MonkeyBusinessBlog

Getting Ready For "The Football"! First A Message From Plaxico Burress.

This just came into us from one of our friends.  John McCain had "Joe the Plumber", we have "Bruce the Roofer".  Straight out of Pittsburgh, just like Plaxico, Bruce the Roofer is having a little fun with us Giant fans.  We can take it.  I haven't spoken to Big D, but I'm feeling REAL good about the Giants right now, even without Plaxico.  What does any of this have to do with business?  Nothing, which sometimes is a good thing.  Enjoy.

Here Comes the "Anything Remotely Tied To The Auto-Industry" Bailout!

Ahh, that didn't take long did it?  Here's a nice story just out on Bloomberg;

Dec. 31 (Bloomberg) -- The U.S. Treasury drafted broad guidelines for aid to the auto industry that would let officials provide funds to any company they deem important to making or financing cars.

The Treasury already has provided $6 billion in aid to GMAC LLC, the financing arm of General Motors Corp., and up to $17.4 billion in financing for GM and Chrysler LLC, using funds from the $700 billion bank-rescue package. With today’s announcement, the Treasury is giving itself discretion to provide additional aid from the Troubled Asset Relief Program to the industry, including companies beyond the automakers themselves.

“Treasury will determine the form, terms and conditions of any investment made pursuant to this program on a case-by-case basis,” the Treasury said in the new guidelines. “Treasury may consider, among other things, the importance of the institution to production by, or financing of, the American automotive industry,” the guidelines said.  The government also will weigh “whether a major disruption of the institution’s operations would likely have a materially adverse effect on employment and thereby produce negative spillover effects on economic performance” or on credit markets, the Treasury said.

Like I said yesterday, giving that initial money to GM and Chrysler was like inviting Count Dracula into your home through the front door.  You think the bank bailout has gone bad?   Wait till the six employees at Treasury try to track THIS bailout!  I'm going to call over/under on this bailout $650 billion.  Any takers?

I HAVE ANOTHER STOCK FOR YOU

As you know, this isn't a site you come to for stock picks generally. That's not our game. Never has been. Never will. But from time to time we come out and give some recommendations. Not like that assclown Cramer, with our sleeves rolled up looking like a used car salesman. No, we just present facts and when the prices go where we want them, we have a nice quiet cigar and a classy adult beverage.

Now let me preface this with saying, if I tell you to buy (or sell) a stock, you can be rest assured, I have done the same. If we recap, 2 stocks we have talked about here over the last 12 months have been McDonalds (MCD) and more recently Annaly Capital Management (NLY). Now Mickey D's is up 5% on the year. How is that looking versus the rest of your portfolio in 2008? Right. Annaly is up like 18% in the last 1.5 months since we've recommended it. Do you think we kinda know what we are talking about?

Now for today's stock. Its a company that actually buys property and rents it out and manages it. Before you curse me out, listen up. In the Summer of 2007, I was hot on the trail to buy STUDENT housing. Yep thats right. Off-campus housing for college kids. I thought the prices were a bit steamy and waited, luckily. At around the same time, one of our avid readers, known as "Fletch", turned me onto a stock named Education Realty Trust (Ticker:EDR). These guys buy the campus housing and manage it. They selectively develop new campus housing too. They also pay a fat dividend of 20.5 cents a share (which is a 16.40% annual yield at today's prices).

Now at the time (Summer of 2007), the stock was hovering around $14.50. Today, I just bought some at $4.99. I also will be joining their Dividend Reinvestment Plan (DRIP) and you can find an enrollment form for this program at www.educationalrealty.com . So EDR is the way to go. After all, in a recession do more people or less try and go to college to stay competitive in the workforce? They have to live somewhere right? Can't wait for that first dividend to roll in sometime in February. Enjoy.

Quick Update On GMAC's Pathetic Debt Swap Capital Raise

In our post from yesterday I alluded to this debt swap exercise GMAC had embarked on to raise capital from bondholders.  A debt swap is an exercise whereby a company who can't raise capital and is heading to bankruptcy, offers to swap senior debt for a combination of new senior bonds and equity. To the bond holders it's a classic, "Take what you can get because something is better than nothing."  According to Bloomberg News, here is how the debt swap went, falling just a tad short of its $38 billion goal;

Dec. 31 (Bloomberg) -- GMAC LLC, the auto lender that’s getting a $6 billion federal bailout, completed a debt swap designed to bolster its capital after falling short of its $38 billion goal.

About 59 percent of its old notes eligible for the swap and 39 percent of the debt from its Residential Capital unit were tendered, according to a statement from Detroit-based GMAC today. The goal was 75 percent.  The swap, designed to help GMAC qualify as a bank holding company, lost some urgency when the Federal Reserve approved the company’s conversion last week and the Treasury promised financial aid Dec. 29. GMAC has said the swap was still an important step to reduce debt and shore up its balance sheet. The firm is the primary lender to customers of General Motors Corp., and restoring the GMAC’s health is part of a U.S. plan to save the automaker from bankruptcy.  GMAC accepted about $17.5 billion in aggregate principal amount of its notes and $3.7 billion of ResCap’s notes. GMAC will issue about $11.9 billion of new GMAC senior guaranteed notes and $2.6 billion of GMAC cumulative perpetual preferred stock to its holders. The ResCap swap results in $688 million of new GMAC 7.5 percent senior notes due 2013 and $483 million of new GMAC 8 percent subordinated notes due 2018, the statement said. Some debt holders balked at terms of the exchange because they may have to take a loss on the transaction.  

The key takeaway is this little gem;

"The swap, designed to help GMAC qualify as a bank holding company, lost some urgency when the Federal Reserve approved the company’s conversion last week and the Treasury promised financial aid Dec. 29"

"Lost some urgency."I bet!  Like I said yesterday, "Welcome to freakshow central."  GM has us going down a rat-maze that may top the AIG travesty, minus AIG's valuable assets.

Bailing Out GM. It's as Easy as 1-2-3 ... Umm, 4-5-6-7-8-..........

JPM Chase analysts are predicting that main GM supplier Delphi will also get some sort of federal bailout package to keep it viable and hence GM viable.  Funny, but I thought we were bailing out GM so they wouldn't take down the entire supplier chain and cost the U.S. millions of jobs?  Now it appears that the suppliers need a direct bailout too.  Here is the Bloomberg story GM May Get Delphi Rescue in Bailout

This is one ingenious and evil scam and you had to know it was coming.  Once we got into GM for the initial $13.4 billion it was like inviting Count Dracula in through the front door.  GM has our money now, and a lot like AIG, they are now calling the shots and Uncle Sam is getting led around by the nose.  First GM gets a multi-billion loan.  Then they say, "For us to succeed and pay you back you really have to keep our financing arm GMAC afloat."  So last week we grant GMAC, who is essentially insolvent, a federal bank charter.  This of course will give GMAC access to unlimited short-term liquidity from the Fed.  Then yesterday we cough up $5 billion to GMAC in return for preferred stock, essentially to get them over the little capital hurdle necessary to qualify for a federal banking charter.  Additionally, because GMAC needs more capital through a rights issue (giving existing shareholders, who right now are bondholders who are swapping bonds for equity.  There's a whole story there for another time) GM has asked for and received an additional $1 billion loan from Treasury so they can participate in GMAC's rights issue.  After all, it would be embarrassing if GM couldn't buy stock in its own subsidiary!

Now we come to Delphi.  Here's a piece of the Bloomberg article (whole article is up top in blue);

Domino Effect

“There’s a pretty good chance that some sort of resolution for Delphi is included,” said Kirk Ludtke, an analyst at CRT Capital Group Inc. in Stamford, Connecticut. “To stabilize GM and give it an improved chance to attract private capital, you need to resolve Delphi.” Delphi initially had a $3.4 billion commitment from Cerberus Capital Management LP in December 2006 to help it out of bankruptcy. Cerberus backed out in April 2007, and Delphi received a new offer in July 2007, valued at $2.55 billion, from Appaloosa Management LP. That offer was withdrawn in April 2008.  Delphi is working on alterations to its current bankruptcy reorganization plan that will cut the amount recovered by creditors. The new plan also will account for GM’s assumption of its unfunded pension liability, which reduced Delphi’s exit- financing requirements.  On Dec. 1, Delphi won an agreement that allows it to continue using its $4.35 billion bankruptcy operating loan, which expires tomorrow. Delphi potentially can continue to use the proceeds from the loan until June.

Welcome to freakshow central!  I'm going to go out now, drive down the block into town and tell Vigna Brothers Auto Shop to start the paper work for their Treasury money!

Let's Beat A Dead Horse, Shall We?

I know I've been sounding like that guy "Little John" in the old Bugs Bunny cartoon that kept screaming, "Dont you worry, never fear, Robin Hood will soon be here!" Then of course, after about 8 times, Bugs gets frustrated because Robin Hood doesn't show up and yells at "Little John" about being a liar - and voila - Robin Hood appears.

Well I know I keep saying "it's almost time to buy, but not yet"... which is probably a cause for frustration for some of you, but I'm gonna say it again. I must add, I am in no way timing this to coincide with the New Year either. Some others might be, which is causing my stock charts to behave the way that they do. But I will say this, the housing market again laid an egg this morning when the S+P/Case Shiller Index came out and said housing prices dropped in 20 major cities over 18% for this October versus October 2007. 18%!! Then consumer confidence came out below even the lowest of estimates from economists. That's saying a lot. You know what else is saying a lot? Stocks are......UP!! 

I'm telling you there is somebody or somebodies in there buying stocks. There is also more cash on the sidelines relative to where the stock market is in over 20 years. If these stocks stay up on the day today, that's also a big statement. 

Now let me play "Little John" again... a little more realistic though... "duuuuuuh don't chew worry, nevah feahhhhh, bettah markets will soooooon be heaaahhh....duhhhhh".  

In These Dark Times There is Hope: "The Slap-Chop"!

Last night, as I was watching the movie classic "Rocky" this infomercial came on.  This proves to me that American "know-how" is alive and well.  We will overcome with "The Slap-Chop"!  And by the way, the "pitch-guy" could probably bring peace to the Middle East if he got all the players in a room.

Case-Shiller Housing Index Decline Sets Another Record.

First the bad news.  The Case-Shiller housing index of twenty metropolitan areas fell a record 18%, year over year.  Now the "good" news.  The numbers are from October.  October was perhaps the high of the "The World is Ending-Panic Index".  Since this time, Richie has gone out into the field, along with some special Monkey Business friends to some foreclosure auctions.  Here was Richie's report from two weeks ago from the auction;

Well folks, I tried to buy a few items at the foreclosure auction down in Fort Lauderdale, FL this weekend that was provided by the good folks at www.ushomeauction.com, but I missed.  When I tell you this was a room filled with over 3000 people at the Broward County Convention Center, I'm not kidding.  When I tell you EVERY one of the 300+ properties for sale had multiple bids on it during the auction, I'm not kidding.  Most important of all, when I tell you about 85 - 90% of the properties were sold -- which meant the banks agreed to sell to even the lowest priced bids AND the buyers had the proper financing for the purchases -- I'm not kidding.

I'm not disgusted or upset that I missed, either.  I know there are more opportunities to come but I also know I better hurry if I want these rock bottom prices.  I think you can start turning off the TV now too on some of these reports about how everyone will be homeless shortly.  There were people all over the place down there at the auction (and people bidding online via the internet) willing to bid for a bargain.  I understand it's not the cure-all for the housing industry, but I'm telling you right now these auctions are taking supply off the market.

We'll keep you posted on further developments on this front, but I will leave you with the line of the auction provided by the auctioneer while trying to get people to bid more on a property, "Um folks, I'm not talking about you buying a car, I'm talking about a place to LIVE.  At this price, you probably couldn't buy a CAR!"  The price (and the laughter from the crowd) went up off that little quip and the property sold for a whopping 50 thousand.  Um, I'll be at the next auction too.  No doubt.

Additionally, one of our close associates had this to say from the foreclosure auctions he attended;

Boys, just bot 1st one at auction on fri.  29cents on dollar from where direct comp (4 doors down street, similar stats & condition) traded retail in mid-Oct.

So, while we expect housing to continue to decline, perhaps at an accelerating pace in November and December, the anecdotal evidence that Richie and our friend have started to gather in December suggests that at least real buyers are starting to clear inventory at a meaningful rate.

Treasury to Buy Stake in GMAC

From Bloomberg News;

Dec. 29 (Bloomberg) -- The U.S. Treasury said it will purchase a $5 billion stake in GMAC LLC, the financing arm of General Motors Corp. Treasury will also lend an additional $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company, the Treasury announced today. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.  The credit is under the Treasury’s Troubled Asset Relief Program and comes after the Federal Reserve last week approved GMAC’s application to become a bank holding company.

Becoming a bank makes GMAC eligible for federal aid and eases the threat of a collapse, which threatened to dry up credit for purchases of GM cars. Dealers depend on GMAC to finance about three-quarters of their inventory. Analysts have said the lender’s survival is a crucial step toward saving GM, which has said it may run out of cash.

This is really becoming comical in a sad, pathetic sort of way.  GMAC is allowed to become a bank despite having "a little trouble" coming up with enough capital to qualify for a bank charter.  No worries, Uncle Sam will help that along by putting $5 billion of capital into GMAC.  Presto!  GMAC is also going to embark on a rights offering to raise capital.  To help that along we are going to lend General Motors $1 billion so GM can participate in GMAC's rights offering!

Lets summarize what we, the taxpayer, are doing for GM;

1. To get GM through the next couple of months we lend them $13.4 billion.  GM has to come up with a plan to become a "viable company", the unions have to make wage concessions and Rick Wagoner can't fly the corporate jet anymore.  Otherwise, we're going to make them file Chapter 11??  Riiiiiight!  Good luck with that.
2. Since GMAC finances seventy-five percent of GM dealers inventory, we allowed them to become a bank so they can attach themselves to the many fine free-money lending facilities set up by the Fed.  We will take a $5 billion stake in GMAC to give them enough capital to avoid making the granting of a federal bank charter too much of a farce. 
3. Additionally, we are lending GM $1 billion so GM can buy a stake in GMAC.  Let me repeat, we are lending GM $1 billion so they can "buy" a stake in GMAC. 
4. As a quick aside, do you know why GMAC would have been dead a long time ago if not for all this aid as well as about eighteen months of debt swapping, renegotiating, pleading  and other assorted financial drama?  They blew themselves a second, third and fourth A-hole in the subprime and Alt-A residential mortgage market.  Additionally, they blew themselves a fifth one in the commercial real estate mortgage market.  Getting mad yet?
5. Therefore, we lend GM $14.4 billion and inject their financing arm, GMAC, with $5 billion of capital and an open ended short-term Fed credit line, so GM can build cars to sell to their dealers on credit, so dealers can sell the cars to consumers to get the money to pay back GMAC, so GM can pay us back.

I hope someone at Treasury is keeping all this on a spreadsheet!

I GOT A NEW GIG FOR US

I know I've said this before but I'll say it again.  There's been a rash of articles and talking heads lately yapping about company board of directors around the globe who are soooooooo incompetent.  I would argue that it's not so much incompetence as it is doing absolutely zilch when the guy that works for them, the CEO/Chairman, is an assclown.  As a matter of fact, they do what the CEO/Chairman says to do about 99% of the time.  You think they are happy about that now?  People are crawling all over the Board of Directors now about how they just collect a check and are a mouthpiece for the officers of the company.  That's not what they signed up for I bet. 

So I have a proposal.  Why don't you contact your favorite company, or better yet in many or your cases, tell the people at YOUR company, that the monkeybusinessblog.com boys should be on your Board.  You think there will be any shenanigans?  How about when one of these assclowns does something untoward and we drop a dime on him about 10 minutes later on the blog?  You think people will take undo risk with us on the case?  Or even better, you think we can't ask the right questions?

So chew on that for a little while.  Maybe even contact your congressman.  After all, the government is a partner in a lot of these companies now, right?  I think I'm onto something here.  It's always been a dream of mine to be quoted in the company minutes with something like this: "Mr. Bennett asked who is this assclown and why does he run the place again?!?!"  Enjoy.

Explaining The Bernie Madoff Phenomenon As Only Dr. Seuss Can!

Ever since the Bernie Madoff scam unfolded I have been struck by the very dark comedy of it all.  Originally, to get fleeced by Bernie you had to belong to the inner circle of American-Jewish universities, philanthropies and country clubs.  Like any close knit ethnic and religious organization, this relatively tight knit community was formed because just a couple of generations earlier, the Jewish members of finance and education were not allowed to play with their Protestant or Catholic counterparts around the world.  Therefore, they formed their own exclusive groups. You had to be in one of these exclusive groups to give your money to Bernie in order to get his fantastically stable and relatively high returns.  The ethnic makeup of the original victims, in this case Jewish-Americans, is a classic symptom of a scam.  The predator, Madoff, preys on the fact that his victims trust him because he is of the same group that they are.  The necessary wall of skepticism that they would give to an "outsider" is lowered because Bernie was "one of them."

Eventually, the institutional "old-money" power circles that had historically excluded the Jewish money circles from their clubs now wanted into the most "exclusive" Jewish money club, Madoff Investment Management.  They wanted in BAD.  Looking back, Madoff must have found it so amusing to watch all this "old money" that just a few decades ago wouldn't have let him anywhere near their clubs and institutions, now practically begging to give him their money.  Luckily for the "old money", there were "feeder funds" and "fund of funds" firms now set up (earlier in the decade) to take the "old-world money", for a fee of 1%-2% (as well as a performance fee).  These funds and "private banks" climbed over one another to give Madoff their money, paying steep fees just for the privilege!

The rest is history.  As it turned out, Bernie was an equal opportunity thief.  He stole from Jew and Gentile alike.  In fact he had just recently started fleecing Arab investors and was making his way to Asia when the scam finally blew up. If you have time, check out Dr. Seuss "The Sneetches" starring as Bernie Madoff is "Sylvester McMonkey McBean".  Part I and Part II.

Merry Christmas and Happy Hanukkah From Monkey Business!

You know what?  No talk today about Bernie Madoff or jobless claims or the Fed tearing up AIG's credit default swaps with "unnamed counterparties" {cough cough......Goldman Sachs} on our dime.  It's Christmas Eve tonight and the fourth night of Hanukkah.  Here's a clip from last year that I think you will find enjoyable.  Our friend and New York City's favorite itinerant singer, C.J. (M.T. Suit makes a appearance as well) takes us into Christmas and the new, hopefully better year.

The Seer of Orange County California Speaks...And It's Not Good

John Moorlach, the man who warned against the impending doom to Orange County California in the early 1990's based on County Treasurer Bob Citron investments in structured notes, and was ignored, has spoken again.  According to Bloomberg News, Mr. Moorlach believes that we will see at least ten municipal failures in the coming year.  Here is the story on Bloomberg Moorlach Sees Municipal Defaults in 2009.

We have sort of a "special" relationship with Mr. Moorlach as we have followed his record of correctly predicting disasters and usually being ignored.  Here's a nice little video we did a year ago on the subject.

NOT GOOD IN HOUSING.....AGAIN

Now you are going to hear everywhere that housing is still in DEEP trouble.  Purchases of existing homes were down 8.6% in November.  You're going to hear that prices dropped 13.2% from a year earlier.  Even NEW home sales dropped again last month.  You'll also hear that it's going to get a LOT worse.

From my point of view, this is rear view mirror stuff.  As in, this is all in the past.  What is going to happen in the future is the question I want answered.  BUT the reason I will stay disciplined about not chasing anything at any foreclosure auction is the number that I like to watch.  That's the number of months it will take to clean up the inventory at the current sales pace.

That number is the key for me.  All the other stuff is cocka-locka (technical term).  However, in October that number was 10.3 months.  You want that number going LOWER.  You know what it did last month?  It went HIGHER to 11.2 months.  That ain't a trend we like to see.  Like our stock market projections, we ain't giving the monkeybusinessblog.com BUY recommendation on the housing market yet either.  God bless and pay down those mortgages if you can.

Where the Heck is Neel Kashkari?

Have you seen this man?

 

Boy, talk about a thankless job.  I have to admit, when Treasury first started injecting capital directly into the banks I thought it was a good idea.  I figured it was a better option than having Treasury try to buy billions of bonds that they would not be able to value properly, especially after Ben Bernanke stated to Congress that Treasury would purchase the assets at some sort of "intrinsic" value.  It would be better to put the capital into the banks and let them move the assets to stronger hands (distressed asset funds) at market levels and then absorb the losses with the TARP money.  I know for a fact that this has actually happened over the last month.  Continuing their track record of awful public communication, Treasury has not communicated this to the public.  Additionally, Treasury has not communicated to the public that many of the banks who took the TARP capital are anticipating further losses in residential, commercial and corporate credit and probably need more capital before they start lending.

Now we have a situation where people, universally, are furious over the question, "Where the hell did the money go?"  This has just been exacerbated by the Auto-Bailout hearings, where GM and Chrysler were given the proper gas-light treatment before getting their $17 billion loan.  Personally, I think the TARP money has gone to absorb losses or shore up against further losses.  Maybe Treasury and the banks aren't talking because they are afraid of another September style financial panic.  More likely, it's just bad communication on the part of Treasury.

Whatever the case, I feel for Neel Kashkari.  They put this guy out as the public face of an operation (The Office of Financial Stability) that is essentially a ghost ship.  Treasury was undertaking this historic effort with a group that probably didn't have the headcount for a decent pick-up basketball game.  It's a bad joke.  This seems to be a recurring problem throughout this entire mess.  "Decision-makers" seem to have no idea what it actually takes to get things done right.  In October, Treasury could have put an ad in the the local New York papers, "Wanted, Experienced Bankers and Regulators to Serve The Office of Financial Stability", set up a booth in Grand Central at noon the next day and by 2:00 PM the same day they would have had one hundred very qualified people heading to Washington.  Instead they sent a thirty-five year old former technology investment banker with no direct regulatory experience and a few senior government officials who also had no idea how to do the actual job.  Hell, did they even have a mission statement or some sort of game-plan?  I'm going to guess no.

Sorry Neel.  Somebody owes you a apology.

Hank Greenberg Interview: This is Good Stuff

CNBC interview with Hank Greenberg this morning.  Besides the little fact that Hank thinks the government screwed AIG with the loan terms to bail their asses out, he asks all the right questions in his best self-serving way.  The best quip:  CNBC asks Hank if Goldman Sachs has too much influence over the financial system and Hank says, "You think?"

 

Here is the link to watch the interview.  I suggest you watch it.

http://www.cnbc.com/id/15840232?video=974531592

"How Cerberus Stole Christmas." The Sad Story of Kimberly Wisconsin

Story on Bloomberg today about the sad aftermath of a private equity takeover of a paper mill in Kimberly Wisconsin.  Feinberg Despised in Wisconsin.  It must be real hard to explain to a fellow human being that he was just a piece of "Free Cashflow" to you. Here's some of the story;

Dec. 23 (Bloomberg) -- Just about everyone in Kimberly, Wisconsin, hates billionaire Stephen Feinberg.

“This is a greedy, extremely greedy guy who doesn’t care about other human beings,” said Jeffery Wyngard, a third- generation Kimberly mill worker with 30 years on the job. “Feinberg has no morals,” said paper mill workers union local president Andy Nirschl. “There won’t be a lot of Stephen Feinberg Little League fields,” said Bob Brukardt, who also worked at the mill for 30 years. “He sold his soul to the devil.”

Feinberg inspires this reaction in Kimberly because Cerberus Capital Management LLC, the company he founded in 1992, owns NewPage Corp., which closed the town’s 119-year-old paper mill that Local 2-9 of the United Steelworkers says was profitable when NewPage bought it nine months ago. Six hundred people are out of work in the town of 6,200 at the same time Cerberus’s money-losing Chrysler LLC automotive unit was seeking a taxpayer loan.

 As a special added bonus, here's a clip on private equity that Richie and I made around this time last year;

Some Great Inspiration

Here is a movie clip to watch at your leisure.  It's one of my favorite movies of all time, "The Best Years of Our Lives." Made in 1947, it is the story of three men coming home from different theaters of World War II.  Check out this scene with Dana Andrews.  He's had the toughest time adjusting to life back home and he's just about to give up when he gets inspired.  Here's hoping and working for the best in 2009.

Here Comes the Lawsuits- Fairfield Greenwich Funds Sued

From Bloomberg News Fairfield Greenwich Funds Sued Over Madoff Losses.  No surprise here.  Fairfield Sentry Fund put SEVEN POINT THREE BILLION of investor funds with Bernie Madoff, earning many millions of fees.  As we said earlier, funds that put investor money with Bernie were either; 

1. Dumb and greedy.
2. Negligent, lazy and greedy.
3. Knowingly participating in a criminal conspiracy...and greedy.

Take your pick Walter! (Walter Noel, Fairfield's founding partner).  Richie and I can't tell you how many times we've been in meeting rooms or "events" with the like's of these "Masters of the Universe".  These guys acted like they got their intelligence from the Almighty himself.  Now its all over.  Greedy, lazy pigs.  So long ass-clowns.

Insurers Plunge on Commercial Mortgage Outlook. Same Blind Dog Running Into the Same Parked Car.

Check out this piece from Bloomberg Insurers Plunge on Commercial Mortgages.  A couple of weeks ago, led by The Hartford, these insurers stocks surged on The Hartford's sunny projections for 2009.  At the time back on December 5 we wrote a piece, "The Hartford Reminds Us, It's Not a Lie if You Believe It.";

The titled borrowed of course from the great "Seinfeld" character, George Costanza.  The Hartford Financial Services Group had a investor call today where they announced that "liquidity is ample" and capital "was strong".  These are the same guys who bought a problem S&L a couple of weeks ago for $10 million so they could apply for a Thrift Charter and access the TARP for $3.4 billion.  This is also the same firm that just weeks ago, had to take a $2.2 billion hit for their exposure to AIG, Lehman, Freddie and Fannie.  I may be leaving a trainwreck or two out from that list.  Perhaps Wachovia and/or WAMU.

The stock is up an astounding 57% off this stunning news.  This is like watching the same old, blind dog, chase the same parked car and get its face smashed in over and over again.  The fact that management had a call to state they were liquid and more than adequately capitalized should strike fear into the hearts of everyone by now!  How many times can you hear this same song and dance?  Here are the only two things to take away from this call.  The CEO Ramini Ayer said that a portion of the insurers portfolio has been “hammered way beyond what we believe is the intrinsic value,”

What portfolio might that be?  How about the Commercial Mortgage Backed Security (and loan) portfolio?  The Hartford has "overweighted" that sector, holding $11.2 billion CMBS.  What CEO Ayer said today is he has decided to carry those assets at what he calls intrinsic value, which is essentially wherever he feels like marking them.  Keep selling Mortimor, keep selling.

Observations in the Holiday Season

My daughter is 5.  She is figuring out the whole Christmas thing real nicely.  She figures "I'm a good kid (mostly), I write a letter to Santa, I leave some cookies for the fat man and some milk, some carrots for his reindeer, and I am all good.  I get all the stuff I ask for."  To which Santa's good helper, "Daddy", thinks um maybe. 

You see, I got it all about the bargains, the price slashing, the "deals" this season.  Except you know what I think is happening, too?  A lot of these stores aren't ordering lots of supply for this season and for the 1st qtr of '09.  That makes sense right?  If you think you are about to go bust or worse, the guy you are buying from is about to go bust, you order just what you need and that's it.  Retail stores are getting absolutely pulvarized, yet when I go to the stores or even online to get those "awesome deals", I have found that 80% of that stuff is OUT OF STOCK.

Now Marketing 101 tells me that ain't an awful strategy by the retail companies, because most people, if they can't get the exact thing they wanted at the store or online will just grab something else.  Not me, but I think I am on the unique scale there.  So it kind of makes me believe if you think that you are going to get some REALLY awesome bargains after Christmas at these retail stores, I would say, not so fast my friend.  I think the companies are forced to have HUGE inventory management excellence to survive.  So if you really need something and it's on the shelf, you may be in luck.  If not, you may have to order it at a not so special price.  Understand??

Now for me, my daughter only asked for 2 things (I told you she was a good kid).  A Barbie "computer" with a mouse and all, and a new TV.  The Barbie Computer was on sale at a lot of places for a mere $29.95 from $49.95.  You know what?  I can't find it.  So I will probably go on EBAY and beg shortly.  And by beg I mean pay up.  AND pay for express shipping to get it here by Xmas.  The TV?  Well, before you yell at me for getting a 5 year old a TV, it ain't going in her room.  It's going in Mommy and Daddy's room!  So it can be "hers" but we figured it was high time to have more than 1 TV in the house.  That "deal"?  I really like this Panasonic 42" Plasma.  It looks like I can get all I want for $750.  For a real nice one.  Shipped for free.  Happy days.  Which tells me for higher end items there is still stuff available at good prices.

I have a funny feeling the numbers are SO bad in terms of projections for these retailers for the Christmas season that they are going to come in a little bit better than people think.  Oh, the consumer is going to have to change his ways for sure.  It's just too soon for the reality to sink in this time.  The lower or more reasonably priced items are moving.  Now does anyone have that Barbie Computer??  I'll pay up....

O.C.C. and O.T.S. Publish "Re-default" Data on Modified Loans

First of all, being layed up has forced me to watch more CNBC than I normally would.  You know what?  If you go into it looking to be entertained and pop a couple of percocets, it's pretty damn funny!  In the early morning you have Mark Haines and Erin Burnett.  I love Haines.  He's irreverent and he really seems like he couldn't give a sh*t if they fired him tomorrow!  He reminds me of lots of good guys I've worked with.  I like him a lot.  Erin Burnett early in the morning?  Hysterical.  I think she works about an eighty-hour week, including the Sunday talk shows and by Monday morning she's shot.  I swear that she got lost in whatever the hell she was trying to say three times today!  I also think Haines doesn't like the fact that CNBC has decided to make his co-host the financial reporting golden child.  I caught him giving Erin at least two verbal back of the hand slaps this morning.  Fabulous. 

Then Kudlow comes on.  He is completely outrageous.  In twenty years I'm not sure if I've ever agreed with ANYTHING Kudlow says.  I may be the Ying to his Yang.  I want to have a show with him.  Today he was using the New Testament parable of "The mustard seed" to explain why he likes buying retailers NOW!  Apparently, he feels that Christmas 2009 will be a huge improvement from this current Christmas season.  He based this on.....?  He never really said.  Personally, I'd be more worried about retailers MAKING IT to next Christmas!  Anyway, a good point to segue into the O.C.C. O.T.S. Third Quarter Mortgage Metrics Report . Check it out http://www.occ.treas.gov/ftp/release/2008-150a.pdf

The "re-default" numbers on modified mortgages are certainly sobering, but not really shocking.  Check out these 30+ days delinquent numbers on loans that have been modified six months after modification;

Prime Mortgages (originally) 38.5%

Subprime                             61.29%

Alt-A                                   53.15%

There's a mustard seed for Larry.  To modify mortgages to the point where "re-defaults" get down to semi-reasonable levels (as opposed to these insane ones) we will EASILY go through the remaining $350 billion of TARP money.  Easy.

It's A Credit Crunch Christmas!

This is good.  Sad, but good!

Swiss Bank Justifies Investing With Bernie: He Was Cheating

Finally, an institutional investor, Union Bancaire Privee, gives a no bull-sh*t answer as to why they thought Bernie Madoff's uncanny returns were real, Bernie had a "perceived market edge".  The Financial Times writes this morning Madoff had "perceived market edge."

It's pretty simple folks.  Feeder funds and private banks sent investor money (and charged nice fees to play a fancy game of post office between the investor and Bernie) to Madoff because they were either;

1. Dumb and greedy.
2. Negligent, lazy and greedy.
3. Knowingly participating in a criminal conspiracy.

In a letter to investors on December 17, UBP stated that they believed Madoff could successfully implement his "split-strike options strategy because;

"We were assured that he had some visibility as to the momentum of the markets due to his significant volume size as a broker/dealer.  The perceived edge was Madoff's ability to gather and process market-order flow information and use this information to time the implementation of the split-strike strategy."

Ahh "market-timing".  Others might call that "front-running" customer orders and trading on inside information.  The Swiss used to be so discrete.  Now?  They put in writing that they were sending funds Bernie's way because they assumed he was trading illegally.  I've asked this before and I'll ask again, "What the hell happened to the Swiss?" 

If I Were Japanese I'd Be Pretty Pissed Off!

Tonight the Japanese Ministry of Finance reports that exports for the month of November crashed nearly 27% from last year.  From Bloomberg News;

“Japan’s export crash is finally upon us, and this is the worst thing that could happen,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The recession will be very severe as companies adjust investment, production and labor.”

I just do not understand how the Japanese didn't see this coming.  How can they still be so export dependent?  This is almost like running a company that makes gas guzzling cars and not having a "Plan B" if gas prices soared. ...oh wait, never mind!  Seriously though, the Japanese have been through what we in the United States are going through now.  If anybody knew how devastating a broken banking system could be for a nation's economy, it's Japan.  The Japanese two major trading partners are The United States and China.  Both the United States and China were dependent on one thing to maintain growth and prosperity.  They were dependent on the Play Station playing, Chevy Tahoe driving, up-to-his-eyeballs-in-debt American consumer.  Whatever happened to the time old adage, "Know thy customer?"  If anyone should have known the United States insane spending and no-savings habits it's Japan right?  The Japanese have been feeding our debt addiction for decades.  How could they not make any meaningful adjustments to their economy over the last decade to decrease their dependency on the American consumer?

Your answer might be, "Well, with the rise of China as a global economic power, the Japanese did diversify their American exposure by greatly increasing their economic ties with China."  The only problem with that is that right now China is very heavily dependent on the American consumer too.  You can say that hindsight is twenty-twenty but I think this was a relationship that was pretty easy to read, ESPECIALLY FOR JAPAN.  Japan was once an emerging export driven economic power.  It was and still is a society that saves about as much as we spend...too much!  Japan should look at China and see a younger version of themselves.  China saves "too much" because right now there isn't much of a social security system set up.  If the citizens don't save a huge percentage of their incomes, no one else is going to do it for them.  Therefore, Chinese citizens can't consume enough right now to create a strong domestically driven economy to offset a sharp decline in exports to the U.S.  Hence, the Chinese economic machine slows dramatically.

How come Japan didn't see this double-header coming?  Isn't this what their Ministry of Finance is supposed to think about and create policy?  While the U.S.A. is still the clear winner in this year's "Dopey Economy" award, Japan has to get some serious consideration for third or fourth place (Iceland has to be two or three).

    

Big Dick is Anti-AFC East

Well folks its a little bit late but on purpose this week. You see we wanted to see how the 2 games shook out prior to Sunday in the NFL. And you know what happened? Both AFC teams that needed to win, won. The Colts and the Ravens have turned up the heat on the other guys in the AFC. Boy do Miami, New England, and the Jets NEED these games today if they want to get to the playoffs. Not surprisingly they are all favored.

But you know what? The oddsmaker knows this and we dont really care who wins the games outright when we are betting pointspreads. And we are playing pointspreads. Therefore, lets go AGAINST the teams that need em! Controversial? Sure. Winning formula over time? You bet your asssscot.

So: KC+4 vs miami, ARIZONA+7.5 @ new england, SEATTLE+4 vs New York Jets.

Good luck and god bless.

Where Were All Of Bernie's Trades?

Bloomberg asks a question that we have been wondering about, "If Bernie Madoff was doing the volume of trades he needed to do to generate his returns over the last decade or so, wouldn't he have literally BECOME the exchange traded equity option market?  Madoff Strategy "Dwarfed Markets" In Trades Never Done.

“It was never done,” Michael Schwartz, chief options strategist at Oppenheimer & Co. in New York and a trader since 1965, said of the strategy. “If he did it on an exchange, we would have heard about it, and if he did it over the counter, the person he bought it from would have hedged it on an exchange.”

This "phenomenon" has been apparent throughout this entire financial debacle.  It hasn't just been Bernie Madoff.  Every Wall Street bank assured its investors and its regulators in 2007 that "they hedged" the mortgage credit crisis in one way, shape or form.  A few bloggers and a few fund managers like David Einhorn, came to the conclusion that;

1. Either the "hedges" they were talking about were impossible to do with out moving the entire market against themselves, or; 
2. They had layed off the risk in the over-the-counter derivative market to entities that were dramatically "over-rated" by the ratings companies, or;
3. The only hedge for the risk was to sell the damn position because it was unhedgeable!

Risk gets transferred from one party to another.  It is very rare that the risk goes away forever.  It either appears in the exchange traded markets, or like in the case of AIG, it shows up when the counterparty who provided the hedge can't pay up.  This is common sense that's easy to lose when everybody is making money and happy.  As we go forward with a new regulatory and risk management regime we have to remember to follow the hedge and/or follow the deal flow.  In the case of Bernie Madoff, trying to follow the deal flow would have resulted in the quick conclusion that these trades just weren't being done and hence the business was a mirage.

In the future we have to follow the advice of the late Mark Felt ("Deep Throat" from Watergate)...."Follow the hedge....follow the hedge."

CCB To Ken Lewis: "How About A Nice Game of Solitaire Kenneth?"

I want to thank Ken Lewis, CEO of Bank of America, for giving me this layup post.  I had surgery on my busted leg yesterday and today the magic drugs they gave me have worn off!  The Financial Times is running a story this morning, "BofA Shelves $3 billion Plan to Cut CCB Stake." This is beautiful.  Back in 2005 BofA purchased a large stake in CCB, with the right to sell the shares in November 2008.  While the shares of CCB increased sharply, CCB was worried about what would happen if BofA dumped a large portion of shares into a relatively illiquid market.  Therefore CCB got BofA to buy MORE shares of CCB at a discount, with the right to sell the shares in 2011, in May 2008.  At the time we worried that BofA was being played by the Chinese like "Raymond" (played by Laurence Harvey) was in the 1962 classic "The Manchurian Candidate".  BofA was essentially locking themselves into CCB until November 2011.  A big share dump in 2008 would crush their 2011 stake.

This cancellation of BofA's $3 billion sale of their CCB stake, on the request from CCB, certainly seems like Kenny is getting played just like we thought.  From F.T.

The precise reason for the 11th hour-abandonment remains unclear, but dealmakers in the region believe that the Chinese government was unhappy about the timing of the share sale, the first such attempted divestment by a foreign investor following the expiry of a lock-in period.  The share sale could have triggered a fall in CCB share price just as Beijing is trying to garner support for its large banks and arrest a stock market slide.

I am going to guess that CCB is using its leverage that it gained over BofA by getting BofA to pony up more dough that locks a bulk of their CCB stake until 2011.  Here's what we wrote back in May of this year, "Ken Lewis: The New Manchurian Candidate"

Bank of America (BOA) announced today that it planned to add to its already sizeable stake in China Construction Bank Corp. (CCB) by investing another $1.86 billion.  This increases it's stake in the largely government owned bank to 10.8%.  BOA gets these additional shares at a 64% discount!  Nice deal no?  It sure seems that way but it has been pretty tricky since BOA started investing in CCB in 2005.  Back then BOA bought 9% of CCB with the option to buy up to 19.9% til 2010 (at a discounted price provided CCB stock value increased...which it did).  When BOA first bought its 9% stake in CCB in 2005, it promised it wouldn't sell any of its stake until November 2008.

Here is where the game of high stakes poker comes in.  CCB stock has increased nearly 180% since 2005. However, CCB diluted the stock a lot through share offerings a little while ago which probably didn't make BOA too happy.  Additionally, as I am sure you have been following, BOA is having a little capital problem back here in the motherland.  BOA has the option to sell its existing stake in CCB in November of this year (the Countrywide takeover is supposed to be consummated by the end of the third quarter).  It is estimated that this stake is worth $14.5 billion.  I don't think the Chinese or Kenny Lewis want to test the liquidity of CCB shares by unloading a sizable amount on the market.  Sotoday BOA announced that it would buy another $1.86 billion with the agreement that they will not sell any of that stake until August 2011 (at least not without the consent of CCB).  Ken Lewis said today, "We have a great relationship there and sure want to keep it that way.''  I bet!

Here is what I worry about.  First of all, it seems as if these two entities CCB and BOA are so important to each other they are becoming welded at the hip.  CCB has some indirect credit exposure to BOA because if losses keep mounting for BOA here in the United States (which I think they will), the potential need to liquidate a big piece of this winning trade increases, at least until November 2008.  However, BOA has just increased their stake in CCB by $1.86 billion.  They can't sell that piece until 2011.  So a sizable dump of their current CCB holdings could damage their remaining position.  Did BOA just kind of paint themselves into a corner, albeit at a 64% discount?

Here is what I worry about even more.  In the United States we have shown in gory detail just how bad we can cock up a banking system.  We've done it in the past, we sure are doing it now, and I am sure we will do it again.  However, sorry as it is, we are the best game in town.  Now take a largely government owned (that's a totalitarian communist government mind you) bank with very little history of what we would consider to be real banking, and a lot of history of doing what their government masters tell them to do.  Additionally, the Chinese banking system has a history of corruption, influence peddling, and influence accepting.  I think it is very naive NOT to expect that many $ billions of capital is going to just one day disappear.  It is going to happen, I am sure of it.  It scares me to see our country's second largest bank tied so strongly into an entity that has far more potential to explode than I think BOA is giving it credit for.  The last thing we need is for another $4 billion of precious capital to go down the terlet.

Anyway, this is why I call to memory that 1962 John Frankenheimer classic "The Manchurian Candidate",  In the modern day version the bad guys have their hooks into Kenny Lewis as opposed to poor brainwashed Raymond Shaw.  If you remember it took good Old Blue Eyes, Frank Sinatra himself, to break the evil grip the communists hoard had on Raymond.  Who's up to play Frank's part? 

SPEEDY RECOVERY "BIG E"

As  most hockey stars have to do from time to time, our resident "Wayne Gretzky", Eric Salzman, has to go under the knife due to his leg injury incurred while playing hockey a few nights ago.  The boards are a little safer for all the hockey players without "Big E" roaming the ice. 

Now just because he can't skate or run, doesn't mean he can't talk or write.  Which is good news for all of us who follow monkeybusinessblog.com!  We want you back real soon E!  Here's to a speedy and happy recovery for you pally.  Good luck!

A Quick Note...And a Laugh

Last night my futile effort to play ice hockey came to an end with a SNAP!  The last run of the last drill of the night.  Broken leg in two places.  How am I doing? 

Is it almost time to buy stocks?  Richie makes compelling points and I've watched him invest for over a decade and he ends up on the right side of the trade more than most.  One thing I learned is if the market wants to go up, it goes up.  Period.  I think however, the rally we get is going to a nice bear market rally. 

There's just too many unanswered questions for me.  I hear horror stories everyday concerning companies "destocking" inventories, companies all along the supply chain going toes up because they have been cut off from normal credit from their bankers.  The cut-off of the life's blood of the global economy, financial capital, is going to reach a point where the damage will be irreversible.  Technically, we have monster hedge funds like Citadel cutting off redemptions until next March...and maybe longer.  What are they going to sell to raise cash?  Stocks?  I think so.

We have the plummeting dollar in the face of record Treasury supply coming down the pike.  How is that going to play out with global trade when exporting countries want to slash their currencies too?  How the hell are we going to finance all this debt, especially with the Fed bringing short term rates down to zero?  This is essentially destroying the all important government repo market.  This is a huge technical because it makes it real difficult to borrow treasuries.  That's not good from a trading persepective (liquidity) when we are increasing supply to record levels.

That's enough for now.  I'm going to try some of these pain medications they gave me.  Actually I'm not in much pain right now..but I'm bored! Just kidding for you children out there.