Wednesday, January 28, 2009

Is it real? or is it from The Onion?

Pop quiz: I'm going to give you two actual quotes from recent news stories, and you need to decide which one is from a real business story, and which one is a satire from The Onion.

1) Bank of America Corp, the biggest U.S. bank by deposits, will leave Chairman and Chief Executive Officer Ken Lewis in charge as the company tries to absorb the operations and losses of Merrill Lynch & Co.

“The board today during their regular meeting expressed support for Kenneth Lewis and the Bank of America management team, noting their experience in managing through challenging environments and in assimilating mergers,” said lead independent director Temple Sloan in a statement supplied by the bank.

I mean, come on - that CANNOT be real can it? BAC's board of directors actually thinks it's a good idea to leave Ken "I'll pay you $20 billion for that pile of shit" Lewis in charge? Really? Bad idea jeans!

2) CHICAGO—While a majority of the nation's top retailers have reported a decided slump in 2008, economists studying the declining consumer markets are still unable to determine if discount clothing store T.J. Maxx has been affected by widespread recession.

Financial analysts, observing more than 100 locations nationwide, cited large quantities of off-brand and wildly scattered merchandise as evidence that T.J. Maxx has either been devastated by the economic downturn, or is carrying on as usual in spite of it.

Seems like it could be legit - I mean, TJ Maxx always looks like it's in a complete state of disarray, as if the store has just been ravaged by a tornado.

Correct answers are in the comments.


Monday, January 26, 2009

Bad Idea Jeans

You remember the classic SNL fake commercial for Bad Idea Jeans right? Well, perusing the free daily newspaper this morning, I came across this gem:

Cops: Drunken worker set fire to WTC elevator - A commodities broker who police say was intoxicated was arrested after he allegedly tried to set fire to a freight elevator he was trapped in. Ryan Brinkerhoff, of Jersey City, got trapped in the elevator at 7 World Trade Center early Saturday and started the fire in an effort to attract attention, police said.

Wow. Bad Idea Jeans. I immediately posed the question to my wife, "How drunk would you have to be for you to think it was a good idea to start a fire in order to attract attention if you were trapped in an elevator?" I'm pretty sure I've never been that drunk. I also love the use of the word "allegedly" in the report, like it wasn't determined if he tried to set fire to the freight elevator or not.


Wednesday, January 21, 2009

The Prince!

language NSFW.


Firstly, I don't think enough has been made about the CBO's report on the valuation of the TARP "investments" so far - so go read that post again.

I read two good quotes today: first, from LongOrShortCapital:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as final and total catastrophe of the currency system involved. -Ludwig von Mises, Human Action (1949)

the other was on Paul Kedrosky's site:
The British government plans to provide insurance for new asset-backed securities. That is like helping a junkie to detox by guaranteeing drug supplies until the local dealer resumes normal service.
-- Source: John Kay (in FT)


Friday, January 16, 2009

Heroes and Goats

First off, major props to US Airways pilot Capt. Chesley B. Sullenberger III, who pulled off the 6 sigma move of ditching his aircraft in the Hudson yesterday with no casualties. I believe this is the first time a wide body commercial aircraft has executed a water landing with no casualties. It was about 12 degrees in NYC yesterday, with 40 degree water temperatures, by the way. Hats off to you Captain Sullenberger.

Unfortunately, there are other topics to address, and while I briefly contemplated putting them in a separate post, that would have just bumped Capt. Sully down the page, so I'll hit them here.

1) This BofA bailout is absurd. I mean, truly ridiculous. Remember how crazy the original idea of buying troubled assets from the financial institutions was? Well, we've taken that idea, and crappified it to the Nth degree: now we, the taxpayers, don't even get any potential upside from backstopping these troubled assets. Instead, we guarantee the banks (Citi, and now BofA) against losses, and they keep the upside. I mean - what more can I say? Way to go Hank Paulson.

2) California will be delaying income tax refunds because, well, they're broke! but don't worry I'm sure things will get better because:

3) We, the taxpayers, have given Chrysler a $1.5B low interest loan so that, get this - they can loan the money out at LOWER interest! As we saw with GMAC, I guess they'll make up for it in volume.

4) I've saved the best for last. Surprisingly, not much was made of this report from the Congressional Budget Office on the status of the TARP results (from the government's investment perspective) so far. Let me give you the key points:

"This is the first of CBO’s statutory reports on the TARP’s transactions. Through December 31, 2008, those transactions totaled $247 billion...CBO estimates that the subsidy cost of those transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions) amounts to $64 billion."

For those of you who can't do the math, or translate this to layman's terms: They are saying that the government is already down $64B on a $247B investment, or roughly 26%. This is especially shocking since most of the funds weren't even disbursed until mid December. Down 26% in about a month - great work - sounds like a good investment to me!

The report provides fascinating details, like that they expect a loss of $21B on the $40B AIG bailout, and a loss of $3B on the $5B GMAC bailout. They also expect losses of $3B on the other $4B of loans to the other auto companies. That's losses of 75% on funds that were disbursed less than three weeks ago. Please, let's not let anyone use the terms "loan" or "investment" again - these number CLEARLY show that these are BAILOUTS.

At the risk of sounding like Karl Denninger, I'm really starting to feel like we, the people of the United States of America, are being raped by Hank Paulson. And it doesn't feel good.


Thursday, January 15, 2009

Don't Hate the Playa - Hate the Game

In case you're unaware, today's atrocity is that Hank Paulson and his boys allegedly promised Ken Lewis, CEO of Bank of America, more government money a month ago, after Lewis engaged in financial terrorism by threatening to walk away from his horrendous deal to buy Merrill Lynch (which I wrote about a full FOUR months ago!). The government supposedly feared this would roil the markets, and made a secret handshake with Lewis. The details will be released with BAC's earnings next week.

Instead of writing a rambling 5000 word rant on how absolutely insane this latest Bank of America bailout story is, I'm going to give you two links which I think have already covered the point well:

1) Clusterstock:

BAC CEO Ken Lewis decided to buy Merrill Lynch. No one forced him to do it. If it was such a bad decision that it threatened to kill the firm, he should resign in disgrace (or, if he refuses to do so, he should be sacked). It's not as though he didn't have plenty of warning.

If Hank Paulson promised Bank of America more money, meanwhile, both he and BAC should have disclosed this immediately. This is highly material information. It's also NOT a private deal. It's a government deal. The public deserves to know about this instantly.

Taxpayers should be furious at how they and their money are being treated by a government that supposedly exists to represent them. Bank of America did not buy Merrill Lynch for the good of the country: It bought it because Ken Lewis thought, wrongly, that he was getting a deal. Ken Lewis should be held accountable for this. Hank Paulson, meanwhile, should immediately disclose exactly what this secret deal was, when he made it, and why.

2) Barry Ritholtz

So the horrific deal Citibank cut with Treasury was a blueprint, an example for the next foolish investment — and here it is: Bank America, a supposed good bank, that couldn’t wait to get their hands on Merrill Lynch, now a bad bank.

And now that we all see what a terrible decision that was by supposedly sophisticated private sector players, well, then rather than take the hit, BoA has their grubby hands out begging for some taxpayer loot to paper over their idiotic decision-making. First they bought that giant manure pile CountryWide, and now they own another stinking pile of enzyme-free donkey-fazoo, Merrill Lynch.

I say, fuck ‘em. Why do I have to pay for their bad judgment?

Enough already! Fire Ken Lewis, he’s a bum. He’s made several horrific acquisitions, and needs to serve up his head on a platter for his god-awful lack of judgment. Toss out the entire Board of Directors, too, as they all suck. They’ve bankrupted the company, its time they all need to go.

While I certainly agree with both articles, I think Barry is misplacing the blame a little bit. Ken Lewis is just a playa in this scam - Hank Paulson is the one who keeps doling out the dough - can you blame Lewis for asking? The blame lies with Paulson.

And before anyone gets any crazy ideas about how we HAD to bail out BAC because they are too big to fail and if they walked away from MER it would have destroyed the financial system: let me explain one thing: as long as the government guarantees all deposits in bank accounts (which they haven't done yet, but could easily do!) - the financial system would be ok. Failed banks can be easily replaced with new, untainted capital, which would then be available to lend. Contrast this to the current situation, where blood (money) is being pumped into sick patients (banks).

Ken Lewis (CEO of BankAmerica) is one of the worst deal makers in the United States. He bought Countrywide, and then Merrill - each of which he overpaid drastically for, and each of which threatens to poison his firm. Fortunately for him, there is a worse deal maker with even more money watching his back: Hank Paulson. The bad news for America is that Paulson is spending OUR money.

I'll have more when the details of this latest thievery of taxpayer funds are revealed - if my head doesn't explode.


Saturday, January 10, 2009

If I Could Teach You One Thing

Ok folks - here it is - Kid Dynamite's 2009 Tip of the Year for investing:

Understand the reasoning and arguments of those who hold the other side of your position.

Prices are the result of buyers and sellers expressing their views in the markets. I don't want to get to sidetracked here, but this is why people screaming "the speculators are manipulating prices" - be it by buying oil (so unfair!) or by shorting financial stocks (so unfair!) - is ridiculous. Prices are the end result after everyone in the market has expressed (or had the opportunity to express) his opinion by buying or selling. If "speculators" pump up the price of oil to levels which are completely absurd, then others will come in and sell the oil right back down to a level they feel is fairly priced. If "short sellers" drive the price of a stock down to bargain basement levels, value investors will jump in and buy the stock back up to a price they feel no longer represents compelling value. It should be clear to the reader that any suggestion of banning sellers of financial stocks or buyers of oil is blatantly senseless, and results in falsely manipulated market prices.

In fact, oil prices were so high last summer because the reality of a harsh global recession hadn't yet hit - people were still clinging to arguments like "the average recession lasts x months" instead of waking up to the new paradigm of drastically decreased leverage and slower growth (or recession). Similarly, prices of financial stocks plummeted not because some evil mastermind was shorting the stocks down to zero, but because their balance sheets were unsound, and they were technically bankrupt.

But back to the lesson: I'll throw another simple example out there from the risk-arbitrage world, because I was a risk-arb trader for several years. Dow Chemical has a deal on the table to buy Rohm & Haas (ROH) for $78 in cash (I believe that's the price). This deal was struck back in July of 2007, before the credit markets blew up. Recently, Dow Chemical received notice from Kuwait that the nation was terminating a joint venture with DOW worth roughly $17B, which cast doubt on DOW's ability to finance their acquisition of ROH. Now, I'm not a lawyer, but I'm told that the merger agreement between the two companies is iron clad - it leaves DOW no "outs" to withdraw from the deal - even given the massive deterioration in the global financial markets.

ROH stock now trades around $62. The bull case is that Dow cannot get out of the deal, no matter how much they might want to - and will be legally required to complete the deal at $78 (they even have to pay interest starting next week, so that price goes up). The bear case is that everyone knows ROH would be worth about half that right now if they didn't have the Dow bid, and that Dow will be able to use some sort of other excuse, like insolvency of the combined company to renegotiate a lower bid. You have to understand the logic behind each argument. I don't have a position in ROH, but I made a small wager with a colleague who is a much better risk-arb trader than I am that the deal would NOT get done at the $78 price.

As for the broader markets, I'm intensely bearish. I'm not an economist, but it's clear to me that we're in a new paradigm of debt - one where the lavish spending and growth financed purely by debt for the last 7 years will be reigned in. I am constantly asking myself what the bull case is - how people can think that things will be ok. I think the bull case is based on ridiculous citing of PAST recessions, which are, to me, clearly irrelevant right now. It also hopes that massive government spending will re-ignite the economy and get us out of this mess. The key issue here is that we never allowed the economy to bottom - to stabilize at a natural level from which we could then provide stimulus. On the contrary, we're in a scenario where the economy is falling off a cliff (relatively speaking ) - and the policy makers are trying to "catch a falling knife." I don't think you can stop the inevitable - you can't prevent the pain, you can only delay it.

The bull case also assumes that things will be ok once house prices stabilize. Contrarily, I believe much of the growth of the last several years was a result of people SPENDING their home equity - the term is mortgage equity withdrawal - they treated their homes like an ATM and took their equity out. Now, some of these people have already spent their equity and find themselves with home prices worth less than their current mortgage value. We're supposed to feel sorry for them and bail them out by reducing their mortgage principal owed? They spent that money on a car, a flat screen TV and a vacation already! But lest I get diverted again - back to the point - we won't be able to use our mortgage equity on cars and tv's and vacations in the next 10 years because home values won't be on a 45 degree straight line up!

It seems obvious to me that after you have a drunken feast, you MUST have a hangover where you feel like crap. Well, the last 7 years have been an orgy of debt and spending - and we'll have to take the pain from that era. This pain will be much more than the foreclosures we've seen so far - those were people who never owned their homes in the first place. The next wave will be credit card defaults when revolving debt decreases, and the harsh realization that mortgage equity is not a one way straight line up.

I'd love to see how long the restaurant on my corner selling $8 plates of hummus lasts - or the trendy steak restaurants charging $65 for a fillet mignon. One of the things about NY is that the entire city seemed to be financed by corporate dollars - from restaurants to sports tickets. What will happen now that corporations are reigning in spending? Will they still tolerate $2k dinners for client entertainment? I doubt it... The new Yankee Stadium still had 6 unsold luxury boxes last time I checked - that doesn't bode well for NY corporate spending.

I'm not trying to convince anyone out there to go get short the market. I myself have a tiny short position now - I'm hoping to capitalize on the optimism and potential rally around the beginning of the Obama Administration and new stimulus plan - and establish a short position into the rally. I'm somewhat nervous because I do get the sense that many have this exact idea, and if the rally fails to materialize, the selloff will be swift and will not allow opportunity to establish short positions prior to the destruction.

My point was that regardless of your position, you need to understand what the argument on the other side is. By arguing the opposite, by playing Devil's Advocate with yourself, you can form a better thesis, gain more confidence in your position, or even reverse it all together.


Wednesday, January 07, 2009

I Learned It By Watching YOU!

Thanks to the Big Show for this all-too-true cartoon:

Monday, January 05, 2009

Quick, but Good

My two favorite financial bloggers each have questions worth looking at:

1) from Paul Kedrosky: "Is Financial History Bunk?"
I've been arguing for the past year that generally, it IS bunk - it's useless to compare the AVERAGE length of past recessions, because we've never had a situation like this, or even close to this current crisis! This is especially scary when you consider that we're relying on a true academic, Ben Bernanke, to get us out of this mess... Kedrosky also points out that the tiny sample size also renders any comparisons highly suspect.

2) from Barry Ritholtz: "Why don't policymakers respond to rising markets?"
Indeed... and this gets back to yesterday's point which I discussed in the Lewis/Einhorn article about the mistake of trying to form policy to protect falling stock prices.

And oh - if there was any doubt about how completely incompetent the SEC was - the WSJ today reports on how they investigated Bernie Madoff at least EIGHT times, but failed to detect the massive fraud that he was perpetuating. Nice work boys.


Sunday, January 04, 2009

Sunday Reading

There is some good stuff out there to talk about today. First off, Michael Lewis (of Liar's Poker fame) and David Einhorn (kingpin at Greenlight Capital) co-authored a lengthy piece in today's NY Times which takes another look at the financial crisis. Part one begins a little slowly, looking at how attempted Madoff whistle blower Harry Markopolos's claims could have been ignored by the SEC, and segues to the completely incompetent actions of the ratings agencies (Moody's, S&P) and the bond guarantors (MBIA, Ambac). They also mention the SEC's gross incompetence and backwards logic:

"Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)"

For those of you who are not aware, Einhorn drew wrath and ire in 2007 when he explained in detail why Lehman Brothers had major problems with their balance sheet, and why he was shorting the stock. As a short seller of Lehman's stock, he was accused of having ulterior incentives to see the stock go lower. Of course, Einhorn didn't cause any of Lehman's problems, and was really just a messenger of how they could be fixed. If he'd been listened to instead of attacked, Lehman might still exist today. Needless to say, Einhorn was correct about Lehman.

In part two of their article, Lewis and Einhorn take issue with the Treasury's disbursement of funds, and put the $306Billion government guarantee of Citigroup's questionable assets in perspective:

"The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.” Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined."

I especially liked their observation, which I have made previously, that the government needs to "Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices...The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission"

Lewis and Einhorn's piece is long, but worth reading.

Clusterstock referred me to a great article from the Wall Street Journal about how to better understand the mortgage crisis. The must read story tells of how an unemployed alcoholic woman managed to take out a $103,000 mortgage on her 576 square foot shack in suburban Arizona. It's an absolutely sick story about the gross negligence at every step in the chain: mortgage broker, home appraiser, lender, borrower - which ends with her shack being sold in foreclosure for $18k to her next door neighbors - who no doubt over payed just to remedy the eyesore that her home had become. Wait until you see the pictures.

I also enjoyed Clusterstock's sarcastic story "Economists Who Blew It Agree: Prosperity Just Around Corner."

Finally, although Karl Denninger is a bit of a zealot, I can't really disagree with his logic, and I think it's worth pointing out that he continues to do a good job of explaining why the government's solutions to this financial crisis cannot possibly work. I'm going to leave it in his boldface type, because I think it's simple, accurate, and worth emphasizing.

"The problem is that there is too much debt in the system; adding more debt to the system simply makes the problem worse at an exponentially increasing rate.

It is impossible to fix a problem that is best explained as "too much" of something by adding more of that same thing.

This is true whether the "too much" is a drunk who wants a bottle of whiskey, a crackhead who wants another hit, or a heroin addict who begs for another shot.

You can't solve any of their problems with more of what ails them any more than you can solve a debt problem with yet more debt."

You can also check out Denninger's predictions for 2009. I only include them because his 2008 predictions were pretty darn good, and I tend to largely agree with him on his 2009 outlook.

until next time,