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.


Anonymous said...

You mentioned Bob Toll in this post and I think that's appropriate because normally calm Toll is now blaming "the press" for the disaster in the real estate market -- i.e. the press is making it sound like conditions are worse than they are. Perception becomes reality, etc., etc., etc. Blaming the press is usually a signal that someone's frustration that their own idiotic actions has reached its zenith. Since I've bet heavily against Mr. Toll's industry, I was mighty glad to see his comments. I love it when the crack's show. By the way, my personal opinion is that nobody could exaggerate how bad the situation is.

AX said...

Toll is in a really bad position. He's unwilling to lower prices and he has only a high-end product to sell. No one can get that type of loan these days without spectacular credit and some lenders are requiring 25% down. He does have a much better capital base with a larger line of credit than his competitors, though. As I mentioned previously, Centex and other bond "junkers" may be forced to pay their revolvers, too bad they're broke. Thanks for the comment!