Tuesday, July 28, 2009


The plethora of earnings reports and pseudo-information out the past few weeks has been hard to digest, all with the net effect of a large market rise. Earnings have managed to not trip on estimates lowered to the ground, as 76% of S&P reporters to date have beaten their projections. Ridiculously low projections (you didn't think analysts would err on the top-side this soon did you?) combined with huge savings coming in the form of layoffs are behind these beats, not sudden increases in sales to strapped consumers. As unemployment rises and inventories are replenished, do we not realize this is a one-trick pony? You can only cut so much of your workforce before you cease to function as a company.

But this logic doesn't seem to play as there was general excitement over MOM gains in home prices of 0.5%, the first such gain in over 2 years. Ok, but home prices are down 32% YOY; the fact that they are not accelerating at previous pace is because that pace cannot be maintained. Don't tell Wall St. though.

To no one's surprise, temporary short-selling bans have become a permanent fixture. However, disclosure of short positions by hedge funds was not extended. We've been awfully hard on these guys, haven't we? 2008 was rough for them, let's let them get back to leveraging their clients into oblivion.

To my surprise however, there has been some action on GS' and other large firms use of super fast computers to gauge market direction before anyone else has a chance to buy or sell. NY Senator Schumer has pushed the SEC to action, threatening legislation if they fail to force the availability of pricing simultaneously for all market participants. This didn't sit well with one of the CEOs of these platforms. "William O'Brien, chief executive of Direct Edge, made no apologies for the practice that fueled his market's rise and said that dark order types 'democratize access to dark liquidity.'" What?

Oh, and there's $165 billion in CRE loans coming due this year, much of which is already delinquent. Both Benji and Janet Yellen have said this week that this remains one of the largest threats to the banking system. Watch out for bailout #2, or does that not come until this one officially fails somewhere around Q1 of next year? Don't forget to watch Bernanke explain to locals on PBS why we gave AIG $185 billion but let local businesses fail en masse!




Tuesday, July 21, 2009

Did We Stub Our Toe?

"In a way, I feel sorry for him. It's not his fault."
"Whose fault is it, the bloodsucking, capitalistic beasts of Wall Street."
Excerpt from Eye in the Sky, Philip K. Dick, 1957

On the way home from the clinic this evening, I scrolled through the dial and settled on NPR, a habit that has been easy to break over the last year as the general tone has seemed all too often to coincide with the daily musings of the MSM. However, I was ensnared by the mention of Matt Taibbi, whom I recently referenced in light of his poignant GS bashing. He took the host through his findings, and was emboldened by GS' recent earnings bomb, which has brought about new skepticism over our bailout system. Rolling into his next interview, the host introduced us to Charles Ellis, "founder and now senior adviser of Greenwich Associates, an international strategy consulting firm he founded in 1972. His book, “The Partnership: The Making of Goldman Sachs” came out last October."

Needless to say, Mr. Ellis, who sounded like he was 100 years old, did not concur with Matt's assessment of GS as a blood-sucking vampire. He quickly asked to be excused from the interview if it was going to be a GS bashing session, and then made the analogy of comparing our economic woes to stubbing your toe in the middle of the night. You're looking for someone to blame, the furniture, the bathroom, etc., but the finger should be pointed at yourself.

In a way, Mr. Ellis is right. Americans need to take responsibility for their glutonous spending and the ramifications of using money they didn't have and could never expect to have. But Mr. Ellis' analogy stank with the smell of corporate greed and protectionism. Posting record profits 9 months after being backstopped from bankruptcy both through TARP and AIG kickbacks doesn't make it appear as if GS is playing by the rules. As Taibbi pointed out, their VAR (value-at-risk) models, the very same models which Taleb has criticized as being woefully inadequate for evaluating large events, allowed for the largest daily losses in GS history last quarter. Is this a sign that these guys have learned their lesson? Are they really a bank? C'mon!


Saturday, July 18, 2009

The Forest Through the Trees

It's hard to see sometimes, especially when banks that needed backstops of over $100 billion continue to report billions of dollars in profits. I was hoping for one more market dump on Monday to get out of our FAZ calls with a small gain and reset after this bogus earnings season, but Meredith Whitney trumped me by turning GS bull on Monday morning. We knew the fix was in when she appeared on CNBC, something any bear has been loath to do. Wonder is she had any heads up from the inside as her estimates were by far the most accurate, and over $1/share higher than the average?

While the market was raging higher this week, we were presented with a golden goose in the form of CIT. But while I was busy putting on a JPM hedge that earned 10% in 2 days (late to this party as well), CIT was busy going bankrupt. Around 2:50 on Wednesday, shares were halted at $1.64. They opened again on Thursday at .40, only to hit .90 at one point yesterday. But $1 puts purchased on Wed. for .05 went to near .70 on Thursday, not bad for a days work if you had the courage. I was too entranced by the 250-point run up to put my money down.

Despite the market's rapid rise this week, only GS really rose after actual earnings. One-time gains from tax credits and huge loss reserves didn't seem to sooth most investors. Only GS' ridiculous gains from being the only game in town were considered legit, if not criminal. It was nice to see an op-ed by Krugman yesterday on the back of last week's Taibbi article condemning Goldman as a profit-machine benefitting not only from implicit government guarantees, but the demise of the American financial system. Even CNBC's on-air editor Charlie Gasparino (who was quickly pushed off-air) said that GS' ability to make money like this, given the money they sought from the govt., is obscene. He reminded us that he was there in September, and that GS was indeed one day away from going bankrupt with everybody else.

If there's one phrase I hate from the MSM stockpickers, it's "don't fight the tape." With that said, who knows what kind of catapult or trap-door the rest of earnings season holds? I've already made my short bets, will look to hedge next week with SSO or SPY out-of-the-money calls.

Friday, July 10, 2009

PPIP? PPPlease

"It's pathetic that the real reporting has been left to a music magazine and some independent bloggers."
Matt Taibbi

Now, The BBB wasn't mentioned specifically, but I'm sure Matt had us in mind when interviewed post expose on GS in Rolling Stone entitled, "The Great American Bubble Machine." He basically blames GS for the creation and destruction of every bubble going back to the 30s and points to political influence all the way up to Obama. This story is becoming old news so I won't rehash more quotes, but interesting that GS was also involved in another big story this week, one of possible "secret formula" theft by a leaving employee.

"The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Mr. Facciponti said in the court, according to Bloomberg. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

This is what GS' lawyer had to say concerning Sergey Aleynikov, who supposedly uploaded GS' proprietary formula for evaluating trades in microseconds to ensure huge profits. But doesn't this quote beg a simple question from the judge? If others could use this formula to manipulate the markets, isn't this what you are already doing, GS? Not much of a stretch I think, but it would be fascinating if someone else was able to use it to steer the market in the same way GS appears to in the last 20 minutes of daily trading. By the way, have we received an explanation as to why trading was extended 15 minutes durin a session last week ?

Now to the title. Remember when the bailout money was supposed to relieve the banks of all their toxic assets, then a week later it was decided no, that's no good, let's just give the money to the banks. Then remember this PPIP thing, where we were going to let private equity leverage loans at 10-1 with explicit caps on losses, to buy up to a trillion dollars in toxic assets and that this would save our financial system? Well, turns out PPIP isn't quite going that far. Try 4% of that original figure, $40 billion. $40 billion, does that help anything? Does anyone else feel like Geithner Paulsoned us with this doomsday scenario at taxpayer liability to go along with this BS?

Elizabeth Warren of the Congressional oversight committee reiterated today that banks are paying back warrants at 66% of face value and continue to push to pay even less. At least someone is pushing our interests, even if their advice goes unheeded.

And last, congratulations to Anon on his new baby boy!



Friday, July 3, 2009

What's In a Number?

First off, happy 4th of July everyone! I hope that everyone has a happy and safe weekend.
We've seen plenty of figures over the last week. Let's review some of these numbers and try to put them in the context of reality.
1. Americans lost 467K jobs in June according to our government. This was over 100K more than economists' estimates, which had been revised up just during the week. Barack glibly announced that while this was a bad number, he had just met with a bunch of big energy dudes who are making tons of money and who will provide jobs going forward. I'm sure that's a big relief for the half million Americans who just lost work.
Keep in mind that number doesn't reflect seasonal layoffs in retail where college-age kids will have no chance of getting a job and much more importantly, the impending job losses from the Chrysler and GM bankruptcies on both the plant and dealership fronts.
2. Speaking of automakers, let's dig into the sales figures for our largest companies. Ford's mere 10.9% decline in sales (YOY it turns out) was trumpeted by the MSM as good news and a reflection of Ford's growing market share. As Eric Janszen points out in his most recent Itulip article, sales numbers (GM -33%, TM -31%, Chrysler, -42% Honda -30%, Nissan -23%) are even worse than they appear:

"Automakers also have been plying record incentives in the form of cash or special financing to press customer traffic into dealerships, making it more difficult to determine the long-term demand for vehicles. Edmunds called the month the most expensive June on record, with the average U.S. incentive at $2,930 per vehicle sold, up 20 percent from a year earlier. Edmunds expects incentives to fall as production cuts in recent months pare inventories. Ford’s profit margin is -12.66% and Operating Margin is -5.49%. Hard to imagine how increasing incentives by 20% will improve on that. Input costs, such as payroll, are not down 20%."

So, Ford is getting $87 back for every $100 in car they sell. Yeah, that sounds like good business.

3. 125%, 80K, 5 million. These numbers represent the possible new percentage underwater Fannie and Freddie will be able to refinance loans, the number of loans they've been able to refinance at 105%, and the total number of people who were supposed to be helped by this program, respectively. In other words, the program to date has been a total failure with a little more than 1% of supposedly eligible homes being able to refinance. Even at 125% underwater, given the ever-rising rates and demand for at least 20% down, most homeowners will continue to be out of luck on the refinancing front. Perhaps that is why mortgage applications fell 19% this week.
4. A "slight" glitch in home sales in San Diego will have to be adjusted for the month of May. The WSJ reports that sales YOY will be revised down modestly from 89% to 6%. Hmm. Not quite as good. This is typical both of local level realtors and the NAR, who continue to front-run overly optimistic housing data when the truth is, the number of foreclosures banks are not revealing is tremendous, and if revealed, would implode the Case-Shiller index.
5. 5%. That's the new minimum balance on JPM credit cards and Citi will also be raising its minimums on 15 million customers. So when you see Americans "saving" at the highest levels in 60 years, be forewarned that this is simply the CC companies slashing available credit to already drowning consumers. If you can barely pay 2%, 5% is gonna be rough. Expect delinquencies to rise rapidly over the remainder of the year.

Sorry to be so pessimistic heading into our holiday weekend, but the only thing I feel sanguine about right now is having a few days off! Enjoy your 4th.