Odds and Ends - Wednesday

I have a handful of odds and ends to address today.

First of all, perhaps someone familiar with the vagaries of SPAM can tell me why this specific post of mine generates the most SPAM comments?  I can't figure it out. Is there some combination of desirable keywords in that post?  I don't think it gets a lot of traffic at all - I can't understand why spammers love it.

Thanks to my readers for all the flashlight recommendations in the last thread.  I ended up getting the Streamlight 88850 Polytac LED (via Amazon PRIME).

I'll let you know how it works.

Now - One big story you'll read this morning is "PIMCO Makes $8.1B Bet Against Lost Decade of Deflation"  First let's pull some snippets from the Bloomberg story:

" Bill Gross’s Pacific Investment Management Co. made an $8.1 billion wager that the U.S. won’t suffer a decade of deflation like the one that crippled Japan starting in the 1990s. That’s the notional value of long-term derivative contracts tied to the U.S. consumer price index that Pimco’s mutual funds entered into during the first half of this year, according to a regulatory filing. The funds received $70.5 million in up-front premiums under these contracts, known as inflation floors, in return for agreeing to pay investors should prices decline in the 10 years ending in 2020"

"Pimco disclosed in a June filing that its funds began writing 10-year inflation floors during March and reported last month that they issued additional contracts in April. According to the Aug. 27 filing with the U.S. Securities and Exchange Commission, 25 Pimco funds entered into these inflation floors during this year’s first half, with Gross’s $247.9 billion Pimco Total Return fund accounting for $6.57 billion of the $8.1 billion total."

"Premiums from the contracts help boost fund income as yields on government bonds are near record lows. Potential losses are limited because the fixed-income securities that account for a majority of the $1.1 trillion the Newport Beach, California, firm oversees would probably gain in value if consumer prices had a protracted decline."

So there are a few things to notice:  the contracts Pimco sold are analogous in their payout profile to options - Pimco collected premium and will pay out if deflation rears its head.  It's not a swap where Pimco profits on the other side if there is sizable inflation.   As the third paragraph I excerpted above notes, this seems like a perfectly reasonable trade for Pimco's portfolio:  they already own a metric crap-ton of bonds which will gain in value if we see deflation.  Thus, I would view the trade less as a "bet against a lost decade of deflation," and more as selling covered calls on a teeny tiny portion of their bond portfolio.  But hey - spin is clearly very important these days, and Bloomberg chose to paint this story as Pimco making a statement against deflation.

I want to highlight some other links:

1) Felix Salmon is one of the few mainstream media writers who understood that FINRA's Trillium fine was not about "quote stuffing."  If you hear someone refer to Trillium's activities as "quote stuffing," you can file them in the "don't know what they're talking about" camp.

2) Stock Rabbi is a new blog I'm following.  He writes about modern financial stories with a humorous little Jewish/Yiddish slant in each post.

3) Economics of Contempt, on the two year anniversary of "Lehman Week,"  bring us major newspaper front pages from that week in 2008.

4) The Best Anti-Penny Rant Ever

-KD

Readings

Michael Lewis in a lengthy Vanity Fair piece on Greece

"As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it."

Orin Kramer NYT Op-Ed:  How to Cheat a Retirement Fund

Via MISH comes this video of NJ Governor Chris Christie responding to a question from a teacher:

-KD

Stuff You Should Read

-Via Dealbreaker, quarterly letters from
1) Ackman (Pershing Square)
2) Loeb (Third Point) - sizzling!

"So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire." - Dan Loeb

- Paul Kedrosky simply explains how charts and data can be misleading, using a chart from Arnold Schwarzenegger's recent WSJ Op-ed as an example.  I have to admit that I fell for this chart at first too, which is why Kedrosky's point is a must read.

-via Barry Ritholtz, the Periodic Table of Wall Street Criminal Elements

- Ritholtz:  Your Info Is Not Private as a Bidder on EBAY

-Howard Lindzon with the best post title of the month:  "The Internet Makes Me Pee Less"


-KD

Readings From the Past Few Days

Over the past several days I've read a lot of stuff which was Tweet-worthy but that I didn't blog about.  I rehash some of that list here for you:

-The Reformed Broker:
1) Welcome to The Jungle
2) It's Not A Flight to Safety, It's a Cash Out

-MISH:
1) "The Question: Are Stocks a Screaming Buy Relative To Bonds?  Creates  False Premises"
2) Mishkin's Iceland Report Was Horribly Wrong, And He Was Paid to Write It

-NY Times:
1) India Tries Using Cash Bonuses to Slow Birthrates
2) In Case of Emergency: What Not to Do
3) Wells Fargo's Odd Mortgage Essay Question

-Steve Randy Waldman's recap of another blogger meeting at Treasury

-Abnormal Returns:  The Art of Reading 13-f Filings

-KD

The Week That Was

I've written a ton of stuff in the last ten days or so.  In case you missed any of it:

- On "bailouts" for traditional journalism 

- On bailouts for states and municipalities

- A Comedic Interlude, courtesy of Jon Stewart (The gentleman is CORRECT in sitting!)

- more comedy - my wife and country music

- Sneak some zucchini onto your neighbor's porch day!

- Complaining about charity???

- The facts behind Colorado Springs turning off their streetlights (Can't vs Won't)

- Bernanke:  ""Unlike the federal government, every state except Vermont is required to balance its budget, forcing spending cuts, tax increases or both -- actions Federal Reserve Chairman Ben Bernanke said last week are contributing to the nation’s sluggish recovery."

Translation:  Our inability to spend beyond our means is hurting our "recovery."

- The White House's Spin on Financial Reform

- On changing outlooks

- Aid for responsible delinquent homeowners

- You can't force people to make markets

There were also some worthy reads which I didn't write about, some of which I tweeted:

- Denninger is never shy

- Poole Op-ed on FNM/FRE

- Carney Op-ed on FNM/FRE

- Financial Reform's unintended consequences - op-ed

-KD

The Week That Was

Upon returning from my sojourn to New York City to see God Street Wine, I banged out a bunch of posts this week.

-God Street Wine @ Irving Plaza recap.  I received comments on this post from show organizer Michael Weiss, and lighting director Jeff Volckhausen, who I emailed back and forth with a few times talking music, Phish, GSW and life - which was cool.  I's great to know that people are finding this stuff I write.

- Cardboard Gods : If you like good writing, buy this book.  If you ever collected baseball cards and like good writing, buy this book even faster.

Two garden posts:

-Battling tomato hornworms

-My super cute dogs

-I do not think Bernanke's tough talk matters much anymore, here at the boundary scenario (ZIRP).

-KD

Anecdotes - and Catching Up

I'm back from a mostly-internetless weekend where I saw a bunch of old friends and saw God Street Wine in concert twice.  Two quick stories from the weekend while I catch up on the goings on, and work on a GSW trip report:

1) Ice Cream Store in Rumson, New Jersey (very very wealthy town):

I went out for ice cream with Lee and his wife on Sunday night.  We ran into a huge line at Crazees (big biz!) and eventually I obtained a cherry vanilla cone with brownie bites.  As we stepped outside to sit down and eat our ice cream, we encountered a woman presiding over a cute King Charles Cavalier Spaniel as well as her three daughters who were running back and forth into the store. The girls looked to be about 6, 8 and 10 years old.  The dog tried to lick one of the girls' cones while she wasn't looking, but the mom chided the pup, "No, Caymus, you'll get your own."  Dad then brought out a soft serve vanilla cup for the dog and placed it on the ground.  I couldn't resist, asking, "Won't that make the dog sick?"  "Oh no - she eats a lot of French cheese,"  the woman replied, and immediately another woman sitting on the other side asked the same question, wondering if it would upset the dogs stomach.  All I know is that I'm pretty sure I'm not giving MY dog a full serving of ice cream unless I feel like mopping up diarrhea.  Boom!  See - you didn't think I could work diarrhea into a blog post first thing on Tuesday morning did you?

So the mom puts the cup of ice cream on the ground, and says "Here you go, Caymus" (by the way - CAYMUS!!!!)  Caymus takes two licks and then WALKS AWAY! I couldn't believe it - I was in awe.  This pooch must have quite a life.  Immediately, all three little girls spout, "I'LL EAT IT!" and one of the girls, the youngest, promptly drops her ice cream cup right on the ground, face down, but immediately implements the 5 second rule, scooping it off the ground and re-engages it without a spoon.   Great stuff.

2) I had a little Amtrak trouble yesterday coming home from NYC to Boston.  When our train (the regional - aka LOCAL) pulled into Old Saybrook, there was an Acela Express waiting there already on the adjacent track.  "Uh oh," I said out loud, and the conductor immediately explained that there was a "serious situation" with storm damage to the tracks ahead which was currently being diagnosed, but that we "be here a while."  I got off the train, found out that the Express had already been there for 90 minutes, and realized that they'd get the go-ahead before us.  I politely negotiated my way onto the Express, after asking the conductor if the train was crowded, and if I could hop on. "Are you gonna pay the difference in fairs?"  He asked me.  "Nope."  I replied.  He shrugged and smiled and said "ok - we're trying to be accommodating - but don't go talking in a loud voice telling everyone on that other train that you're coming over here."   It ended up taking me 7 hours to get from NYC to Boston, even on the "Express,"  and then I had to take a bus back to Concord.  As the bus pulled into the station, I got totally soaked by a raging rain storm as I ran to my car, and my wife called to tell me that the power was out!  

Anyway, the power is back, and I'm catching up on the weekend's reading...

-KD

Friday Links

- I guess Citibank isn't too worried about the Volcker Rule.

-Words of Wisdom from Howard Lindzon:

"Winners go unnoticed because people are looking for winners on the losers page when in fact the biggest winners come from the winners page."

That's a sentiment that Howard has been voicing for a long time now.  It's also, perhaps, one of the most difficult natural tendencies to override - I mean - that our nature is to do the opposite:  we normally want to buy stocks that are down, not up.  I penned a more abstract version of this concept early this year.

-A double shot from Calculated Risk:

-Lenders Go After Money Lost in Foreclosures

and

-S&P Expects up to 70% ReDefault Rate on Loan Mods

-If you haven't yet watched John Stewart's piece on "Independence from Foreign Oil," you must.

-KD

Articles I Tweeted Recently

Here are some of the things I Tweeted last week:

Singapore charges people to go into its casinos. I had no idea.

"To discourage locals from gambling, the government collects casino entrance fees -- $70 for a 24-hour period or $1,400 for a year -- from all Singaporeans and permanent residents.  Almost 30,000 people, mostly recipients of public assistance or those who have filed for bankruptcy, are automatically barred from entering."

Jon Lajoie Beatles Satire:  Previously unreleased version of Blackbird.  Funny, unless you really love Yoko Ono.

Obama Warns BP on Paying Big Dividends Amid Oil Spill.  This article is a great example of how you have to actually read the story before passing judgment.  I read the headline and thought "wtf is Obama talking about?  BP's dividends and their cleanup of the oil spill are two totally different issues." They can pay all the dividends they want as long as they don't run out of money to clean up the oil and pay the claims for all the people they hurt.  Of course, when you read the story, you figure out that Obama is not an idiot and he knows this - and his point was that BP shouldn't pay out billions in dividends and tens of millions in image control publicity ads, and then end up "nickel-and-diming fisherman or small businesses."  (disclosure:  long BP stock)

Half A Dozen States Delay Tax Refunds

Florida Marlins sell tickets to Roy Halladay's perfect game at face value.  The game already happened. 

-KD

Wednesday Links

Some good reads today:

1) The Reformed Broker Josh Brown continues his hot streak with the witty "Zagat Sovereign Risk Reviews."

"UNITED STATES:  Locals claim to have "lost their taste" for this "mega-dining palace" but when rumors about the "cleanliness of certain European eateries" bubble up, the "bridge-and-tunnel crowd" flocks to US bonds and currency "like there's no tomorrow".  "Prices have gotten cheaper" here for most entrees, but many diners are "waiting on the sidelines" for "even better values".

BRAZIL:  The "wait-staff" can be finicky about "both tips and government bond auctions", but the "raw materials that come out of this kitchen" are "popular with diners" around the world.  The scene is made up of a burgeoning middle class - all grabbing a bite in between" buying homes and shopping for cell phones".  The bar scene is "youthful and ambitious" with a "taste for capitalism" not seen elsewhere on the Latin continent.  The place is "highly reliant on its homemade sugar", so "bring your sweet tooth"!

read the rest at his site.  If you're not familiar with Zagat's, you won't get the joke. If you are familiar, you should enjoy Josh Brown's take very much.

2) James Bianco at The Big Picture: "How Much Economic Growth is "Artificial?"  I would guess that  Bianco put "artificial" in quotes because he meant "Government generated," which may not be synonymous with "artificial," but anyway...

3) MISH: Students Get Buried In Debt, Who's to Blame?  I could probably write 5000 words on this subject, but I'm not sure I want to open that can of worms.  I'll just give you Mish's unsympathetic assessment of the situation:

"Supposedly "Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong."

It should take seconds. Going $100,000 in debt to get an interdisciplinary degree in religious and women's studies seem rather foolish to say the least. Exactly what kind of job did Ms. Munna expect to get with that degree?

Now she is working for a photographer and it is plain to see her degree is totally useless.

Ms. Munna and her mom should look in a mirror to see who to blame."

4) An interesting chart from McKinsey via Barry Ritholtz, regarding overoptimistic equity analyst estimates.

5) Big Setback for AIG in Repaying Taxpayers

The American International Group scuttled the deal to sell its huge Asian life insurance arm to Prudential of Britain for about $35 billion, in a major setback to repaying the government for its 2008 rescue. 

Trying to appease its angry shareholders, Prudential had tried to keep the faltering transaction alive by lowering its price for the unit to $30.37 billion at the last minute. But A.I.G. rejected that proposal, issuing a terse statement on Tuesday that it would “not consider revisions” of the original terms.  

I've written about this one before...

-KD

Friday Thoughts

Calculated Risk can't believe there is actually legislation in motion to provide credit to "help alleviate the severe lack of credit for acquisition, development and construction (AD&C) financing that threatens to end the budding housing recovery before it has time to take root."   Felix Salmon wrote a follow up on the same subject, getting input from the author of the bill, Brad Miller.  As I noted in Felix's comments, I think there is a massive flaw, and that's Miller's claim: "The bill requires that the loans only be in “viable” markets, which means not comically overbuilt markets. Treasury should be able to tell the difference, and banks need to as well."   I think we've already proven that neither the Treasury nor the banks adequately altered their behavior during the housing bubble, so why should we expect them to be able to self-medicate this time?

Michael Panzner quotes the Of Two Minds blog at length.  My favorite snippet (emphasis NOT mine):

"The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers. 

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.

 

If a buyer puts almost no money into the purchase--even now, FHA and VA loans can be had with a mere 3% down payment--and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built. 

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit. 

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed. 

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.

 

In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles."

Some humor from the Reformed Broker, Josh Brown: "Free Advice to the Stars RE: Ponzi Schemes"

1.  Anyone who refers to himself as a "Financier" is full of sh*t.

2.  Your financial advisor is not supposed to play polo or wear designer sunglasses, nor should he ever have a popped up collar under any circumstances.  He must never wear shoes without socks or wear a watch with a diamond bezel.

click through for the full list.

And in case you missed any of my posts from the last week, focus on these:

Morgenson Misses the Mark

Vegas: Resort Fees?

Senator Bunning's Office Responds

Finally, two rebuttals to David Einhorn's NY Times Op-ed.  First, I want to explain one thing:  the WSJ sniped that Einhorn was "talking his book."  Look - you should assume that everything you read anywhere is someone talking his book.  The great thing about Einhorn is that he makes no secrets about what his positions are.  He lays them out there, and explains his view.  If you're going to critique his thoughts, you have to do it on the basis of his arguments, not on the irrelevant fact that he's talking his book - OF COURSE HE"S TALKING HIS BOOK!  The Times Op-ED was very much related to a speech he gave the night before at the Ira Sohn Conference, a hedge fund charity dinner where the primary purpose is to give smart people the opportunity to share ideas - aka - talk their book.

Now, back to the point: Einhorn's actual argument - which is what these two posts take aim at:

1) The Pragmatic Capitalist

2) Billy Blog

Since I've already been hazed by the MMT crowd, you'll notice that I deliberately avoided quoting the parts of the op-ed that TPC and Bill Mitchell are most critical of.  I agree very much with all of the sections that I quoted in my previous post, and the one thing I'd mention about TPC and Bilbo is that they both specifically pick on Einhorn's claim  "If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors."  As I've said many times, the analogy of Greece doesn't translate to the US as a whole - the two links above explain repeatedly how we are different.  But it DOES apply to our states.  I've written this analogy before:  Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies.

-KD

Lots of Good Stuff to Read

NY Times:  "When Passengers Spit, Bus Drivers Take Months Off."

"And the encounters, while distressing, appeared to take a surprisingly severe toll: the 51 drivers who went on paid leave after a spitting incident took, on average, 64 days off work — the equivalent of three months with pay. One driver, who was not identified by the authority, spent 191 days on paid leave.

Transit officials, facing a budget shortfall of $400 million, called the numbers troubling."

Barry Ritholtz linked to another brilliant effort from The Onion: "New Law Requires CEOs to Humbly Shrug Before Receiving Huge Bonuses."

"The crackdown comes on the heels of Wall Street's 2010 bonus season, during which not one executive was observed to look at the floor meekly, sink his hands into his pockets, or dig his right toe awkwardly into the ground before taking his cut of the estimated $55 billion in payouts.

The SEC rule stipulates that CEOs set to receive bonuses between $1 and $5 million will be required to raise their eyebrows in feigned surprise. Those who make between $5 and $10 million will have to smile uncomfortably and say, "Yikes, that's a whole lot of simoleons," while executives receiving more than seven figures must now audibly stammer, "It's, you know, I mean, ha! What are you gonna do, you know?" before having the funds wired directly to an offshore bank account."

The graphic table in the article is pure genius too:

Bond Girl writes a very interesting meme about the ratings agencies, and the relative absurdity of people trying to sue them.  Now, I think the ratings agencies were probably more guilty of gross negligence than any other single cog in the wheel of the asset bubble, and probably resulted in more damage, but BondGirl's points are spot on (and I don't think she's defending ratings agencies, by the way):

"Segal notes in his article that a couple of judges have dismissed the rating agencies’ arguments that their analysis is protected by the First Amendment.  OK, if the rating agencies’ grades are not opinions, what are they?  Investors like Mr. Grassi – even more sophisticated investors – seem to treat ratings like they are offering investment advice.  But surely a court would not choose to endorse that kind of silly expectation.  Mr. Grassi did not pay S&P for the ratings.  S&P did not recommend that Grassi buy the bonds (presumably, his broker did that).  S&P did not make an effort to get to know Grassi’s investment objectives, his financial position, his risk tolerance, or anything that would traditionally be associated with the process of providing advice.  So how can Mr. Grassi claim that S&P is responsible for his losses?  How can anyone present this guy as a hero?"

Paul Kedrosky presents a NY Times graphic: "Heavy Load Ahead."

MISH:  "Insanity Down Under."  MISH highlights the insanity of an article which explains:

"ING Direct, Australia's fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.

At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.

"People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach" ING Direct CEO Don Koch said. "There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.""

I don't know - maybe it's from the Australian version of The Onion.

VegasRex's latest piece, "The High Cost of Self Esteem," has so many quotable passages, I had trouble picking one out...

"Regardless of what you look like, I have nailed way hotter women than you.  I promise.  Yes, even if you are the prettiest woman in your Jazzercise class back home.  Regardless of how cute you are, or have been told you are, there is nothing you have that I haven’t seen before, and the chances of me being smitten by your beauty are damn-near non-existent."

Rex's piece reminds me of the one I penned earlier this year, titled "March of the Penguins."

File under "They actually said this:"  Bank Of America: "We believe the best way to feel better during a correction is to buy some shares."

Marty up!

Don't get sore - buy some more!

-KD