MonkeyBusinessBlog

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Does Cramer Still Have a Show?

As many of you know, I dont watch CNBC. Something about how they mislead the public and try some far reaching sensational statements to get viewers. I think those broads on "The View" do a much better job then that  and I guess thats why a lot more people watch "The View" than CNBC (I dont watch "The View" either). But that's for a different time. 

As the Dow approaches 9400 here, up another 2% today, I wonder if the d'bag known as Cramer still has a show. Does anyone know? I mean he said when we were at 9955 on the Dow a few weeks back to sell everything in the stock market and not come back for 5 years.  So his show, from what I understood, was one that recommended and panned stocks right? So if you tell everyone to go away from the stock market for 5 years, what do you talk about on the show? I dont know but maybe someone can enlighten me.

Oh and boy he was looking smart on that call for a while, I mean the Dow got down to 7882 which was  a snappy 21% return in a short period of time for the gasbag! But now big crazy roll up the sleeves man, youre up about 6%, and thats in a month. Which still aint bad, but the trend might not be your friend son. I'm not so sure that was sound advice to tell people, to not only sell, but to stay out of the market for 5 years. Assclown, rumor mongering, fool. The buy signal aint up yet at monkeybusinessblog.com but we'd also never make stupid fearful statements like that.

There are different ways to enter this market too. These methods will be described to you in the days and weeks to come. You can be scared today since its Halloween but you wont have to be for long. We are seeing some light in certain sectors even if most people are climbing under their desks.  Stay tuned.

Friday = BDP

Editor's Note--You've heard the word GDP thrown around a lot this week to determine the ol' "are we in a recession yet" argument. Well we've got another measure that you can use on Friday's. Its called BDP. As in Big Dick's Picks. Big D finished 3-3 last week but not without some angst that he I'm sure will touch upon. Lets get to the gridiron with Big Dick!--RB

Richie, that was a bit of a tough pill to swallow last week. We didn't do much in the horsies but we were right that CURLIN wouldnt win. Just picked the wrong pony to beat him. We went 3-3 in the football but we were about 3 plays away from being 6-0. But as my daddy, Big Big Dick, always used to say, "a friend in need is a pest." So we wont act needy. But we will lay you down with the best 6 selections of the weekend. 3 in the college. 3 in the NFL. Here goes.

Apparently one of the lineman on the UCONN HUSKIES writes a blog. That's good enough for Big D! Well actually the fact that UCONN has covered the spread 10 of 11 at home is what put us over the edge. Take UCONN! Big Dick is aware it's not basketball season but DUKE is really playing nice FOOTBALL. Wake Forest is a bad favorite. Take DUKE! Finally, in the college, ARKANSAS STATE looks great. You say, "Big Dick.......ARKANSAS STATE?! Where did you get that one?" Well they are merely playing the 2nd best team in the land, Alabama. But when you put a nice +23 points next to ARKANSAS STATE, the RED WOLVES (yes that's their mascot) look really nice. Take em!

In the NFL where we were dealt some unlucky bounces (and refereeing), we'll play some lower profile games and stay away from the higher profile ones. In Minny, we like the red hot HOUSTON TEXANS +4.5. Then we'll take 2 totals on tried and true scoring home teams. Believe it or not, the CHICAGO BEARS are the best OVER team at home in the last 3 years in the NFL. Take the OVER in their matchup with Detroit. Next best OVER team? Denver Donkeys, um Broncos. Lets go over with Denver and Miami.

So there they are. Your 6 secrets to happiness in the next 48 hours. Saturday: UCONN+4 vs West Virginia, DUKE+8 @ Wake Forest, ARKANSAS STATE+23 @ Alabama. Sunday: HOUSTON+4.5 @ Minnesota. OVER 43 CHI/DET, OVER 49 DEN/MIA. Good luck and god bless to all of you. Spook your bookmaker this Halloween! Boo!

Hey Hey! Ho Ho! We aint gonna Foreclose on You No Mo'!

JPMorgan Chase has just announced they are modifying $110bn (that's billion) of mortgages. They are opening up regional counseling centers in troubled areas and said it wont put any loans into foreclosure in the next 90 days. I'm telling you its things like these that keep houses from being forced into sale and lowers that all important supply of housing number. Which in turn could cause prices to rise. I'm not saying housing is going to shoot up right away but these are the steps that help it go up. Speaking of things that go up, Big Dick's Picks is coming up next. God bless you JPMorgan Chase.

Overnight: Yen Up, Nikkei Down, Barclays Pays UP

In a classic case of buy the rumor and sell the news, the Bank of Japan cut its benchmark rate from .5% to .3%.  Some were expecting a cut to .25%.  Nevertheless, with the cut already priced in to both the Yen and the Nikkei, the Nikkei fell approximately 5% while the Yen strengthened versus USD by approximately 2.25 Yen (98.6 to 96.93).  I said this yesterday and I think it hold true for the short term, "Be careful in Asia right now."  There are massive flows coming from the unwinding of the "Yen Carry Trade" that will take the Yen back up, and should knock the Nikkei back down.  Government intervention can only do so much against these flows.  Additionally, the rest of Asia will continue to reprice itself to the coming reality of global recession.  Japanese banks like Mitsubishi UFJ, have been getting hit hard and should remain under pressure.  There will be a time sooner, rather than later, to buy these guys, but I think now is the time to stand back and let things get wrecked some more.

Meanwhile, over in jolly England, Barclays announced it is raising $11.8 billion in capital from Middle East investors.  Barclays has decided to raise the new capital, as required by the U.K. government, privately rather than go to the government.  The government in the U.K. must not be as nice  a partner as the U.S. government because Barclays sold $9.3 billion of convertible and preferred shares with coupons as high as FOURTEEN PERCENT!  They really didn't want to join Royal Bank of Scotland in the new government owned club!  Right now in the U.S., we are buying preferred shares in our banks with initial coupons of FIVE PERCENT (it steps up to 9% after 3 years I believe).  This could explain why many of our banks are lined up outside Treasury carrying fruit baskets and other gifts, while asking to "get with the government program."  It will be very interesting to see how this very expensive capital effects Barclays risk allocating (ie, lending) going forward. 

With All the Talk About Wall Street Management Bonuses. Here's an Oldie but a Goodie!

Is GMAC Trying to Get a Bank Charter By Threatening to Pull Dealer Financing.

I find it interesting that GMAC was making noise about obtaining a bank holding company charter yesterday and a story today about their threat to pull many car dealers financing on "lot inventory".  Maybe I'm just a cynical guy (on this day in particular a hung over cynical guy) but it almost seems GMAC is making some dramatic statement to show that if they can't have access to Fed liquidity they can make some real bad things happen.  According to Bloomberg News;

Oct. 30 (Bloomberg) -- GMAC LLC, the lender partly owned by General Motors Corp., is telling some GM dealers it will no longer provide them with financing to buy vehicles because of its own reduced funding, according to letters sent to the retailers.  Some dealers also are being told that they will have to start repaying such loans after vehicles have been on lots for at least 180 days, according to the one of the three letters. Gina Proia, a spokeswoman for Detroit-based GMAC, yesterday declined to confirm them.  Hundreds of the retailers may have received such letters in recent weeks, Denny Fitzpatrick, chairman of the California New Car Dealers Association, said in an interview. The automaker has about 6,500 U.S. dealerships.

Hmm.  GMAC has signed up for the Fed's Commercial Paper facility no? (I just saw AIG hit it for $22 billion.  Aren't we lending to ourselves there?)  The rates are competitive for term so what's the problem?  I'm not sure why they would ask their dealers to do the impossible and turn inventory into cash that they have to know the dealerships don't have.  GMAC has a solvency issue so why go out of their way to print guaranteed losses by making the dealerships default.  I think GMAC wants to show how important it is to the economy and how quickly they could cause some misery in order to get a bank charter and access to the Fed's term funding programs.  Just my hunch, let me know if you see it another way. 

A Throwdown of Magnificient Proportions

You all had to know that with this $700bn government "rescue plan" there was gonna be some strings attached for the banking community. Well the strings just got pulled a couple of times yesterday by a certain NY Attorney General Andrew Cuomo and a certain group of congressfolk named Waxman, Pelosi, Reid, and oh yes Obama. See it has to do with the year end bonuses for Wall Street "fat cats".

Apparently, these big banks have already put aside quite a bit of dough, like $20bn, to pay bonuses. Senator Obama calls it an "outrage". The congresspeople's point is understandable because they believe if the "gubmint" didnt come in and bail these assclowns out, there would be no bonuses to pay because there would be no company. Ask our good friends at Lehman Brothers they know all about it.  

I saw John Gutfreund, former CEO of Salomon Brothers, and no stranger to fights and problems his damnself, said the the odds of the Wall Street guys giving up their bonuses were "slim and none". I think "slim" just left the building too.

This should provide for some high drama, but something no one is really talking about? Plenty of these Wall Street "fat cats" are on the left side of the political aisle. So Obama could win the presidency and when he hears that one of his big donors says "Yeah Barack I'd love to keep giving but if you dont help me get my bonus, I cant donate." Lets see how much of an "outrage" it is then. Change too. Thats what Obama is for right? Change. That goes for Pelosi, Waxman, Reid, McCain, Palin, J.S. the ragman, Abe Lincoln's family, and anyone else who thinks they are going to win this battle easily.

It is a bipartisan "fight to the death". You know what though? THAT'S when  "Main Street" gets really pissed off. Me too. You blow up your firm guy, you fire all these people, you get a lifeline from Uncle Sam, you gotta pay the piper homey. That's how I play. You make a lot of dough, dont fire anybody, dont need a lifeline, take what you want you filthy animal. It cant be capitalism on the way up and "funny socialism " on the way down. And by "funny socialism" I mean split up the spoils to just a little group of "Socialists". Share with everybody ladies and gents. Stay tuned to this fight. It's gonna be a long good one.

The Hartford Takes a $2.6 Billion Hit. They Say All is Well, But They May Take Our Money Anyway.

The Hartford Financial Services Group took a $2.6 billion hit to their investment portfolio and posted their first quarterly loss in five years.  The firm had recently raised capital from Allianz earlier this month.  It looks like they may have to raise more capital now.  Sorry Allianz.  Hartford took hits on their exposure to Lehman, AIG, Freddie and Fannie.  Additionally, the company had to write down investments purchased for retirement account products as the assets "underperformed" the guaranteed minimum.  I'm going to guess these are commercial mortgage backed securities, leveraged loans and Credit Default Swaps on corporate debt. Just a hunch.

The insurance companies scare me.  Based on the performance of their stocks, I imagine they scare everyone else too.  My experience with the big insurance companies is that they have always been the slow moving deer when it comes to their investment portfolios.  They need duration and yield and they often overpay to get it.  Also, much like everyone else, I am sure they rented their brains out to the ratings companies when it came to buying "AAA" structured assets.  I'm sure they took advantage of "AAA" assets that paid way over risk free rates and now those assets aren't performing like AAA.  Just a hunch.

The Hartford said they wouldn't, ``categorically sit here'' and rule out another capital raise to cover investment losses after Allianz, Europe's biggest insurer, agreed Oct. 6 to invest $2.5 billion.  They also said, quoting from Bloomberg News, 

``We feel very well capitalized,'' Zlatkus said in the conference call. ``But in terms of would we access the Capital Purchase Program, if that's available -- we certainly think there are favorable terms as we see it and we would look to do that.''

I don't think our man Zlatkus should have used the term, "Favorable", when describing the TARP.  As a stake holder in our $700 billion distressed asset investment fund I say, "Take a hike Hartford. You're not getting a dime until you have exhausted all other means of raising capital.  Additionally, if you want that capital there's a few hundred billion of assets that need to be marked to fair-value.  And while the terms may be favorable, they will be favorable to us, not you."

   

Short -Term Outlook: I Think We Have Rung Out All The Good News For the Immediate Future.

I'm getting the feeling that the next couple of days could get real messy.  We've had a huge run up in equities, a nice reduction of money market rates, a sharply falling yen and tighter credit spreads.  I think we've gotten about as much positive price action as we are going to get off of the massive global government interventions in currencies, money market rates and credit.  The great unwind of the "Yen Carry Trade" is ready to resume here with USD/Yen up (so weaker Yen) from 92.7 to 98.5 in the last four days.

Hedge funds in particular, with their huge redemption requests (that they have to honor in December and next March) are going to sell into this latest bout of equity and credit strength and buy back Yen at these cheaper levels.  We will now see market forces swamp out government intervention the next couple of days.  This is just my gut talking.

For the longer term I keep looking at what I think are positive developments in the money markets, the efficient use  of government capital injections into the banking sector and I think that after this next wave of selling, more opportunities will present themselves to those with dry powder.  It's going to take a while, but I think we are going to see a positive tone return to equities (as opposed to the sheer panic selling and panic buying) and credit, and a decline in the insane volatility we have been enduring.  That is my longer term view.  We have a lot of pain to endure in the economy over the next year, but I think underlying that pain is going to be the building of the foundation to take us up.

It's All Getting SOOOO Boring. When Do the Show Trials Start?

I don't know about you but all this volatility has numbed me to the point of boredom.  We need something to cheer us up, give us a good laugh.  I say, "Let's get the show trials started NOW!"  Here's a preview of what's to come.  Imagine the three gentlemen on trial as Dick Fuld (Lehman), Ray McDaniel (Moody's) and Angelo Mozilo (Countrywide).

Hey! It's Me Sounding Smart!! Good Thing You All Know Better,

The Fed Talks Shortly

Back in the day as a bond guy, whenever the Fed talked people listened. For some of you who are old enough to remember, kinda like, "when EF Hutton talks........people listen". See back then, the Fed really wasnt too upfront with what they were about to do in terms of moving interest rates. So that provided a whole cottage industry of "Fed Watchers". These were ladies and gents who were employed (some with large staffs!) by any broker/dealer that wanted to be somebody. The Fed Watchers would all go to these public Fed meetings and probably meet with each other and come up with some statement for whatever the Fed governors cryptically said. So it was kinda like having a house psychic on hand. As a matter of fact, I gave a Magic 8-ball to one of the guys who was a Fed Watcher at my firm. I dont think he liked that idea but he kept it on his desk so maybe he did. You remember the Magic 8-ball right? So when I gave it to him I said "whenever you dont know what the Fed is going to do with regards to interest rates, just shake the ball, and scream will the Fed cut 50 basis points?! It might say "Yes" or "Is possible" or "no way"." Anyway, I digress.

After awhile, the Fed didnt speak much "Fedspeak" and there was less of a need for Fed Watchers. But these days there might be a new need. See the Fed in about 5 minutes is going to release whether or not they will cut the Fed Funds rate to 1% from 1.5%. But people will be hanging on their every word in terms of what the Fed says is happening to the economy. Exciting times indeed. The stock markets seem to be happy with what they THINK the Fed will say as they are still in positive territory even after yesterday's gargantuan move. Who knows?  I must admit I havent sat watching and waiting for a Fed meeting announcement like this in 18 months. Happy hunting.

Fannie Bids Farewell to a Classic Bit of Accounting Fiction!

It is a truly historic day today.  Fannie Mae will write down its $20.6 billion "Tax Deferred Asset" to ZERO.  We say goodbye to one of the greatest pieces of accounting fiction ever.  Somewhere, Enron CFO Andy Fastow is shedding a tear.  This "asset" sat completely unreserved on Fannie's books and accounted for HALF their capital for at least a year!  A tax deferred asset is nothing more than losses capitalized on the balance sheet that can be used against future income.  Unless Fannie planned on making about $80 billion over the next decade, it should have been impossible for Fannie to carry this asset completely unreserved.  Did anyone expect Fannie or Freddie (they have a huge, unreserved tax deferred asset too) to post $multi billion profits over the next few years?  I think not.

This piece of accounting fraud was "hidden in plain sight" for over a year, a year where both companies, their accountants and their regulator assured us that both Freddie and Fannie were solvent.  It was ludicrous and insulting to anyone's intelligence.  Finally, when the stench was just completely overwhelming, Hank Paulson and Treasury pulled the plug. 

Farewell Tax Deferred Asset, it was one hell of a run!

More Green on My Screen Y'all

Just wanted to make sure everyone knew that stocks have opened HIGHER today. Not lower after yesterday's 11% move up in the U.S. All these things that we have been pointing out might just be taking hold here. Again there is some more pain too come and I'm not sure we are at the bottom but I think we are a lot closer to the bottom then people think. Enjoy for a little while.

Japan Looking to Get Rid of Pesky Mark to Market Accounting

According to the Financial Times;

"Japan will ease controversial accounting rules that are forcing banks to write down the value of illiquid securities, the country's fiance minister said yesterday."

I tell you one thing, it really sucks to have lost the moral high ground doesn't it?  Remember I wrote a while back, when the SEC was suspending short selling, calling for the "relaxing" of mark to market accounting, and other anti-free market schemes to prop up our equity markets, that we had lost one of our favorite past-times.  That past-time being, lecturing the rest of the world about maintaining free markets and financial disclosure transparency.  We can't lecture the Japanese about this move and it hurts!

Seriously though, Japan suspending mark to market accounting after the damage that "Held to Maturity" accounting did to their economy in the "Lost Decade" of the 1990's is pretty scary.  When the Germans were destroyed by the hyper-inflation of the early 1920's they were terrified of loose monetary policy for decades.  Of course, that inflation helped bring on the Nazi's and World War II, but you get the point.  The take away here is, as major markets rely increasingly on artificial means to prop up their equity markets, be very wary of getting a false sense of security on the latest positive moves in the Asian equity markets.

"We're the Government and We Are Here to Help."

Looking at Asia tonight and things seem to going just as planned, with "planned" being the operative word.  The Nikkei is up over 6% as the Yen is down versus USD over two yen (97.45 right now).  There is a strong belief that the Bank of Japan is going to cut its benchmark rate in half (.5% to .25%) as they attempt to reign in the mighty Yen.  As we talked about yesterday, there a big old trade that fed the world leverage machine for about fifteen years called the "Yen-Carry-Trade".  That trade is being unwound now as hedge funds and other levered vehicles return investor money and return the funds they borrowed in Yen.  Who is going to win, the BOJ or the great leverage unwind?  All I can say is the BOJ better come packing! 

Meanwhile, the Hang Seng is up a "modest" 2% tonight after falling then rising about 13% Monday and Tuesday.  There's still plenty of time though to put it into gear.  All kind of talk the last two days about government intervention into the Hong Kong and mainland markets.  The fact that the HKMA did this in size ten years ago provides precedent.  There is also talk of all kinds of nasty tricks to punish short sellers.  Enough to get nasty shorts on-sides anyway.

The question we have to ask is, "Can massive government intervention into the equity markets give a lasting positive result?"  We in the U.S. certainly proved that messing in the equity markets can fail spectacularly.  We are encouraged by the signs of progress in the U.S. and Europe with regard to resuscitating our banking system.  However, we have a long way to go, and I have a feeling that while our financial sectors have completed most of their correction (acknowledging that our governments have put a floor under the stocks with a massive dose of free money and relatively cheap capital) many other sectors are still overvalued.  I hear a lot of talk about P/Es being low and I can't help but thinking, being the dumb bond guy that I am, "Are they using the right 'E'?"  I am still skeptical that we have factored in enough of a deep recession into corporate earnings forecasts for 2009.  We will see.

Asia, on the other hand, does not seem to have priced in enough of a recession for any of their sectors.  I also fear that there are some huge asset bubbles in mainland China, namely real estate, that are going to blow once things slow down.  I have a feeling that when they blow, a whole bunch of bad things are going to get blasted out from under their rocks.  I just have a feeling.  With that happy thought, off to bed!

Sometimes The Craziest Ideas Can Work!

I'm feeling good today.  Is todays rally overdone?  Of course it is.  Are we going to have more down days than up in the next few months in the stock markets?  I think so.   However, I like the fact that the CP markets are beginning to function again and I like transactions such as PNC taking Treasury infused capital to buy Nat City and write down their garbage to very defensible levels.  That is a very effective use of the capital.  Inter-bank lending rates have dropped twelve days in a row now as well.  Additionally, like Richie's been saying, the housing market, while still hideous, is at least showing faint signs of a pulse. 

Is all this supported by new government programs?  Pretty much, but at least the damn things are working.  Could you imagine if after all these initiatives, TED spreads were still at 480 basis points and banks were hiding under their desks as funding starved, commercial paper market denied companies were pounding on the doors to get at their emergency credit lines?  As I said to one of our friends, the patient is now eating solid food, peeing on his own and taking short walks around the room with the aid of a walker (since I started this, the Dow is up another 150 points!).  We have a LONG way to go with lots of pain along the way.  Nevertheless, we are starting to mend the foundation.  Lets celebrate with a little "Family Guy".

Federal Reserve Funded Commerical Paper Program Doing the Job!

This is what we're talking about!  Forget consumer confidence, that huge sucking sound you heard was actually a positive sound!  Like the kind of sound you hear when you unclog the terlet.  In this case it's our financial plumbing.  Bloomberg News reports that longer dated CP issuance has surged ten-fold.  Here's the story from Bloomberg.  (By the way, we love Bloomberg, best financial reporters in the business. Can we have a half priced license now??!! How about a TV show?)  Anyway, sorry about that.  Here is the story;

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVAQU7i2pQw0&refer=home

Now if Morgan Stanley could just manage to un-cluster-f**K itself (This whole Mitsubishi UFJ deal, as one of our sharpest readers pointed out today, really smells fishy.) we'll be in business!

Redistribute the Wealth Indeed!

ESPN.com is reporting that Wayne Huizenga owner of 50.1% of the NFL's Miami Dolphins has sold his remaining stake to Stephen Ross who previously held the other 49.9%. Now its not shocking that  Huizenga sold his part of the team since he had agreed to do that at some point in the future when he sold Ross the first piece. The shocking thing was what Wayne said.

He told the Sun-Sentinel that he knew that Barack Obama wants to raise capital gains taxes if he were to be elected. So Wayne came with this, "I'd rather give it to charity than to him. If you do it this year or you do it next year, the difference is humongous because of the taxes." Yowsah. The Obama campaign came out and actually disputed this assessment. Sounds like John McCain might want to have a fundraiser party at Wayne Huzienga's house in swing state Florida. Wayne also has some dough in his pocket and might be able to contribute some more to the campaign.

G.E. Responds To Yesterday's Post

Yesterday I posted a piece titled, "Laugh of the Day!  GE "Supports" Federal Reserve Commercial Paper Facilities.   In the piece I poked fun at G.E.'s comments regarding the new Federal Reserve funded commercial paper (CP) facility.  I said;

"A quick post here for the line of the day.  Remember a few weeks ago when GE, the GE with the $90 billion short-term commercial paper ("CP") program, was having a funding heart attack as investors fled the term CP market?  If you remember, it took Warren Buffett's generous purchase of preferred equity (10% coupon) along with five-year warrants to buy GE at $22.50, along with a additional diluting $12 billion common raise to save GE.  This event back on October 2, made things perfectly clear that the credit markets were completely seizing up.  GE had $62 billion of bank credit lines they were going to start tapping and the banks didn't have the cash.  Enter the Fed, intervening directly into the term CP markets, circumventing the cash hoarding banks."

Today Russell Wilkerson, spokesman for G.E. responded;

Russell Wilkerson from GE. Eric, I wanted to respond to your post and provide some context. On October 1, we did not have any disruption to our commercial paper funding and we did not need to/nor did we have any plans to tap our bank lines. We announced plans to proactively raise $15 billion in equity to give us greater flexibility and strength in this volatile market. We provided a detailed liquidity update on our most recent earnings call on October 10 (http://www.ge.com/investor)

As for the commercial paper funding facility (CPFF), GE fully supports the actions of the Fed in creating the facility as a way to add liquidity to the $1.5 trillion U.S. commercial paper market to reduce rollover risk and encourage longer term buying by investors.  The Fed is encouraging issuers to utilize the facility. As the largest issuer, we committed to participating and communicated this to our CP investors last week. We accessed it yesterday as planned. Our access to the CPFF allows GE to assure investors that we can make a secondary market for our commercial paper by repurchasing it from them in the event they need liquidity. We have continued to fund without disruption through the financial crisis at good spreads. However, investors who are concerned about their own ability to access liquidity have shortened their investment horizon. This facility will help us manage our maturity profile. 

Please call me if you have any questions. Thank you.

I respect Mr. Wilkerson's response.  However, the market conditions and events of the first two weeks of October tell a story, admittedly circumstantial, that things were very stressful for any finance company that relied heavily on short-term wholesale borrowing.  G.E., with its nearly $90 billion CP program fits the bill.  If you talk to any trader on any funding desk they will tell you that the in the first days of October, no one was lending unsecured to anyone for any term greater than overnight.  The CP market was under incredible strain as money market investors drained liquidity for anything other than Treasury bills.  TED spreads exploded to record levels. 

Additionally, G.E. completely reversed course from their September 25 investor call where they categorically stated they had no need of additional capital. On October 2, GE sold Warren Buffett $3 billion of preferred stock carrying a 10% coupon.  Additionally, GE granted WEB $3 billion of five-year warrants struck at $22.50 a share.  At the time GE was trading at $24.50.  I have seen analysis that essentially converts the 10% preferred and five-year warrants (struck at $22.50) into a common share price equivalent.  The analysis shows Mr. Buffett's firm would have essentially bought GE at $9.25 a share, if the deal were based on common stock.  That's a price of $9.25 versus a then current price of $24.50.  GE additionally raised an another $12 billion of common stock.

Are these the actions of a company not experiencing distress?  I don't think so.  We have heard time and time again from many financial companies that their liquidity and capital positions were fine, just days before they came to market to raise capital and funding, often at punitive levels.  I'm afraid that I have become a bit jaded.  Nevertheless, I thank Mr. Wilkerson for his response and I sincerely hope that he is right and I am wrong.  

There's Green on My Screen!

Now the Consumer Confidence numbers came out about 15 minutes ago and they were at an all-time low. Even lower then the low estimates all the "experts" were predicting. It's basically saying the consumer is dead and gone forever. But you know what? The stock screen I'm looking at is all green and green means up. Red means down. No red. Maybe the stock market is really starting to figure out that numbers in the rear view mirror dont really matter. That Consumer Confodence number was really bad yet stocks are holding to firm gains thus far with the Dow up 225 points. I'm starting to likey the stocks and that's the first time I've said that in a bit. Dont buy yet but dont fret. I'm a poet and I dont know it. Well actually I do. Stay tuned for more updates but dont be surprised when the "monkeybusinessblog.com buy signal" comes soon. Lots of people are saying no way. Just need a few more people to say that, then we pounce with our customary contrarian plays.

Asia Snaps Four Day Losing Streak

Well, lets dispense with the good news first.  Asia rallied last night!  The bad news is the rallies were driven by speculation of government intervention to "stabilize" the markets.  The Hang Seng, after falling nearly 13% Monday, rallied back 14% while the Nikkei rallied back 6.4% after falling 6.35% on Monday.  Unless you are an options trader long equity volatility, this price action is just horrible.  Whats worse is the rallies were driven primarily by;

• The Hong Kong Monetary Authority's (HKMA) musing that they may intervene in the Hang Seng to support prices.  They did this in 1998 to the tune of $15 billion (back when a $billion was really a $billion) and it turned things around.  I have a bad feeling that kind of action won't work for any meaningful period this time around.  In 1998, while Asia was still hurting, the rest of the global economy was chugging along.  This time around we are entering into a deep global recession.  I'm not an equity genius but I have a feeling that Asian corporate earnings estimates have not fully factored in how slow things are going to get.  Investors may bravely say things are cheap after this month's rout, but I think they can get a whole lot cheaper.
• The Nikkei rallied primarily off of the threat of intervention in the currency markets.  The soaring value of the Yen versus its trading partners, driven by the huge flows associated with the "Yen Carry Trade" unwind, has really hurt Japan.  The global currency markets see the Yen going higher, therefore it will go higher.  Government intervention is a tool that may cause longs to cover and temporarily weaken the currency.  Nevertheless, when the global flows say the Yen is going up, it's going up.  USD/Yen went from 92.78 Monday to 95.55 today.
• The Japanese government also imposed short selling restrictions from now till next Tuesday.

Asian inter-bank lending rates all reported sharp spikes today as the credit freeze seems to be taking hold in the region.  Japanese bank giant Mitsubishi UFJ has been getting pummeled, along with Nomura. Nomura is looking at it's second quarterly loss, driven by the cost of acquiring Lehman Brothers Asian operation and a nice $425 million hit on Iceland.  Mitsubishi is having serious dilution issues as it looks to raise capital in the middle of a equity market rout and the raw feeling investors have over its steep purchase price of 21% of Morgan Stanley.   

Law of "Unintended Consequences" Part Deux

Remember a couple of weeks ago we talked about being careful of the "Law of Unintended Consequences"?  The government told Freddie and Fannie to start buying up to $40 billion underperforming mortgages a month so they could be modified and saved from foreclosure.  Sounded like a great idea.  Unfortunately, the mortgage markets were relying on Freddie and Fannie growing their prime mortgage portfolios from $1.55 trillion to $1.7 ttrillion by December 2009, as mandated by the conservatorship agreement with Treasury.  If Freddie and Fannie were using all their mandate to buy substandard loans, they weren't going to be buying prime, conventional conforming loans.  With that, mortgage rates made to prime borrowers managed to increase as treasury rates fell because Freddie and Fannie mortgage backed securities (MBS) did what we technically refer to as "puking".  

The government is starting to see what it must have been like for those boys who ran the old Soviet Union a few decades back.  You command the factories to make more steel than they are capable of, they start throwing things already made of steel into the smelter to meet the "demand".  Next thing you know everyone is wondering where all the T-34 tank chassis went!

All kidding aside, when Treasury and the Fed back stopped the money market mutual funds, guaranteed deposits flowed out of banks. When the FDIC guaranteed all non-interest bearing bank deposits up to $1 million, money market mutual funds got killed as the money flowed back into the banks!  When Treasury declared that it guaranteed new senior bank debt for the next three years, Agency (Freddie and Fannie) debt got killed as smart guys moved into the latest thing to get a government guarantee, with a nice yield to boot.  Now today MBS get killed again and mortgage rates go in the wrong direction as the economy sinks further.  Why you might ask?  Well I bet it has something to do with what one of the largest holders of Agency MBS had to say today.

Oct. 27 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said he likes the debt of KeyCorp and Regions Financial Corp. because the banks are submitting applications for the Treasury's equity- purchase program.

``We like the ones that are submittingapplications: Key Bank and Regions and a host of others that are large enough and well capitalized enough to be admitted to the club,'' Gross said in a Bloomberg Television interview from Newport Beach, California. ``The government is investing 10 to 15 percent of the banks' total capital themselves into the company and so why not be a partner with the government at a higher yield than the government is giving? It's a slam dunk in my opinion.''

Fifteen regional U.S. banks accepted at least $34 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets. Regions, Alabama's biggest bank, is selling a $3.5 billion stake to the Treasury, and KeyCorp, Ohio's third- largest bank, will sell $2.5 billion.

Ooops!  Sorry Mr. "Prime-Credit-Current-on-All-Your-Debt-Want-to-Refinance-or Buy-a-House"  You can't because you are subsidizing Key Bank!

Laugh of the Day! GE "Supports" Federal Reserve Commercial Paper Facilities.

A quick post here for the line of the day.  Remember a few weeks ago when GE, the GE with the $90 billion short-term commercial paper ("CP") program, was having a funding heart attack as investors fled the term CP market?  If you remember, it took Warren Buffett's generous purchase of preferred equity (10% coupon) along with five-year warrants to buy GE at $22.50, along with a additional diluting $12 billion common raise to save GE.  This event back on October 2, made things perfectly clear that the credit markets were completely seizing up.  GE had $62 billion of bank credit lines they were going to start tapping and the banks didn't have the cash.  Enter the Fed, intervening directly into the term CP markets, circumventing the cash hoarding banks.  

Fast forward to the present.  Bloomberg News is reporting that the Fed is currently buying ninety day commercial paper at 2.88%.  That is 1.38% over the Fed's Fed Fund Target rate.  Prior to August 2007, when the funding markets began to freeze, the 90 day CP rate was very close to the Fed Funds target rate.  However, 1.38% is much lower than the 2.28% differential on October 9 of this year.  The program is slowly starting to revive the term CP market.  According to Bloomberg News;

"Corporate borrowers are increasingly issuing longer-dated debt.  Companies sold a daily average of $24.5 billion of paper due in more than 20 days last week, of 15% of total issuance, fed data show.  That compares with 7.4% a month earlier.  Issuance of debt due in one to four days accounted for 77% of the total, down from 83% a month ago."

So we have progress, slow, but progress all the same.  Anyway, I'm reading this article and I come upon this;

"General Electric, the biggest U.S. issuer of commercial paper, threw its weight behind the Fed's plan last week to show support for the facility, spokesman Russell Wilkerson said.  "There is a role for us and other large issuers to play here in demonstrating that this action is good for the market and very important for the buyers of GE paper as it provides a secondary market," Wilkerson said last week." 

Well thank you GE for doing your part!  This may be the funniest thing I've read in a long time.  "There's a role for us to play."  HAH!  Yes, the role for GE to play is the overly leveraged finance company that has it's hand out for the U.S. taxpayer to lend to it on a unsecured basis so they don't drop dead!  Russell Wilkerson, there's about two months to go in 2008, but you might just have clinched the "Fredo Line of the Year!"  Congratulations. 

Some Good News.

Lets take a break for a moment from the financial markets and talk about something that I promise will eventually be uplifting.  In the last year, a lot of people have had the rug pulled out from under them with regard to what they did for a living.  Not only have they lost their jobs, they have lost their careers as well.  I was talking to a friend of mine this week about our world of finance.  We concluded that this is a lot like what happened to the steel workers when suddenly the country stopped making steel.  What the hell are all of us finance guys going to do now that we don't "make" finance anymore ?

I'll tell you what we are going to do, we are going to use our tenacity, our creativity and brains to build all kinds of new exciting stuff!  This blog?  Let's just say that Richie and I believe in "The Gretzky Theory".  The "Gretzky Theory" states, "Don't go to where the puck currently is, go to where the puck is going to be."  We've been creating content for almost a year now and guess what?  A lot of people in the entertainment industry, especially the new wireless industry, want business content.  Ta-da!  I'm not bragging here because we haven't made one thin dime yet, but we skated to where the "puck" was going to go and now it's here.  Richie went to Yale so I won't include him in this statement. 

"If a dopey bond guy like me can do something new and at a minimum, get it into position to score, so can you!"

In fact one of our readers was just in the news for a cool new product he created.  He had the support of his family and the intestinal fortitude to take a risk and check out what happened (pay attention all you MIT-grad modelers!);

 BEND, Ore., Oct. 16 /PRNewswire/ -- Architect Mark Allan recently
suffered the loss of his job due to the economic downturn in the housing
construction market. Sending out dozens of resumes did not help his
situation, so along with his job search he also spent the last of his
savings to develop a construction toy for children. His wife and kids
encouraged him to use his advanced 3D computer training and architectural
software to develop the prototype models and metal molds. From that point
forward, it was just a short step to full plastic production. The economy
might be bad, but toys are just as popular as ever.

    Now he enjoys a brisk business, selling the toy online with big box
stores. This geometric Construction Toy of the Future -- Qubits(R), is a
dynamic new entry into the multi-million dollar construction-toy industry.
It is gaining popularity with school teachers, retailers and -- of course
-- children all across the USA. A simple plastic toy that can be built up
using a unique patented modular geometry, it quickly captures the
imagination of children who might have visions of becoming architects,
engineers, scientists or even nanotech designers.

    As a father and an architect, the inventor, Mr. Allan, realizes that
math and science can be intimidating mentally, "But if you can put
something in the hands of a child, they will be able to comprehend things
better and have more fun," he says. "Toys influence children; hopefully
Qubits(R) will inspire today's children to expand their horizons to include
engineering, chemistry or nanotechnology."

    Qubits(R), pronounced Q - bits, stands for quantum bits, Mr. Allan
said, which are a unit of measurement in the realm of science that includes
the development of semiconductors used to make the technology of cell
phones or computers. Just as coal can become diamonds when its atoms are
rearranged, Mr. Allan says Qubits(R) help children understand the
possibilities in rearranging nature's building blocks. "I always want to
associate Qubits(R) with science," Mark said. "That's what makes our toy
different from everybody else's."

Oh Sweet Jesus, Devaney is Still Around!

For those of you who have followed this blog for a while, the name John Devaney will be familiar. For those who havent been following this blog for a while (we're not sure why you wouldnt but we forgive you. We dont forget though....), John Devaney was a wonderful poster child for the excesses of the recent years. He ran a company in Florida called United Capital Markets. He had a yacht called "Positive Carry" and his own chopper where he would entertain clients and potential clients on both whenever they asked. I remember they also would sponsor performers like Jay Leno and ZZ Topp to perform at the various ABS (asset-backed securities) conferences.

The younger kids on the street used to think the world of this guy. With all his toys, his beautiful Florida lifestyle, and what looked to be millions of dollars, who wouldnt? Well me and Eric wouldnt. I remember having the "Hal Holbrooke discussion" with some of these kids a lot. You remember in the movie "Wall Street" where Hal Holbrooke plays the crotchety old broker who tells Bud Fox (Charlie Sheen), "Bud, I like you but I dont know where you are getting your ideas from and its all gonna end soon." Of course, Buddy just said the old man was jealous and had no idea what he was talking about. Of course we know what happened to Buddy. The old man was right. So were Eric and I about Devaney.

Like everything else, Devaney's hedge fund blew sky high. Gone was the yacht that we used to call "negative carry" well before this crisis. Gone was the flash. However, our friends at the NY Post reported in their article this weekend "Devaney Booed off Stage", that old John is up to his old tricks. Apparently, they had an ABS EAST 2008 conference last week! We are sorry we didnt cover it here at monkeybusinessblog.com, but since there were so few people at the ABS WEST 2008 in Vegas in February that we did cover, we figured there would be no one at the ABS EAST this year. I guess even if there were 3 people in attendance, John Devaney was one of them.

The Post article then says Devaney was talking to the crowd and talked about how the MARKET was wrong and not him. The crowd started booing and screaming! The conference administrators had to grab the microphone from him!! It got better. He had a party on his mother's yacht (that he had to borrow for the day since his "Positive Carry" was gone) and the Post talked to 2 unidentified former investors with Devaney who had lost $1.5mm. These 2 investors were getting their drink on and were plotting to steal some art from the yacht "to get even"! They ended up chickening out in the end.

People you cant make this stuff up. We are sorry we werent there to cover it live. Maybe we can get a nice exclusive interview with John Devaney. If nothing else, it looks like we need to head to Vegas for ABS WEST 2009. These are events the public demands to see! Stay tuned.

New Home Sales Up Unexpectedly

I think stocks are up right now because new home sales went up 2.7% last month. I reiterate that I understand it is a backward looking number and we would need to see some follow through in October, but we keep saying here at www.monkeybusinessblog.com that it's at least something. I am not saying its wonderful out there but there's at least a pulse on what was pretty much a dead housing market. Some of you fine viewers disagree with this and that's ok but let me do my best Muhammed Ali impersonation. One of the great interviews with Howard Cosell with Ali went something like this.

            Howard Cosell: Muhammed......Muhammed you are TRUCULENT!

            Ali:    Cooooselllllllllllll, I dont know what truculent is, but if its good, I AM IT!

So for all of you "prediction haters" of the monkey business boys prowess in calling some powerful trends, just have a look see to the right in the archive section dating all the way back to last year. Youre seeing a LOT of people saying the same nasty things about housing, wall street, the economy, etc. NOW, like monkeybusinessblog.com was saying last year, and then some. How'd that work out? Right. So, I'm telling you this housing thing is turning. It might be turning like the U.S.S. Intrepid sitting in the swamps of Jersey (i.e. slow), but its turning. If I was looking for a house right now, I wouldnt be afraid to buy. That reminds me, theres an auction next week in Florida for brand new houses that didnt sell, going for probably 50-60% lower then their original prices. It says bring a $5000 cashier's check. I think I will and my golf clubs, swim trunks, and surf board. Maybe not the surf board. But you get the idea. I aint bullish but I aint bearish anymore either on housing. Call me optimistically neutral.

Some Old Wives Tales Turn Out to be True! Asia Crushed.

I went away for one stinking Friday and a weekend to take my son to a hockey tournament in Marlborough Massachusetts (The Mighty Rye Mariner Mites took the silver medal by the way)  and I feel like I missed another leg down in the "end of the world as we know it scenario."  As Richie wrote on Friday, even the mighty Citadel, the "gold-standard" of hedge funds is rumored to be thinking about shutting down a couple of funds.  Not the flagship fund mind you, but even shuttering a few of their smaller funds is enough to send chills up the spine.  Lets face it, nobody is THAT SMART.  NOBODY.  When a maelstrom like this current crisis roars, no one who relies on leverage as a main part of their business model can "side step it."  This quote from the Financial Times over the weekend clinched it for me;

"Citadel Investment Group held a conference call yesterday (Friday) to address liquidity concerns that its hedge funds would be forced to liquidate.  The firm said that redemptions were 'modest' and it had $8 billion in available credit to support trading.  Citadel said it was 'significantly diversified', with 30 per cent of its assets in cash and US treasuries."

One thing that I have learned in this disaster is when leveraged financial companies are forced to hold press conferences about their ample liquidity, I start getting nervous about solvency.  The drive to create liquidity for hedge funds, the forced selling of their easiest to sell assets, begins to degrade the quality of their balance sheets and soon turns into a solvency issue.  I'm not trying to yell, "fire" in a crowded movie theater here, but I would not be doing anyone a service by not pointing this risk out for any leveraged financial company, including our blue chip hedge funds. 

This brings me to my title, "Some Old Wives Tales Turnout to be True! Asia Crushed."  Asia continues to get hammered as the realization of a deep global recession takes hold in these export driven economies.  One of the big problems (there are quite a few big problems) is the soaring value of the Japanese Yen and the tie in to the enormous amounts of leverage that was derived from "The Yen Carry Trade."  You remember some of the "Old Wives Tales." you were told as a kid?

1. "Don't make a funny face because it will freeze that way and you'll look funny forever."
2. "Don't pick your nose because your fingers will turn green."
3. "Don't play with your 'thing' too much or it will fall off."
4. "Someday the Yen-Carry-Trade will get unwound."

Number four is turning out to be true!  For at least the last fifteen years, leveraged companies have taken advantage of the super low borrowing rates on Yen.  Often over the last decade, these funding rates have been 4% to 6% lower than USD, Sterling and Euro funding rates.  The play was to borrow in Yen, buy USD assets (also the other currencies listed above, plus higher yielding one like the Aussie dollar) and effectively earn a chunk of the carry differential between Yen funding rates of say, .5% and USD rates of 4%.  The laws of finance tell you that this is not possible without taking huge risk that at the end of the borrowing period the value of the Yen you borrowed goes up, thus wiping out your profits.  I won't get into a dissertation here on how forward currency rates take care of this (be happy to answer comments).  However, lets just say that the laws of finance were put on hold for the last two decades to the point where everyone and their brother was funding in Yen and investing in higher yielding currency assets.

The laws of finance are now "correcting" this phenomenon.  As leveraged financial firms get redemptions calls and liquidate USD, Sterling, Euro assets, they must take the borrowed portion of cash they have raised and convert it back into Yen.  Thus, they must buy Yen and sell the higher yielding currencies.  This is why the Yen is soaring right now.  Leveraged players have to unwind the short Yen positions.  In the month of October check out these gains Yen has made on the following currencies;

1. USD - 15%
2. Euro- 35%
3. Aussie - 58%
4. New Zealand - 46%

With the world entering a deep recession, and Japan's leading trading partners falling flat on their back, the LAST thing they need is a USD/Yen of 92.  Unfortunately, that is exactly what is happening.  The forced liquidation from global hedge funds is forcing them to buy Yen to pay off funding as they delever.  The government can intervene to provide short term relief.  However, government intervention is like a drop in the ocean to the overall world currency flows.  The unwind of the "Yen Carry Trade" trumps any government intervention for the long run, and by long run I mean days and weeks.

Trying to Rally Here

The stock markets are off their lows and feel like they are trying to rally into the closing bell in a few minutes. There was a lot of angst especially at the open today which is why I implored you to go outside. Some of you heeded that call. Nice work.

There were also some nifty rumors that Citadel, one of the biggest hedge funds on the globe, was being forced to liquidate a few of its funds and thus adding to the angst. Its a scary world when like 4 weeks ago, Ken Griffin, the head of Citadel was talked about like the messiah. Today? It looks like he might be just another guy who ran a hedge fund and got smashed. They are holding a conference call right now with their investors. Conference calls are usually a sign that you are in trouble.

Monkey Business Blog sources are also being told that Hank Paulson is trying to get JP Morgan Chase to buy Citadel right now. Interesting times. My advice? Turn on the horse racing and play Big Dick's selections. Dont try and make sense of this market mess. You'll just get frustrated.