Wednesday, May 28, 2008

Don't Mess With Texas

We've frequently discussed how abysmally banks have been performing and their continued overvaluation by the market despite a propensity for lying about their assets and exposures. An excellent article detailing the return of retired FDIC experts was in this weekend's Furthermore, something called "The Texas Ratio" was outlined by Gerard Cassidy of RBC Capital Markets. "The ratio is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The number basically measures credit problems as a percentage of the capital a lender has available to deal with them." When that ratio reaches 100%, banks generally tend to go kablooey. For reference, IndyMac has a ratio of 140% and is currently dying. NCC, a strangle I am currently playing, has a ratio of 40, up from single-digits just 2 years ago....

In accordance, I've come up with a list of cheap out-of-the-money puts on some potential belly up banks:
Synovus SNV 1/09 7.50s .2-.45
Corus CORS 1/09 2.50s .25-.5
East West Bancorp EWBC 1/09 10s .4-.6
Colonial CNB 12/08 5s .8-1

The Wells Fargo Credit Quality report for May is both an oxymoron and hilarious. It succinctly fleshes out what I've been preaching for 6 months. To quote a fellow iTuliper babbittd, "Consumer credit outstanding rose $15.3 billion in March (chart 1). Revolving debt, which includes credit cards, rose $6.3 billion, more than the $3.9 billion increase in February. Non-revolving debt, which includes auto loans, jumped $9.0 billion following a $2.6 billion increase in February. Falling home prices and slowing job growth are squeezing household wealth (chart 2). Thus, consumers are increasingly turning to credit cards and other forms of debt to finance their purchases.

Real consumer spending growth had been trending down for two years before credit card use ramped up and saved the day, at least for awhile (chart 3). However, over the last six months, spending growth has slowed even further, suggesting credit card use has not been able to fully compensate for slowing home equity withdrawal and job growth. The jump in credit card use amidst a slowing economy has led to rising delinquency rates on credit cards (chart 4)."

Capital One, anyone?

Lauren LaCapra of notes used auto loan rates are going through the roof....insult to injury.

May 2008 Credit Quality Report from Wells Fargo

Tuesday, May 27, 2008

No Stacking

When my brothers and I were called upon to do the occasional chore growing up, one of the simple tasks we were asked to do was putting away the dishes. Three of us, three components of "dishes," glasses/dishes/silverware. Like calling shotgun, calling dishes was the thing to do. Then came silverware, and if you were slow, you got stuck with glasses. However, to prevent the dishes guy from gaining too much of an advantage, we made the "no stacking" rule. This precluded the dish putter away from stacking all the bowls and plates at the dishwasher and thus blocking the other two from their jobs while speeding up his own.

The point? Well, they're at it again. Except in this case, the homebuilders are stacking up negatively compounding errors. In a recent article, SA's Judy Weil detailed homebuilder desperation. “A new financing program currently available through K. Hovnanian Mortgage enables qualified buyers to purchase a home with just a 3% down payment that can be lowered to 0% down if combined with a second program — resulting in 100% financing." Let's not leave out the genius of Lennar. “This weekend, Lennar Corp. will start interest rates at 2.88% for the first year - 3.88% for the second - before a slightly higher rate locks 'for life.' In some markets, Ryland Group Inc. will cover the down payment and closing costs, while KB Home has zero-down deals."

Any of this sound creepy and familiar? I'd say so. But hey, I just live in South Florida surrounded by lock-boxed homes and multiple family renters who jam themselves into soon-to-be foreclosed upon houses from flippers who can't pay their adjustable rate mortgages. "Resulting in 100% financing." Again, this means that these people will really have two mortgages at the outset, setting them up for financial disaster. I guess these guys haven't learned from the already defunct mortgage arms of other builders; they want to make sure they go belly up as well.

Returning to some good ideas, the following supports my recent foray into diesel (long Cummins, CMI). Bill Fleckenstein writes, "Hourly costs to operate a 250-horsepower farm tractor in the nation's heartland have gone from $10.26 per hour in 2003 to $36.43 per hour this spring. This is directly attributable to diesel cost increases." Yes, indeed. And farmers will have to keep paying for those diesel engines and the repairs for them as well.

As mentioned a few days ago on my blog, part of the diesel play lies in Brazil. "According to MSN Money's Jon Markman, Brazil is the world's biggest exporter of raw materials. The global demand for Brazil's exports is fueling strong economic growth." Whether it's ag or ore, diesel engines do the heavy lifting to transport that raw stuff around.

What about China? The NBER reports "Trade between the whole of Africa and China (imports and exports summed) grew from $10.6 billion to $73.3 billion between 2000 and 2007, and between Sub-Saharan Africa and China from $7 billion to $59 billion over the same period. China is now Africa's third largest trading partner behind the EU and the US. The Chinese FDI stock in Africa has grown from $49 million in 1990 to $2.6 billion in 2006." China's not trading for lollipops in Africa, they're building rails and mines to export commodities for themselves. Diesel will play a huge role in this development.

Disclosure: Long CMI

Saturday, May 24, 2008

Slow Down, Sparky!

Ugly week for the markets, but not for yours truly. Capital One and retail took a beating, while the SRS posted a 10% weekly gain. I love overconfidence. I love 500-point drop buying opportunities. Kicking myself for not buying Cummins on Wed. under 70, I bought it at $68 on Thursday and could've had it for $66 yesterday. But I'm not a market-timer nor should anyone be. I like the price and I like where diesel is going as ag/industry blows up in Brazil, India, and China.

I also went long on Freeport-McMoran on a $10 dip this week. They are sitting on the largest gold and copper mine in the world and have cranked up "Molly" production. Molybdenum is a metal that adds "hardness" essentially to steel and will only see increased demand going forward. Prices are at an all-time high.

Digressing for a moment, the following quote is one I want you to read very carefully. For if you believe what is spouted, you should never read my blog again. This is from Jonathan Hoenig of SmartMoney:

"Winning trades tend to start out as winning trades. Very seldom does an investment start out with a major decline only to turn around and rally 50% — at least within a reasonable period of time. More often than not, traders tend to get bogged down during extended bear markets, exactly why it's usually better to cut a loss quickly rather than dig in and ride it out."

This might be the most ridiculous thing I've ever read. Good thing Paulson didn't listen to this while he was accumulating CDSs and becoming the most successful hedge fund manager in the world. Good thing Bill Ackman didn't listen to this while shorting Ambac and MBIA the last 6 years. I guess it's because of experts like this that most don't see the next big thing, they're too busy collecting 10% losses in their portfolios.....

I've posted more than a few winning trades over the last 6 months. I can assure you that most if not all were down at some point due to the nature of market volatility. As I recently wrote, I regret not having had the courage to add more to positions when cheaper prices were available. This type of drivel is consistent with Modern Portfolio Theory and other crap that economists and mathematicians have come up with that enables them to buy high and sell low. As Taleb wrote in The Black Swan, go from experience(s) to books, not vice versa if you want to hit homeruns. "Pruining" every pick that has lost 10% at some point would virtually eliminate all successful picks unless, as we discussed, you are the best market-timer we've ever seen.

So much to write, so little time. Bill Gross added to the under-reported inflation bandwagon this week, in similar fashion to the Phillips' and Williams' articles I posted recently....

Two gross banks we've discussed previously are at it again. UBS has had to discount its shares by 33% in a recent offering to raise $15 billion. Despite the fact that this will dilute its current shares, the stock went up. NCC has been in a holding patten around $5.80. My strangle needs it to take a dump or skyrocket, not waffle. They are stuck in more ways than one. They're still holding a bunch of subprime assets they can't unload. "Nat City still has subprime loans from First Franklin on its balance sheet. And despite its efforts to run off the subprime portfolio, it still had $5.3 billion subprime loans left at the end of the first quarter, according to Bloomberg."

Dare I add before we go that home inventories increased 10%, in April? Even Larry Yun, master of spin and rhetoric, coudn't save face for the NAR with this data...

IOD: Cummins diesel (CMI), Freeport-McMoran (FCX)

Wednesday, May 21, 2008

All Lubed Up

For a guy I haven't followed much, I'm going to reference T. Boone again. He's prominently featuring his mug all over CNBC ala Warren Buffet-Man o-the-people recently. After this oil expert repeatedly said oil was going to pop and drop back into the 80s, he recently began showing up and saying, "hey, what did I know, this stuff is clearly heading to $150." Thanks, dude, so, you were only off by 87% initially, very helpful for the clones (thanks, Rome) who shorted oil on your sage advice. For those of you following this humble investor, you could've bought COP under $70 several times and watched it climb to $95 today. You also could've bought PXJ at $21 and watched it climb to over $33 today. But hey, I'm not the oil billionaire.

Dennis Gartman, "renowned" commodities trader, has also been making almost daily appearances on CNBC. Good call on both the oil and gold bubbles as well, as gold has rallied 10% in the last 2 weeks....hmmm, about the time I recommended it. Up to $930 today.

CPI numbers were not taken well, when core inflation (bogosity that doesn't include housing, food, or energy) rose more than expected. In addition to the John Williams article I recod 2 weeks ago, try reading Kevin Phillips' recent article in Harper's. He puts the CPI at closer to double digits and explains the tricks that have allowed the govt. to lower unemployment and inflation numbers drastically, particularly since Reagan took over. Scary stuff.

BAC and other lenders have pulled out entirely from the student loan business. New entries have been blocked due to the delay in post-graduation repayment with no guarantees of success. Another loan debacle that adds to this debtor nation's delinquency....

My diesel review is not complete but I looked at both Eaton and CDTI yesterday. Eaton is very solid and has exposure to several industries, all with international exposure giving it a nice currency hedge. Also, they have made several large sales of their hybrid-diesel engines and have penetrated China. I like these guys and they are still 15% off their 52-week high. CDTI is a different play. They have multiple patents for cleaning diesel and other emissions. They are also developing biodiesel fuels to compete with ethanol. A positive, no debt. Negatives, no earnings and multiple failed auctions recently to raise liquidity. But, with a 300% increase in sales last year and trading at $14, more than 50% off its highs, CDTI presents a high risk-high reward situation. Cummins dipped into the 60s yesterday and has bolted 3% today. I am reviewing them now.....

Hope nobody's planning on flying American. If you are, travel light. $15 for first bag checked...others will follow suit. Days of discount airlines are over. Book now.

Tuesday, May 20, 2008

Ax for Congress

Awhile back, I implored you to write your local congress person about impending legislation that would allow a 4-year retro tax break to big builders and possibly allow bankruptcy court judges to arbitrarily assign new loans to people in foreclosure or delinquency. I asked my congressman if I would be first in line to recoup lost equity in my home since I have been paying on time all along. Shouldn't I get a lower rate with better terms first since I've already spent the most? To his credit, Robert Wexler responded with a thorough and non-canned response. Here it is:

Thank you for contacting my office regarding legislation that provides tax cuts to homebuilders, rewrites loans, or provides a bailout to subprime mortgage borrowers. I appreciate your views on these important issues.

Since the end of last summer, more and more homeowners in our country have been unable to make their mortgage payments and have been losing their homes to foreclosure. In fact, the number of foreclosures in our country has hit an all time high. To protect homeowners from losing their homes to foreclosure, the Bush Administration has implemented a program called "Hope Now." Hope Now requests that mortgage lenders voluntarily re-negotiate their loans with homeowners. I do not believe that a voluntary program alone is a workable solution for homeowners facing foreclosure.

Currently, the mortgage industry has very little regulation. I strongly support legislation that increases regulations on the mortgage industry. Indeed, mortgage lenders need to be required to seek alternatives to foreclosure, including: altering repayment plans, loan modifications, short sales, and other options. I firmly believe that foreclosure should only proceed as a last resort, after all available options have been exhausted. Moreover, if a lender does not take action to voluntarily modify a mortgage repayment plan, then I support giving bankruptcy judges the ability to modify the mortgage repayment plan. I firmly believe that if lenders refuse to re-negotiate loans, then the courts need to step in to save people from losing their homes. The threat of the courts taking action to modify repayment schedules would encourage lenders to voluntarily re-negotiate with homeowners. In addition, homeowners that are late on their mortgage repayments should be referred to qualified housing counselors to provide assistance. Proactive and robust action is the best way to address our Nation's mortgage crisis. Yet, I do not believe that the government should bailout individuals who have made very poor loan decisions. Please be assured that I will keep your views in mind as this issue is debated in the House Financial Services Committee and on the floor of the U.S. House of Representatives.

Thank you again for taking the time to write. Please feel free to contact me with any additional questions you may have or anytime I may be of assistance to you. If you would like to be updated on these and other issues, please stop by my website ( and sign up for my electronic newsletter. I hope you will find these tools to be valuable resources in keeping up with events in Washington and South Florida.

With warm regards,
Robert Wexler
Member of Congress

Thorough yes, the answer I was looking for, no. Basically I am one of many, but those many might get foreclosed on. And while I will be "kept in mind," re-election will be top of mind and pushing legislation to help his constituents will win out. "Yet, I do not believe that the government should bailout individuals who have made very poor loan decisions." But, that's all of the people you just described helping, isn't it?

I'm rolling now, so I can't be stopped. Let's take another shot at housing. Congress is feverishly attempting to push through legislation that allows Freddie and Fannie to buy up gobs of mortgages to stem foreclosures in America's credit-crunch shell game. Never mind that these companies continue to bleed money. Never mind that the falling knife of home ownership is accelerating, not abating. Ever the tactful CEO, Bob Toll recently said, "Most buyers are canceling because "they go to their friends and neighbors and say, 'We just bought a new home,' and everybody says, 'What, are you crazy? Prices are dropping,' " according to the chief executive."

In a recent article in The Economist, European banks were put under the microscope to see why they've been hit so hard by the crisis. In a word, leverage. I love this following assertion. "At the same time Credit Suisse's proprietary risk model, designed to simulate the effect of crises, signalled a problem with the amount of risk-adjusted capital absorbed by its portfolio of leveraged loans." Wow, can I have access to that proprietary model, the same one that didn't kick in before $37 billion were lost. Very kind, indeed.

Speaking of models that have failed in the past, Mr. Myron Scholes is back. You may remember Mr. Scholes of Black-Scholes fame, Nobel Prize winner for his "proprietary" options valuation model. Or, you may remember Mr. Scholes for his role in hedge fund Long-Term Capital management, whose crash in 1998 almost brought our stock market to its knees had it not been for another bailout. Well, wait a few years and poke out the turtle. Myron was recently interviewed on Bloomberg and said, "In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we've seen since the end of the Second World War.''

Hey, we're not all gloom and doom here. Not all. But the editor of The Gloom, Boom, and Doom
Report Marc Faber agrees with me on the sad state of retail. "I personally think we are just starting the credit crunch and it is going to be worse," he said. "I think the economy really stinks and the next sector to be hit, in America and elsewhere, is retail." Retail. Yes. I've heard that before, from myself! Home Depot and Lowe's got trounced this week. 60% drop in earnings for HD and both companies see a bleak consumer outlook going forward.

I think that's enough carnage for now. Cummins dropped 3% yesterday, an appearance in the 60s and I'll look to buy. Will continue to research Eaton and its hybrid diesel....

Saturday, May 17, 2008

Rational Investors?

Shockingly, the Dow didn't go up 1,000 points yesterday when housing data revealed an 8% increase in housing starts. What that proved was 2 things. 1, that number applies to multi-family dwellings with a mere +/- 14.5% margin or error (single home starts down almost 2%) and 2, even the bulls realized that adding homes to a market with glut is a terrible idea. "At this point in the Housing cycle, only two metrics that report stronger than expected results—Sales and Pricing—should be rewarded in the market.”

"Department stores Kohl's Corp. (KSS) and Nordstrom Inc. (JWN) reported double-digit declines in fiscal first-quarter net income amid one of the worst consumer spending climates in almost two decades." While Kohl's isn't quite the benchmark that Walmart is, a 27% decline in sales does not bode well for the economy. Discounted discounters are getting killed and top-line numbers have been a joke across the board due to all-time discounting efforts.

Two shorts heading in the right direction. COF finished another down week briefly falling under $51 yesterday. Purchased at $50, the volatility in the puts may even provide profit as the stock returns to that level. NCC took another 5% hit as other small lenders such as KeyCorp were downgraded yesterday. However, I'm still stuck on the other side of the strangle so will hope for an even more precipitous decline and then hold on for any ride up to increase profit/reduce loss.

Will work on a diesel analysis the next few days....

Friday, May 16, 2008

Wind Tunnel

TBP is not a WWF rasler' but T. Boone Pickens, he of oil billions and now wind energy fame. His company, Mesa Power, is buying 667 GE turbines to be delivered in 2010 for his Pampa Wind Project. I said about 3 weeks ago in my solar/ag posting that not everyone will be the winner in the Texas corridor project. Seems like the billionaire is getting the jump. Even if his project pushes full capacity, estimates are enough electricity for about 1.2 million homes. Let's not get too excited yet.

Here's something scary, but very close to home and a concern of mine even though it's about condo owners. A NYT article yesterday details the plight of foreclosed-on and partial capacity condos where owners who actually pay their bills are getting whacked. "Each of the remaining owners has had to chip in an extra $1,000 assessment and $50 more a month for cable and Internet. That is on top of Ms. Sanz’s $450 monthly maintenance fee." I fear an assessment in new-construction communities such as my own are imminent due to the deadbeat flippers who have failed to pay their HOAs and the deadbeat renters who have failed to pay them.

Retailers continue to beat estimates. That is, they continue to beat projected 7% sales declines by posting stellar 6% sales declines. Who wants to own this stuff? Strong work again by our analyst community who had 11% sales growth projections at the beginning of the year.....

GS came out with a $141 oil prediction for the 2nd half of the year. Anybody else notice gold is back up to $900? Strong dollar, huh?

TOD: Start thinking about diesel. My brother recod Cummins to me a few weeks ago at $48, now it's $73. Volkswagon is coming out with a diesel Jetta next year, 60mpg. My coworker's husband is attempting to make his own diesel, I'll let you know how it goes....

Thursday, May 15, 2008

10% Defaults Coming

Again, I'd like to distinguish the difference between Mastercard and Visa and the banks who carry the credit card loans on their books at revolving rates and make money on fee structures. V and MC simply charge the vendor a transaction fee. BAC, COF, WM and Chase (JPM) all have increased loan loss provisions on defaulting/delinquent cards and expect those numbers to increase as unemployment and foreclosures continue to rise. In her article, Laurie Kulikowski estimates that delinquencies on WM loans could go over 10%. Furthermore, remember that these are unsecured loans. You default on your credit card and it effects your score, but they can't remove a tangible asset from you. You default on your home loan, and they put a lien on your house!

"Moody's Investor Services on Tuesday issued a negative outlook for the next 12 months for the entire consumer finance industry, which includes credit cards, auto finance, education finance and other consumer lending areas, as recession fears ring true, according to a report." Also, as we well know, these banks haven't been exactly forthcoming with their balance sheet information and have forecast most inaccurately about consumer trending. Shame on you Karen Finerman who recommended shorting COF in the 40s then advised dumping the position when it went over $55. Does she manage her firm's money with the same kind of conviction less decision making?

Continuing with our glowing theme, April year-over-year foreclosures rose 65%, the highest number in the history of the world. Greenspan says we'll be done by 09', really? I keep thinking of contrarians Bill Fleckenstein and Nassim Taleb in attempting to put a date on this bottomless pit. How can we draw comparisons with this housing bust when the underlying credit mess beneath it is unprecedented? Another 6K jobs lost last month as well.

A side note on the Cavs for TC. James is easily the best player ever, they should've won last night aside from awful FT shooting. Jordan never played in "the zone" era...

Update: Mental math champion indeed. Except when I forget to read the fine print and don't include the transaction costs on selling and the .1o/contract expiry fee on winning contracts. Thus, throw out the 8% brother, here is the new math:

500 Obama/450 Mccain nets $338.50 O, -154 M
520 Obama/500M nets $231 O, $34 M or 4.6% O
350 O/400M nets -$82 O, $409.50 M or 11%
500 O/475 M nets $244 O, -$6 M or 5.1% O
375 O/400M nets $18 O, $260 M or 6.96%

Sorry, always a catch. Again, if Hillary wins you'd be screwed. Waiting to hear from intrade because if you cash in pre-election, you might be able to avoid expiry fee which would increase returns.

Wednesday, May 14, 2008

Mental Math Champion

Sometimes, being a nerd is good. As a former 7th and 8th grade champ in the high art of doing simple math problems in my head, this skill has carried forward into my daily life as I daydream of ways to make money. As promised, I sketched out a hedge for the upcoming presidential election on assuming percentages from yesterday of Obama 55.2% and McCain 37.8% to win (I assumed you'd have to pay full asking price, but this is an open market and negotiable). All percentage gains include the 5 cents/contract price.

Obama 520/McCain 500* yields $389 either way, or an 8% return

Pro M: Obama 350/McCain 400* yields $18 for Obama, $679 for McCain or in easier terms, a push on Obama and a 19% McCain return

Pro O: 400 Obama/350* McCain yields $431.50 for Obama, -$68.50 for McCain or 12% Obama and a mere 2% loss if McCain wins

*Note: Simply using these same ratios will produce the same percentage return, just different dollar amounts.

There are 2 catches. One, if Hillary wins the nomination, you're f'ed, but could still collect if you're pro M and he wins. Two, if it becomes apparent closer to election time that you're candidate will win, you can still trade your contracts like options and not take a complete loss on those contracts. For example, if McCain makes a huge run, Obama contracts might trade at 5, not 55. You could take the 10 point loss and still collect 150% on your M bets. Pretty interesting I think.

I'll talk more tomorrow about the current market. Nice to see COF take a $5.50 dive in the last week. Volatility rules.

Monday, May 12, 2008

I'll Bet You Anything

Since recommending SRS multiple times on this site, this double-inverse commercial real estate index has fallen on hard times. But this isn't an options play. It is sort of an option unto itself due to its 2-1 leveraging by nature. With that said, commercial real estate is doomed to take the next hit. Perhaps without quite the severity of its residential brother, commercial property drops tend to lag and its once contribution to GDP is already starting to drag. Bloomberg reports "First, commercial real estate tends to lag behind housing trends. The residents of new developments need stores to shop in and offices to work in, so commercial projects are planned after a town starts booming and are completed in the following quarters. So when times are good for housing, commercial property makes the real-estate investment news even better." Also, banks didn't limit their risky loans to homeowners. Construction projects got way ahead of themselves and will now suffer the unfulfilled promise of vacant stores. ``It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,'' Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote. ``We have little doubt, though, that it will. In spades.''

Following with another favorite, Jim Jubak of MSN Money says not to get too high on Visa and Mastercard results. Aside from increased usage, he notes that as AmEx said CC use is up almost 14%, they also set aside $800 million for new delinquencies/defaults and they expect those numbers to increase. Speaking of Mastercard, they said demand for motor fuel based on their purchasers slid 2.5% recently. With oil now over $126, "We're engaged in a painful experiment in discovering how high the price has to go before it really, really hurts, before it hurts enough to slow demand globally," said Adam Sieminski, chief energy economist for Deutsche Bank. Up to $4 officially in these parts, and I know that I must continue to drive. Anyone else thinking about driving less or happy to have a company car to run into the ground?

As far as my gamblers/ambitious readers, check out This site basically provides options on current events, including political and financial situations. Points are reflective of a mere 10 cents, so contracts can cost as little as 10 cents. One thing I'm looking at is the Obama option. Bid/ask is around 55/56 currently to win the whole thing, while McCain stands aroung 37/38. Thus, an Obama contract would cost you around $5.50. A win would produce about an 80% return. Also, these trade until "expiration of the event" like options, so if McCain makes a push, you could always dump for a limited loss. I will work on a hedge to post here in case someone thinks McCain has a chance.

Friday, May 9, 2008

Maybe They're Right?

I remember reading an article from a bullish analyst after the last set of lies/disappointments/writeoffs from AIG. The stock had dropped from about $60 to $45 first on the possibility of huge writeoffs and losses, then on the actual reporting of the same. He said at the time that AIG was the "buy of the decade." After losing another $8 billion and recognizing the need to raise an additional $12.5 billion, the stock hovered around $40 today. Given the company's complete refusal to tell the truth and obviously much greater exposure to MBS, shouldn't this company be hammered more? Maybe that analyst was right. If these type of armageddon-greater than some countries' GDP-type losses don't sink the ship, maybe nothing can.

Citi came out online with their restructuring plan, stressing the need to dump a mere $500 billion in non-core assets, roughly 22% of the company. As Robert Redford said to Cliff Robertson in 3 Days of the Condor, "You people are kind to yourselves." These MBS and CDO debacles were referred to as "hobby assets" by Citi, you know, like just $70 billion or so we could afford to lose causing us to slash our dividend and lose more than 50% of our stock price! Nice hobby, idiots.

The last 2 days have been a reminder that the recent rally has a complete disconnect to economic reality. Gold has risen, oil is through the roof, and the dollar is up to its old tricks of losing value against every currency basket. "Main Street has just entered the act. The peak of the pain is not visible yet," said Asha Bangalore, an economist with Northern Trust in Chicago. I ditto this sentiment. April retail numbers were a sham with an entire extra weekend of reporting. Furthermore, I think we can infer an inverse correlation with the success of Walmart and Costco and that of specialty retail. People are simply looking for bargains and can't afford to pay for anything else.

Credit card issuers are backlashing against potential legislation that might curtail some of their gray-area practices. They say stricter policies will raise rates for good-credit consumers, the bulk of their business. But the bulk of the profits come from sticking it to higher-risk debtors. They don't make any money on people like me who use their CCs as debit cards, essentially using the money as a free monthly loan. They make money from accruing monthly balances at high rates, penalizing with late-fees, and raising rates on accounts already running a tab. "The banks are trying to protect a franchise that is based on deception," said Ed Mierzwinski, consumer program director with U.S. Public Interest Research Group. "They saw an opportunity to make bad money on top of good, and they seized it."

Just to refute the notion that I am strictly short this market, I cashed my True Religion ticket today for the 2nd time when good earnings led to an almost 20% pop this morning. I have owned Jan 09' 10s since August, sold today for about a 40% profit. I'm thrilled to dump a retail holding and persist in my view that XLY will continue to plunge. I was sold on TRLG due to their successful expansion and the short-term theory that people who can afford $300 jeans won't be crimped by gas and food prices. Don't want to test that any further.....

Wednesday, May 7, 2008

Death Blow

Sorry for the prolonged absence, but I had a very busy week with my birthday, my wife's birthday, and my little brother's wedding sandwiched in-between. Death blow is a reference not to the current state of the economy, but to the best man speech I delivered. Originally scheduled for 6 or 7 minutes, it took me about 10 minutes to complete because I couldn't talk over the laughter. I believe the best compliment I received was from a complete stranger who told me he could now never have his brother, or perhaps anyone who even knows him, give his best man speech after the brutal blow I delivered. Watch for the youtube feed in the near future and congrats to my brother and his new wife! My one failure of the weekend was not being able to shave my alma mater into my brother's back hair, but hey, you can't have it all.....

Back to the markets....bought gold last week when it went under $850, about a 25% correction from the top. This is a longer-term hold as I think the dollar bulls have it wrong, again.

Funny comment from an itulip interview where founder Eric Janszen says that his friends in Spain, a socialist country, think our economic policies are more socialistic than theirs.

Despite its recent success, the future of home equity and credit card loans remains like a scythe hanging over the American consumer. Eternal optimist and hider of writedowns John Thain, CEO of Merrill, said this today, "But banks that have a consumer exposure, like credit cards and home equity loans, are likely to experience greater delinquencies going forward than we've seen."

From the same itulip interview, interviewee Dr. Michael Hudson says he thinks the Bear Bailout will be viewed years from now as one of the greatest debacles in American economic history, on par with Depression policy and 70s recession policy. Great.

Home sales down from Feb. and down 20.1% year-over-year. This is going to get much worse. The joke continues as Fannie lost over $2 billion dollars but "assured" investors they have plenty of capital. As long as Bernanke keeps printing it for them...

Still trying to clear my brain from all the red bull and vodka, will get the posts rolling again. Despite my desperate pleas to my brother that not all guests would have 20-30 drinks, he still had plenty of liquor left over.