Sunday, March 30, 2008

Flip This House?

Shockingly, MSN Money ran an article today about how people are still making out in this housing market. The bulk of the article centered on people flipping houses. That's great. It's a strategy that worked so well for Americans over the last few years that they'll be in debt forever. Keep up the optimistic reporting and I'll keep up the reality check....for example:

Forgot to mention KB Homes putrid results on Friday. They lost (what else can homebuilders do?) $3.47/share last quarter. Sales were down almost 70% and the CEO said things look bleak as foreclosures will continue to glut the market and margins will continue to be reduced. Surprisingly, their stock fell a little as perhaps the worst isn't over yet, although Lennar continued to climb.

A little birdy (thanks, Dr. Mike) recod a possible strangle or straight up short play on Corus Bancshares (CORS). This is a company that went from conservative banking strategies to funding almost all condo loans in housing bust markets, with a disproportionate amount of those loans in Miami. Their profits fell 96% last quarter and their loan loss reserves seem a bit underfunded as projects will be coming due in the next year and ain't nobody going to be living in them.

Recapturing some concern from an "Anonymous" comment, we have 2 synergistic forces working that may further hinder financials and equities in general. First, Paulson will release his plan for an expanded and domineering Fed tomorrow which will entail much greater oversight of the SEC, futures, and mutual funds. This happens about every 20 years or so as our markets go kablooey and people ask why there isn't more regulation. Then we go without an adverse event for awhile and Wall St. clamors for deregulation. Then we come up with stuff like CDOs and leverage ourselves 20-1 and go kablooey again. This in turn leads to a revival of the Dems and impending corporate tax hikes and regulation. Markets don't like that, they like Bushisms. By definition, more taxes equals less profits. Don't get too excited about financials and the omnipresent XLF reco!

Saturday, March 29, 2008

I Just Lost $900 Million!

Awwww, poor Jimmy Cayne, CEO of BSC, cashed his and his wife's options out for a meager $61 million. Just last year, with the stock soaring to $170, he was a billionaire on paper....guess that's the difference between theory and reality. I've got a joke that explains the difference as well, but you've probably heard it before.

As I've been saying for months, retail is in the crapper. Wasn't it just last month that Penney's shot up on news that same store sales weren't as bad as expected? Now they've lowered their earnings forecast by 33%! Bogus pops on sales from stores like Tiffany's don't exactly reflect the current state of the American consumer. The better Walmart and Costco do, the more foreboding it should be for even the mid-level retailers. People are broke, and I will continue to hang on to my XLY puts as a result. Look for mid-level restaurants to continue to falter as wallets cinch up.

As greater evidence of this, home equity delinquencies are at an all-time high, now over 5%. The problem for lenders is this. If someone is defaulting on their home equity loan, they're probably defaulting on their mortgage as well. As first lien-holder, the mortgage gets paid back first if assets or sold. Banks have been reluctant to refinance or take reduced home equity payments, but that day may be coming soon as anything is better than nothing (right Bear?)

Speaking of which, Bush's mortgage plan, whatever the hell that is, should be revealed in the next 2 weeks. Paulson has consistently stated that we will not bail out investors and other unqualified buyers. Banks will be encouraged to swap reduced loans for treasuries to help the consumer. My question is this. I have never missed a payment on my fixed-loan. I had additions/upgrades put into the mortgage that add value to my house without ever have taken a home equity loan. I have lost equity in my house over the last 2 years. Shouldn't I be first in line, not last, if we're offering to essentially write off lost equity with our banks? I'm a much better credit risk than 99% of my neighbors; will I be punished for being credit savvy and a strong earner?

As anecdotal evidence of just how bad things are getting (at least here in South Florida), my wife met a neighbor yesterday who was moving out of her rental. She had been renting from an investor (of course) who was now going into foreclosure (of course). She could not find another home in our development to rent because all of the other rentals were going into foreclosure as well. Instead, she'll be moving right across the street into another development until that owner goes into foreclosure as well. Please tell me we're not bailing these people out!!!!

We should get very official proof of recession when the jobs report is unveiled on April 4th. As I documented in my post March 2nd, our labor statistics are eternally flawed. That's how we came up with a number that was 88,000 jobs higher than reality. The economists from Trimtabs, who predicted much more accurately a loss of 77K, note that we survey the wrong industries (gov't and manufacturing) far too heavily as we are now a service industry economy. These changes are much more significant and that's why the jobs numbers always have a steep correction.

I will continue to look for strangle/boom/bust candidates this weekend....will let you know.

Thursday, March 27, 2008

Not So Fast....

After almost 1,000 points were gained in rapid fashion, the last 2 days have again beaten down financials and thrown ice water on tech. This is still much more typical of a bear-type market than irrational exuberance. It again calls in to question the bull etiquette and the possibility of short-covering as a short-term explanation.

Lehman has had its second "rumor bath," dragging it down almost 10% after almost doubling from it's first crash last Monday down to $24. Much like Bear, they insist they can borrow or sell about a trillion dollars, plus, combined with new Fed policies, have no chance of going under. I don't know about the first part, but the second might be true. We may have missed the boat on Lehman a week ago.....

However, the ship may still be sinking at companies like WaMu, National City, and UBS. Projections are for another $18 billion in writedowns for the Swiss bank, and they can't be bailed out by the Fed. The other 2 might simply be bankrupt, and will either be bought out or fail.

Lennar came out with another round of gross earnings today, a loss of $.56 and decreased sales of 64%. This was rewarded with a 3% gain. While the time to buy may be when there's blood on the streets, their CEO reiterated the year ahead looks bleak. I disagree with a CNN report today that the time to buy homebuilders is when P/E ratios are high as a low P/E indicates strong earnings. No one was looking at these companies in 2002 when they had cranked out 20 years of increased quarterly earnings and their P/Es were 3! It was only after their boom that they were allowed a higher multiple and now, a multiple of infinity since there are no earnings.

Be patient out there. All the pundits who tried to push you into XLF have lost you 10% of your money in 2 days....I will continue to work on strategy but remain miserly with my cash pile at the moment.

Tuesday, March 25, 2008

A Penny for Your Thoughts

In perhaps the most ridiculous subprime development yet, the former president of Countrywide and his cronies have established PennyMac, a company thought will purchase distressed mortgages and repackage them into more profitable products. The same criminals who led homeowners down the path to negative amortization loans are now repurchasing those same loans again for profit, sticking it in on both ends. Only our newly founded bailout at all costs Fed could allow such a thing. They're probably even encouraging it as it takes some of the heat off of them to do the same.

The markets continue to soar as the Bear bid hit $10 yesterday and the stock $13. JPM insists they weren't coerced into this action directly, but the threat of huge class action suits were impending. Had the gov't simply let Bear fail, JPM could have scooped up any piece they wanted for less than $2 and not had this hanging over their head. As it is however, life isn't so bad as they have a $29 billion free pass to cover Bear's assets over 10 years. The risk they run now is that their own shareholders will sue them for putting an additional $800 million into the deal.

Again, I urge you to acknowledge the last week's events as moment in time, not a bottom or impending bull-rally. Japan has 3 trillion yen in unrealized subprime losses, The Banks of China is writing down $1.3 billion in subprime exposure.....this is still a global problem. Yes, had you gone long every financial and homebuilder at noon last Monday you'd be looking like a genius. I sold out of my short positions based on gain vs. potential loss as this market has proved to be stormy, but I am far from convinced that there is any value in homebuilders or most financials. We'll see how new home sales made out as they have to compete with existing home sales and the glut of foreclosures. Mortgage rates have dropped temporarily but no one has the credit score to take advantage. All of this new liquidity for Fannie and Freddie still leaves them skittish about making new loans and they are requiring a larger down payment than ever.

I will continue to monitor Google and Microsoft for long-term calls and weak banks for possible strangle positions. This involves buying out of the money calls and puts in anticipation of sharp moves in either direction. As of now, UBS and WaMu are on my list.....

Monday, March 24, 2008

What Now?

Sorry for my prolonged absence. I had a crazier week than the markets, juggling 3 job offers, a wedding, two kids, and deciding to sell all of my puts except the retail index XLY. I realize I missed a few important events in the meantime like the market rebounding about 1,000 points, Bear Stearns losing 98% of its value only to quintuple from its lows, and the Fed acting like China. Gold has taken a dump, but the alt energy stocks have come back in force.

We are no longer free-market capitalists. On "great" news today, homebuilders shot through the roof (again). Median home prices fell to $195K.....that sucks. Existing home sales trickled up on these low prices. However, new home sales come out later in the week and I notice the NAR didn't get into foreclosures.

BAC may take another $6.5 billion writedown, and that comes from Richard Bove, Cramer's long lost bullish brother who has been recommending financials for the last year. People are crazy if they think this thing is over; we're not even into the Alt-A writedowns or peak of ARM resets.

As far as investment advice, I've gone from hell-bent to cautious in the last week. I'd like to see how commodities play out as I think gold has been unfairly punished but will continue to be.....I think many financials and homebuilders still stink but will ride this wave of optimism....I'm also thinking of going very long MSFT and perhaps GOOG with LEAPS out to 2010. My money market has gone from a safe and liquid 5% to 3.8% and dropping thanks to Mr. Bernanke.

Don't forget about the rally during the last bear market, the one that knocked 80% off the NASDAQ from which it is still 50% lower. We're still 1,500 points below October and beware the jobs report 4/4. Things may be quite a bit worse than you think.

On a positive note, 7 of my elite 8 teams are still alive, despite another choke from my alma mater, Pitt. I guess Bobby Knight picking them to win it all was the death blow. My 1 loser was Duke, and let's face it, we all hate The Chef and Duke.

Monday, March 17, 2008

Socialized Medicine

Bear Stearns is bankrupt. They lied, S&P lied, everybody is else is still in the process of lying. However, as I wrote to the other day, I'm worried that the market didn't plunge even more on news of the 5th largest investment firm going bankrupt 3 days after the CEO assured us they had plenty of capital. The Fed is acting in ways the haven't since the Great Depression, and they're propping the market up with incredible loans ($30 billion in risk-free money to J.P. Morgan for their bailout of BSC) and money printing.

There is no concern for inflation or currency devaluation. Clearly other banks will fail. The Fed simply said that our financial system cannot afford for that to happen and will continue to accept the kitchen sink as collateral. While my positions and reasoning have been affirmed despite the bullish analysts bashing us bears for our pessimism and short-selling, the Fed is curtailing my profits. I fear tomorrow will be another rally on outlandish cutting, dollar be damned. If futures hold until the open, I might get out of everything today and move into a bearish or even double inverse dollar fund, possibly along with gold. I would like to short Lehman but that thought is 2 weeks late as they have dropped from the mid-50s and will open in the high 20s today.

I am keeping this short for now as I am glued to the open, but I will detail any transactions later. I would just like to finish with a thought. If the gov't owns our banks, what kind of country do we live in? Feels a bit like the 1930s in here....

Ok, I'm out. I'm still holding onto my XLY retail index (in the money) put as I think retail is in for a very tough year. I will list below my puts sold and percent return since purchase. The average length of time held was 77+ days, but most were around 68-73 days. 77 days ago on Dec. 31, the market peaked at 13365. We are down 11.5% since that time.

PUT Purchase Price Sell Price %Change

XLF 10.85 16.45 +52%
BAC 9.90 15.30 +55%
WM 8.30 11.80 +42%
MDC 8.80 6.10 -31%
CTX 8.00 8.80 +10%
LEN 6.70 7.70 +15%

Guess I wasn't too late to get my shorts in, despite every analyst in the country saying so at the new year. Average return based on actual dollars put in (Unfortunately had less money in XLF and BAC) was 19.8%. A fair evaluation of my effort to hit homeruns says 3 triples, 2 singles, and a big fat backwards K. I got impatient with the homebuilders as I fear the bulls tomorrow on possibly a full-point cut. I am not ruling out a return to shorting homebuilders as I believe there will be several bankruptcies in this industry that the gov't will not bailout (not directly, if they buy back all the subprime loans homebuilders will shoot through the roof). It's been a rough ride, but beating the market by 30% isn't too bad. Not bad either for a novice options trader. I'd like to see you find that kind of return in a mutual fund. What's next? Shorting the dollar I believe, but I'm also not ruling out taking some homerun shots to the upside. Again, MSFT has my attention.

Thursday, March 13, 2008

Fizzle, Part 2

Awww, poor little rally couldn't quite make it yesterday as Dow went from up 120 to down 50 as credit, oil, and a dollar quickly turning rupee brought us back to earth. News keeps rolling in that can only be seen as the beginning, not the end, of this destructive credit mess.

Carlyle Capital is officially bankrupt. They cannot meet their margin calls.

Another hedge fund, Drake Global Opportunities, is shutting down after giving their clients the opportunity to lose 20% last year. Existing clients are having a hard time getting their money out as their investments are locked into leveraged, illiquid CDOs which have little market right now.

Lawrence Yun, former used car salesman and now lead economist for the National Association of Realtors, said yesterday that commercial real estate is in trouble. The market may contract by "as much as 40%" this year. When Mr. Sunshine gives a report like this, you know things are really bad. This is the same guy who's been coming out every 2 weeks and telling us not only is this the best time ever to buy a home, but that the 2nd half of the year looks great for the homebuilders. Sure it does. What else would you expect the NAR to say?

In perhaps the scariest realization of all, Eric Janszen of thinks that the credit mess will spread fully into the $6 trillion muni-bond market. Considering this number is larger than our national deficit, I don't think Bernanke can simply open up another credit window or print more cash to cover the mess.

Another day, another half-dollar. The euro hit $1.55 yesterday, I'm sure it will go higher today. Again, how long will foreign investment prop up our treasuries as they watch their portfolios diminish every day?

Don't be fooled by the false optimism and short-covering on Tuesday. A return to 11,000 is coming.

Wednesday, March 12, 2008

Agonal Respiration

Well played, Bernanke, well played. A slightly new trick perhaps, but futile nonetheless. The Fed is now giving up treasuries for less secure collateral in the form of $200 billion. This is a not so subtle way of bailing out Bear Stearns from collapse, and possibly keeping Citi and BAC afloat. The question remains if the Fed will break down further and start accepting CDOs as collateral for gov't treasuries, which would of course make our whole financial institution a sham. Furthermore, WaMu as it did after giving horrible earnings, suddenly rose on rumors that Buffett or private equity will infuse their pockets a day after their bonds were slashed and burned.

Alas, let's look at some actual data from the last 2 days. TI gave a poor outlook for 2008. Hovnavian had to cut margins by 12% down to 6% to make any home sales and by the way, cancellations kept going up to 38%. Even their CEO said we have not hit a housing bottom. Gloomster Bob Toll also added that companies with joint venture exposure will be the next wave of worse news for the homebuilders. Hmmmm, did the author of this blog forewarn of that very thing several months ago? Did I offer up Lennar, Centex, and Ryland as the most exposed to these crappy investments? I believe I did. As many smaller builders have already gone belly up, the larger builder gets stuck with all the land and all the loans. Oh well. Please refer to The BBB blog on 12/14 for this analysis. Freddie Mac also came out today and said home prices have only fallen "1/3 from peak to trough from where they will." Outstanding news for my homebuilder puts that rallied ridiculously yesterday/

Just for fun, oil hit $109 yesterday but was largely ignored due to the rally. Gas prices were at an all-time high. A recent article on mall vacancies gives a scary picture for retail. As more retail space hits the market, shoppers have no money to spend. Projected vacancy rates are skyrocketing in Phoenix, KC, and San Antonio, up to possibly 20%. I gave a recent example of this at The Gardens Mall in Palm Beach Gardens, FL. If you weren't 80 years old with a pedometer or attached to a baby stroller, you weren't there. What was I doing there? Well, I was attached to a baby stroller and we only went to redeem gift cards, no cash out of pocket.

Perhaps the market is tired of going lower. Perhaps the gov't will keep printing money until there is no such thing as a bad debt for banks. At some point though, inflation (if not already) becomes a real threat and the Fed must acknowledge it. Let's hope it's before the Chinese decide our treasuries are worthless and pull out en masse, leaving us all bankrupt anyway......I told you it would be a scary market.

Sunday, March 9, 2008

Marginal Trading

What is a margin call? It's when you borrow a bunch of money you don't own against a smaller percentage of capital, and your subsequent investment goes kablooey, forcing you to put up more to maintain that spread. Here's a more official definition from wikipedia:

Margin call
When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investor now either has to increase the margin that he has deposited, or he can close out his position. He can do this by selling the securities, options or futures if he is long and by buying them back if he is short.

But what happens if you don't have additional capital to sustain those margins? Uh oh. Let's ask Thornburg. Hey Thornburg, what happens when $600 million in margin calls comes due and you don't have $600 million, or $60 million, or $6? Oh, your stock price goes from $10 to $1. But didn't you just tell us a few months ago that this wasn't going to happen, you know, on the day your stock went from $18 to $10? Thought so.

So what are some of the other lenders stuck at 20-1 leverage on their margin calls doing? Well, if you're Citi you've begged the Saudis for $30 billion, which they recently said was not enough. If you're USB you wait until the day earnings are out to tell anyone about your billions in margin calls. Or, if you're Lehman, you pretend you don't have any margin calls. There are lots of ways to play it smart. According to Reuters, J.P. Morgan says we are facing a "$325 billion systemic margin call." On top of that, they estimate that home prices will drop 30% from 2006 levels, only down 14% to date. Uh oh......

In another uplifting trend, personal bankruptcies are at a 3-year high. "The proliferation of available credit, combined with the increase in mortgage interest rates, has stretched everyone to their maximum, and they're going to break," analyst Brian Small said. Hey, and we're still months away from maximum ARM resets!

IOD: Start thinking about Microsoft.....

JJ and Other Non-Moving Moves

Getting back to some offseason football quickly, there have been a bunch of moves made recently, not many of them going to matter much. Trading in Shawn Alexander for Julius Jones and T.J. Duckett is like trading in your 98' Caddy for 2 03' Buick Regals. Exactly. I guess when Alexander stopped running behind 2 all-pro linemen and an all-pro fb, he wasn't quite as good.

My hometown Browns have been actively employing a strategy that has worked but teams are reluctant to use. They have been trading draft picks for solid players on the premise that who could they draft who would be as good as these guys their 1st and 2nd years. They've added Donte Stallworth, Sean Rodgers and Corey Williams. When the Pats got Moss last year, they gave up a 4th round pick. Who in the wide world could ever give that kind of return out of the 4th round? Chris Chambers for a 3rd round pick, Jonathan Vilma for a 4th rounder.....maybe he's injured but if he returns to form, that's like getting a free first rounder. The argument against has been hoarding draft picks. Well, that strategy only works if you know how to draft. Look at the Dolphins, the Broncos over the last 8 years. Most of their picks don't even make the team, let alone become stars. Ditka took a lot of heat for his Ricky Williams trade, but he ran for 1,800 yards and was a beast. Lots of guys can run for 1,000 (it's only 63 yards a game), but not 1,800.

Uh, Vernon Gholston just ran a 4.58 and jumped 42" at the OSU pro day. Sorry Long brothers (Chris and Jake), you just lost about $15 million.....

Michael Turner to Atlanta? Why? Give Norwood and shot, and why would Turner settle for splitting time again? On a team with no QB? Questionable.

Saturday, March 8, 2008

A Little Short

With the jobs loss in February (short month) alone of 63K, inevitably pending revision to a higher number, the market took a little dump yesterday. Actually, I was hoping for more of a 300-point swoon, but there was low volume nibbling on a drop of 200. I had an itchy trigger finger on my XLF puts as they crashed to a 5-year low, but then I stepped back and thought about what might make them go higher. I'm gonna wait it out awhile longer.

There will be some false hope in the upcoming weeks. The Visa IPO will give the facade of big deal making. This is getting done so GS and JPM can actually underwrite some new business this year. The Fed is leaning towards a 75-point cut now, not 50. Also, they're going to make $200 billion available. But as the credit crisis unravels, I am astonished by permabull response that things will get better. There is no historical comparison credit wise to our current situation. While the recession may not strike as deep as the 70s drought, financial woes may be much worse and we may arise from this with staggering, not stagnant inflation, as our dollar fades into oblivion. Again, if the Chinese decide that our treasuries are worthless and start to sell theirs, they truly will be worthless.

Washington Mutual got downgraded twice yesterday as their bonds fell into the Bs. Two scenarios are possible for this terrible company. One, they'll go the way of Countrywide and plummet to about $4, or, they'll soon be a takeover candidate and rise on this news. I'm hoping for the former as my Jan 09' 20s are starting to look good! The second downgrade came out after the bell yesterday and was harsher than the first, so it could happen. If you recall, there were takeover rumors in January after they missed earnings by a million percent, with the infamous "things can't get much worse" label attached to WaMu. Really?

Here's a figure of significance. 1 Trillion Dollars. That's how much Paul Miller of Friedman, Billings and Ramsey thinks the mortgage market is short of capital (link below). He goes on to say that 11 trillion in debt is held up by less than $600 billion dollars, or leveraged 19-1. As we've seen with Thornburg and Carlyle, this is causing some unpleasant and unpayable margin calls. As this debt gets collateralized further, mortgage rates actually increase as debt declines. This will continue to happen until leveraging returns to much more standard levels and leaves a slew of bankruptcies in its wake. In one of the comments on this story, a reader asked naively if it was the short-sellers sending this market into turmoil and if they shouldn't be banned to the casinos. Well, after leveraging your mortgage into a 19-1 proposition for their own gain like throwing a chip between 2 numbers on a roulette wheel, I responded "Isn't investing gambling anyway?"

MBIA asked Fitch yesterday to remove their ratings on 6 of their businesses. Just Fitch though. Hey Fitch, we don't like that you give us bad ratings so just make them disappear please. Thank you. What? This is ridiculous! Sue Chang of reported last night, "It (MBIA) also pointed out that Fitch's coverage of the underlying credit quality of transactions that MBIA insures is limited, which could lead to "misinterpretation" in turbulent times. In response, Fitch stated that its analysis is of the highest quality and its understanding of MBIA's municipal and structured exposure is strong. Nonetheless, the rating agency will evaluate its ability to maintain coverage on MBIA over the next few days and make a final announcement. "

TOD: Write me with your better than book movies and vice versa.

Friday, March 7, 2008

200 and Another 2000 to Go

That's it. Keep telling us how things are getting better, Crammer, or financials have hit a bottom CNBC, or buy the dips and sell the rips! That's my favorite, the same kind of strong analysis that has led CNBC to recommend the financial ETF XLF at every price decrease from $32 down to $24. I simply recommended shorting it at $32 on this site (I shorted it at $29 on the way up first). But hey, I'm no wizard like these guys.

I think the following quote sums up current market conditions:

"We are in historic scarier-than-all hell territory," said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. "I am hearing many people say that the market is more broken now than it ever has been."

Specifically, he is referring to the now illiquid bond markets, whether they be munis or short-term treasuries. He's also referring to the never ending spiral of poor credit and bad CDO obligations. Citi is now trying to unload $45 billion in their loan portfolio. USB reportedly sold a $24 billion subprime portfolio to Pimco for .70 on the dollar, way below the market price of .84.
Reports also state that Ambac was cold calling people to participate in their stock offering, a stark contrast from CNBCs report that the money would be raised without problem.

Paused a second there to take in the horrifying job numbers for Feb., down 63K! As I wrote a few days ago, real-time data that is available but the Fed refuses to adapt to led to a much more accurate prediction of 77K jobs lost. Estimates by economists ranged all the way up to growth of 100,000K, how is that possible? In his last appearance that will ever be allowed, Steve Liesman even threw a wet blanket on a 0.1% decrease in Feb. unemployment. He explained it as such a bleak employment environment that less people were attempting to find jobs. By the way, Jan. payroll losses were revised to -22K. The service sector, supposedly the steadiest in the economy, only produced 26K new jobs last month, arrghh.

The Fed, perhaps with some knowledge of this number before others, revealed that they will be buying up to $100 billion in securities to force liquidity upon the market. The B-teamers had just spent 5 minutes talking about what a foreboding sign this would be in correlation with a bad unemployment number, and admission if you will, of recession. Bada boom!

The S&P and NASDAQ hit 52-week lows yesterday, bottoming below Jan. 22 levels, but the Dow still hovers 400 points above. I have no faith in charts or trending. I just think this market should be much lower.

Thursday, March 6, 2008

I'm Hungry

I wanted to talk a little bit about raging food commodities after watching a documentary on the starving North Koreans last night. My wife and I were horrified to watch the state of malnutrition in that country. A striking fact was the average 7 year old in North Korea is 8" shorter than their South Korean brothers. This is a country that can afford to feed its people, it just chooses not to.

The relevance to today was brought forth in another interesting article by Jon Markman. Are we going to run out of food whether we can afford it or not is the new question. "Wheat futures prices have tripled since 2004, corn prices have almost tripled since 2005, and soybeans have tripled since 2006." Furthermore, rice has not only soared in price, but we are at a 25 year low in terms of reserves. Aside from how this may induce investment strategies going forward in companies that have soared in the last year such as Monsanto and Potash, do we have to worry if China and India continue to grow at alarming rates that we have enough food in the world? Or, are we back to natural selection? Even with all of our synthetic growing technology, a famine might ensue, bringing population levels back to sustainable rates.

Back to the market, Ambac has been both the source of 150 loss reduction and 170 point gain reducer the past 2 days. I'm becoming a little nauseous even as I write because, who cares about this stinking company already!! They're broke. That's why no private investor infused cash and they were forced to raise an additional $1.5 billion on their own (less than the $2 billion the ratings agencies wanted) and diluting their already obliterated shares an additional 19%.

UBS has a $400 billion dollar exposure to substandard credit. That's a lot. Their writedowns may now grow to $25 billion, of course that figure was just $15 billion last week, so who knows?

Thornburg Mortgage failed to make a $30 million payment, triggering further payment penalties. Look dudes, if you can't come up with $30 mill these days, you're in bad shape.

Woohoo! 12 of 18 retailers beat sales projections last month, the catch being that most beat horribly negative expectations with just plain bad negative results. Yeah, let's get excited about that.

Foreclosures hit an all-time high last month. As I've mentioned before, we still have another 5 months until we hit the largest ARM reset months. This is only going to get worse. Pending home sales stayed the same, a positive sign according to the economist for the National Association of Realtors. This is the same guy who said that home sales would pick up at the beginning of this year, then the 2nd half of this year....Anyone who listens to this guy's projections must have a large hole in their head.

Jobs out tomorrow, ADP says 20,000 losses in Feb. vs. a projected 35,000 gain.

Bomb in Times Square this morning, great.

In another example of how the Fed's cuts aren't helping people who have resetting ARMS, Laurie Kulikowski of reports, "Applications aren't getting funded because the borrowers aren't meeting the underwriting criteria," says Tom LaMalfa, a managing director of Wholesale Access, a residential lending market research firm. "We're guessing only six out of 10 borrowers who apply [for a loan] get refinanced." Can't refi without credit, don't have good credit if you had an ARM in the first place. Mortgage rates continue to trend up in this horrible credit environment.

P.S. This should be my last template change for awhile. Finally found one that fits my title, is legible, and that I can make easy additions to.

Tuesday, March 4, 2008

It's Gonna Take A Lot More Than That.....

That's what Dubai International Capital (DIC) said after some of their Gulf counterparts put billions of dollars into CitiGroup. Billions, not enough to rescue one of the largest banks in the world, which, by the way, will be laying off 30,000 employees due to a horrible balance sheet. I'm so giddy I can barely get my fingers to type fast enough. How long have these guys been lying to us? Let's continue....

Countrywide said yesterday that some of their payment-option loans are set to default and that delinquency on their ARMS rose 900% last quarter. Yes, 900%. A payment-option loan for those not familiar was another ingenious product developed by Country and their slimy peers which gave "homeowners" an option of paying a real payment, just interest, or less than full interest for a certain time period. You may also know this product as a negative amortization loan. Not surprisingly, 71% of those loans are now delinquent, and 86% of people actually owe more on their house than the day they bought it. Great. Of course, they didn't need any income verification to get those loans, so I'm sure they have plenty of cash on hand to pay it down.

What else is new? Oh yeah. People have started to opt for paying off their credit card minimums but not making their loan payments. Why? Credit cards are their only source of cash. If that dries up, they can't buy food or cigarettes or pay for their big screen tvs. Mortgage, whatever. I'll worry about it when the bank sends me my 3rd foreclosure notice.....

Speaking of mortgages, Thornburg Mortgage is a little late on their margin calls. Lenders don't like that. Money Thornburg borrowed to make fancy bets never returned, now their lenders want that money paid back. Uhhh, but we don't have that money. Uh oh.

Construction spending was at its worst levels in 14 years in February, news that battered homebuilders. Those builders I've been talking about with billions in debt, land they can't sell, and a product no one wants such as Centex and Lennar, are in real bad shape. I'll ask again, if homebuilders aren't building homes, how are they making any money? What if Coke came out and said, yeah, we don't have enough money to make Coke anymore, we're selling off our bottling plants, and the Coke already on the shelves is competing with other drinks that will be cheaper every day, is that a stock you'd like to own?

In more good news for Ambac and MBIA, California just decided that paying for bond insurance isn't even worth it. If our munis blowup, oh well, but I'm not paying 7.7% of the total to insure it. Nobody wants to do business with these clowns. Buffett has withdrawn his offer to buy the muni side of their businesses.

Maybe the Fed should hire me to gather info for them like this, so when they speak before Congress they know ahead of time that what they're saying are lies, not while they're saying it. Info like this might be revealing. "The Federal Deposit Insurance Corp.(FDIC) is planning to beef up its division of resolutions and receiverships, which handles failed banks, by 40% this year." (BILL DONOGHUE, link below). Why would they need 40% more employees you ask? I don't know, I mean, they only have 76 banks on their watchlist, historically low right? Just in case? I doubt it.

Sunday, March 2, 2008

Bottoms Up

Always on the lookout for pints of reality, similar in deliciousness to the pints of Red Bull/Vodka I consumed on a rare boys night out, Paul Kedrosky of gathered a week's worth of global gobbledeegoo to digest. I have regurged some of the most pertinent passages here (links below). Ironically, without even having knowledge of my blog, my drinking partner/PA also mentioned the ridiculous prices of Mach 3 razors! He's outdone me, buying used cartridges on Ebay and paring his shaves down to once a week, impressive!

Bloomberg reported that credit default swaps tied to MBIA's bonds rose 106 basis points to 705 points, according to London-based CMA Datavision. "That meant it cost about $705,000 to buy a contract protecting $10 million of bonds from default for five years. The figure also implies that MBIA has a 45 percent probability of defaulting during the next five years. By contrast, credit protection for AAA rated General Electric Co. on bonds of equivalent maturities were only 137 points." This again points to a raging conspiracy among banks/bonds/rating agencies. How could one AAA product cost 5x more than another. What's the point?

What a great concept, the misery index, comprised of the sum of the unemployment rate and inflation. The index currently stands at 9.2 percent. That's the highest reading since October 2005 and up from 5.8 percent in December 2006 (Bloomberg).

Another hedge fund goes kablooey! Peloton is being cashed in by its lenders and withdrawls from the fund have been stopped. "City sources fear the Peloton firesale will prompt banks to ask other funds to put up more cash to support their positions, forcing more to close. " $2 billion in equity, poof!

Finally, a NYT article says our current measures for inflation/recession are outdated and don't factor in real-time accessible data. "For the first time since the fourth quarter of 2003, TrimTabs estimates, consumers will have less money to spend this quarter on a year-over-year basis. The firm expects this figure to fall 0.6 percent from the same period in 2007." Things are actually worse as this service expects Feb. job losses to be 77K, a bit more than the 30K expected gain by the Fed. Let's see who's right......

Saturday, March 1, 2008

Back to Reality

When the Oracle comes out and says "The Party's over," it's over. I leave Party capitalized because this sham rally has been a formal event, a complete 5-week bash where investors got stoned, checked reality at the door, and let their computer models readjust while they did shot after shot of Patron. I remember my 8th grade science teacher during the crash of 87' disappearing into the lab every 2-3 minutes with a portable radio, telling us to shut up, and looking very nervous. I wonder if during those times the market would've reacted to news like a 9% dip in home sales with a 10% gain for homebuilders. Or, if they would've listened to prominent CEOs in the field like Bob Toll who said, "Market conditions stink."

Buffett not only acknowledged dire conditions for the insurance business, stating much lower expectations are in order, but that his untouchable Berkshire insurance biz lost 18% last quarter. Wow. He also went on to say that S&P companies are grossly exaggerating potential pension fund gains and reserves by assuming an 8% return. This is just flat out wrong. If we try to extrapolate these gains over the rest of the century, the Dow would cross 1 million. Not very likely according to Buffett. With finality, he also asserts that there is no way Berkshire will come close to returning 17.8% going forward. Party time on Monday!

While the market cheered loan cap lifts for Fannie and Freddie this week, not everyone was thrilled about increased capital exposure for the 2 behemoths who just recorded a combined $6 billion loss.

"Neither of these organizations has enough capital to cover their risk, and they know it," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics, a firm based in Torrance, Calif. "I'm concerned about solvency for these entities."

"We should be increasing their capital requirement, not loosening it," Sen. Chuck Hagel, R-Neb., said.

Muni auctions continue to fail as they have become more expensive than treasuries, thus negating any profit for bond hedgers. In not-so-shocking news, Ambac may have not locked up the capital it needs to maintain its rating. Let's just hope there's not a tertiary bounce on news that it will lock up that capital, again.

A few notes on personal inflation, anecdotally of course. Besides paying more for gas (still buying premium as per the manufacturer's request, ouch), here are a few items that pain me to buy lately:

1. Razors. Having a Flinstone-esque 5 o'clock shadow, I need to shave often. 12 Mach 3 replacement blades now cost $23 at Super Target. Last year, they were $16. Damn my patients, I'm only going through one of these things a week unless absolutely necessary, about 3 shaves a week!
2. Diapers. 126 phase 4 Huggies for $30. We tried the Target brand, but it was costing more to replace the soiled clothing than buying new diapers.
3. I've replaced about a 4-5X/week Dunkin' Donuts iced latte with pre-bought Lite Mocha Frappacinos from Super Target of course. I figure each one I drink saves me about $2.50, that 's $10/week, $520/year. Nice.
4. Organic Frozen Dinners. While delicious and good for me, the price of a Cedar Lane 6 oz. veggie enchilada is about $6 at Publix, our supermarket. 260 calories later, I was left feeling hungry and $6 lighter. For $6, I'll just buy a healthy lunch or make a sandwich. I'm going to keep eating the Amy's pizzas though, they're delicious.
5. As more evidence of a tough economy, my haircutter at Hair Cuttery told me it's been "dead" all week, a February in Florida, typically her busiest time of the year. When people can't afford $13 haircuts, there's trouble ahead.