Friday, November 14, 2008


Or FARCE as the TARP plan was to be originally called. Congress thought that TARP sounded a little better, even though it never had any intention of following through with buying out the troubled assets. At least it only took a few months more for Paulson to be exposed as a total fraud and to lose all credibility in a single afternoon.

Speaking of farces, let's talk about dying industries and the money we should not spend to keep them afloat. I recently wrote that I was torn about the Big 3 bailout that will inevitably be approved next week at a great cost to us all. The American car industry is dead. GM is losing an estimated $52k every minute. We have not been competitive on price or quality in 2 decades. There is no demand for these products and trucks are literally selling for half of what they did 4 years ago. Who is going to buy?

And I make the same argument for the homebuilding industry. If I hear one more analyst say "we need to fix the root cause, housing," I might go insane. How can we put a floor on prices when nobody has the money to buy a home, mortgages are getting more expensive, and inventory increases daily while prices go down daily? Let's look at homebuilders. All, yes all, have negative earnings. They all have a product that costs more to produce than millions of competitive products on the market that have a decreasing daily price. If the only way they can make money is to sell new homes, why are their stocks trading above pennies? And don't give me land as an asset. That should be valued right up there with MBS at present time.

Retailers have it only a little better. While they may still have some products people want, they have to slash prices on inventory they paid loads for 6 months ago to entice buyers, and now nobody has the credit to pay. Not being able to finance a 42" TV means no sale, and as we've seen from dire reports this week from Best Buy, J.C. Penney, and Nordstrom, it's only going to get much worse.

A final note about hedge funds. These over-leveraged beasts are dying a quick death, maybe never to return. One fund company admitted this week that its 2 primary funds had lost 77% and 83 % respectively this year. Traditionally, this company had boasted 38% annual returns. So in one year, they wiped out 5 years of gains. That's the kind of fire they played with, but not with their money, yours. George Soros appeared before Congress this week and warned of a possible Depression, not recession. And John Pauslon (not Hanky), the guy who made billions betting against MBS the last 2 years, presented a simple strategy that his firm has employed without risking all of his shareholders' money. He notes that most of the time, his funds are not leveraged at all, and at most his firm has held 33% borrowed equity. Furthermore, there are agreements with his clients that he makes no money in a down year and even clawback clauses to give money back for poor performance.

Anybody on the hill listening? Or can we count you to quack the market to 7K before Obama takes over? I hope so. This weekend is the last chance for the 45 day redemption out.


Tiger Coach said...

Ax... Can you explain more about the redemption period?

It is disturbing how many analysts have already gone of the record calling bottom... I wish we had an All-start list... of where and when these market bottoms were called... maybe it deserves the attention of an entire website to be dedicated to that subject...

The real problem... I can't believe our government , Congress in particular is so gullible. After the Big BIG Bailout went through they are all sounding shocked that Treasury has "altered" their plan to "fix" things. I wonder if they still believe in the Tooth Fairy, Santa Claus, or the Easter Bunny?

Nice article!!!

AX said...

Sure, TC. Most hedge funds only allow a few days a year in which you can withdraw money. On top of that, your request must be submitted 90 days or 45 days, depending on the fund's rules, prior to redemption. Given the horrible performance of these funds year to date with ever increasing poor performance, many funds are actually sitting on tons of requests to pay back money. In order to pay back shareholders, they have to liquidate holdings prior to the payback date at the end of the year, or by Jan. 1. This is why I think we've seen gold get battered short-term, when people like Jim Rogers, Eric Janszen, and Steve Forbes all say it should be trading in the 4 digits.

Anonymous said...

Ax, Great article. I agree we should not bail out these dying industries I have been saying this for for two years now! But, we will and the "Nanny State" keeps growing stronger.

In regards to the Housing industry I do think something has to be done. At the very least some people should be going to prison, others should actually get kicked out of their homes. I would love for them to put into action the plan I discussed with you but that will NEVER happen.

In regards to hedge funds, I agree they are getting killed but so are just about every other fund/stocks on the market. All of the gains they may have had in the past 5 years are getting wiped out. Other than shorts or options what type of rec do you have to make $ in this environment?

AX said...

Anon, agreed that total loss % with other funds are similar to hedgies, but the sheer size of hedge funds makes these losses disastrous. On top of the 20-25% of the profits these funds keep in good times, clients are going to punish them hard.

I still think stocks are toxic. This week proved again that it can always get worse. But, Citi at $8 and change is probably a long term winner. If Wachovia failed and never went below $3, then I don't see how Citi goes much lower. Ditto BAC at $15 and possibly GE at $15 as well. Don't be fooled by any short-term bounces though as many were 2 weeks ago with the market near 10K again.

DCNorth said...

Hello Ax,

Scary. The economy is getting downright frightening with the layoffs starting to hit mainstreet now. As for GE, I want you to check out this article by James Quinn who makes a great case against GE! Credit cards are getting smoked as they say the default rate is going up 10% next year!

AX said...

Yeah, I read that yesterday. Scary indeed! Makes me not want to buy even at $15....

DCNorth said...

Hello Ax!

Talk about utter destruction in the market today. I keep asking, "How much worse can it get?", but I don't see this "floor" that everyone talks about. 7K? That's not that far off when you think about it. 2 more days like today and we are there!

This reminds me of Japan in 1990's. Overinflated property values, stock market collapse, deflationary environment, government intervention in the banks, Fed rate getting closer to 0%.

Am I crazy?

AX said...

DC, nope. Not crazy on any front. Despite his insistence to the contrary, Bernanke and Paulson seem to be translating the Japanese playbook for a 15 year recession very well. As far as a floor, you know what I think of technical analysis. 7K? Sure, why not? I bought Citi yesterday on 2 assumptions. 1, it can't go much lower than $6 because it is too big to fail and even banks that did fail like Wachovia, are still trading around $5 (citi crashed to $6 today) and 2, if it does fail, then we're at armageddon and that means my gold will be worth so much I won't give a crap! Thanks as always, working on new post right now.