MonkeyBusinessBlog

Geithner to Reassure China About Deficits.

From Bloomberg News;

Treasury Secretary Timothy Geithner arrived in Beijing with a pledge that the Obama administration will control its borrowing as he sought to reassure China its holdings of U.S. government debt are safe.

“No one is going to be more concerned about future deficits than we are,” Geithner told reporters on the way to two days of meetings that start today in China’s capital.

Geithner will meet with Premier Wen Jiabao, who in March called for the U.S. to “guarantee the safety of China’s assets.” China is the largest foreign holder of U.S. government debt, which so far this year has handed investors the worst loss since at least 1977 on forecasts for ballooning federal budget deficits. 

To read the whole article Geithner To Reassure China About Deficits.

Sometimes, not always, but sometimes a story will hit and I will IMMEDIATELY see the perfect movie clip to parody the story.  This is one of those times!  The late great Peter Sellers from Dr. Strangelove;

This Always Makes Me Smile.....Have a Nice Weekend.

Wanna Eat, Drive & Sleep Comfortably? Guess What? That Costs Somethin'

As we wind down the glorious month of May in the markets, we have noticed a few interesting things. First off, bloomberg.com just reported that commodities have gone higher in price in May by more than any other month since 1974. Oh, and the US Dollar is dropping. Many are pointing to a general recovery in the economy as for the major reasons why.

I got another reason. I-N-F-L-A-T-I-O-N. Yep, when the wiseguys catch a whiff that inflation is in the air they grab what we like to call "hard assets". You know, stuff (technical term). They certainly don't want to hold dollar bills. So they buy gold bars or corn futures or gasoline. They get rid of their dollar bills. Eric has been telling you all for months now how interest rates will be going higher due to all the bonds the Treasury needs to sell to raise money for all these bailouts - and guess what? It's happening. 

See, the scary part about when inflation creeps in, it's really difficult to get out. Kind of like cockroaches. You know how you can get rid of inflation? RAISE interest rates. You think the Obama Administration wants to do that? Ummm, no. So you might want to pray that something happens and rates stay low. I'm kind of scratching my head thinking about what could happen. The thing is everyone was talking about deflation a few months ago and I laughed at that. Now INflation is being talked about. I ain't laughin at that. 

So we own COP and UNG as you know and those are performing quite nicely now that commodities are roaring. We'll keep those positions. Stocks are basically unchanged and we still like our SPY position but we're getting a little wary. As in, it might be a LOOOONG summer. Stay tuned as always for more updates.

"Bond Vigilantes" Here it Comes!!

Bloomberg News has a piece out this morning titled Bond Vigilantes Confront Obama as Housing Falters.  Now I know that the term "Bond Vigilante" is an old term used with some pride back in the day when the bond market used its power to get presidents and Fed chairman to balance budgets and tamp down inflation.  Now however, I fear that the term "Bond Vigilante" will be used by the White House to create a "Wall Street" vs "Main Street" visual that paints Wall Street as foiling the President's plans to save the economy by "pushing up interest rates".  In fact I think I predicted it yesterday.  You just watch, it will happen real soon.  I can see the Robert Gibbs press conference as clear as day.  Maybe even the President himself!  Can't you just hear it?;

"Now, these Bond Vigilantes on Wall Street....these folks still don't get it.  They don't like the fact that we are trying to clean up the mess that they made through our bold rescue initiatives so they are trying to derail us by pushing up interest rates.  Well, I'm here to tell all you good folks on Main Street that I'm not gonna let them do that.  Not this time!  Thank you and God bless America!"

There are two frightening things here.  The first is I hear these voices in my head all the time!  The next is, I can see the President actually believing what I know he will be saying.  The good thing is the Fed has put a lot of thought into why Treasury rates are rising and they found this (From Bloomberg);

Fed officials see several possible explanations for the rise in yields beyond investor concern about inflation. Among them: The supply of Treasuries for sale exceeds the Fed’s $300 billion purchase program, the economic outlook is improving and investors are selling government debt used as a hedge against mortgage securities.

What a novel concept!  Supply of Treasuries is overwhelming demand, and investors who know that the Fed is committed to keeping mortgage rates down artificially by buying mortgage backed securities are front running the Fed.   As overall rates rise and MBS widen to Treasuries, fast money sells Treasuries and buys MBS and rides the Fed's wave all the way home.  Then they take profits, lather-rinse-repeat.

That's what is happening but that won't make much political red meat for the President. 

Paul Krugman Says We are Not Printing Money.

Let me start by saying I like Paul Krugman.  I know that is heresy in many circles but not in mine.  That being said, I either don't understand or I disagree with what he says today in the New York Times The Big Inflation Scare. Specifically this statement;

"Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all."

Here is how I understand things as a dumb fixed income guy.  JPM Chase has $10 billion FNMA mortgage-backed-securities.  These MBS are real securities and they are assets on JPM's balance sheet. The Federal Reserve asks JPM to offer these securities.  JPM offers the securities at 100-00.  The Fed says, "Thank you, your done."  JPM says, "Great, $10 billion MBS sold to you at 100-00."  Upon settlement, those MBS leave JPM and settle with the Fed.  The Fed pays for the securities by crediting JPM's Federal Reserve account by $10 billion.  Isn't that credit an asset for JPM?  If not then JPM just gave away $10 billion right?

Now the question is, "Where did the Fed get the $10 billion to credit JPM with?"  It certainly seems like they got it by expanding the money supply no?  Maybe they didn't "print" the money but they certainly "made" it. Those excess reserves at the Fed that Mr. Krugman is talking about are assets on JPM's balance sheet.  I bet they would be a little upset if the Fed treated these assets as fictional and just made them disappear.   As far as I know, the only way the Fed can get back the reserves they credited JPM's account with is to sell them an asset of equal value.  At least that is what they taught us in Accounting 101.

If I am wrong please in all seriousness tell me why.

"Geithner To Urge China to Boost Demand."

From Bloomberg News;

Treasury Secretary Timothy Geithner will urge China to boost domestic demand and loosen controls on the yuan in his first trip to the nation since taking office, while readying a defense on queries about sinking U.S. bonds.

In meetings with Chinese leaders in Beijing June 1-2, Geithner will encourage China to move toward a more flexible exchange rate, a U.S. Treasury official told reporters in Washington. He will also answering any questions the Chinese may have about the dollar or the U.S. budget deficit, the official said on condition of anonymity.

Treasury Market All Better Now!

Whew...Good thing THAT'S over!  I love when I see quotes like this from the equity guys (From Bloomberg News)

“A drop in Treasury yields is a positive for the stock market and for financials,” said a money manager who oversees $21 billion in New York. “Investors had been concerned about how quickly rates had been climbing, affecting the ability to refinance and get mortgages. A drop in rates creates a good environment for financials.”

Sorry bro (I like using that "bro") but just like in your market, people get tired of selling, consolidate, take profits by covering shorts, flatten their positions so they can go away on Friday....whatever.  Our good buddy who trades lots of bonds said this afternoon, "Everyone just wants to crawl into their hole and hide for the rest of the year."  We have the mother of all supply problems AND a Federal Reserve trying to keep treasury and mortgage rates artificially low.  You can't trade with a combination of those two dynamics.  It's not a good technical when the ten-year note moves POINTS day over day over day.  You ask a trader to either bid or offer bonds in size and that trader knows that there's a good chance he might be wearing a quarter-point loss before he can square himself back up.  Therefore, he hides under his desk and liquidity goes to crap.  That's not the place we want to be when the Treasury is issuing  a couple hundred billion a month!  And if trading Treasuries is damn near impossible, try trading mortgage backed securities in this!

The law of the markets dictate that we go higher in rates and unless the government makes it illegal to sell Treasury notes, we are going higher and all the Fed is going to continue to do is lose a lot of money and devalue the currency trying to fight it.

I'm going to go dig a hole. 

Did You Know That Home Mortgage Debt is Nearly 75% of GDP?

The folks at www.housingdoom.com (what a great name!) have a nice little piece out this morning The Housing Price Bubble is Deflating Faster Than the Debt Bubble.  

I feel stupid that I didn't know that, especially since I've had a pretty good handle on the amount of home mortgage debt outstanding and GDP.  I guess I just never put the two side by side and said "Holy Sh*T!!"  What's frightening is we've been at that 75% level since 2006....and at the rate GDP is going into the crapper..Yikes!

From Doom;

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt.

I just got the picture of President Obama, Larry Summers, Tim Geithner and Ben Bernanke looking like little kids building a sand castle on a beach shore-line and wondering why the waves keep knocking it down.

** One of our friends just reminded us, it's only debt if you have to pay it back!

 

See What Happens if You Don't Modify a Delinquent Mortgage!

Forget about paying servicers $1,000 bucks to modify a loan and then $1,000 a year for three years if the loan stays current!  How about if you don't modify a delinquent mortgage you can get "DRAGGED TO HELL!  I couldn't wait till this movie came out BEFORE knowing that it starts with a loan officer kicking a poor old lady to the curb!  This is awesome.  I wonder if the FHA financed part of this picture?  The clip is scary so don't let the kiddies see, or at least tell them that the same thing can happen to them if they don't pick the toilet seat up before peeing!

Freddie Mac Shows the Way Forward!

Great article in America's best business section, The New York Post Freddie Mac Attack.  Talk about a story with delicious irony.  In one story we get to examine;

• The disaster in commercial real estate financing.
• The continued nonsense from the GSEs even AFTER their humbling government takeover.
• The sick comedy with our debt rating process.

From the New York Post;

Think of it as a Freddie smack.

Government-owned Freddie Mac has snubbed the two leading rating agencies -- Moody's Investors Service and Standard & Poor's -- on the plum assignment of rating the market's first securitization in nine months, relying instead on the market's two smaller rating agencies.

Instead of going with Moody's and S&P, the industry standard, Freddie will have AAA ratings from Fitch and Canadian agency Dominion Bond Rating Services on its $1B deal.

According to people familiar with the matter, Moody's and S&P lost the Freddie mandate because the ratings method they applied was considered too rigorous.

That's not to say that snubbed firms would have granted the deal something less than a AAA rating, a source noted. However, the ratings firms required Freddie to sign documents that freed them from blame in case anything went wrong with the bonds.

This is hysterical....in a sick sort of way.  The government is desperate to head off the oncoming category 5 commercial real estate hurricane by using Freddie and Fannie to provide liquidity to the sector.  They both have sizable multi-family portfolios to begin with, but what I think is happening is the government wants to ramp it up big time (the guarantee part of the business) to get as many multi-family loans refinanced as they can.  I am sure that the underwriting process will be relaxed considerably, leaving you and I (the tax-payer) with our tushies hanging in the breeze.  Oh, and lets not forget that the government will be providing nice non-recourse financing to investors through TALF!

Meanwhile, S&P and Moody's are looking at the billions of CMBS drek that they rated over the last few years and are essentially saying, "We'll put our discredited stamp of approval on this sucker, but you have to sign a bunch of documents absolving us from misrating the bond." 

Then you have Freddie, pretending that it's 2001 by telling S&P and Moody's, "If you aren't a team player, we'll just cut you out and find somebody that will put a AAA stamp on the bond.  You guys are in the box!" 

As Tony Soprano said, "The hustle never ends."

Funny Things Happen When You Create Money Out of Thin Air.

Did anyone with a brain in their head think that we could issue enough debt to eventually match our GDP, or even surpass it and very bad sh*t wasn't going to happen?  Did anyone think that we could issue $100 billion of debt in one week, with the promise of coming back to the market next week for another big slug......and then repeat the process next month, and the month after that and the month after that....and the Fed would solve the supply problem by "buying" billions of it back by wiring cyber-money into dealers accounts at the Fed....and the bond and currency markets weren't going to puke?

Unfortunately for us, we have people running things who have never actually been in "the markets"  and have seen the simple yet brutal arithmetical answer to what happens when you hear over and over again,

"Please bid $1 billion.  Thanks, you are done, please bid another $1 billion on the follow.  Thanks you are done.  Please bid another $5 billion on the follow.  Thanks you are done...."

Prices tend to go down and yields (rates) tend to go up....by a lot.  That is what is happening now and it's just the beginning.  The President and his Treasury Secretary and his Budget Czar can say all they want about how they are going to eventually balance the budget down the road and make all these new Treasury notes and bonds disappear.  To the market that means nothing.  President Clinton understood that when he apparently said upon taking office, "You mean the course of my Presidency is going to be determined by a bunch of f**king bond traders??"  The answer was yes then and to a large extent it is now.  This isn't a "Wall Street" vs "Main Street" issue, although I am counting the days until President Obama tries to make it one.  This is an entire global investment community eventually saying, "We're already puking on the bonds we bought last month, we can't take anymore."  It's kind of like financial water-boarding.

Anyway, associated with all this Treasury supply and the Fed's futile attempt to control it, is the $500 billion or so agency mortgage-backed-securities the Fed has been purchasing.  Here's something we wrote back in January 2009;

 I've been watching the Fed wave in $10 billion of Fannie and Freddie mortgage backed securities over the last couple of days and all I see is a lot of money going into originators pockets Fed's MBS Purchase Program Nets BIG GAINS! (my post from yesterday), a small drop in primary mortgage rates and a complete cock-up (technical term) of the MBS market, as a gigantic, long-only fund (The Fed) wades in with a purchase strategy that has nothing to do with relative value.  The money the Fed loses taking down a mere $500 billion MBS by June will outpace any "gains" we achieve in the housing market.  You heard it here first. 

Well, it's nearly June and the average MBS was down TWO POINTS yesterday!  On $500 billion that's a cool $10 billion......in a day!  Here's a little song by the late and great Warren Zevon for "Helicopter Ben".

 

Hmmm. I Seem to Remember A Certain Blog Recommending Buying a Little TBT Back in December!

Wow!  What a selloff at the back end of the old Treasury yield curve eh?  Here's what we told you to do waaaaaaaaaaaaaaaaaay, back on December 10, 2008.

We like to say on this blog, "Don't skate to where the puck is, skate to where you think it's going to be."  Once the Fed starts buying the hundreds of billion of Treasury notes, Freddie and Fannie notes and Mortgage Backed Securities to engage in what is called, "Quantitative Easing", I am scared sh*tless about what happens next.  We wrote  about this a couple of days ago and now we see some big guns in the bond investing world are voicing similar concerns.  Here is our post If You Can Picture It, It Can Happen.  I am scared that at a minimum we are creating a very dangerous Treasury bill, note and bond bubble that will burst as the economy starts to "re-flate".  When the economy starts to come out of deflation and pick up, the Fed is going to have to sell a lot of bills, notes and bonds to mop up all the easy money sloshing around the financial system. The Fed will be unwinding it's "quantitative easing" and bonds are going to get crushed. I also think we can get some serious inflation.

There is a exchange traded fund (ETF) ticker TBT.  It gets you short two times Treasury bonds twenty years and greater in maturity.  Just know that this trade will produce what is called negative carry. Because you are short the bonds you are effectively paying the coupon and receiving a cash rate of close to zero.  Therefore, everything else equal, it will cost you a bit each day.  However, if you want to hedge against the potential for a real bad event in bonds (whose yields have set all-time lows the past couple of weeks), and inflation, TBT is a nice little ETF to own.

TBT closed 42.75 on December 10.  We bought some at 44 and some more at 39.50 that week.  Closed today at 57.  Hi-Yah! 

The Fed's Quantitative Easing Strategy - Part II

Ten-Year Treasury note up to 3.64% as Fed buying can't keep up with Treasury selling.

NOBODY but the Fed is buying Agency Mortgage Backed Securities at the insanely tight spreads to Treasury (and the Fed is the one who tightened these spreads to the point where nobody else wants to buy them).   However, with rates going UP sharply, mortgage servicers have to....SELL them.

How we doin'?

Kim Jong-iL And G.M.

From The Williambanzai7blog

BANZAI7 News--Undisclosed sources have disclosed that North Korean leader Kim Jong IL is a bondholder of General Motors. The disclosures also indicate that Kim was a big purchaser of Chrysler and GM credit default swaps in trades opposite American International Group.

Knowledgeable unknown sources indicate that Dear Leader will lose his shirt if GM files for Chapter 11 as expected on June 1. Dear Leader was apparently infuriated by the terms of GM's proposed exchange offer and rumors that the UAW is slated to receive more equity in a Federal financed bankruptcy restructuring.

Read on Macduff  Kim Jong-iL Watching GM

"Problem Banks" Rise to Highest Level in 15 Years. When They Get to 75 Years We Can Stop Counting!

From Bloomberg News;

U.S. “problem” banks climbed 21 percent to the highest total in 15 years in the first quarter, and provisions set aside for loan losses weighed on industry earnings, the Federal Deposit Insurance Corp. said.  The FDIC classified 305 banks with $220 billion in assets as “problem” lenders as of March 31, an increase from 252 with $159 billion in assets in the fourth quarter. Assets at “problem” banks were the highest since 1993, the agency said today, without naming any lenders. The FDIC said its insurance fund slumped 25 percent to the lowest level since 1993.

“The first quarter results are telling us that the banking industry still faces tremendous challenges,” FDIC Chairman Sheila Bair said today at a briefing in Washington. “Going forward, asset quality remains a major concern.”

As we told you last Thursday "Umm, New York....We Have a Problem." The FDIC is in BIG trouble.  It would be in big trouble EVEN IF IT HADN'T guaranteed over $400 billion of BofA and Citi's toxic assets AND guaranteed $billions in bank debt and inter-bank lending.   Unfortunately it did both. 

This is a huge, huge mess folks and don't let anyone tell you different.  All this hoopla about "Stress Test" passing and capital raising by the big 19 banks and financial institutions is a perfect execution of what we like to call, "The Bigger Idiot Theory".  It's a charade.  They (the government) are replacing TARP money with suckers capital and because they can't go back to Congress and ask for another few hundred billion clams to bail out the FDIC.  Any capital that gets returned is going to go right into this next bailout.  I'm not telling you this to ruin your day.  However, that warm stream you feel going down your back ain't rain....if you catch my drift.

Muy Bueno Sonia!

Hey you can call me a guy who plays favorites for the local folks who "done good" all you want.I love stories like the one about the newest Obama nominee, Sonia Sotomayor. A Latina girl growing up in the Bronx with her mom working 6 days a week as a nurse, her dad deceased when she was 9, and a tough neighborhood with lots of distractions. All she does is go to Princeton University, then Yale Law School, then becomes a big judge, and is now nominated to the Supreme Court. Christ, Hollywood has probably already optioned the movie on her life! 

Because I didn't collect "topps judge cards" (like topps baseball cards), I really didn't know the history of Judge Sotomayor. Then I read it yesterday. She's the judge who ruled in the New Haven, Ct. fireman case. What is that, you ask? Oh, its the case where a white guy who was dyslexic spent about $1,000 of his own dough to get special study materials to pass a test to get a promotion in the fire department. It entailed also making audio tapes of the study material because he had trouble reading. The guy would eat, sleep, and drink this exam material for months when he wasn't putting out fires during his regular job. Lo and behold the guy passes the exam!! 

Then Judge Sotomayor rules against his promotion since there were no black people promoted. Yep, you read that right. Check it out.

You want to know why Judge Sotomayor did this? I mean, after all she could probably relate to hardships and struggles to get where she was, right? Well, you ain't a gonna find out. What you ask? "How come I'm not gonna find out, Richie?" you say? Well because the good judge didn't issue a reason. So there. You know why she didn't submit a reason to the public? Because of THIS very day. As in, she didn't want some good ol' Republican boy in the Senate some day when she might be a Supreme Court nominee, shredding her apart due to this ABSOLUTELY politically correct decision in the fireman case. But don't worry. The Senate hearings for her confirmation will be good. They'll bring this "fireman-gate" up and other things like Judge Sotomayor saying something about how Latina women can handle certain decisions better because white males haven't "been there". The hearings won't be as good as the Clarence Thomas hearings with Anita Hill (whatever happened to her?) but they will be entertaining nonetheless. 

Regardless of your political beliefs, if you think the Supreme Court is all about abortion or gay marriage you are sadly mistaken and you might want to get some of those "topps judge cards" your damnself. There are PLENTY of business decisions made in that court all the time. Which way do you think the good Judge Sonia is gonna rule on those items? I'll give you a hint: A-N-T-I Business

So good luck to the local girl who made it bigtime. But Eric and I have been pretty good at picking what kind of folks these Obama nominees have been so far, right?  As they say in the markets, "I'm a seller". As in, in my opinion, this ain't a good thing. Hope she proves me wrong.   

FaceBook Worth $10 Billion. Hmmmm.

From Bloomberg News;

Facebook Inc., the world’s largest social-networking service, said it received a $200 million investment from Russia’s Digital Sky Technologies, valuing the company at $10 billion.

Digital Sky, which has offices in Moscow and London, will get a 1.96 percent stake in the company through preferred stock, Palo Alto, California-based Facebook said today in a statement.

Facebook, which makes money from online advertising, is counting on its surging popularity to help it overcome the worst ad market for Internet companies since the dot-com bust. Chief Operating Officer Sheryl Sandberg said last month that the company has enough money to ride out the economic slump, though it hadn’t ruled out accepting more funding.

“A number of firms approached us, but DST stood out because of the global perspective they bring,” Chief Executive Officer Mark Zuckerberg said today in the statement.

Facebook has received more than $400 million in equity investments from Microsoft Corp., Peter Thiel’s Founders Fund, and venture capital firms Accel Partners and Greylock Partners.  Digital Sky has funded Internet companies in Russia and Eastern Europe, including Mail.ru, Forticom and VKontakte. It’s invested in social-networking companies that reach 350 million people and are market leaders in more than 13 countries, the company said.

Now, we are definitely down with the whole new age media thing.  That's why we are partnered up with PodcastGo.com.  It's all about providing eyeballs with content anytime and anywhere.  However, when I read these FaceBook stories I can't help but see Steve Case and Gerald Levin giving each other love on the podium as they destroyed Time Warner!

Perhaps....Just Perhaps...The "Consumer" is an Idiot.

I've been out of action the last few hours and was a little surprised that equities were up sharply.  I said, "Hmm, why are we up?"  Then I saw this headline on Bloomberg News. "Consumer Confidence Jumps The Most in Six Years."

Americans’ spirits are lifting as stock prices rebound, mortgage ratesfall and perceptions grow that the job market may not get much worse. Discounts by companies such as Chrysler LLC and Macy’s Inc. to attract customers are also benefiting consumers.

“We’re certainly moving in the right direction,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “We expect to have positive economic growth in the third quarter. The job declines will fade.”

I find something odd.  Isn't the "consumer" the same completely irrational being that used his house like an ATM machine and signed up for every "free" credit card that came in the mail from the years 2003 to 2007 and charged them up to the hilt to buy a whole bunch of sh*t that he or she didn't need and couldn't afford?  It's stupefying that we can be running all kinds stories about how "consumers" in this country acted like meth-addicts with their finances and are now ruined, while simultaneously running stories about how we are rallying off  a jump in "Consumer Confidence".  First of all, I have never met anyone, who has met anyone.....who has met anyone that has actually been polled for this sucker!  Do any of these economists or bobble heads who make up our  "Financial Media" see ANYTHING wrong with this picture?  They might as well poll my son's nursery school class!  Actually, my little guy hears me rant all day so if they asked him if he was confident to consume he would say, "Sh*t no!"

Meanwhile, back in the real world, the Case-Shiller/S&P housing numbers produced another disaster, down 18.7% in March and down 19.1% when comparing Q1 2009 with Q1 2008.  From Bloomberg;

“We see no evidence that a recovery in home prices has begun,” David Blitzer, chairman of the index committee at S&P, said in a statement.

If the "consumer" is dumb enough to think that they can actually go shopping for stuff they want, from whom are they going to borrow from?  It ain't going to be from the bank. 

 

We'll Sell When We Feel It's Right

The markets are feeling a little bit more blaise. Well it is May. The May to November period in stocks has never been wonderful. So we tread carefully. We sold McDonald's (ticker: MCD) for the first time in about 12 years the other day and you know what we are doing this morning? Selling Chevron (ticker: CVX) for the first time in about 12 years. Yep. Oil is starting to climb and although CVX is not a pure play on the price of oil, it should move a little bit up. When oil is up 35% on the year and up 80% off the lows in December and CVX is DOWN 12.5%, it is time to move on. So we bid a fond farewell to our friend Chevron who has provided with lots of joy over the years. That also doesn't mean we won't be back when we feel the time is right. Just not now. We like our money. SELL CVX.

Speaking of money, many of you have inquired about our natural gas play, ticker UNG. Well it appears we were one day too early last week when natural gas had its worst day in about 5 years as it dropped 9.2%. But please keep in mind this was a technical play (technical term) based on technical charts (technical term). We are going to stay with the position because the charts still look fine.  Obviously we will continue to monitor the situation, as well as other positions, and keep you posted. HOLD UNG. 

You can tell by my tone in the 1st paragraph, I am getting less bullish. We still have nice profits in SPY and COP but I have no problem taking those profits when the time is right. That could be soon. Good luck today.   

Banks Turning "Bad Loans Into Income." Uh-Oh.

So how about that Kim Jong-il?  I just put the finishing touches on my "History of Structured Finance-Part I" to be given in Korea (South....the North hasn't gotten back to me yet) the middle of next month and that nut-job detonates a Hiroshima strength bomb and fires some short range missles!  Commie bastard!  I had a whole analogy about structured finance being potential weapons of mass destruction and now I can't use it.

Anyway, a short note to be followed by a longer one when I get home from www.foxnews.com "The Strategy Room" (9am-10am).  Give this a read from Bloomberg JP Mprgan $29 Billion WaMu Windfall Turned Bad Loans Into Income.  You don't have to be an accountant, which I am not, to read that and say, "Uh-oh."  The long and short of it is, when JPM Chase and Wells Fargo bought the disasters known as WaMu-Wachovia they marked down the banks gigantic portfolios of toxic loans (Option ARMS, Alt-A, Subprime, etc) down sharply.  The banks were allowed to do this because they used the Purchase Accounting Rule as explained here, 

Purchase Accounting

The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

“One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” Cassidy said. “Those transactions should be favorable over the long run.”

Ah yes, accreting them back in.  Talk about hiding the salami!  The banks will accrete this discount (which when you add BofA and PNC into the equation equals $56 billion) based on the difference between the, "Value of the loans on the bank's balance sheet and the cash flow they are expected to produce."  The key word here is expected.   According to Bloomberg, check out what Wells Fargo is doing with the $122 billion of Wachovia Option ARMS;

Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.

The Wachovia loans added $561 million to the bank’s first- quarter interest income, leaving Wells Fargo with a remaining accretable yield of almost $10 billion.

Government efforts to reduce mortgage rates and stabilize the housing market may make it easier for borrowers to repay loans and for banks to realize the accretable yield on their books. With mortgage rates below 5 percent, originations surged 71 percent in the first quarter from the fourth, a pace that may accelerate during 2009, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.

Recapturing Writedowns

Wells Fargo, the biggest U.S. mortgage originator, doubled home loans in the first quarter from the previous three months, in part through refinancing Wachovia loans.

“To the extent that the customers’ experience is better or we can modify the loans, and the loans become more current, that could help recapture some of the writedown,” Wells Fargo Chief Financial Officer Howard Atkins said in an April 22 interview.

Hmm, $561 million taken into income in the first quarter.  One way they are doing it is refinancing or modifying existing loans into new ones.  That's one way to write assets back up! The question here is, what's the credit quality of those loans?  Remember we are seeing huge "re-default" numbers on modified loans.  This smells bad.  Back after "The Strategy Room"!

The Unofficial Start to Summer

Hey, it's Memorial Day Weekend! Which of course is the unofficial start to summer. If you've been in the Northeast U.S. this week, you probably feel like it's the middle of the summer with the 88 degree temperatures and blistering sun. Word is more people will travel this year than last year due to a 33% drop in gasoline prices versus last year at this time. Probably a little less air travel though.

The markets are going to be pretty slow today, as expected, as people take off early to get wherever they are going. Right now stocks and bonds are pretty unchanged.

Well we here at monkeybusinessblog.com wish all of you and yours a fabulous weekend. Make sure you enjoy yourself at the barbeque or whatever you are doing. Most importantly, hug a veteran or a current serviceman or woman and thank them for all they do because after all this weekend is about them and their fallen colleagues. Talk to you next week everybody.

Ed Liddy Sails Off Into the Sunset....Mission Accomplished!

From Bloomberg News;

“What I will get out of this is, hopefully, an enhanced reputation and a feeling like I stepped in at an incredibly vulnerable time for our country and provided some stability,” Liddy said in an interview. “It’s easy to forget just how awful the situation was in September.”

Now, as you know, Mr. Liddy was a member of Goldman Sachs Board of Directors and held quite a few shares of said company.  Of all the people in the world that Hank Paulson, Tim Geithner and Ben Bernanke could have picked to run AIG back in September, they picked Mr. Liddy for this "thankless task."  Certainly there were other ex-insurance company executives or other able, smart people to take the reigns.  It had to be a Goldman Sachs guy.  Why?  Well, an outsider may have said, "Boy, it looks like we are operating as a conduit for Treasury to pay Goldman Sachs $13 billion of taxpayer money.  Is there something wrong with that?"  Mr. Liddy likes to remind us that he only got paid $1 for his service.  However, didn't Goldman Sachs stock go up from $47 to $137 in his AIG tenure?  I don't know about you but a 191% increase in your major stock holdings ain't too shabby!

I think if you go back to Mr. Liddy's quote above and replace the word "country" with Goldman Sachs, it's a pretty accurate quote.

Banks Want to Buy Back TARP Warrants? "Show Us a Bid Bro."

Why does everything that government touches have to be so freaking complicated?  Bloomberg has a nice piece out today TARP Warrant Sale Shows Banks May Reap "Ruthless Bargain"

Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorpin Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data. If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed.

“For once we’d like to get a fair value when we come into contact with the banking system,” said Representative Brad Miller, a North Carolina Democrat and chairman of the Investigations and Oversight Subcommittee of House Science and Technology Committee. “We don’t want a ruthless bargain.”

Way to go Congressman Miller!  Mr. Warren Buffett got some real nice warrants on Goldman Sachs and General Electric in the fall right?  What do you think WEB would say if the fine folks at Goldman or GE if they came to him and said, 

"Hey, thanks for helping us out in our time of need.  Yeah, about those long dated options we gave you as part of the deal....we want them back."  

WEB would say something like, "Of course gentlemen, this is America and there is a market for everything.  What's your bid?"

The point is, we can reasonably argue over what implied volatility to use and what dividend assumption and rate to use to price the forwards of each of these publicly traded stocks and then arrive at a level that is fair for the taxpayer and doesn't kill the banks looking to get out.  However, we took these warrants because we wanted some freaking upside on the bailout!  That was the whole point.  And lets be real clear, ALL THESE GUYS GOT BAILED OUT AND THAT INCLUDES GOLDMAN SACHS!  If the shyt kept rolling down the hill and over a cliff, we would be left "holding Herman" (technical term).  Now that the bailout has worked in these companies advantage they can't just disregard the benefit we got for saving them.

Our advise to Treasury and Congress is simple.  Ask each bank what Warren Buffett would do if he was the owner of the warrants?  Trust me, they'll understand.

Report From The Field: South Western Pennsylvania. It Ain't So Bad!

I know it's rough out there....trust me, I know.  While it may seem like it, we don't mean to be pounding you over the head with bad news and dispelling good news every day because we're having a good time.  I mean, sometimes it's pretty funny, but I know it can be downright depressing.  That's why we try to throw some good video clips, make stellar predictions about American Idol, bring Big D in, etc.  When we bring the pain it's because we don't want you getting hurt out there by all the bobble heads feeding you bull-sh*t.

Anyway, one of our great friends who runs a large construction company in Western Pennsylvania has given us a report from the field.

• Unlike here in the New York metropolitan area and other parts of the country that boomed in the boom times, Western PA never really boomed, so therefore, it's not busting.  Actually, when you think about it, things got to a relative happy median in PA.  Business was good, but not blistering to the point that things got out of control.  Hence, our friend reports that while there are bankruptcies and foreclosures in his area, it's not at a crisis point.
• Commercial banking in his area has been relatively reliable from a business standpoint, although smaller or newer players have had problems.  Hence, customers are paying slower and suppliers are tighter with their credit.  He has seen one decent size customer go bankrupt.  Apparently, they didn't drag anyone else down with them. 
• The Federal stimulus dough is starting to roll in.  Our boy has a union company (as well as a non-union company) that will be a recipient of stimulus business, which will help subsidize the non-union side.  
• The main thing our friend tells us is things are TIGHT.  What he means by that is, everyone is terrified that things will get worse and work will disappear.  Therefore, when projects come up for bid, guys come in real aggressive (low bid) to win business.  Of course that leads to tighter profit margins.  That means a couple of screw ups or bad luck and you can be working at a loss.  

So, all in all, not terrible out there in Western PA.  I imagine that is representitive of a good amount of the heartland.  I hope anyway.  Feel free to comment or email in and let us know how things are with your local economy.  This is how we get a true read on the shape of things, as opposed to a bunch of graphs and charts from the Feds. 

GMAC, Ahem, Ally Bank Gets More Dough

Did anyone see that GMAC the financing arm of GM (General Motors) changed its name last week to Ally Bank to enhance its tarnished image? I always love that. They have long meetings about these things too. Hire Public Relations Groups. Always about image. How about trying to sell more cars? That might help your image too. If Charlie Manson changed his name to Mother Theresa you think that would change his image? And apparently that part of their image about selling cars is still lacking as the government is about to drop them another cool $7.5bn of our taxpayer money.

 

If I'm Ford Motor Company, do I get a little miffed that I have still not taken a dime from Uncle Sam while my competitors have been given billions? I never thought I'd say this but "bravo Billy Ford you got some guts." It almost makes me also want to say, "you know what? screw GM and Chrysler. I'm getting a Ford F-150 truck." That would be an interesting dilemma for our administration now, wouldn't it? For us taxpayers too. If some sort of grass roots movement started with not the slogan "buy American", but "buy American that isn't owned by the government." Interesting times.

Fed to Add "Legacy" Commercial Mortgage Backed Securities to TALF.

Oh dear.  I have to hand it to Geithner and Bernanke.  They learned their lesson about charging up to Congress and asking for hundreds of billions of taxpayer funds to "bailout banks, car companies and insurance groups and credit card companies (did I leave anybody out?).  The American people are so damn pesky, creating oversight boards to see where the money is going, complaining that the institutions receiving their money either aren't lending to them or lending to them the way "Louie on-the-corner" would.  This just ain't the way to go and Hank Paulson must be real pissed he didn't think of what Tim and Ben are doing.

Forget going to Congress!  Just set up multi-$-trillion Federal Reserve lending facilities like TALF, stick the FDIC on the line for any losses and do whatever the hell you want!  I think this came out yesterday but Bloomberg has a nice piece Commercial Mortgage Bonds Rally on Fed's Legacy Plans.  It all comes down to the non-recourse lending aspect of TALF.  To get the prices on CMBS pumped up the TALF is going to have to give away the store to get buyers.  That puts taxpayers at huge risk without us having any say in the matter.  Maybe if we all got together and asked nicely they would throw us a bone.  Probably not.

The good news is, just like the feedback we have gotten from the "Legacy Security" and "Legacy Loan" idea (PPIP), the pumped up prices probably won't be enough to get our banks or insurance companies to hit bids and not take huge losses.  Therefore, they probably won't participate, at least voluntarily.

"Umm, New York....We Have a Problem!"

Before I get started this morning, I have to take my "American Idol" victory lap.  As predicted LAST Tuesday, Kris Allen defeats Adam Lambert to take the 2009 American Idol award!  I have to say something though.  Kara DioGuardi?  That song that she wrote for Adam and Kris to sing is the kind of stuff that weakens a great nation!  Her songs are like bad Hallmark greeting cards.  Climbing mountains, going higher, deeper, farther etc.. Pure drivel.  I just had to get that off my chest.

Back in 1987 when I was the ripe old age of 23, I was given the task by the Federal Home Loan Bank of New York (this was before the Office of Thrift Supervision was created and took over supervisory functions of S&Ls and Savings Banks) to be the "Examiner-in-Charge" ("EIC") of a nice little thrift in Southern Westchester County.  I was given the assignment at such a young age because the thrift was supposed to be "pristine". The previous exam found nothing of concern and the bank was given the highest rating.  The bosses figured I could cut my teeth on an easy assignment, learn how to manage a small group of people and take more responsibility.  

I showed up at the bank on a beautiful late summer day.  I introduced myself to the bank's management, got my three person team set up and then proceeded to do what I was told was the first thing the EIC was supposed to do, read the Board of Directors minutes from the previous exam to the present.  I started reading and what I found was that the bank had three relatively big commercial real estate projects going on.  All three were entering various stages of default!

One project was building a condominium complex in a nice little Westchester town on the Hudson River.  This town was not really in my bank's area of lending and they had gotten involved through another bank in the county and were given a "participation interest".  My bank was not familiar with either the real estate or the developer.  It turned out that directly facing the beautiful terraces of our condo complex was a home for elderly folks suffering from various stages of dementia and Alzheimer's. Every day it didn't rain, the patients were taken out for fresh air, which mostly consisted of sitting in a wheel chair and yelling.  I'm not being insensitive here.  This story was in the Board of Directors minutes!  Like they say in real estate, "Location, location, location."  Nobody wanted to buy a condo in THAT location.  The bank's $3 million investment was at best "Doubtful" and most probably lost.  Meanwhile, the developer took whatever skin he had in the game out in the first construction loan draw in the form of his "general contracting fee".  The second draw for various "soft costs" was his profit.  The remaining draws went to build the condo complex nobody wanted.  The participating banks owned that.

The next project was even better!  The bank entered into another participation with banks in the Rockland County area of New York.  The loan was to build a condo/retail space.  According to the minutes, not only did the developer get all his cash and profit out in the first construction loan draw, but he and his associates essentially boosted all the materials the construction loan enabled them to buy.  It appeared that neither the lead bank nor the participating banks did any kind of project inspection before they released funds.  The best part was the developer was involved in "organized crime" (Who knew?!) and the minutes disclosed that he was found dead at the construction site, shot execution style through the head.  My bank was writing off $4 million on this beauty!

There was one more project loan that just went bad without any help from dementia patients or mobsters.  I think that cost the bank $2-$3 million.  I added up the numbers, looked at the bank's regulatory capital and quickly deduced that the bank was INSOLVENT!  I went up the the CEO's office and asked if everything I read was accurate and I swear he said, "Yes it is, I suppose this is the end of the line for us."  I told him I'd call New York and get back to him!  The bank was shuttered before summers end.

I'm telling you this story because I guarantee you that all the same commercial mortgage loans that medium to small banks made all around the country in the mid to late 1980's, got made again in this decade.  I will guarantee you that banks, eager to keep up with their "profitable" competitors and to satisfy the human desire to be a "player" where the action is, threw all prudence and common sense out the window and flushed billions down the toilet.  Just like in the 1980's, the regulators either weren't watching the store or didn't have enough resources to effectively regulate this activity.  Additionally, nobody in Washington had any desire to "impede the free markets" by halting the flow of capital into condo complexes and strip shopping centers in the middle of nowhere and construction projects that were little more than con games played on the banks, often with bank management as a willing participant.  When we add up the losses, the FDIC is going to need a big big bailout, just like in the 1980's.  This part of our crisis is just starting to play out.  It's like the story about the frog and the boiling water.  You drop the frog into boiling water and he jumps right out.  If you put him in the water, luke warm and then slowly turn up the heat, he gets cooked.  This part of the banking crisis is like the latter frog scenario.  Proceed with extreme caution.

Pay Attention to the VIX

I'm not talking about the Vicks Vapor Rub you put on your chest when you get a cold. I'm talking about the VIX which is a volatility measure on the Chicago Board of Trade Stock Options Exchange. Now we aren't going to get into a long discussion about derivatives and options theory, drawing math formulas everywhere. But you can learn something here without that stuff.

See, the volatility in options markets is usually going haywire (technical term) when there is panic in the streets. Obviously, this past fall there was a lot of panic. Well the VIX hit a record level of 80.86 on November 20, 2008, which--surprise, surprise-- was a multi year low in the stock market. Well guess what's going on these days? The VIX has been falling steadily to close yesterday at 28.80. Experts tend to say anything above 40 on the VIX represents trouble. Well 28.80 is under 40, no? That means according to this measure, there aint much trouble.

Bloomberg.com reports this morning that this is the lowest level on the VIX since before Lehman went bust last September. Make sure you keep your VIX near you when traveling in the markets. Maybe not in the medicine cabinet with the Vicks Vapor Rub, but keep it close. Less panic and more complacency leads to higher markets generally. Pay attention.

Kris Allen WILL Win it Tonight!

I am patiently waiting for American Idol to end so Mrs. Salzman and I can watch the uninterrupted DVR version later this evening.  I'm fired up for the event, nearly a bottle of wine deep!  As I predicted last week, Kris Allen will take the crown tonight, especially if Adam Lambert "glams" it up too much, which I think he will.  This Allen kid is hot and I think he stops the "Inevitability of Adam Lambert" tonight!

I know I have been shirking my blogging duties as of late.  I am taking a bit of a sabbatical to write the history of structured finance in Korean.  It ain't easy, especially when you are "Powerpoint Challenged."  Luckily Mrs. Salzman is learning, coming up big with some serious flow charts!  Boxes, triangles, arrows shooting everywhere!  I am starting the presentation by comparing structured finance to nuclear power.  That has to kill.....no pun intended.  Anyway, I'll be back because I see a lot of serious financial drama on the horizon.  Until then, put your money on Kris Allen!

Here's Another Stock For You

In the theme of "a high tide raises all boats", we are going to add to the suggestion box and tell you to buy another stock. How are you doing with the other ones we told you about?  Right. So sit back, relax, and collect some more here this morning.

Now this isn't so much a stock as it is an ETF which stands for Exchange Traded Fund. Now before you wiseguys get all up in arms about how expensive these things are compared to regular stocks, this one is 1) not too bad expense-wise and 2) pretty much the best way to play this sector unless you are in the commodity pits trading futures which many of us are not.

Now this stock (or commodity, bare with me) has been on my radar for months. My trusty charts said to sell this baby on July 18 of last year at a fine price of 53. The charts have not given a buy signal until this VERY second. The stock?  The United States Natural Gas Fund LP. The ticker is UNG. The price of this stock tracks the natural gas futures contract traded on the New York Mercantile Exchange. BUY IT at what looks to be an opening price of 15.75 right now.

There is sooooooo much upside in UNG. Yes, the economy is still weak but there are signs things are picking up. When things get a little heated, stuff like natural gas goes higher in price. Yes, the stock is up 24% from its lows but it's still down 70% from 52 weeks ago. You rarely get to see a beautiful stock chart like this so we are in on UNG. Go forth and prosper.