Bottoms Up

Always on the lookout for pints of reality, similar in deliciousness to the pints of Red Bull/Vodka I consumed on a rare boys night out, Paul Kedrosky of TheStreet.com gathered a week's worth of global gobbledeegoo to digest. I have regurged some of the most pertinent passages here (links below). Ironically, without even having knowledge of my blog, my drinking partner/PA also mentioned the ridiculous prices of Mach 3 razors! He's outdone me, buying used cartridges on Ebay and paring his shaves down to once a week, impressive!


Bloomberg reported that credit default swaps tied to MBIA's bonds rose 106 basis points to 705 points, according to London-based CMA Datavision. "That meant it cost about $705,000 to buy a contract protecting $10 million of bonds from default for five years. The figure also implies that MBIA has a 45 percent probability of defaulting during the next five years. By contrast, credit protection for AAA rated General Electric Co. on bonds of equivalent maturities were only 137 points." This again points to a raging conspiracy among banks/bonds/rating agencies. How could one AAA product cost 5x more than another. What's the point?



What a great concept, the misery index, comprised of the sum of the unemployment rate and inflation. The index currently stands at 9.2 percent. That's the highest reading since October 2005 and up from 5.8 percent in December 2006 (Bloomberg).



Another hedge fund goes kablooey! Peloton is being cashed in by its lenders and withdrawls from the fund have been stopped. "City sources fear the Peloton firesale will prompt banks to ask other funds to put up more cash to support their positions, forcing more to close. " $2 billion in equity, poof!



Finally, a NYT article says our current measures for inflation/recession are outdated and don't factor in real-time accessible data. "For the first time since the fourth quarter of 2003, TrimTabs estimates, consumers will have less money to spend this quarter on a year-over-year basis. The firm expects this figure to fall 0.6 percent from the same period in 2007." Things are actually worse as this service expects Feb. job losses to be 77K, a bit more than the 30K expected gain by the Fed. Let's see who's right......

http://www.nytimes.com/2008/03/02/business/02gret.html?_r=1&ref=business&oref=slogin
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_sesit&sid=aW0NPzWnjAQ0
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3465233.ece

Back to Reality

When the Oracle comes out and says "The Party's over," it's over. I leave Party capitalized because this sham rally has been a formal event, a complete 5-week bash where investors got stoned, checked reality at the door, and let their computer models readjust while they did shot after shot of Patron. I remember my 8th grade science teacher during the crash of 87' disappearing into the lab every 2-3 minutes with a portable radio, telling us to shut up, and looking very nervous. I wonder if during those times the market would've reacted to news like a 9% dip in home sales with a 10% gain for homebuilders. Or, if they would've listened to prominent CEOs in the field like Bob Toll who said, "Market conditions stink."

Buffett not only acknowledged dire conditions for the insurance business, stating much lower expectations are in order, but that his untouchable Berkshire insurance biz lost 18% last quarter. Wow. He also went on to say that S&P companies are grossly exaggerating potential pension fund gains and reserves by assuming an 8% return. This is just flat out wrong. If we try to extrapolate these gains over the rest of the century, the Dow would cross 1 million. Not very likely according to Buffett. With finality, he also asserts that there is no way Berkshire will come close to returning 17.8% going forward. Party time on Monday!

While the market cheered loan cap lifts for Fannie and Freddie this week, not everyone was thrilled about increased capital exposure for the 2 behemoths who just recorded a combined $6 billion loss.

"Neither of these organizations has enough capital to cover their risk, and they know it," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics, a firm based in Torrance, Calif. "I'm concerned about solvency for these entities."

"We should be increasing their capital requirement, not loosening it," Sen. Chuck Hagel, R-Neb., said.

Muni auctions continue to fail as they have become more expensive than treasuries, thus negating any profit for bond hedgers. In not-so-shocking news, Ambac may have not locked up the capital it needs to maintain its rating. Let's just hope there's not a tertiary bounce on news that it will lock up that capital, again.

A few notes on personal inflation, anecdotally of course. Besides paying more for gas (still buying premium as per the manufacturer's request, ouch), here are a few items that pain me to buy lately:

1. Razors. Having a Flinstone-esque 5 o'clock shadow, I need to shave often. 12 Mach 3 replacement blades now cost $23 at Super Target. Last year, they were $16. Damn my patients, I'm only going through one of these things a week unless absolutely necessary, about 3 shaves a week!
2. Diapers. 126 phase 4 Huggies for $30. We tried the Target brand, but it was costing more to replace the soiled clothing than buying new diapers.
3. I've replaced about a 4-5X/week Dunkin' Donuts iced latte with pre-bought Lite Mocha Frappacinos from Super Target of course. I figure each one I drink saves me about $2.50, that 's $10/week, $520/year. Nice.
4. Organic Frozen Dinners. While delicious and good for me, the price of a Cedar Lane 6 oz. veggie enchilada is about $6 at Publix, our supermarket. 260 calories later, I was left feeling hungry and $6 lighter. For $6, I'll just buy a healthy lunch or make a sandwich. I'm going to keep eating the Amy's pizzas though, they're delicious.
5. As more evidence of a tough economy, my haircutter at Hair Cuttery told me it's been "dead" all week, a February in Florida, typically her busiest time of the year. When people can't afford $13 haircuts, there's trouble ahead.

Pesos are Starting to Look Good

Alright, a mere 10 minutes later, I can't resist going apepoop on recent market happenings. Let's start with Charlie Gasparino's dead-on assertions that this facade of saving Ambac and MBIA's ratings should be leading to market destruction, not market gains, and, that Buffett's bond-bailout would be to the ruin of those companies, not a savior in white. He correctly states that even if these companies have raised enough capital to preserve ratings (dubious), who would want a AAA backing from them versus Buffett? The rating is meaningless! Also, Buffett's plan led to a rally (of course) because the average investor didn't take 2 seconds to realize that the muni-business would be saved and the CDOs would go kablooey, leading to bankruptcy for these bond insurers. Of course, Gasparino was poo-pood even yesterday by another B-teamer, Becky Quick, who as per her instructions from CNBC, cut him off several times while he made his bear pitch. We're not alone in this:

"If these banks are pretending these companies are triple-A, it's really all a sham," said Edward Grebeck, CEO of Tempus Advisors in Stamford, Conn. "This [rescue] resembles two drunks standing on a corner trying to hold each other up, frankly." The executive notes that capital-constrained firms Citi, Wachovia, UBS and SocGen have all written down billions in soured debt.



Homebuilders bounced almost 10% yesterday on the preposterous notion that home sale figures were so bad, they can't get much worse, thus a bottom may have been found. Let me get this straight. Home sales were down 9% for the quarter, 23% year-over-year, foreclosures are at an all-time high, the bulk of ARMS haven't reset yet, but sooner than later we'll be able to sell new homes again. Hmmm. Inventories are at 10+ months again (ridiculous figure, much higher in areas where people actually live). As proof, January foreclosures in the Bay Area outpaced sales of homes. The condo market in Miami has a 37 month backlog. Foreclosures do not include bank auctions. An inside source at Centex homes in South Florida told me that the builder is not including cans (cancellations) in its sales figures until it has to report its quarterly earnings. Being that cans are far greater than new sales, this figure is kinda important!



Toll Brothers took a huge loss, Fannie Mae only last 3x more than analysts expected. The market bounced yesterday on the "big" news of IBMs buyback. As Jeff Macke pointed out, this is an annual ploy by IBM, who bought back $19 billion last year. The stuck hasn't broken a new high in 10 years, woo-hoo!



Durable goods fell 5.3% last month. On top of a huge PPI move, how can Bernanke lie to Congress today about the minimal risk of inflation?

Royal with Cheese

Taking a brief break from my gastrointestinal churning secondary to the ridiculous market rise on Ambac and horrible economic data, let's talk combine and football as per my loyal readers' (reader's) request.

Guys who have impressed so far include Donald Royal, who ran a 4.39 40, benched 225 24X, and bounced 36". Royal was also listed as one of Kansas State's top CB prospects as his most difficult assignment this past year. In addition, he was explosive at Senior Bowl workouts.....

Vernon Gholston was a beast, running a 4.67 40 and topping all DLs with 37 reps on the bench. Other DLs who impressed were Chris Long, who ran a 4.75 and had a vertical of 34". Just goes to show that NBA verticals are inflated on these 6'9" dudes......

I won't cover McFadden much, needless to say he blew it up with a 4.33 40, solidifying his #1 RB status. But, moving up is Jonathan Stewart, a big back from Oregon who still clocked a 4.48 40, bounced 36.5", and just for fun, did 28 reps at 225.

As usual, there are a couple of freaks at TE, foremost among them Dustin Keller from Purdue. He ran a 4.55 40, jumped 38", and put up 26 reps. Tamme from UK impressed as well.

Guys who wish they hadn't showed up include the Michigan offensive skill players. I can't even find a time for Mike Hart and Mario Manningham ran a 4.59. Ouch. Hart has always been overrated and the combine will not showcase him as an excellent athlete.

Will post more financial and economic thoughts later.....

"Horror Show"

Can't take credit for this excellent title that Nat Worden of TheStreet.com has given to the projected earnings and economic data due out this week. Still feeling queasy from the Ambac 200 point reversal on Friday, I felt a bit more fortified this morning as Lowe's earned $300 million less than analysts expected and 1st quarter and full-year estimates were well below expectations. Yet another signs that these jokers refuse to acknowledge our credit crisis and refuse to lower forecasts until after the fact. Also, as it typical of our irrational bull-machine, the report from Charlie Gasparino that led to the rally had 2 parts, the second half of which was ignored. He mentioned that MBIA's reinsurer, Channel RE, got downgraded. I'd love the bitttersweetness if Ambac somehow manages to save its AAA rating only in time for MBIA to get whacked down to AA or even A in its arrogance!

Just to update our current impending disaster state along with that of our fellow European neighbors, read the attached links below. The first article from the Washington Post details that people's home loan lines of credit have been abruptly cut off. People depending on those lines to pay off higher debt, to run their small businesses, to pay tuition, are out of luck and they'll have to pay off sooner than expected. In the article from the Telegraph, we learn that England will have a similar blowup scenario to our overbuilt condo problem in areas like Miami, with 12% occupancy rates, no hall lighting, no promised amenities, etc. They went crazy on flats, and now these building are ghost towns. Finally, D.B. Zwirn & Co. is closing 2 of its hedge funds after investors lost confidence secondary to fraudulent practices from the manager. Different from funds blowing up due to subprime exposure, this isn't any better, but more of the same from these guys who continue to try to make money out of thin air.

I'll post later with my NFL combine report......good to talk some foosball again!

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/22/AR2008022202987_pf.html

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/21/cmbtl21.xml

http://money.cnn.com/2008/02/22/news/companies/zwirn_closes.fortune/index.htm?postversion=2008022214#

Still the Minors

Whether or not Ambac or MBIA remain AAA or AA, they still have huge sub-prime exposure that can't be easily corrected with a simple line of credit. It's a joke that the market rallied on news that's been out there for 6 weeks. Ambac has already been downgraded and MBIA is headed there. These banks don't have the capital to spare on their already thin liquidity and bolstering Ambac to do so is a sham.

Why aren't we paying attention to the other developing crises at hand like student loan defaults, retailers going bankrupt every week (bye bye Sharper Image), and even preferred customers at investment banks being told they can't withdraw their own money from revolving auctions because these banks would lose too much capital? Citibank has already done this to their own hedge fund customers. The influx of sovereign wealth doesn't mean savior capital, it means greedy capital misplaced.

Muni auctions continue to fail at all-time highs. Even the Patriots are paying 13%-20% on their revolving bond, even though I'm pretty sure Bob Kraft and Cheese is a good credit risk. More and more inflation becomes a significant variable, and the simplistic argument that an economic slowdown means an inflationary slowdown is falsely reasoned. Historically, that has not proven to be the case, but Bernanke, leaning on his degrees, insists it is so. Furthermore, he thinks that the fed will simply reverse rates in a rapid fashion once the economy kicks in and stop inflation in its tracks! Too bad 50% of Americans will be in some sort of delinquency at that point with no usable credit and a negatively amortized home. But let's cheer an Ambac rescue, a company that strayed from its business model to risk $700 billion dollars in loans for our local governments and municipalities for their own gain.

Inflated

Where's Goldilocks now, Kudlow? How do you justify a 160 point loss from the daily high on mostly good news as a Goldilocks economy? When oil pushes over $100, you can't. Almost as impossible to listen to that dude as it is Crammer. By the way, anyone who calls Cramer Crammer is hilarious. Have you watched the video on itulip.com yet?

Watching the B team on CNBC in the morning to see the CPI and housing data while I fed my daughter her breaksfast almost made us both puke. It's like they gave 2 kids and a muppet (Kernen) a microphone and said, "go play!" But don't forget to say, "this doesn't mean the market won't go up" at the end of every sentence.

In light of awful CPI numbers that show inflation is rising as wages are stagnant and unemployment is increasing (not good), let's examine how some retailers have been blasted recently. Also, how can these clowns make statements like "the sudden rise in oil?" Uhhh, oil was at $100 on January 3rd. A commodities trader said this is just a speedbump to $120 this morning; I thought they were going to ban him from speaking ever again.

Macy's: sales down 7.1%, 2,500 layoffs
Walmart: met sales but gave poor outlook for rest of 08'
Target: sales down
Best Buy: poor holiday sales, lowered guidance for rest of the year
Liz Arden: abysmal sales, poor outlook
Nordstrom's: sales down 6.6%

Would like to say thanks to an anonymous TheStreet.com reporter for responding to my email with honesty and personality. You don't often expect a personal response from a legitimate reporter. Thanks for the kind words and respecting the small investor......