do hear anything a real estate broker that is connected to logic and not just outright bullish? If you want to read it and don't have a subscrption let me know and I can email it to you.

Sunday, April 20, 2008

Mortgage Rates on the Rise Again

Been one of those weekends where I have been all over the state. Just got back from Austin where I went to church, played some golf, and then went on a party boat for Britt's (Head of the $120 Billion Texas Teachers Retirement Fund) surprise 50th birthday party. It was fun.

The markets are once again way overbought right about at the same levels as they were 1.5 weeks ago at the major resistance levels between 1385 and 1400. Should be interesting. Friday was no doubt a bullish day. The bulls had alot to feel good about going over the weekend. Amazing for me how these type of things build my conviction in the opposite direction. As I said after the Bear Stearns thing we could go up to that 1440 to 1450 level but I still think the March lows will not be the lows for 2008. Who knows, we shall see.

Interesting article in the financial times pointing out that the huge sell off in treasuries caused mortgage rates to surge.

US mortgage rates soared this week after a dramatic sell-off in the Treasury market that hit housing sector recovery hopes even as it suggested investors were growing more confident in the medium-term US economic outlook.

The yield on the 10-year Treasury rose as high as 3.85 per cent on Friday from less than 3.50 per cent last week as investors sold bonds on expectations that the Federal Reserve could soon end its rate-cutting cycle.

Rates on 30-year fixed-rate mortgages rose to 5.87 per cent from 5.63 per cent a week ago, said. Jumbo mortgages, those of more than $417,000, rose to 7.19 per cent from 7.06 per cent.

Naked capitalism had a good graph showing the mortgage rate over the last year. We are back in that January to mid February range.

It has been the question I have been asking myself lately. Okay the rosy scenario of a shallow recession and strong rebound in the second half is correct (don't think so but just for arguments sake) do the bulls realize how interest rates will respond? That will start killing growth prospects if gasoline and oil doesn't get it first.

Ambac reports before the bell on Wednesday. I am really interested to see what those numbers are going to be and how the market responds especially with the overbought conditions. I really have no idea though I think from a probabilistic scenario it will be negative. Once again time will tell.

Should be an interesting week.

Wednesday, April 16, 2008

Up Up and Away

The market continues its range bound nature. We really haven't gone anywhere in several months with the S&P bouncing between 1400 on the upside and 1260 on the downside. The bulls point to the earnings and the huge up move and they would be right. The bears would point to the continuing TED spread that is widening yet again (this trades non stop so it expanded today, Wednesday, but a new day has technically started and it is flat), the ABX did not participate with the rally, and volume was once again on the light side and the bears also would be right. In addition to all the earnings your also have options expirations day on Friday which for technical reasons is usually a bullish event in downward drifting markets. In general the market seems to have priced in earnings fairly well. I am still waiting for next week with Ambac.

I am busily working on my quarterly letter so will be sporadic in my postings. I am also going to College Station, the land flowing with milk and honey, tomorrow for the final Titan's class of the semester. It is Britt's class he started a couple of years ago and tomorrow is the last class with the current Titan students and the new Titan candidates will be attending before we all go to Olive Garden. Should be fun and as always interesting.

Tuesday, April 15, 2008

Brazilian Wealth

Good column from of all places the Dallas Morning News talking about Brazil. I am a huge Brazil fan. Investing outside the ADRs is not easy. You need a Brazilian tax id and account to invest directly in Brazil which I have done. Also, Buffett has a big currency position in Brazil. That I have not been able to replicate though I have tried but when you are as big as Buffett there are ways to get around things.

The U.S. may be in a recession, but these are the best economic times in Brazil's history. By government estimates, 20 million Brazilians raised their incomes enough to join the middle class in the last two years.

I still think the world food shortage issues will have to come to some degree from this country though it may be at the expense of some additional rain forests.

Robert Rodriguez Still Bearish

Interesting article Robert Rodriguez of the FPA Capital and FPA New Income Funds. I recognize the speech also from last June. I read it last September and referencing him to looking at a crystal ball is not an exaggeration at all. (Thanks goes to Nathan)

Industrywide, the typical fund has nearly 100 stocks, with less than 25% in the top 10 and an average holding period of less than one year. Last June, Rodriguez gave a speech that warned of the coming credit crisis so accurately that it reads with hindsight as if he had been peering into a crystal ball.

Taking his own warnings to heart, Rodriguez raised cash to levels high enough to withstand a nuclear war: 43% in FPA Capital and roughly 66% in New Income. In December he declared a formal moratorium on buying any stocks or high-yield bonds until he felt it was safe to invest again - essentially putting both portfolios into a state of suspended animation. As of press time he has not lifted that moratorium.

Monday, April 14, 2008

CDO Liquidations

I have been swamped and I have not been feeling very well and the first thing that attacks for me is my mind in being able to think clearly so I am about out but one more interesting article. (Thanks goes to Ron)

NEW YORK, April 10 (Reuters) - SMH Capital will act as exclusive agent on the liquidation of $2.8 billion of collateralized debt obligations via six separate auctions next week, market sources said on Thursday.

Not exactly sure what this really means. Like what are the implications if this happens or this happens. Something to keep an eye on though.

Buffett Thoughts

Interesting article on Warren Buffett's latest thoughts on the market. (thanks goes to Pete)

Reading between the lines he sounds a little more bearish than he was even a month ago. Good article.

Sunday, April 13, 2008

Demise of the Euro?

General Electric may have done what the employment numbers the week before were incapable of doing. Shake Wall St. away from the continued belief that things are still closer to 1998 rather than the 1930s or 1970s. We shall see. Technically we are at a key point but not surprisingly we are at a key point from a fundamental standpoint with tons of earnings. That is why I shake my head with people running around trying to make technical calls. Stick to fundamentals and the technicals will eventually follow to the fundamental story. Not vise versa. Use the technical points as guiding posts using them to take advantage when you got extreme readings and you were thinking of shorting x or going long y anyway. This week and next we will have a much better idea what the true fundamental story is. Also, Ambac reports a week from Thursday. MBIA not until early May. Should be interesting.

Interesting article on the Euro entitled "Demise of the Euro" (thanks goes to Doug). I have not heard this perspective at all which makes it especially intriguing to me especially since it makes logical sense. I have no opinion on the Euro. Maybe it goes up or maybe it goes down. Asia currerencies is a total different story as within five years I think across the board there will be continued major appreciation against the U.S. dollar.

Tensions between inflation-obsessed Germany and growth-hungry Latin countries will spell its end.

It is only a matter of time, probably less than three years, until the euro experiment meets its end. The financial crisis in the U.S. is hastening the process, as investors flee the dollar, pushing the euro to a price of $1.59. But it will not stay high for long. Countries like Spain and Italy will withdraw and return to their old currencies. Once that happens, get ready for the return of the deutsche mark and the French franc.

The whole article has some very interesting points I have not read, thought of, or heard anywhere else. Very good read.

Friday, April 11, 2008

Titans of Wall St.

Well I am back. I had a great time in Austin meeting up with friends and sitting in on the TRS (Teacher Retirment System of Texas) board meeting. In general it was more informative than I thought it was going to be. I told Britt that I didn’t know if that was because my expectations were so low or if the Wall St. executives were a little more candid in that environment than say on CNBC. It still was overall surface level stuff and I came away wondering if the CEOs really knew what was going on. Though I disagreed with him on a few things I thought Larry Fink was the most candid. Anyway, as part of the board meeting Britt asked them questions over a period of an hour. I took some notes which I share below. What I picked out was paraphrased but you get the general gist. Overall themes had to do with more regulation and the need for it, positive impacts of sovereign wealth funds, and of course, a general optimistic feel on everything. The executives present were:

John Mack – CEO of Morgan Stanley
Dick Fuld – CEO of Lehman
Larry Fink – CEO of BlackRock
James Staley – Head of JP Morgan Asset Management

First question had to do with recent headlines in the press. Things like “This is the most significant financial crises since the Great Depression.” Also, “The Texan said to the New Yorker, what crises?”

John Mack – Not on the verge of a depression but the worry has been will we see the financial system fail. Money has left the system the Federal Reserve can control. How do you get the control the FED had 20 years ago? This is the question to focus on. Talked about all the good things in the U.S. economy. The worry is the consumer getting crushed with the consumer making up over 60% of GDP.

Dick Fuld – Bernanke has done a superb job, as did Greenspan. There is tons of liquidity now unlike in 1998.

Another question dealt with how you felt about level 3 assets (this was never answered), mark to market accounting, hedge funds, leverage, rating agencies.

Larry Fink – Leverage used to be very simple. The last few years to keep the ROE and return on capital people had to put on more and more leverage. Deleveraging is in all asset categories. Used to be common leverage for things like bank debt would be 8 to 1. Will be 4 to 1 going forward or less. Only two ways to deleverage. Sell assets or raise equity. Last 10 years GDP grew 5.7%, capital markets grew 9.5% approximately That is a huge difference (added emphasis in voice) . Leverage is not being sucked out. Will continue to have fear and uncertainty, the capitulation stage has started. Now is when you should be adding risk. BlackRock has raised $100 billion in money market funds. It is fear money. When it returns to the markets it will return quickly. Rating agencies should be regulated as should hedge funds. To many investors, especially foreign, relied on rating agencies.

James Staley – Financial crises comes every 5 to 10 years. The question has to do how much it affects the economy. Most believe regulation needs to be extended, most people would expect us to say that but we collectively believe we need increased transparency.

Next question dealt with Sovereign Wealth Funds and China Investment Corp investing $5 billion in Morgan Stanley.

John Mack – Optimistic what they sovereign wealth funds can do with all that money. China just got another $100 billion. John was in China talking to the head of the fund and the head of the fund said what are we going to do, we only have five people managing this. John told them to go to Austin to meet with Britt and TRS and see how they are changing the investment structure.

James Staley – They receive more pressure from state pension funds then sovereign wealth funds. See it as a good thing. Bringing up leverage again he mentioned the monolines have 90 to 100 times leverage. Unless you have capital somewhere else firms can’t survive a crises of confidence. That is what happened to Bear. The capital requirements are even worse in Europe. AAA paper requires almost zero capital to meet capital requirements in Europe. That is not going to work. Most people would say if Bear had access to the FED window two weeks before they would have survived. Those people are probably right but Washington needed something to move. Bear had 240,000 derivatives with other broker dealers that are not on any exchanges. This would have frozen Wall St like none of us could have ever imagined. The market would have been down over 2000 points.

Next question had to deal with the confidence in regulation and the cycle of disbelief, denial, anger.

Larry Fink – Washington has been in a state of shock and disbelief. In the 3rd quarter you had tons of mark downs of assets but no selling. Now you have fear and anger. This is forcing people to sell, the capitulation stage. This has to happen and he is troubled that Texas feels immune from this, it may take more than Bear Stearns falling to make it work. Republicans and Democrats battling with the FFH bill is just obscene. Government still hasn’t fixed subprime which started all this. It is not overregulated. Instead of hedge funds and other opaque investment vehicles shouldn’t money be going to firms like the investment banks and BlackRock which are regulated.

Question on Hillary or Barrack

John Mack – He said he was a proclaimed Bush supporter and long time Republican. Didn’t like Hillary but got to know her as a NY senator, has become really impressed and now a supporter. Talked about isolationism and how even in the cold way when we had missiles points at us by Russia we still had a Russian Embassy and Trade Bureaus in Russia. We need that in Iran. We can have disagreements but we need a presence. Hillary understands this and grasps the issues. Barrack is just inexperienced.

Larry Fink – Has been a long time Barrack supporter. Barrack has been losing some of his support. Originally he was impressed with Barrack and that he knew what he knew and knew what he did not know. He was not worried about his inexperience. He has become dismayed on Barracks most recent positions. Barrack has become much more of a populist and taking positions that could continue to bankrupt the country. In the NY primary he voted for Barrack but concerned now.


James Staley –Very optimistic about the invest opportunity. Charged everyone to stay optimistic. (I thought that was the stupidest comment of the entire thing. You charge everyone to be realistic not optimism because that is somehow some higher value).

Additional articles from the Austin Statesmen.

Wednesday, April 9, 2008


I am headed out to Austin for some small discussion group tomorrow morning with the CEO of Morgan Stanley, the CEO of Lehman, and a couple of others. Something the Texas Teachers Retirement System is doing for the board of directors I believe. Should be interesting. Not sure if I will be back around tomorrow either. I expect a couple of interesting things in my email inbox when I get back. Later.

Global Food Crises

News story on CNBC of the global food crises. Last night 9 people died in Egypt in riots as peasants were trying to get rice and bread. Very interesting story.

I have not bought into the oil story, or the gas story, or the metals (not counting gold) story. I have completely bought into the agriculture food story.

The reason is inventory. We have large inventories (most in 10 years) in oil and gasoline. Oil has become a substitute currency and so tied to the dollar which is why it continues to move up. There is no way I would short energy related investments but agriculture products are a totally different story. I have written about this often. Inventories across the board are at 20 to 40 year lows.

Vick, the analysts from the pits in the CNBC video, I think is wrong. He talks about farmers responding to prices and upping output bringing down prices. I disagree. Don't get me wrong, soft commodities could easily be down 30% six months from now. These commodities move violently. But 2 years from now I still think they will be higher. Farmers will respond, well yes they did. Last year in the U.S. they planted more than 90 million acres of corn in response to high corn prices. The most acres since 1944. They took these acres from soybeans and wheat. The end result, corn prices stayed flat at very high elevated levels. Inventory did not increase because of ethanol and corn exports. Soybeans, wheat, and other ag prices skyrocketed as the acres planted for corn were taken from these products. This year farmers cut way back in corn, even though prices were slightly higher than a year ago, with estimates of 86 million acres in corn planted to plant other products. Soybeans and wheat have come off their highs while corn skyrocketed to another all time high today. Its give and take resulting in an overall higher average for everything. People act like there is all this farmland waiting to be planted. Well guess what, in the short term there isn't. I think Brazil will become an agriculture juggernaut over the next few years but that will take time. In the short term (18 months) I don't see how inventory levels develop any meaningful slack whatsoever.

In fact we are one major drought or flooded crop in the U.S. (something we haven't had in over 15 years on a national scale) from causing truly catastrophic consequences.

I wouldn't go out running out buying futures in this stuff (I did add to my corn position a couple of weeks ago at much lower prices) but there are still nook and crannies available to invest in agriculture companies. They move violently however and you have to have the stomach for volatility. I have looked at Russian, Brazilian, Canadian, and Australian agriculture companies. There are still values out there, you just have to dig. The big etf is MOO or COW. Easy way to play the ag story though I would like to see it under 55 before I added more to it. Even as an etf it moves violently. Seen 5% moves plus several times in the past few months.

Meridth Whitney

One of the rare inspirational subplots of our current financial panic has been the rise of Meredith Whitney. An obscure and little-noticed analyst of Wall Street banks, working for an obscure and little-noticed Wall Street bank (Oppenheimer & Co.), Whitney has become, in a matter of months, a woman who moves markets.


Meredith Whitney is the only analyst on Wall Street willing to speak her mind.

Unless you are know the working of Wall St. you have no idea how rare that is.

It all started back on Oct. 31, 2007, when she published her now-legendary report on Citigroup Inc. In it, she pointed out that the company's dividend now exceeded its profits -- the bank was handing money back to its investors faster than it was taking it in from its customers.


We broke through 1360. Fundamentally there was no doubt in my mind eventually we would but that was a big number from a technical perspective. We bounced off of it I don't know how many times both today and in the last couple of weeks.

Keep an eye on MBIA and Ambac. Even if you don't know anything about these companies or don't have a position they should be on your watchlists. If we break those March and January lows in the next month my guess is it will be because of these two companies. So far over 2600 May puts have traded today for Ambac with a strike price of $2.50. Average volume over the last 10 days is 180. Someone is betting Ambac is essentially done by the third Friday of May.

Probably time to start looking at getting defensive. I never stopped being defensive because fundamentally nothing has changed but selling calls on some longs or adding to your short exposure may not be a bad idea.

Tuesday, April 8, 2008

The Bid Remains

I don't know how the market will react and the market continues to seem to desperately want to test that critical area between 1385 and 1400 on the S&P but the news today seemed just awful, especially after the bell.

You had UPS warn on upcoming earnings which is very close indicator of the economy.

You had S&P downgrade 4 insurers, Old Republic International Corp, MGIC Investment Corp, PMI Group, and Radian. These downgrades are under new estimates for S&P that housing prices will fall 20% from top to bottom instead of 11% assumed 5 months earlier (still may be to optimistic).

Then Freddie has demanded remediation from these insures which probably means more capital raising, if they can get it.

You have financial week estimating losses of $15 billion for Citigoup next week while Bank of America may be $9 billion.

However the XLF (the etf that tracks financials) was up over 2% after the bell on this particular news.

Basically Citigroup is nearing a sell of $12 billion dollars of bank debt for a little under $.90 on the dollar. Without having any idea what pieces of bank debt this consists of, my guess is this will be a 3 to 5% haircut compared to market prices. The LCDX (the index that tracks bank debt) has been trading around 93 ish. To move such a large amount of bank debt off the books would require some sort of haircut.

The reason this is bullish is because it continues to show that there is a bid out there at some price. It establishes a bottom. You saw the same thing with Washington Mutual. You saw a bid which people weren't sure a month ago existed at any price. Yes it was extraordinarily expensive and dilutive but it was a bid. I made a mistake in this one. After being down around 10% today I closed out half my position. The press release did not have very good detail in my opinion. After finding out some additional information I realized my mistake and sold some naked calls up above where it was trading and may short back my other half tomorrow. I think looking at this deal after running some numbers WAMU should be trading at 10 tops but the point is once again this shows there is a bid. At some point this bid (referring to the overall bid for financial assets) could disappear again or move lower. At this point though this is keeping the market buoyed.

All in the Psychology

Finding a company you know is undervalued is only half the battle. In my opinion at least 50% of investing is psychological. You have to be able to mentally be a lone wolf, and you have to have a very large threshold for pain, and you have to be able to take losses and not anchor. That is why Buffett has said every IQ point over 115 is wasted in investing. I know many individuals in the investing world whose IQ's are off the charts but are horrible investors if they are making the buy sell decisions.

Anyway with that intro I love psychology readings. Some of my favorite books are psychology books. They are just as valuable as something like You Can Be Stock Market Genius by Joel Greenblatt. Here are two articles.

A new brain-scan study may help explain what's going on in the minds of financial titans when they take risky monetary gambles, sex. When young men were shown erotic pictures, they were more likely to make a larger financial gamble than if they were shown a picture of something scary, such a snake, or something neutral, such as a stapler, university researchers reported.

People's performance on intellectual and athletic tasks is shaped by awareness of stereotypes about the groups to which they belong. New research explains why— and how we can break free from the expectations of others.

Monday, April 7, 2008

Video Roundup

Three videos today, one of George Soros (thanks Nathan), one of Wilbur Ross, and one of Leon Cooperman.

All three I pay attention when they open their mouth. Of the three George Soros is the bear, Leon the bull, and Wilbur Ross is somewhere in the middle. I am probably to the right of Soros on my view and slightly to the left of Ross. I think the S&P 500 will find its way between 1100 and 1200 before this is all over it with but not in the world is going to blow up camp though I do ascribe that scenario as a possibility. The Wilbur Ross video is interesting because he takes some shots at Soros.

George Soros

Willbur Ross

Leon Cooperman

Sunday, April 6, 2008

MBIA Downgrade

MBIA downgraded?? In case you missed it, don't feel bad. Two months ago you would have thought the world would have fallen apart if MBIA would have been downgraded. Now it happens during the trading day and the market ignores it just like it did the horrendous employment data. In fact I did not see it until about 5:00 p.m. on Friday!! I am short MBIA and was at a computer all day glancing at CNBC off and on and it was just not mentioned (at least not that I saw). When I found out my jaw dropped. I couldn't believe it.

There are a couple of reasons why it was ignored, none of them legitimate but it is the signs of the times. One is that Fitch has become the red headed step child of the bunch. Now correctly but they are saying things no one like to hear so they are being ignored. They have always been the smallest of the three but given as much credibility as the other two until they have started saying things that investors and companies do not like to hear. If things become really bad they will be in prime position to benefit as the next time around they may be the only one's standing of the three and will for sure have very high credibility. If things turn out okay they will lose market share and no one will want to do business with them even if MBIA is technically AA and not AAA. Because they stepped out and said look they are AA, if MBIA survives people will remember that not looking upon it kindly if they know they were right and Fitch will be punished as a result. Right or wrong that is the way Wall St. works so Fitch is taking a pretty big gamble.

The other reason why it was probably ignored was because MBIA and Fitch have already had a falling out so there is bad blood. Fitch was calling foul when MBIA was acting like everything was okay and MBIA did not like it. So if you remember MBIA asked Fitch to stop rating them. Fitch said no we will continue doing it and we will do it for free. MBIA screamed bloody murder.

Anyway I think this is more evidence of potential problems looking forward and gives me more conviction in not buying aggressively this latest rally.

Also, by the way, that "reasonably" big toll road bond they insured, yeah well reasonably was a definite qualifier.

MBIA Insurance Corporation, a subsidiary of MBIA Inc., today announced it has guaranteed $373 million of a $3.0 billion bond issued by the North Texas Tollway Authority.

Yeah, so around 13% of one of the larger bond deals done in the last 6 months. A year ago they would have easily gone well over 40%. Hardly something they should be excited about though if you haven't had food for a couple of days and the day old hamburger starts to look pretty good.

Friday, April 4, 2008

Bill Gross and Government Bailouts

If you are a bull you have to be hoping for the Senator Dodd bill to pass. Unlike so much other government intervention that the market rallied on, I think this is actually something that is very bullish and would make a difference. It would also be about the only thing in the near term that would cause me to question my short exposure.

Bill Gross thinks it will happen.

Duration of the Housing Bust

I figure most of you probably occasionally check out calculated risk so I don't post anything on here from that website. However, this underscores so many of my thoughts that I thought I would bring it to everyone's attention just in case you missed it.

It explains why in my mind the equities markets cannot have possibly bottomed.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

A couple of potential differences. One was that the Los Angeles bust was regional and so you didn't have the entire national government trying to figure out how to solve the issue. Interest rates weren't dropped by hundred of basis points in mere months to help combat the decline. In general though, I agree there is no reason at all that prices for housing has bottomed. This in my mind means there is no way that financials have bottomed despite getting slaughtered. Even after the huge price drop I don't think they are cheap on a fundamental basis.

This I think is also correct.

During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

Same thing with financials. When the bottom callers finally stop calling bottoms financials then it will be time to start looking at financials. You saw it in homebuilders. In my personal judgment the bottom callers in housing finally threw in the towel somewhere between November to January. I mentioned that in a post months ago. Though volatile, housing stocks have performed very well since then.

When you stop hearing how it is such a great time to buy a house, it will finally be the time when it is great to time to buy a house.

Thursday, April 3, 2008

Employment Number

Very interesting piece in, of all places, the New York Post. I have no idea what the jobs number is going to do but I have been saying for awhile that the market desperately wants to go up. Maybe the number is hideous and we go down tomorrow. We shall see, but I tend to agree with Mr., it may not matter whether the number is good or bad, the market will still go up.

But let's get back to more immediate concerns. What happens if the payroll report this Friday is as bad or even worse, than Wall Street is expecting?

Oddly, it'll probably make investors happy. They'll have yet another reason in a long list of them to expect more interest-rate cuts from the beleaguered Federal Reserve. (Never mind that the six so far haven't done a hell of a lot of good.)

And what if the Labor Department's wishful thinking and clever manipulation actually works and Friday's number comes in stronger than expected - even if that only means fewer job losses?

Wall Street will probably still be happy.

After seeing the value of their stock portfolios shrink since last November, investors would love to see signs that the economy is improving.

I tend to be a conspiracy theorist anyway but I found this very interesting.

And in case you are wondering about that nearly 400-point gain in the Dow Jones industrial average here on Tuesday, it started with a very suspicious overnight rally in the Standard & Poor's 500 future contracts in Europe.

The Europe rally came after a sell-off in Japan.

Credit for the US rally was later given to the fact that Lehman Brothers was able to sell $4 billion in convertible securities.

But how could that be if stocks began their rally in Europe hours before Lehman said anything?

In case you are wondering, rigging S&P futures contracts is precisely how a Fed governor back in 1989 proposed fixing the stock market.

It probably had to do more with the start of the new quarter and the futures were the quickest way to start rebalancing a portfolio in preparation for the opening of the markets in the U.S. but hey, who knows.

Tuesday, April 1, 2008


There was a fascinating interview in the WSJ on page B1 with Joseph W. Brown, the CEO of MBIA. I normally don't read those type of interviews that the WSJ has every now and then because they usually don't say anything. This one I thought did between the lines!!

Most fascinating part.

WSJ: What are the odds you might have to raise more capital?

Mr. Brown: We defer our revenues over a 30-year period, and so every week we are producing new earnings, and every week some of the liability is running off. That effectively raises capital. Our view is over the near term, the next three months, six months, it doesn't look likely that we would want to go out and raise capital.

WOW!! I may be reading to much into this but a couple of things.

1) You are only raising capital every week as the liability runs off if you are not writing any new business. This was actually asked earlier in the interview. He said they got "the first reasonably big deal, a big toll road." He was quick to add "it's not like turn-the-faucet-wide-open it will come a day at a time." Obviously it is one day at a time if he considers it raising capital as a result of liability runoff.

2) Much more importantly who wants to raise capital???? Who wants to dilute shareholders??? A total failure to answer the question. When I was at Highland one thing that was required was for us to go through deceptive training by Business Intelligence Advisors which is run by former CIA and FBI operatives. One of the head guys was an interrogator at Guantanamo Bay. Anyway this interview has several deceptive wording and behavior issues that we were trained to pick up on. Another example is the use of the word reasonably is a qualifier. It's not that he is lying in anything he is saying. It just shows high probability for deception. Like most of those WSJ interviews the questions were full of fluff. The one question with any meat I thought Mr. Brown was less than being 100% non deceitful.

Did not matter, at least for today. MBIA finished up over 10%.

Market Thoughts

A truly massive rally today on Wall St. You had to be in awe especially with all the just horrendous news out after the open yesterday and before the open today. Things are really really tricky right now. I think though that a shift may have occurred. What I mean by this is a couple of things. Look at the first quarter. EVERYTHING was down. The best performing sector in the U.S. was consumer staples down 1.3%. Even materials was down. Three countries in the world had positive returns in the first quarter. 3!!! Mexico, Chile, and Taiwan. It was a three month period where everything went down. Good, bad, ugly, beautiful, clicking, not clicking, didn't matter it was headed lower. You don't see this very often. You made money on the short book and in a few select names. Things may be shifting moving towards a more favorable stock pickers environment. Many long time value investors got their head handed to them so far year to date. Where they wrong? Time will tell but it hasn't mattered if things were undervalued, it was going to get cheaper. The primary reason was the steady drum beat of increasing systemic risk. Systemic risk affects everything. If the world blows up (the ultimate systemic event) every company is a zero. The systemic risk is now declining. It decreased again with the Lehman capital injection. If it truly continues to decline (I still think there is a reason why it could raise its ugly head again which I will get to in a moment) we will start seeing things move differently. The market is not cheap on a historical earnings basis with historical margins but some stocks are cheap. It is also not expensive so to expect another 30% decline just because is foolhardy. It is wishing what the market would do. These cheap stocks will start moving up as the market moves sideways or drifts up or continues to drift down. I still strongly believe that six months from now we will be below the March lows however I will put it close to even odds we test 1400 in the S&P and 30% probability we test the real biggy, 1450. These probabilities are just gut feels nothing more but I think there is a shift. I have said for a couple of weeks now that this feels like September / November. If I am right the shorts will have to buckle down and the market will be very unfriendly towards them.

Now the tricky part. With all that said, there are some reasons to doubt this rally yet again today. 1) The ABX which I look at everyday only ticked up slightly. This is not surprising considering the news today was bad all the way around. I really do not think the market can have a sustained all clear moving towards all time highs until this starts to pick up. 2) We are now in extreme overbought conditions. The last time we were this overbought was the end of February. Remember what happened then? We are still well short of the overbought conditions in mid October. 3) The trade that has worked for months has been buy before Bernanke speaks, sell after he speaks. Tomorrow he starts speaking before the Senate. He will also speak on Thursday. If this is true to form we will be up again tomorrow and start selling into any rally on Thursday. 4) Huge employment number on Friday. For any truly big bullish move up to that 1450 level that number has to come in line or be better than expected.

If you are a fundamental guy it really doesn't matter. I look at this stuff because I trade in and out of protection and work it into initiating and adding or taking away from positions. The key is the systemic risk. I would be much more long if I knew the systemic risk had truly peaked which once again is an art judgment call.

So what is the systemic event that still haunts me. It is still MBIA and Ambac. Say we put on a great counter trend rally over the next few weeks. We work are way up to that 1450 level and then boom, MBIA and ABK start making their way back to the spotlight again as they report earnings at the end of April / beginning of May. The losses I think will be massive and the rating agencies will start demanding more capital raised or they will cut their ratings. Unlike with UBS who they just cut they will give them a couple of weeks which will drag into a month because these guys just can't be cut. If they are, huge systemic risk returns. I don't know how this will turn out. If I had any inkling it would turn out good I would start moving out of treasuries into money markets and be more aggressive on stocks. As it is, I must in my mind continue to play defense.

Time will tell. The short book could get ugly for awhile and I may not be as aggressive as I should be right now. My mantra is not to lose money. If I can accomplish that, I will end up making money. It worked in the 1st quarter.

April Fools

Which one is an April Fools Joke?

1) UBS loses $18 billion dollars, annouces efforts to raise $15.1 billion through a rights offering, gets downgraded by Moody's and Fitch, and ends up 14.62% today.

2) Blackstone is able to raise an $11 billion fund to invest in real estate.

3) Citigroup annouces it is seeking directors with expertise in finance and investments. Now that is funny if you think about it.

4) Commercial constuction spending declined.

5) General Motors sales declined 19% and Ford's sales declined 14% year over year and both finished up 6% and 4% respectively.

6) The U.S. markets ended up more than 3% on all this!

If you would have guessed none of the above, you would have been right!!

Meredith Whitney on Lehman

This is from Meredith Whitney note at Openheimer. Thanks goes to Nathan. Remember she is the one I put a link for when she spoke on CNBC. A rare independent thinker in the sell side world. She brings up an important point I have heard her mention before and that is the huge need going forward for all these firms to raise capital which is extremely dilutive. The other thing she correctly points out was that last quarter was supposed to be the kitchen sink quarter. That is what you heard from most everyone. It wasn't and now all of a sudden it is supposed to be this quarter. You hear it from the talking heads all over again. At some point they will be right and everyone will feel good about themselves patting each other on the back thinking they are market geniuses forgetting that they only got it right 9 months and 50% later.

Lehman announced after the close that it would raise $3 billion in convertible securities, or 14% dilutive capital. While we believe this to be a necessary evil for Lehman Brothers, we believe it will mark only one of many significant capital fund raises for financial institutions over the course of 2008. We note, last week, the regulators advised Fannie Mae and Freddie Mac to raise at lease $20 billion in additional capital.


As we wrote last week, capital ratios will be of primary focus for financial institutions during the next month of bank 1Q08 reporting. Lehman took the advice it has been giving to its clients for over the past five months in going to the markets well ahead of what it believes to be a barn rush of capital raising throughout the remainder of the year. Thus, while this capital raise is expensive on a near term historical basis, LEH and we believe it will only get progressively more expensive to raise capital as the year evolves. As a result, we continue to be negative on financials as we believe the existing equity investors in financial shares will be consistently holding the "short stick"throughout the remainder of the year.

Wall St's Trade

We are not 15 minutes into the new quarter but it should be obvious what Wall St. wants to believe. It is the trade that sparked the 400+ point rallies a couple of weeks ago. Long financials, homebuilders, etc. and short commodities. The start of a new quarter is what can spark this kind of stuff from a technical perspective. I do not think it is fundamentally sound but it could last for awhile or it may be forgotten in 48 hours. We shall see.

Lehman is flying today. After finishing down over 2% afterhours it decided to surge premarket and it continues higher. There is no doubt that every fresh injection of capital decreases systematic risk for the entire system. Every fresh injection of capital was met with enthusiasm followed by selling later on days or weeks later. I am not willing to bet this will be anytime different. Obviously some money out there is. Maybe there right.