Back in Business

Markets back in business today and I'm in full rant mode after I gained 2 new readers over the long weekend. Clearly word is spreading and before long, we'll be pushing a bloggership of 20!

Where to begin? Oh yeah, more writedowns. Credit Suisse magically failed to account for a billion dollars in losses last quarter and is writing down $3 billion total. Barclays is writing down over $3 billion, but somehow, this is good news. And sneaky snakes, American banks, thought they'd just borrow an additional $50 billion dollars last month under new fed rules to sure up liquidity. This however, was not received as good news because we know that they will not be able to freely lend this money for a better rate of return. So why the necessity? Because I can only assume more money is going to be written down and lost forever over the next year as banks continually try to hide their poor credit exposure. Can we punish these guys already?

Great article by Bill Fleckenstein of MSN Money (posted below, don't let the mullet fool you, this is a smart dude) about how we're just in the first leg of a recession, and that's denial. I'm not in denial. I know the credit mess is going to wreak havoc on every nook of consumership in this country. But the market is. Next comes "realization." When Bernanke and his bull-machine fess up, we can get the ball rolling. And finally comes "the give up." We throw in the towel, not every 100pt. Dow day is considered a rally but simply a dead-cat bounce, and we gain full acceptance that our economy is in the pooper.

Housing numbers come out today, should be a bleak story, but anything better than Armageddon will probably be "good news" for the market. Again, denial....

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/ItsTooEarlyToBeBullish.aspx

You've Been Cut Off

Kudos to the management company of my development for putting the hammer down on delinquent owners who don't pay their HOA fees but continue to collect rent. Starting today, the automatic gate clicker won't work for delinquent houses, and basic cable to those homes have been shut off. Is that unfair to the renters? Who cares? It's unfair to me and my wife who send in our fees on-time every month. As a matter of fact, the next step is to evict renters from those homes in arrears. Why should you collect income if you can't pay your HOA? Ba bye!

This is symptomatic of the oversold housing market, full of delinquent investors and overleveraged greedors. When steps like this are taken, more homes will go into foreclosure keeping the spiral trending down. How Bernanke could think this thing is going to turn around this year is insane.

The New York manufacturing survey posted its worst numbers ever. Paying more for gas and milk it turns out, doesn't represent a thriving economy. Please read the attached link to get a sense of how bad the banks have been covering up their losses. Credit default swaps are tough to explain, but the article addresses it well. Let's just setup a simple scenario. What's going to happen when a mortgage-backed CDO defaults for say $20 billion dollars? The banks that wrote CDSs against it will have to come up with the bonds from those mortgages to cover the losses. Problem is, the CDS on those bonds may total 10, 20, 50X the actual bonds' worth. So who gets paid and who doesn't? Furthermore, those CDSs are hardly regulated, who knows who even owns them to pay you if they go kablooey?

One of England's largest banks, Northern Rock, just got "nationalized." This is a nice way of saying it went bankrupt and the gov't is keeping it from going under. When asked what the shareholders in the bank will get, the Brits basically said, "oh, uh, we'll figure something out." I hope the same happens to Citi and BAC, then we can figure something out......

http://www.cnbc.com/id/23210754/site/14081545/page/4/

Waist Deep

It's been awhile, so let me comment on some sports-related issues. I'm still in my post-football funk, but will prep for March Madness shortly, and will start revealing picks soon.



First, is it any wonder that arguably the best pitcher and position player of recent memory (although I don't think Bonds is better than Rodriguez, roids or not) are not only juice monkeys, but HGH freaks? Clemens literally imploded this week, making a total jackass of himself and doing as much damage to his rep as anyone ever has. He might actually go to jail.



Belichick, it was revealed, has been taping defensive signals since the first second he put on a Pats hoody. Goodell revealed this to Arlen this week, in another of our country's most pressing issues. I mean, who cares about stuff like war and economic collapse when the Eagles might have been cheated out of a SB! What's going to happen to this dude? Nothing. He's already been punished and the NFL just wants it swept out into space with the bus-sized spy probe that may land in your front yard if we can't shoot it down with nuclear missiles in the next 2 weeks.



Good job IU. You replaced a guy who beat and choked his players with a guy who's going to bring your program the death penalty. Has the AD been shot yet?



Getting back to economic issues, let's start withe the Dinallo interview. Seemed like a bright guy, it was just so hard to tell with Joe Kernan interrupting him every 3 seconds to say, "But that's not going to hurt the market, right?" Jesus, every time CNBC ventures to bring on an educated, informed guest who wants to talk economic reality, they're almost kicked off the set for their anti-market sentiment. Dinallo spoke about how FGIC, another bond insurer, had filed to be split into its good and bad businesses, aka, munis and subprime cdos. When pressed about if this was a good option, Dinallo said it was better than bankruptcy, but would not make it a great company all of a sudden. Ambac and MBIA face the same decision in the very near future.



In a little-reported aftermarket note, S&P downgraded debt on 4 builders, including Centex, from junk to bad junk, or from ok to junk status as with Centex. They see very poor prospects of this debt getting paid with limited cashflow and don't think these companies should be allowed to borrow money. Shocking.



And last, just a quick note on analysts. S&P profit forecasts for the 1st quarter are now less than 0. In December they were 11%. In October they were 18%. So these guys were wrong by 20% and if we just look at these numbers, even less than zero seems overly optimistic. How do these guys have a job when they're so very wrong so very often?



IOD: XHB and Centex jan 09' puts
BOD: NFL will do nothing to Belichick
TOD: Watch Itulip.com's Cramer video contest. HIIIIlarious.

Dear Ben

Thank you, Master of the Obvious, for announcing that our economy is in the pooper and propelling stocks into a downward spiral as they should be. Unlike market gurus like Cramer who insist that the fed should only make forward looking statements that are optimistic, even if untrue, I was glad to see a bit of honesty in his testimony. But only bit. For some reason, he keeps insisting that growth will pick up in the 2nd half of the year. When is the 2nd half of this year taking place, in 2020? Bernanke said yesterday that housing and credit problems will continue to weigh on the market for perhaps longer than we expected. Well, which is it? Just earlier in the week he said that housing should pick up by the end of the year. That makes sense. Just yesterday, 45 states said that home sales were down and foreclosures were up. 4 states didn't report and the 1 state that had improving sales was S. Dakota. Wow, what a boon for the GDP that will be !



Cramer also recod yesterday that the gov't bail out all of the CDOs and float the mortgages of the millions of delinquent/foreclosure loans. That's great advice. Hey, I bought shares in a company that didn't actually go up. U.S. gov't, can you just refund me the difference in share price? Why should I have to take a loss? These idiots have only one concern, stock prices. They don't want market turmoil because then the 500 stocks they make you pay to get access to might go down and make their record, like Cramers, stink.



In a bold move today, Citibank is not allowing hedge fund owners to withdraw their own money. Can you imagine if you tried to pull money out of your mutual fund, and Vanguard or Fidelity said, "Nope, I don't think so. You have to ride this sinking ship to the bottom!" Nice work fellas, this on the heels of your other hedge fund which has produced a sweet 52% loss in its first 3 months.

Just in case you thought the bond insurers were in good shape, a reporter revealed on CNBC yesterday that he was begged by Dinallo 2 weeks ago to not report that the bond insurers may be forced to sell/be taken over in their muni business and just go kablooey on their subprime CDOs. All this talk of a bailout was smoke and mirrors, with Dinallo knowing all along that that wasn't a viable option. FGIC got downgraded yesterday and in turn, can't offer municipal protection. So for 2 weeks market optimism has been provoked by a lie. Big surprise. Dinallo has an interview in about 10 minutes, will report on that later......

Alt-A

Ever heard of Alt-A loans? Better get familiar, because they're next. Alt-A loans, like as in alternative to A, like as in alternative to good credit or full documentation of income, is a loan written with substandard credit or ability to pay. Not as risky as a total ARM, these loans were typically written for sub-680 credit holders and people with suspect ability to pay. Banks such as Countrywide wrote a ton of these loans and have been hesitant until now to even acknowledge the tremendous backlog on their books because guess what, they're going to take huge losses on the defaults of these as well. UBS came out today and said they had a $26 billion exposure to these things. Do you think they're the only ones?

Jim Jubak of MSN Money also foreshadowed of another set of loans waiting to collapse. As the government slashes rates to "stimulate the economy" with more credit for millions of already credit delinquent Americans, rates on student loans and some auto loans go down. That makes the bonds they're repackaged into less valuable. With rates set to go down further, those bonds will continue to lose appeal, so they may get sold sooner than later at less than they were purchased for, again causing writedowns for the holder.

I'm rooting for MBIA to get scorched on Capital Hill today. They wil testify that short-sellers, Bill Ackman in particular, have "unfairly driven their price down." Well, let's see. You guys left your primary business to back high-risk loans and you got blown up. Now, with your stock price in the pooper and your ratings about to get cut, you want government intervention. Why should anyone help you out? If your loans fail, it will force massive writedowns and reinsurance, but evryone who played the game knew that. Ackman warned about it in a 2002 report, but nobody wanted to listen.

Check back tomorrow for Bernanke's babble.....

Pound to Get Pounded

I wanted to revisit my visit with Fortune Brands about a month ago. As I said then, be on the lookout for their Jan. 25 forecast. A prime example of another good company being hit hard by sub-prime. They are selling booze better than ever, golf clubs are still moving, but their exposure to homebuilding (Moen) has stopped the company's growth and forced them to lower forecasts. They earned $201.5 million, or $1.28 a share, down almost 22% from $257.6 million, or $1.65 a share, a year earlier. They went on to say that, "the home products unit could only "outperform [a] challenging market."

Hey, at least there's some honesty there. There are other companies with no product exposure to housing who will still lose money as a result of sub-prime. The reason? Greed, of course. Looking to boost investment returns, some companies bought into sub-prime securities to increase interest gains. How's that working out? Let's see.....

Mary Thompson of CNBC reports "these firms bought auction-rate securities — bonds created from pools of long-term debt. They don't pay a fixed rate, rather a lower, rolling rate that's reset through a Dutch auction every 28 to 35 days." Companies who lost their bets include Bristol-Myers and US Air, with writedowns up to $275 million dollars. Nice job putting your cash to work.

Next stop, Europe, where higher interest rates will prevent the huge inflation we'll see next year and beyond as Bernanke allows us to relive the Japanese implosion of the 90s, but at the cost of market hatred. By popular demand, I'll post my congressman's email and phone below so anyone living in my hood can berate a sub-prime bailout plan.

Alcee Hastings: Tel: (561) 684-0565, email at website http://www.alceehastings.house.gov/index.php?option=com_content&task=view&id=104&Itemid=

Follow Me to the Liars

Ok, very bad week for stocks, very good week for my picks. Just to prove I follow my own advice, let me reprint an email I received from the investor relations department of MBIA a few days ago:

Me: I'm confused. Didn't your company just spend 4 hours on the conference call last week insisting you had enough cash? Now you need to raise an additional $750 million dollars (I understand, only $250 million of that is new money)? Is it possible you guys were not being honest last week? Please explain.

Response: The prospectus for the offering is available on MBIA's website, under "SEC Filings". While it provides the company with cash, as mentioned on last Thursday's call, we don't have a liquidity concern, but rather need additional capital to satisfy severe stress testing rigors associated with Triple-A ratings requirements.

Me: Horses**t!

No, you don't have a liquidity concern except that your company may be on the hook for a trillion dollars in faulty securities. Talk about a non-answer answer. Oh, by the way, not only was MBIA lying last week, this dude was lying to me as he wrote! Later that day MBIA made it another billion dollars they needed to raise in an offering, not $750 million. As I've said, these guys lie and are going to continue to lie, just like Mozillo of Countrywide, until they are bankrupt. We need big time corporate punishment/penalties, not corporate bailouts.

However, I continue to be stunned by the market's response to horrific news. MDC, a homebuilder, casually mentioned they lost $6.14/share last quarter. They were rewarded with a 5% gain. MBIA initially got slammed for announcing the need for further cash, but ended Friday up 3%. Ricoculous.

Distressed debt vultures are salivating over the potential for huge losses/bankruptcies this year. Bruce Richards, CEO of distressed specialist Marathon Asset Management, which manages $10 billion, says 162 companies will either default or restructure in the next 12 months.
He hates homebuilders, forecasting home price decline for the next 3 years.

This just in. Bank of America has just for fun (actually, not just for fun, to avoid bankruptcy) decided to double the interest rates on random consumers. I say random b/c some of these customers have good credit, pay their cards on-time, and have even paid down debt over the last year. Welcome to delinquent payment increases BAC, and welcome to phase 2 of the credit cruuuunchh! Read article at right....