Friday, August 29, 2008


GDB-Gross Domestic Bogosity. Revised number almost double the initial reading on the strength of our exports which accounted for a mere 3.1% of the 3.3% improvement. How did this happen? Look no further than to China that when you lower the value of your currency to 0, people will buy your goods. Of course, the downside to that is unbelievable inflation, and when real incomes are diminishing, that hurts real bad. Consumer spending, backed by $100 billion in free money, rose 0.2%, wow. And now we see that things were so bad, that Japan had agreed to backstop the plummeting dollar by flooding the market with yen. Didn't tell us about that in March, did they?

Now let's look at July alone. Not so pretty. Rebate checks are gone. Consumer spending went down 0.4% and wages decreased 1.7%. Reality is here, people are broke. And inflation rose 2.4% to make matters worse. So bulls enjoy your 3-day ride. Auto sales get released next week, and living in Florida, I can tell you that we and New Orleans cannot afford any hurricane damage to hinder our already dead economies.

Volume will be back as well next week. Lehman is laying off 1,500 people. Goldman continues to have their earnings slashed by their competitors (probably overdone like last quarter). But where is the spending going to come from? If the dollar rises as all of Europe and Japan go into a recession, who's going to buy our tractors?

The world's largest shopping center owner saw its profits decline 35% in the first half. The catch? They're not a U.S. company, but it was their U.S. holdings that killed profits. Large American companies (such as GGP) will continue to get racked as the consumer has nothing left to spend.

Carteret Mortgage Corp., who just a few years ago wrote $4 billion in business and had 4,500 employees, is out of business. Add this to Wall St. layoffs, Big 3 cutbacks, and a sinking economy and it very much makes you question unemployment numbers.

Speaking of Wall St., you know, all that debt they refinanced wasn't for free. According to JPMorgan, Wachovia and Merrill "may cost them as much as $23 billion more in annual interest versus a year ago based on Merrill Lynch index data." Kind of tough foe 2 companies that just lost $9 billion each, isn't it.

This week has been a tough one. But enjoy the holiday weekend, and if you live in the Gulf or Florida be careful and safe, and I hope that the markets next week are much rougher than the weather.

Monday, August 25, 2008

Just When I'd Almost Given Up...

My faith was renewed. Oh, not in this economy or government, I'll get to that in a bit, but in my draft strategy. Stuck with the dreaded sixth pick in a 10-man league (although, not all 10 are men), I was able to pick what I believe to be the most solid team by far. In fact, I have 8 of the top 42 Talented Mr. Roto players, 4 of the top 24. Of course, I was enabled by the 8th man, who thought drafting the retired Shaun Alexander in the first round was solid coaching. Here is the winning team barring injuries, cheating, and outright failures:

1. Addai
2. Moss (15th pick, unbelievable)
3. Fitzgerald
4. T.J.
5. Turner (a bit nervous here)
6. Gates (please don't go on the PUP)
7. James (threw up a little in my mouth)
8. Roethlisberger (yeah, I know, E. Manning and Rivers went ahead of him)
9. Bowe
10. Chester Taylor
11. C. Perry
12. Schaub (wanted Warner, went 2 picks ahead of Taylor)
13. R. Williams WR (10 tds last year)
14. Seattle D
15. Kaeding

2 or 3 good other squads, including a brother tandem that colluded to stock 1-team. But overall, feeling good.

Also feeling good about a 200-point Dow drop after Friday's debacle. But what's upsetting me is the market in general. Trot out Barney Frank today to say "it's market speculation that's driving Fannie and Freddie down. They have plenty of liquidity." We know that genius, it's the $220 billion of capital due next month that they don't have. Trot out Lawrence Yun to spin some of the worst housing numbers ever. Thankfully, Diana Olick, perhaps CNBC's only honest reporter, advised us that inventory now stands as 11.2 months, an all-time high and that banks are hiring realtors to dump auction homes, not included in the inventory stats.

And what about the Big 3? How can we expect them to stay in business without $50 billion in new capital? I don't know, maybe we shouldn't. Don't run a crappy low-margin business that's done better by 10 other companies who are blowing you out of the water. Add that to the $30 billion for Bear and we're up to almost $100 billion in bailout money, not even including all the free money available at the discount window being swallowed up at $18 billion a day.

I guess I'm asking, as we approach the election, how can we have any trust in our public officials who have placed such criminals, or allowed such criminals, to profit while our economy crashes to the ground? All the while, allowing for the "moral hazard" of taking huge leveraged bets that if they pay off, great, if not, bailout at taxpayer expense.

"Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions." I think he summed it up best with, "You don't let your borrower determine the value of the collateral offered to you. That's just crazy.'' Crazy indeed, taking mortgage backed CDOs in exchange for government treasuries, all to buoy Wall St. while tuning out huge inflationary risks.

But soon, despite the recent bear-market financial rally, reality will make a guest appearance as Libor spreads have continued to widen beyond levels first breached with the Bear failure. ``These problems going into year-end are likely to be worse this time round because of the amount banks have to refinance in December,'' Thomson said, citing a figure of $88 billion. ``The suspicion is that banks are still hiding losses. The banking system relies on trust and at the minute there quite simply isn't any.''

So I'm at a loss. I don't expect either candidate to rectify this as McCain will place stodgy Republicans with strong Wall St. ties, and Obama has aligned himself with University of Chicago economists responsible for "efficient market theory." I feel for us....

Friday, August 22, 2008

How Do I Know You're Lying? Your Lips Are Moving!

As Michael Caine said in A Shock to the System, "You, you, and you panic, everyone else remain calm." An appropriate title these days as the credit shock is continually underestimated by our Fed leaders who, about an hour from now, will spew a load of garbage about how their hands are tied and give no real info about the horrible state of the economy and continuing credit debacle.

Despite a $5 rise in oil yesterday, an event that just last month would've panicked the street, stocks were flat and FNM actually rose. The bulls are grasping at any straw that could be deemed a silver lining. I refuse to believe the insolvency of the world's largest mortgage guaranteers can be viewed as good news along with the destruction of all common shareholder equity.

Unemployment and domestic growth numbers continue to be disgusting. We continually hit low-levels not seen in 20 or 30 years, but the government thinks pumping the market is more important than rampant inflation and diminished wages, killing most Americans.

I've written several times about the portend of CRE destruction as an obvious future loser in the distressed credit scenario. It was the basis for my GGP puts, which hit 100% profits earlier in the day yesterday. "Bankers believe the headwinds may be shifting after a large apartment complex in Harlem warned last week that it might not be able to make good on a $225 million mortgage payment by September." "Broader real estate indexes are already showing signs of trouble. Moody’s/REAL Commercial Property Price Index has dropped nearly 12 percent since its peak last October." Shocking that the free credit may translate into commercial properties that were sold to developers without proper funding as well....

And what about the global economy? John Markman asserts that there's no way U.S. stock can thrive in a world of sinking stocks. "How about Asia, the crown jewel of global growth? It's a wet noodle. The Chinese market is down 31%, South Korea is down 27%, once-hot Malaysia is down 29%, and India is down 43%. The best in the region are down half as much but still a lot, as Japan has lost 16% of its value this year. Taiwan is off 14%, Australia is off 21%, and Singapore is down 19%." European stock markets have taken similar plunges. Are we decoupled? I don't think so. China just became Japan's largest customer, knocking us off the top rung.

So let's see what's next. Gold made merely a $60 gain in 4 days immediately after notes came out that it was heading back to $600. Listen to the analysts if you want. Me? I'll keep listening to myself.

On a side note, my first fantasy football draft takes place Sunday night. I'll be sure to list my winning team next week, or what should be the winning team before my star players get injured in preseason. Never, never draft before preseason is over!

Tuesday, August 19, 2008

Mistake On The Lake

It hurts me to reference the joke that was once and now might be again my hometown of Cleveland. Infamous in the 70s and 80s for such memorable events as a pollution infested Lake Erie catching fire and 5 cent beer night at old Municipal stadium leading to a forfeit by the Indians due to drunken idiots storming the field in the 8th inning, now 3 major Cleveland banks are leading candidates to go under, Nat. City, Key Corp., and Fifth Third. "Cleveland-based National City's bonds have plummeted as much as 17 cents on the dollar since June and yield more than 10 percentage points above Treasuries, similar to Ford Motor Co. debt. KeyCorp, Comerica Inc. and Fifth Third Bancorp have also tumbled, falling as much as 14 cents." "Such bonds default within one year 22 percent of the time, compared with 1 percent for non-distressed junk bonds, according to Martin Fridson, chief executive officer of New York-based research and investment firm Fridson Investment Advisors." Huntington, another regional Cleveland bank, continues to lose money as well.

Getting back to bashing Lehman, they failed to secure $5 billion from S. Korea in an effort to secure more capital without selling Neuberger. Not going to happen. Even CNBC is poking Fuld and lists Lehman as the next major to possibly go under.

A little honesty goes a long way. Former IMF chief economist Kenneth Rogoff had some brutal comments for the financials yesterday. ``The worst is yet to come in the U.S.,'' and "Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money." Speaking of which, how low do the GSEs need to go before they say uncle....down another 20% each earlier this morning. It's a slow and painful death watching these 2, who continually resist the need for a bailout. Meanwhile, "Fannie, based in Washington, has about $120 billion of debt maturing through Sept. 30, while McLean, Virginia-based Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg." How in the world are they going to raise that kind of money in the next few weeks?

A lot of dishonesty goes a long way as well. A recent survey by Schwab shows that independent analysts are expecting a rise in the S&P. "Fifty-eight percent of independent investment advisers surveyed said they expect the Standard & Poor's 500 index to rise, an increase from 46 percent over the prior poll in January. One-third of advisers who said the S&P will rebound said it will rise more than 10 percent by the end of the year." Nice call. So, 46% of you were 15% wrong in January, and now let's make it more than half. In the meantime, GS, MS, and Sanford Bernstein continue to slash estimates on banks, and GS upped it's loss estimate on Lehman to almost $10/share for the upcoming quarter.

I'm laughing on the inside as I write this for crude inventories "unexpectedly" rose last week and this one piece of news buoys the markets while FNM and FRE fail right before our eyes. How can this be unexpected when the economy is dead?

I know I haven't listed new picks in awhile, but I'm playing my bets out for now. Financials have resumed their beating and I have no idea in the world how car dealers can make money right now. I will continue to look for CRE opportunities to short, as well as retail.

Sunday, August 17, 2008

The Hundred

100. Significant number for many reasons. Number of meters to run to be world's fastest (can't believe Bolt jogged a 9.69). Number of lies banks and the Fed tell before we finally give up. Number of patients I saw the last 3 days. And this, my loyal readers, my 100th post. And I'm feeling friskier than ever with a hurricane threatening to blow by my house and the end of "earnings" season a week away. Let's get to it.

Since someone from Lehman, not unlike Schwab, has been logging on, let's start with you. Looks like you're going to preannounce your return to earnings in the 3rd quarter with a $1.8 billion loss. Nice work. While you feverishly search for someone to unload your horrible mortgage and CRE portfolio of $40 billion, no one is buying, not even at 22 cents at the dollar. Not even with the promise of bearing the first $5 billion in additional losses that those securities might bring its new owner. Sounds promising. And what percent are you going to have to pay on your new round of capital? 10%, 12%?

Wachovia has to regurgitate $9 billion in ARSs to its clients. While this won't come as a direct loss, those assets will be gone and I'm sure that the customers who you defrauded with "same as cash" promises will run to renew deposits with you. All the while, your Pick-a-Pay option ARMS are even worse than the sub-prime loans causing all the damage. But don't worry, only 45% of your loans fall into this category, and most won't reset for 2-3 years. Of course, when they do, homeowners will have to make 60-80% higher payments on a home worth less than it was 10 years ago. Good luck getting that money back.

My new buddy, Randall Forsyth, editor of Barron's Online, recently wrote how he had no idea how stocks were rising in this financial environment. Last week rewarded us with a drubbing, albeit a reduced beating by week's end, of financials. You're not alone, Randall. "The financial crisis will probably not end until next year or even 2010, Germany's Handelsblatt newspaper quoted Morgan Stanley co-President Walid Chammah." This on top of reduced profitability forever more for investment banks according to Chammah.

And the market's friend the last month, declining oil prices, may have awakened the monster. OPEC. Seems they don't like the price of oil dropping with the world economy going into the flusher and demand, not speculation, driving prices down. If they can't sell as many barrels, they'll just have to cut production, by say, 30K barrels a day. Yep, that should do it. Keep prices nice and high. And with our "strong dollar" negating the only thing keeping our debatably positive GDP above water, exports, that could lead to another spiraling sinkhole in the economy. That, and all of Europe and Japan going into a recession doesn't exactly bode well for exports. Don't poke the tiger....

Tuesday, August 12, 2008

America Doesn't Have Problems

That's right, that's what W. told Bob Costas during his Olympic interview, as if the question itself was crazy. No, no problems. All of our major banks are under investigation, unemployment is at a 5-year high, and the housing bubble is puking over most Americans. But hey, our basketball team is really good, so we don't have any problems.

Well, let's see. JP Morgan and Wachovia just said that they lost billions since the beginning of July. Even the Fed came out with a survey that said 50 of the largest commercial lenders had significantly increased loan requirements and standards and that credit was becoming unbelievably hard to come by.

The temporary short-selling restrictions end today unless the SEC has an emergency meeting to extend things. However, it does appear as if they'll attempt to put permanent rules in place next month. Could lead to a short-term panic sell, which would be sweet.

Oil is for dummies. It's the fact that global economies are dying, not speculation, that has led to a decline in prices. "Price increases are sometimes associated with economic recessions, but oil price declines have never been followed by an economic boom," said James Hamilton, an economist at the University of California, San Diego, who studies oil price shocks. That's right. At $115, a price that would have sent us scrambling a mere 6 months ago, the market has become all giddy that the economy will somehow miraculously turn. Never mind the bankrupt and broke masses, who have maxed out their only source of income, credit cards and home equity. Another reason AmEx might get downgraded and why Morgan Stanley got knocked down 2 ratings pegs yesterday.

Global commercial property sales have been cut in half, and this includes a huge rise in sales from BRIC nations. "U.S. sales dropped 63 percent. UK sales were off 57 percent and Germany slid 65 percent."

Keep the faith though, bulls. When this bear market rally ends, probably in a GSE bailout or Lehman going under, the turn will be swift and the shorts will make their run.

Thursday, August 7, 2008

Don't Read Between the Lines-U.S. Government

Please don't. Because if you actually take 3 seconds to explore the ridiculous numbers the government puts out, it could make you ill. Seriously ill. "According to the Zillow survey of homeowners, conducted by Harris Interactive, nearly two-thirds of U.S. homeowners think that the value of their own home has increased or remained stable over the last 12 months." That's right. But most of those surveyed also thought that their neighbors' property had decreased in value. What planet is this on? Even the numbers put out today, which have a mere 15% margin of error, revealed that home prices in the scant thriving areas of the U.S. such as Texas, are heading down. Mortgage rates have gone up, 40% of inventory is composed of foreclosures and bank-owned homes (not even including auction homes), and well, you now know about the adverse market delivery charge. Even yesterday, with Freddie Mac laying more tracks to the Treasury bailout room, had an uptick.

The veil has been lifted. Citi and BAC are being sued by no less than 12 plaintiffs. Having to buy back these ARS is not the same as CDOs, but another chink in the transparency of these companies.

Referencing a company I mentioned months ago prior to the dismal March employment numbers, Trimtabs offers a much more realistic estimate of job losses than the BLS by looking at data such as actual payrolls. As Igor Greenwold wrote, they thought the economy lost 169K jobs last month, not 51K. The government insists it's hiring practices keep unemployment in check. With cost-cutting moves such as that offered by the governator, why bother? How the hell are 200K people going to live on minimum wage in California?

AIG's continued demise is a boon to our GNW short. Hey, at least they're fessing up to some of their losses. Genworth is holding out on writing down over $3 billion in assets. That check will come due sooner than later.

Wednesday, August 6, 2008

The Adverse Market Delivery Charge

No, this doesn't apply to the negative impact of simply owning stocks this year. This is the term Fannie uses to account for increased charges on loans they're buying and repackaging as of 10/1. The rate will go from 0.25% to 0.5%. Hmm, I wonder if those lenders will then add that additional 0.25% to loan originations, sending the 30-year rates up a quarter point? Seems logical. And in a time when people are going bankrupt, the Fed's loose fiscal policy will have imploded again as mortgage rates rise while foreclosures go up and homes flood the markets. Great job.

The disconnect between economic reality and stock prices the last 3 weeks has been greater than the disconnect between Green Bay's front office braintrust and their delusional chances of winning without Favre. I'd like to make offers similar to what they did. Hey, CEOs, we'll pay you to retire before you run the company officially into the ground. But don't let Freddie Mac hear that. Their CEO was warned by no less than 20 employees about CDO risk, but that didn't stop him from plowing forward. And S&P, well, apparently if paid, will rate cow products.

Earnings season is almost over. Despite the impending collapse of the Big 3, the worst earnings possibly ever, and the continuous denial of such firms as Merrill Lynch about their true situation, the markets have rallied. What is going to carry this charade further? Carmax noted a 17% decline in sales in just the last 2 months. Bennigan's went out of business. Another bank failed. What about uninsured deposits, such as payrolls? Uh oh. Are you telling me that if my bank goes under while holding my $50 million payroll, I'm out of luck? "Uninsured depositors, including company payrolls, are the next "potential iceberg" for the U.S. economy, said Larry Lindsey, CEO and president of The Lindsey Group economic advisory firm. "All you need is one case where the uninusured depositors, the big deposits, don't get covered, and you have the potential that they start to run," he said."

Citi continues to bleed from every whole, including credit card securitizition. They refuse to acknowledge the Merrill markdown of 22 cents (actually 5 cents) on the dollar for even less-risky CDO products. When the bill comes due, it will take a large toll. Pandhit is playing with fire. As we mentioned months ago, we have breached the next tier of crappy loans, Alt-A. They are piling up in default and right next to them, much not to my surprise, is a smaller pile of prime loans beginning to sour. Even Jamie Dimon admits JP Morgan will lose triple its initial estimates on these loans.

So hold tight. There's 3 months before another round of inflated earnings against grossly low projections can buoy stocks again.

Oh, one more thing. For the executive from Schwab who keeps reading this blog to gain enlightenment and borrow ideas, feel free to contact me. I have spoken with your staff and despite having 2 people call me, you did not offer me a job. I find that strange. As I said in my letter, my service may not always remain a free one. Post at your leisure with a good time to contact you. Thanks.