Agonal Respiration

Well played, Bernanke, well played. A slightly new trick perhaps, but futile nonetheless. The Fed is now giving up treasuries for less secure collateral in the form of $200 billion. This is a not so subtle way of bailing out Bear Stearns from collapse, and possibly keeping Citi and BAC afloat. The question remains if the Fed will break down further and start accepting CDOs as collateral for gov't treasuries, which would of course make our whole financial institution a sham. Furthermore, WaMu as it did after giving horrible earnings, suddenly rose on rumors that Buffett or private equity will infuse their pockets a day after their bonds were slashed and burned.

Alas, let's look at some actual data from the last 2 days. TI gave a poor outlook for 2008. Hovnavian had to cut margins by 12% down to 6% to make any home sales and by the way, cancellations kept going up to 38%. Even their CEO said we have not hit a housing bottom. Gloomster Bob Toll also added that companies with joint venture exposure will be the next wave of worse news for the homebuilders. Hmmmm, did the author of this blog forewarn of that very thing several months ago? Did I offer up Lennar, Centex, and Ryland as the most exposed to these crappy investments? I believe I did. As many smaller builders have already gone belly up, the larger builder gets stuck with all the land and all the loans. Oh well. Please refer to The BBB blog on 12/14 for this analysis. Freddie Mac also came out today and said home prices have only fallen "1/3 from peak to trough from where they will." Outstanding news for my homebuilder puts that rallied ridiculously yesterday/

Just for fun, oil hit $109 yesterday but was largely ignored due to the rally. Gas prices were at an all-time high. A recent article on mall vacancies gives a scary picture for retail. As more retail space hits the market, shoppers have no money to spend. Projected vacancy rates are skyrocketing in Phoenix, KC, and San Antonio, up to possibly 20%. I gave a recent example of this at The Gardens Mall in Palm Beach Gardens, FL. If you weren't 80 years old with a pedometer or attached to a baby stroller, you weren't there. What was I doing there? Well, I was attached to a baby stroller and we only went to redeem gift cards, no cash out of pocket.

Perhaps the market is tired of going lower. Perhaps the gov't will keep printing money until there is no such thing as a bad debt for banks. At some point though, inflation (if not already) becomes a real threat and the Fed must acknowledge it. Let's hope it's before the Chinese decide our treasuries are worthless and pull out en masse, leaving us all bankrupt anyway......I told you it would be a scary market.

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&date=20080310&id=8309874

http://www.marketwatch.com/news/story/home-builder-stocks-rally-fed-liquidity/story.aspx?guid=%7B0386D3ED%2D59EE%2D4795%2DB6FF%2D7F73D7585082%7D&dist=TQP_Mod_mktwN#comments

Marginal Trading

What is a margin call? It's when you borrow a bunch of money you don't own against a smaller percentage of capital, and your subsequent investment goes kablooey, forcing you to put up more to maintain that spread. Here's a more official definition from wikipedia:

Margin call
When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investor now either has to increase the margin that he has deposited, or he can close out his position. He can do this by selling the securities, options or futures if he is long and by buying them back if he is short.

But what happens if you don't have additional capital to sustain those margins? Uh oh. Let's ask Thornburg. Hey Thornburg, what happens when $600 million in margin calls comes due and you don't have $600 million, or $60 million, or $6? Oh, your stock price goes from $10 to $1. But didn't you just tell us a few months ago that this wasn't going to happen, you know, on the day your stock went from $18 to $10? Thought so.

So what are some of the other lenders stuck at 20-1 leverage on their margin calls doing? Well, if you're Citi you've begged the Saudis for $30 billion, which they recently said was not enough. If you're USB you wait until the day earnings are out to tell anyone about your billions in margin calls. Or, if you're Lehman, you pretend you don't have any margin calls. There are lots of ways to play it smart. According to Reuters, J.P. Morgan says we are facing a "$325 billion systemic margin call." On top of that, they estimate that home prices will drop 30% from 2006 levels, only down 14% to date. Uh oh......

In another uplifting trend, personal bankruptcies are at a 3-year high. "The proliferation of available credit, combined with the increase in mortgage interest rates, has stretched everyone to their maximum, and they're going to break," analyst Brian Small said. Hey, and we're still months away from maximum ARM resets!

IOD: Start thinking about Microsoft.....

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20080308&id=8307087

http://money.cnn.com/2008/03/04/pf/personal_bankruptcy.ap/index.htm?postversion=2008030417

JJ and Other Non-Moving Moves

Getting back to some offseason football quickly, there have been a bunch of moves made recently, not many of them going to matter much. Trading in Shawn Alexander for Julius Jones and T.J. Duckett is like trading in your 98' Caddy for 2 03' Buick Regals. Exactly. I guess when Alexander stopped running behind 2 all-pro linemen and an all-pro fb, he wasn't quite as good.

My hometown Browns have been actively employing a strategy that has worked but teams are reluctant to use. They have been trading draft picks for solid players on the premise that who could they draft who would be as good as these guys their 1st and 2nd years. They've added Donte Stallworth, Sean Rodgers and Corey Williams. When the Pats got Moss last year, they gave up a 4th round pick. Who in the wide world could ever give that kind of return out of the 4th round? Chris Chambers for a 3rd round pick, Jonathan Vilma for a 4th rounder.....maybe he's injured but if he returns to form, that's like getting a free first rounder. The argument against has been hoarding draft picks. Well, that strategy only works if you know how to draft. Look at the Dolphins, the Broncos over the last 8 years. Most of their picks don't even make the team, let alone become stars. Ditka took a lot of heat for his Ricky Williams trade, but he ran for 1,800 yards and was a beast. Lots of guys can run for 1,000 (it's only 63 yards a game), but not 1,800.

Uh, Vernon Gholston just ran a 4.58 and jumped 42" at the OSU pro day. Sorry Long brothers (Chris and Jake), you just lost about $15 million.....

Michael Turner to Atlanta? Why? Give Norwood and shot, and why would Turner settle for splitting time again? On a team with no QB? Questionable.

A Little Short

With the jobs loss in February (short month) alone of 63K, inevitably pending revision to a higher number, the market took a little dump yesterday. Actually, I was hoping for more of a 300-point swoon, but there was low volume nibbling on a drop of 200. I had an itchy trigger finger on my XLF puts as they crashed to a 5-year low, but then I stepped back and thought about what might make them go higher. I'm gonna wait it out awhile longer.

There will be some false hope in the upcoming weeks. The Visa IPO will give the facade of big deal making. This is getting done so GS and JPM can actually underwrite some new business this year. The Fed is leaning towards a 75-point cut now, not 50. Also, they're going to make $200 billion available. But as the credit crisis unravels, I am astonished by permabull response that things will get better. There is no historical comparison credit wise to our current situation. While the recession may not strike as deep as the 70s drought, financial woes may be much worse and we may arise from this with staggering, not stagnant inflation, as our dollar fades into oblivion. Again, if the Chinese decide that our treasuries are worthless and start to sell theirs, they truly will be worthless.

Washington Mutual got downgraded twice yesterday as their bonds fell into the Bs. Two scenarios are possible for this terrible company. One, they'll go the way of Countrywide and plummet to about $4, or, they'll soon be a takeover candidate and rise on this news. I'm hoping for the former as my Jan 09' 20s are starting to look good! The second downgrade came out after the bell yesterday and was harsher than the first, so it could happen. If you recall, there were takeover rumors in January after they missed earnings by a million percent, with the infamous "things can't get much worse" label attached to WaMu. Really?

Here's a figure of significance. 1 Trillion Dollars. That's how much Paul Miller of Friedman, Billings and Ramsey thinks the mortgage market is short of capital (link below). He goes on to say that 11 trillion in debt is held up by less than $600 billion dollars, or leveraged 19-1. As we've seen with Thornburg and Carlyle, this is causing some unpleasant and unpayable margin calls. As this debt gets collateralized further, mortgage rates actually increase as debt declines. This will continue to happen until leveraging returns to much more standard levels and leaves a slew of bankruptcies in its wake. In one of the comments on this story, a reader asked naively if it was the short-sellers sending this market into turmoil and if they shouldn't be banned to the casinos. Well, after leveraging your mortgage into a 19-1 proposition for their own gain like throwing a chip between 2 numbers on a roulette wheel, I responded "Isn't investing gambling anyway?"

MBIA asked Fitch yesterday to remove their ratings on 6 of their businesses. Just Fitch though. Hey Fitch, we don't like that you give us bad ratings so just make them disappear please. Thank you. What? This is ridiculous! Sue Chang of MarketWatch.com reported last night, "It (MBIA) also pointed out that Fitch's coverage of the underlying credit quality of transactions that MBIA insures is limited, which could lead to "misinterpretation" in turbulent times. In response, Fitch stated that its analysis is of the highest quality and its understanding of MBIA's municipal and structured exposure is strong. Nonetheless, the rating agency will evaluate its ability to maintain coverage on MBIA over the next few days and make a final announcement. "

TOD: Write me with your better than book movies and vice versa.

http://www.marketwatch.com/news/story/mortgage-market-needs-1-trillion/story.aspx?guid=%7B359B5377%2D39DB%2D4C8B%2D9178%2DC45726A45272%7D

http://www.marketwatch.com/news/story/mbia-fitch-ratings-process-different/story.aspx?guid=%7B5DE10C90%2DFF19%2D4B7E%2D86FB%2D2865C135E042%7D&dist=morenews

200 and Another 2000 to Go

That's it. Keep telling us how things are getting better, Crammer, or financials have hit a bottom CNBC, or buy the dips and sell the rips! That's my favorite, the same kind of strong analysis that has led CNBC to recommend the financial ETF XLF at every price decrease from $32 down to $24. I simply recommended shorting it at $32 on this site (I shorted it at $29 on the way up first). But hey, I'm no wizard like these guys.

I think the following quote sums up current market conditions:

"We are in historic scarier-than-all hell territory," said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. "I am hearing many people say that the market is more broken now than it ever has been."

Specifically, he is referring to the now illiquid bond markets, whether they be munis or short-term treasuries. He's also referring to the never ending spiral of poor credit and bad CDO obligations. Citi is now trying to unload $45 billion in their loan portfolio. USB reportedly sold a $24 billion subprime portfolio to Pimco for .70 on the dollar, way below the market price of .84.
Reports also state that Ambac was cold calling people to participate in their stock offering, a stark contrast from CNBCs report that the money would be raised without problem.

Paused a second there to take in the horrifying job numbers for Feb., down 63K! As I wrote a few days ago, real-time data that is available but the Fed refuses to adapt to led to a much more accurate prediction of 77K jobs lost. Estimates by economists ranged all the way up to growth of 100,000K, how is that possible? In his last appearance that will ever be allowed, Steve Liesman even threw a wet blanket on a 0.1% decrease in Feb. unemployment. He explained it as such a bleak employment environment that less people were attempting to find jobs. By the way, Jan. payroll losses were revised to -22K. The service sector, supposedly the steadiest in the economy, only produced 26K new jobs last month, arrghh.

The Fed, perhaps with some knowledge of this number before others, revealed that they will be buying up to $100 billion in securities to force liquidity upon the market. The B-teamers had just spent 5 minutes talking about what a foreboding sign this would be in correlation with a bad unemployment number, and admission if you will, of recession. Bada boom!

The S&P and NASDAQ hit 52-week lows yesterday, bottoming below Jan. 22 levels, but the Dow still hovers 400 points above. I have no faith in charts or trending. I just think this market should be much lower.

I'm Hungry

I wanted to talk a little bit about raging food commodities after watching a documentary on the starving North Koreans last night. My wife and I were horrified to watch the state of malnutrition in that country. A striking fact was the average 7 year old in North Korea is 8" shorter than their South Korean brothers. This is a country that can afford to feed its people, it just chooses not to.

The relevance to today was brought forth in another interesting article by Jon Markman. Are we going to run out of food whether we can afford it or not is the new question. "Wheat futures prices have tripled since 2004, corn prices have almost tripled since 2005, and soybeans have tripled since 2006." Furthermore, rice has not only soared in price, but we are at a 25 year low in terms of reserves. Aside from how this may induce investment strategies going forward in companies that have soared in the last year such as Monsanto and Potash, do we have to worry if China and India continue to grow at alarming rates that we have enough food in the world? Or, are we back to natural selection? Even with all of our synthetic growing technology, a famine might ensue, bringing population levels back to sustainable rates.

Back to the market, Ambac has been both the source of 150 loss reduction and 170 point gain reducer the past 2 days. I'm becoming a little nauseous even as I write because, who cares about this stinking company already!! They're broke. That's why no private investor infused cash and they were forced to raise an additional $1.5 billion on their own (less than the $2 billion the ratings agencies wanted) and diluting their already obliterated shares an additional 19%.

UBS has a $400 billion dollar exposure to substandard credit. That's a lot. Their writedowns may now grow to $25 billion, of course that figure was just $15 billion last week, so who knows?

Thornburg Mortgage failed to make a $30 million payment, triggering further payment penalties. Look dudes, if you can't come up with $30 mill these days, you're in bad shape.

Woohoo! 12 of 18 retailers beat sales projections last month, the catch being that most beat horribly negative expectations with just plain bad negative results. Yeah, let's get excited about that.

Foreclosures hit an all-time high last month. As I've mentioned before, we still have another 5 months until we hit the largest ARM reset months. This is only going to get worse. Pending home sales stayed the same, a positive sign according to the economist for the National Association of Realtors. This is the same guy who said that home sales would pick up at the beginning of this year, then the 2nd half of this year....Anyone who listens to this guy's projections must have a large hole in their head.

Jobs out tomorrow, ADP says 20,000 losses in Feb. vs. a projected 35,000 gain.

Bomb in Times Square this morning, great.

In another example of how the Fed's cuts aren't helping people who have resetting ARMS, Laurie Kulikowski of TheStreet.com reports, "Applications aren't getting funded because the borrowers aren't meeting the underwriting criteria," says Tom LaMalfa, a managing director of Wholesale Access, a residential lending market research firm. "We're guessing only six out of 10 borrowers who apply [for a loan] get refinanced." Can't refi without credit, don't have good credit if you had an ARM in the first place. Mortgage rates continue to trend up in this horrible credit environment.

P.S. This should be my last template change for awhile. Finally found one that fits my title, is legible, and that I can make easy additions to.

It's Gonna Take A Lot More Than That.....

That's what Dubai International Capital (DIC) said after some of their Gulf counterparts put billions of dollars into CitiGroup. Billions, not enough to rescue one of the largest banks in the world, which, by the way, will be laying off 30,000 employees due to a horrible balance sheet. I'm so giddy I can barely get my fingers to type fast enough. How long have these guys been lying to us? Let's continue....

Countrywide said yesterday that some of their payment-option loans are set to default and that delinquency on their ARMS rose 900% last quarter. Yes, 900%. A payment-option loan for those not familiar was another ingenious product developed by Country and their slimy peers which gave "homeowners" an option of paying a real payment, just interest, or less than full interest for a certain time period. You may also know this product as a negative amortization loan. Not surprisingly, 71% of those loans are now delinquent, and 86% of people actually owe more on their house than the day they bought it. Great. Of course, they didn't need any income verification to get those loans, so I'm sure they have plenty of cash on hand to pay it down.

What else is new? Oh yeah. People have started to opt for paying off their credit card minimums but not making their loan payments. Why? Credit cards are their only source of cash. If that dries up, they can't buy food or cigarettes or pay for their big screen tvs. Mortgage, whatever. I'll worry about it when the bank sends me my 3rd foreclosure notice.....

Speaking of mortgages, Thornburg Mortgage is a little late on their margin calls. Lenders don't like that. Money Thornburg borrowed to make fancy bets never returned, now their lenders want that money paid back. Uhhh, but we don't have that money. Uh oh.

Construction spending was at its worst levels in 14 years in February, news that battered homebuilders. Those builders I've been talking about with billions in debt, land they can't sell, and a product no one wants such as Centex and Lennar, are in real bad shape. I'll ask again, if homebuilders aren't building homes, how are they making any money? What if Coke came out and said, yeah, we don't have enough money to make Coke anymore, we're selling off our bottling plants, and the Coke already on the shelves is competing with other drinks that will be cheaper every day, is that a stock you'd like to own?

In more good news for Ambac and MBIA, California just decided that paying for bond insurance isn't even worth it. If our munis blowup, oh well, but I'm not paying 7.7% of the total to insure it. Nobody wants to do business with these clowns. Buffett has withdrawn his offer to buy the muni side of their businesses.

Maybe the Fed should hire me to gather info for them like this, so when they speak before Congress they know ahead of time that what they're saying are lies, not while they're saying it. Info like this might be revealing. "The Federal Deposit Insurance Corp.(FDIC) is planning to beef up its division of resolutions and receiverships, which handles failed banks, by 40% this year." (BILL DONOGHUE, link below). Why would they need 40% more employees you ask? I don't know, I mean, they only have 76 banks on their watchlist, historically low right? Just in case? I doubt it.

http://www.marketwatch.com/news/story/ultimate-sell-signal-part-ii/story.aspx?guid=%7BA2FE5E59%2D337F%2D4F6C%2DA974%2D470D6FD8B553%7D