Wednesday, April 30, 2008
WASHINGTON (Dow Jones)--A bill that would force the Bush administration to temporarily halt filling of the nation's emergency crude stocks to help ease oil and gasoline prices has a veto-proof majority, the bill's sponsor said Tuesday.
President George W. Bush earlier in the day rebuffed a bipartisan call from lawmakers to stop diverting oil into the Strategic Petroleum Reserve at a time when oil prices have traded to record highs near $120 a barrel.
But Sen. Byron Dorgan, D-N.D., said that his proposal - which would halt diverting oil to the SPR when oil trades above $75 a barrel - could overcome the president's objections based on support from 51 Democratic senators and the 16 Republican senators who urged the president to pause the policy.
An official in Dorgan's office said the senator may try to attach the proposal as an amendment to the Federal Aviation Administration reauthorization, which the Senate is expected to debate later Tuesday, with a vote possibly Wednesday.
"I welcome the bipartisan support for my plan to stop filling the Strategic Petroleum Reserve and hope President Bush and the Department of Energy will come to their senses and join the effort to bring some relief to those who are suffering from pain at the gas pump," he said in a press release.
Presidential candidate Sen. John McCain, R-Ariz., Sen. Kay Bailey Hutchison, R-Texas, chairwoman of the Republican Policy Committee, and 14 other Republican senators have urged the administration to halt deposits of crude oil.
In the House, Speaker Nancy Pelosi, D-Calif., has also called for a suspension of the fill policy.
Monday, April 28, 2008
Opec’s president on Monday warned oil prices could hit $200 a barrel and there would be little the cartel could do to help.
The comments made by Chakib Khelil, Algeria’s energy minister, came as oil prices hit a historic peak close to $120 a barrel, putting further pressure on global economies.
His remarks suggest Algeria wants Opec to continue to resist calls by US and European leaders for the cartel to pump more oil to help ease prices. But Mr Khelil blamed record oil prices on the weak dollar and global political insecurity.
He told El Moudjahid, Algeria’s government newspaper: “I don’t think that an increase in production would help lower prices, because there is a balance between supply and demand and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.”
He added: “The prices are high due to the recession in the United States and the economic crisis, which has touched several countries, a situation that has an effect on the value of the dollar. Each time the dollar falls 1 per cent, the price of the barrel rises by $4 and of course vice versa.”
Thursday, April 24, 2008
The Zurich-based bank said its net loss for the three months was 2.15 billion francs, compared with a net profit of 2.7 billion francs in the year-ago period. The result was a wider loss than the 1.23 billion francs expected by analysts.
"The number of times people have seen the light at the end of the tunnel it turned out to be a train coming down the tracks," bank Chief Executive Brady Dougan said on a media call.
Credit Suisse took the bulk -- 2.66 billion francs -- of write-downs for collateralized debt obligations, but also marked down 1.68 billion francs for buyout loans granted but failed to sell to investors, as well as 944 million francs for mortgage securities.
A couple days ago, Credit Suisse said that foreclosures could top 12% nationwide:
NEW YORK, April 22 (Reuters) - Falling U.S. home prices and a lack of available credit may result in foreclosures on 6.5 million loans by the end of 2012, according to a Credit Suisse research report on Tuesday.
The foreclosures could put 12.7 percent of all residential borrowers out of their homes, Credit Suisse analysts, led by Rod Dubitsky, said in the report. That compares with a foreclosure rate of 2.04 percent in the last quarter of 2007, they said, citing Mortgage Bankers Association data.
The new forecast includes 2.7 million subprime loans whose risky characteristics sparked the worst housing market since the Great Depression. Subprime foreclosures, on top of the 676,000 already in or through the process, will hit 1.39 million in the next two years alone, an upward revision from the 730,000 predicted by Credit Suisse in October.
Writedown $5 billion a quarter, and you put away the rose colored glasses!
SHANGHAI, China (AP) -- China's most-watched stock index surged 9.3 percent Thursday -- its biggest percentage gain ever -- after the government cut a tax on stock transactions in a move widely seen as an effort to boost slumping markets.
You had the bottom here:
After being down 50% from it's highs, the Shanghai Composite, finally made a decent candle on the chart. It traded down a few percent to under 3000, then reversed and closed up .99% on a 5% move to 3147.79.The bottom in China is now in.
PetroChina and Sinopec are big winners. As advertised!
Wednesday, April 23, 2008
Why is Merrill suing National City? Because AmBac, the monoline "insurer" of which Callan is the CEO, now doesn't want to pay the guarantees that it guaranteed ostensibly because they don't have the money. What do you expect when a stock goes from 90 to 3. A triple AAA rating? But the ratings agency is another story!
Merrill Lynch bought First Franklin, the sub-prime slush fund of National City for $1.3 billion a year and a half ago. when problems were readily apparent in sub-prime land. But apparently not to Merrill Lynch!
Merrill had this to say at the time of the merger:
"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," said Dow Kim, president of Merrill Lynch's Global Markets & Investment Banking Group. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns. We look forward to working with the experienced teams at these companies to serve their clients and leverage our broad range of mortgage products and services."
These companies will be included in Merrill Lynch's global mortgage platform, which is a division of the Firm's Global Structured Finance & Investments (GSFI) Group.
"This acquisition, and the origination platforms in particular, fills an important gap for us domestically providing a significant presence in both the wholesale and online retail channels," said Michael Blum, managing director and head of Merrill Lynch's GSFI Group. "Home Loan Services adds scale to our existing servicing platform and allows us to enhance our special servicing and risk management of mortgage products. In addition, we believe the acquisition will complement our existing third party client business, which has grown significantly in the past few years."
Now Ambac doesn't want to pay it's guarantees; specifically those with First Franklin, of whicjh Merrill acquired, and Bear Stearns, whose obligations our Fed guaranteed.
Here's that story:
CHICAGO -(Dow Jones)- Bond insurer Ambac Financial Group Inc. (ABK) has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.
During its first quarter earnings conference call Wednesday, David Wallis, Ambac's chief risk officer, said the company is examining transactions that have performed much worse than expected.
Wallis suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. (BSC) it closed in April 2007. Another is a transaction with First Franklin.
Now last month, Merrill sued defunct Security Capital Assurance for $3.1 billion to recoup CDO losses of which they'll never get.
They'll have better luck collecting the $78 million that the Nasser family stuck Merrill Lynch with, when they sold naked puts on Bear Stearns stock before it collapsed, of which the shorts used that information to raid MF Global, saying they were stuck with the losses.
So now Merrill Lynch, which bought First Franklin from Nat City, now sues National City, to indemnify it for it's losses from the unit they bought from them hoping that they might find some of the cash that investors just gave to Nat City!
National City Corp. said Tuesday Merrill Lynch wants the company to indemnify it for losses relating to loans at Merrill's First Franklin Mortgage Company unit, which it bought from National City in 2006.
In an 8-K filing Monday, National City said it received a letter from First Franklin on April 10 alleging that National City had "breached certain representations or warranties contained in the purchase agreement." The misrepresentations caused First Franklin to incur losses associated with its repurchase of loans, National City said.
And AmBac, now wants to get out of it's worthless guarantees, so they can guarantee someone else's bonds with their worthless guarantee!
The only guarantee that is triple AAA, is that Ambac eventually will be bankrupt, and all these investment banks will be suing each other for money that they don't have!
Tuesday, April 22, 2008
But while sport utility vehicle sales in the U.S. are tumbling, automakers are finding that for China's newly prosperous car buyers, bigger is still better.
So General Motors Corp. has made the Escalade a star of its auto-show display and is eager to get it on the market here.
"If you look at the fastest-growing market segments in China, there are two — SUVs and luxury cars," said Joseph Y.H. Liu, GM China's vice president for sales and marketing.
Auto sales in China are booming, with analysts and automakers forecasting growth at 15-20 percent this year. But demand for the biggest vehicles is even stronger, with sales of luxury cars and SUVs expected to surge by 40-45 percent.
The bottom in China is now in.
With oil at new highs, and refiners at new lows, much higher prices at the pump are a foregone conclusion.
Monday, April 21, 2008
PetroChina (PTR 135.03) +8.88 on the day should also receive the same.
Are the lucky numbers enough to get the stock going?
Common knowledge was that China would prop up stocks until the Olympics. Instead they have fallen 40%. The Olympics start at 8:08:08 on 8/8/2008.
Maybe PTR's $8.88 gain for the day will be the lucky omen to get back in China's oil stocks!
"Yahoo's first-quarter earnings could sway Microsoft battle"
SAN FRANCISCO (AP) -- After two years of crumbling profits, Yahoo Inc. can't afford another letdown Tuesday when the Internet icon reports its first-quarter earnings.
Although they only cover a three-month period, the results could determine the Sunnyvale-based company's fate as it grapples with an unsolicited takeover offer from Microsoft Corp.
If Yahoo bounces back to exceed analysts' modest expectations, it could be a springboard to a higher bid from Microsoft or provide more credence to management's argument that the company will be better off remaining independent.
Last I looked, Microsoft (30.45) reports earnings on Thursday. The least painful way for MSFT to acquire Yahoo with their cash and stock bid is with a higher price stock price. It's not Yahoo's earnings that matter; it is MSFT. And they will beat handily.
Mister Softee already knows what their earnings are. And since MSFT is playing hardball with Yahoo, it means their earnings will exceed expectations.
Do the math. MSFT advertised their bid for Yahoo as $31:
Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock.
The bid is half stock and half cash of $31. Where would MSFT stock have to go for a $33 a share bid? Since the conversion price of MSFT is .9509 per share, MSFT at 36.81 per share times the conversion factor (.9509)=35. Add in the 31 in cash for half of the stock and you have a $33 bid.
If you want a $31 number for the half cash and half stock bid, MSFT has to trade at $32.60. (32.60 x.9509=31).
So MSFT, at a minimum, will announce earnings, that will push the stock at least at least 2-4 points higher by Thursday in the after hours. Let's split the difference, and use the average of 36.81+32.60/2=34.70.
Which should be the high where Mr. Softee trades on this run.
The bears get bloodied, and Yahoo gets eaten by MSFT.
Tonight the bears will tell you that Texas Instruments guidance means something. Tomorrow it won't matter.
But if they want to go out and lay out some shorts, to be steamrolled again, let them. It's not their money; it's just their investors!
UBS on Monday revealed that its massive losses in securities related to US residential mortgages stemmed largely from the fact that three separate parts of the group had amassed large positions, without sounding the Swiss bank’s once-vaunted alarm bells for risk.
In a report to shareholders two days ahead of its annual meeting, the biggest European casualty of the subprime crisis explains how its elaborate risk detection procedures failed to detect that UBS had built up more than $70bn in potentially dangerous positions.
So elaborate risk detection means they can't detect $70 billion? Boy is that rich!
Sunday, April 20, 2008
Apple always guides lower, and beats their numbers, but Wall Street is sick of their game. Here is a compilation of the last three years of Apple guidance, and how ridiculous it was.
This quarter, I believe Apple will play it straight and give guidance that is more appropriate and in-line with their actual business. Furthermore, I believe greater numbers of Christmas gift cards were redeemed in the first quarter, because of the excitement that Apple had when they were making an announcement at Macworld. The stock sold off because people were unimpressed on the introduction of the MacBook Air. But this announcement had the effect of pushing sales from the fourth quarter into the first quarter with the redemption of the Christmas and Holiday gift cards by those who expected an iPhone or iPod announcement.
.94 cents? Look for Apple to beat the published estimates of $1.06 by .20 cents and good guidance going forward. Especially with the rumors of 500,000 a month ramp of their new iPhones.
The four horsemen of tech are back!
The Bank Of England has a proposal to lend over $100 billion to the markets and take mortgage loans:
"The Chancellor hopes that the cash injection - the biggest ever by the Bank of England - will lead to cheaper mortgage deals and stop the housing market slipping further.
The Chancellor hopes that the cash injection - the biggest ever by the Bank of England - will lead to cheaper mortgage deals and stop the housing market slipping further.
Under the controversial scheme, the Bank will loan money to banks and building societies in return for potentially risky mortgage debts. If the housing market fell and borrowers defaulted on their mortgages, taxpayers could be left nursing losses."
Royal Bank of Scotland is raising $25 billion in capital to offset losses.
Here in the states Nat City is recapitalizing raising over $6 billion at $5 a share, after being prodding by regulators to sell or raise cash.
Bank of America, which reports earnings this week, is considering selling part of it's stake in China Construction bank.
"BofA is sitting on unrealised gains on its holdings that are worth billions. While CCB’s share price has slid in line with the Chinese stock market – 46 per cent below its October peak – the share price is still far higher than the level at which CCB listed in 2005. It has a market capitalisation of about $177bn."
Worldwide, the banks are raising capital, to offset their losses, with the encouragement of regulators.
Add in the cut in the stock tax in China, and the markets are poised to rally again this week.
Last Friday the market soared on Google's earnings. Now the shorts have to suffer with Apple's and Microsoft's earnings this week, whereby both will trounce estimates.
The shorts will be steamrolled.
Friday, April 18, 2008
Amazon spent $224 million.
eBay spent $454 million.
Yahoo spent $602 million.
Google spent $842 million in CAPEX for the quarter!
Now the bears said Research in Motion was going to be hurt by the layoffs in financial services. The fools that sold took the stock down to 82. It's now 50% or 40 points higher in a couple months.
Google was supposed to be hurt becauses companies were not selling ads for mortgages and refinancing. They took the stock down over 300 points. So it's up 80 today.
It's one of the few times that you can buy a stock up 80 and make money. Except for the shorts.
Eighty points is the start of their losses!
At least i didn't see it that way. I said you could get your free money at the bear's burial!
Google, (GOOG 471.09) reports earnings a week from next Thursday, the day before option expiration. Forget ComScore and clicks; what is important is that Google didn't spend $5 billion plus bidding on FCC spectrum. They bid just enough for Verizon to spend their money...
Well, Google is still a "pure play" on search, now that they didn't spend billions on spectrum. What happened to the bearish argument now? Yahoo is falling apart, as Yang is more worried about not being bought by the "evil empire" Microsoft. His response is a power point presentation on how rosy the future will be. Remember the same one he gave on Panama? Irregardless, the market will pay more for Google, as any slowdown has already been more than discounted in its stock price!
...Pure play? Just another useless expression on Wall Street. The financials were a "pure play" on Armageddon or a depression. Now it's obvious that reasoning was just a pure play on fear mongering.
The mantle has been passed to the bulls. And they are clobbering the bears on the head with it.
Google thought they could sandbag earnings and force Mister Softee to pay up for Yahoo, just like Google tweaked Verizon to pay up for spectrum.
But MSFT is sandbagging on it's earnings report also! When they report next week, Mr. Softee can run to 33 from 29. And the May 30 calls are a quadruple at these prices.
And the bears? We've witnessed their burial on Apple, RIMM, and now GOOG. Next week AAPL will pour salt on the bears cuts.
And we'll rubberneck another pileup of the bears being taken out on a stretcher.
Couldn't happen to a nicer bunch.
Thursday, April 17, 2008
Yesterday, Bloomberg finally came around and said the same thing saying it has become a monster:
"Swaps Tied to Losses Became `Frankenstein's Monster'
By Neil Unmack and Sarah Mulholland
April 15 (Bloomberg) -- The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica.
Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality.
Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ``Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to European mortgages, reining in a market that's about doubled in size every year for the past decade.
``The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that's ceased to exist,'' Jacques Aigrain chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.
Lack of Support
Markit Group Ltd., the London-based index provider, said banks last month shelved plans for indexes intended to allow investors to speculate on the $200 billion market for bonds backed by U.S. auto loans because of a lack of dealer support. Indexes on European mortgages and U.S. Alt-A loans, or mortgages made to borrowers a step above subprime, were also postponed.
``The last thing the securitization market needs is another no-cash-upfront instrument that people can use to knock the markets about with,'' said Andrew Dennis the London-based head of the asset-backed debt syndication group for UBS AG of Zurich."
Institutions are trying to load up in the REO market, and nobody seems to be able to put deals together at the prices that they have agreed on. Which means prices have to go higher. Which means housing losses are overstated. Which means those short hedge funds that profited from the marking of their shorts to the crazy marks that these indexes reflected profits gains are just as phantom as a mark as a peak housing valuation at the top of the market. Here the homeowner took the gain with his home equity line of credit! But now you've gone from a peak to a trough in housing pricing because 40% of the sales are foreclosures!
But now the banks, the distressed sellers of the foreclosure property, are now thinking twice about parting from their REO inventory at these prices.
Look at the chart halfway down in the next link detailing the drops in California in one year!
Foreclosure resales - houses sold after being foreclosed on continue to dominate many inland neighborhoods. More than one out of three Southland homes that resold last month, nearly 38 percent, had been foreclosed on at some point in the prior year. This time last year such sales were only 8 percent of the market. At the county level, foreclosure resales ranged from 28.8 percent in Los Angeles County to 56.4 percent in Riverside County....
In recent months, foreclosure resales typically sold for about 15 percent less than other homes in the surrounding area. When these foreclosure resales dominate a market, accounting for more than half of all sales, they tend to tug home prices down by an extra 5 to 10 percent when compared with communities where foreclosure resales are less common.
The NY Times talked about the billion dollar payday these hedge funds reaped.
Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.
One manager, John Paulson made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them...
Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”
The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.
Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees.
Does anyone find it ironic that these folks making billions and billions of dollars, have done it on bets that the average Joe cannot make, and with pricing that isn't transparent that doesn't reflect the actual values?
Remember Warren Buffett's interview with Becky Quick of CNBC last month?
Here's part of it:
QUICK: But we're going to start off with a question about derivatives, because Joe, you brought this up earlier. You were talking about those comments that Mr. Buffett's made in the past about these being weapons of financial mass destruction. And Warren, you said you had a couple other thoughts on derivatives.
BUFFETT: Well, you know, the ways you get into trouble in markets is doing things you don't understand, and then doing them with a lot of borrowed money. And derivatives combine those things. And--but the really important illustration that has never gotten picked up on much was that a couple of years ago Freddie and Fannie got into big trouble, billions and billions and billions of dollars of--that they had to restate. Now, Freddie and Fannie had auditors like everybody else, but they also had a government agency called OFHEO that had 200 people in it whose sole job was to oversee Freddie and Fannie. Two hundred people going to work every day, and those people did not pick up at all on all of these problems that Freddie and Fannie had. I mean, they were looking at complex financial instruments, you know, all kinds of swaptions and all that sort of thing. The auditors didn't pick up on it, but more important, 200 full-time--they didn't have to think about General Motors, they didn't have to think about AT&T. They had two companies to think about. And they issued a report later on telling about the failing of all--everybody else.
BUFFETT: But it shows you--when things get that complex, you're going to have a lot of problems. And CDO squared--I figured out, on a CDO squared you had to read 750,000 pages to understand the instruments that were underneath it.
QUICK: Oh, my gosh.
BUFFETT: Yeah. Well, you start with the RMB, that's the residential mortgage-backed securities, and that would have 30 tranches. And then you'd take--and that would be a 300-page document--you'd take a tranche from each one of that and create a CDO, 50 of those times three--300, you know, it becomes 15,000. Then you take a CDO squared with 50 more, and now you're up to 750,000 pages.
QUICK: You have to read through it.
BUFFETT: And the mind can't comprehend that. What people did comprehend was that the fees were terrific in selling them to the people.
So you have 200 auditors looking over Fannie and Freddie's books, and they can't find any problems, although the problems amount to the tens of billions of losses that weren't recognized.
Now you have hedge funds booking tens of billions of gains, but the auditor doing their books now knows what they are doing!
Today IBM announced blow out earnings after the close. A few weeks back, we were told that IBM's earnings would be punk because financial service firms would be cutting back, and that their business would be slow since Oracle's was. And Friday the world was coming to an end because GE missed.
Whoops. The story changed! I guess that's the difference between stocks and derivatives. We have transparency and liquidity in the pricing of stocks.
Of which you have neither in derivatives.
Wait until this bull market unravels the bears who've booked these billions of profits on these derivative positions of which they haven't closed!
But then, they've already taken the profits on the marks!
Friday, April 11, 2008
So a $200 million shortfall in financial services knocks off $37 billion of market cap to 33?
I'll take GE at 33. At least they tell you the story straight.
Citigroup sells $12 billion of leveraged loans at .90 cents on the dollar. They must need the higher mark! (Just pretend that they didn't indemnify the buyers for their first 20% of losses!
Lehman Brothers, after raising $5 billion for a buyback that never was, another $2 billion unsecured, and a $4 billion non cumulative preferred, now tosses hundreds of millions away bailing out some of their funds and throwing these assets on their balance sheet. But not before constructing a $2.8 billion "Freedom CLO" and getting the garbage rated AAA. And then, giving it to the Fed! No wonder they called if Freedom!
Paul Krugman of the NY Times frets and says: "All of this involves fear of defaults by banks — despite what look from here (central New Jersey) like utterly clear signals from the Fed that bank debts will be socialized if necessary. I’m puzzled, and worried."
Bill Gross has been stabilizing the mortgage arena, by buying paper backed up by houses, and shorting Uncle Sam's paper, backed up by it's promise. here's the story:
"April 10 (Bloomberg) -- Pacific Investment Management Co.'s Bill Gross lifted holdings of mortgage debt in the world's largest bond fund to the highest since 2000, while putting on the biggest bet against government debt since at least the same year...
Bearish on Government Debt
The fund also increased derivative positions that make it short in Treasuries, meaning it will profit from declines in the securities. It held negative 18 percent of assets in government debt in March, the most bearish stance since at least June 2000, according to data compiled by Bloomberg News.
``Treasuries are the most overvalued asset in the world, bar none,'' Gross, Pimco's chief investment officer, said on CNBC on April 4."
The Fed's burying all the toxic paper until the economy has a resurrection, giving the green light to those who hold their nose, and cover their eyes and buy! Thank goodness Easter was early this year!
Tomorrow GE reports earnings. And the bulls will spin it bullishly. And those that sold stocks down at the close today will get clipped again.
Wednesday, April 9, 2008
Goldman had this to say:
The increase in level 3 assets during the first quarter of 2008 primarily reflected reduced levels of liquidity, and therefore reduced price transparency, related to loans and securities backed by commercial real estate, loans and securities backed by residential real estate, and corporate debt securities and other debt obligations, as well as the funding of certain bank loans. (pages 65&66)
In the opaquest instruments of all, level 3 derivative pricing, Goldman threw in $9.3 billion more derivatives for the quarter to $25 billion. GS says this on pricing and risk:
"Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates, credit spreads, volatilities, etc.). Model inputs are changed only when corroborated by market data..."Derivative transactions may also involve legal risks including the risk that they are not authorized or appropriate for a counterparty, that documentation has not been properly executed or that executed agreements may not be enforceable against the counterparty. We attempt to minimize these risks by obtaining advice of counsel on the enforceability of agreements as well as on the authority of a counterparty to effect the derivative transaction. In addition, certain derivative transactions (e.g., credit derivative contracts) involve the risk that we may have difficulty obtaining, or be unable to obtain, the underlying security or obligation in order to satisfy any physical settlement requirement."
On page 98, Goldman has a table of their OTC derivative credit exposure. Last quarter, November of 2007, they had net derivative credit exposure, to those parties rated BBB or below of $15.2 billion. In this quarter, ending February 2008 they had exposure to $24.3 of OTC derivative credit exposure rated BBB or below.
So we know where Goldman's increase in level 3 derivative exposure came from.
And since no-one knows for sure what constitutes level 3 pricing, or the inputs on derivatives, this will probably get some play by the bears, who want to offset Citigroup's good news: The off loading of $12.5 billion of leveraged loans from Citigroup's balance sheet at .90 cents on the dollar:
Citigroup is nearing a deal to sell $12bn in leveraged loans at a discount to a group of leading private equity firms, marking another step in new chief executive Vikram Pandit’s efforts to shrink the beleaguered bank’s balance sheet.
Although details of the deal were still being worked out, people familiar with the matter said Apollo Management, the Blackstone Group and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar
The Citi portfolio includes loans used to finance acquisitions by Apollo, Blackstone and TPG, as well as debt in their rivals’ deals. Apollo would buy about half the portfolio, with Blackstone and TPG taking the rest. Citi declined comment.
Tuesday, April 8, 2008
Hailed three years ago as "the greatest central banker who ever lived," the retired chairman of the Federal Reserve now is being criticized for his management of the U.S. economy before he retired in 2006. The Fed's low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today's financial crisis -- one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.
For much of his 18 years atop the world's most-influential economic institution, Mr. Greenspan was lionized for the economy's performance. Now, he notes, he's being second-guessed for it...
Now 82 years old, Mr. Greenspan wants to set the record straight before the ink dries on the first draft of the financial crisis' history. The former Fed chief doesn't deny that he cares about his reputation. But the larger issue at stake, he says, is getting the lessons of the crisis right."
April 8, 2008 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the drop in U.S. home prices will probably end ``well before'' early next year as the number of houses on the market diminishes, aiding an economic rebound.
``It will not be until early 2009 that we will get close to having eliminated most of this'' home inventory Greenspan told a conference in Tokyo today sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. ``But it is very likely that home prices will stabilize well before that.''
Greenspan added that the extent of damage stemming from the collapse of the subprime-mortgage market won't be known for months. He described the credit crisis as the worst in 50 years, echoing the assessment of International Monetary Fund economists.
It's his annual speech! Anyone remember his comments last year?
Feb 17, 2007
Former Federal Reserve chairman Alan Greenspan said the U.S. housing slowdown may be coming to an end, citing sales of new homes.
"I think the worst is behind us," Greenspan, 80, told a Toronto conference Wednesday, during a speech broadcast live via satellite. "We are in the midst of a very significant inventory liquidation of unsold new homes."
Greenspan's comments represent a view similar to those of his successor, Ben S. Bernanke. Bernanke told the Senate Banking Committee this week that the Fed expects economic growth to strengthen "somewhat as the drag from housing diminishes."
Halifax, which is part of the HBOS group, reported that property prices fell an average of 2.5pc overall, and as much as 5pc in some areas.
The lender, which previously had predicted flat growth for the current year, now expects a "low single digit" fall in house prices this year - indicating that prices could fall by up to 5pc.
So the Bank of England cuts rates Thursday.
Monday, April 7, 2008
They had better buy Wachovia (WB 27.21) which sold off in sympathy Friday. This number can rally to 33, and quickly.
Dry Ships (DRYS 65.67) has been leaned on by those who say that shipping rates will slow with the world wide economy. Whoops. What happened here? China is up 5% as this market, has now made its lows, and Barron's had a nice piece on this number. Here's what they had to say:
At its recent quote of 64, DryShips stock was trading at a price/earnings ratio of 3.5 times consensus analyst earnings estimates of $18.18 a share this year and about 5 times the $12.22 forecast for 2009. DryShips also trades at a more than 50% discount to its peers, although rivals generally seek long-term contracts, which are less volatile. DryShips sports a healthy balance sheet, with net debt equaling about 40% of total capital....
"It's a very cheap stock," adds Scott Black, president of Delphi Management, who notes that DryShips tends to trade in line with the volatile Baltic Dry Index more than with fundamental earnings changes. The index, a broad measure of the price of moving raw materials across nearly two dozen key sea routes, has dropped sharply, from above 11,000 in November to about 7,700.
"With a P/E of three, DryShips trades as if it were going out of business," says Black, a Barron's Roundtable member whose fund owns about 200,000 of the shares. "It's discounting the total collapse of dry bulk trade and [saying] that trade for India and China is over." Delphi has been buying lately as the stock has fallen.
Google, (GOOG 471.09) reports earnings a week from next Thursday, the day before option expiration. Forget ComScore and clicks; what is important is that Google didn't spend $5 billion plus bidding on FCC spectrum. They bid just enough for Verizon to spend their money.
Why the comparison with DRYS? Because both stocks are going up, and I want to show the fallacy of the bears flimsy reasons! DRYS supposedly was cut in half, because they spent $405 million on an oil-service firm Ocean Rig. Wall Street wanted a "pure play" on shipping.
Well, Google is still a "pure play" on search, now that they didn't spend billions on spectrum. What happened to the bearish argument now? Yahoo is falling apart, as Yang is more worried about not being bought by the "evil empire" Microsoft. His response is a power point presentation on how rosy the future will be. Remember the same one he gave on Panama? Irregardless, the market will pay more for Google, as any slowdown has already been more than discounted in its stock price! Buy them both!
Pure play? Just another useless expression on Wall Street. The financials were a "pure play" on Armageddon or a depression. Now it's obvious that reasoning was just a pure play on fear mongering.
The mantle has been passed to the bulls. And they are clobbering the bears on the head with it.
And the ones with the fears are those with the shorts. As Mickey Mantle said, "I don't care who you are, you hear those boos."
And the bears hear the stomping hoof-steps of the bulls!
Sunday, April 6, 2008
Friday, we lost 80,000 jobs and the market rallied. Where were the sellers? They were already beaten into submission by the bears.
And the market rallied on the bogus governmental figures, that included the estimated 142,000 jobs that the BLS included in their birth/death model, where these government statisticians said we even "gained" 28,000 jobs in construction!
The 5.1% unemployment rate gets headlines, but the 9.1% rate that includes the "marginally attached" and the part timers who can't get a full time job is approaching the average unemployment rate of 9.7% rate of the 1981-82 recession!
The Bear Stearns bankruptcy scared out the last long, and the hedge funds smelled blood hoping for a systemic collapse. But the demise of Bear Stearns also left the shorts without their dirtiest clearing firm in the "naked" shorting of stocks.
When it was Patrick Byrne complaining, no-one cared. He was just "nuts." Read his work. And then see if he is nuts.
But when they started the rumours on the banks, they fought back. First we had the Telegraph expose on HBOS:
Britain's biggest mortgage lender, HBOS, falls victim to larceny on the grand scale when dealers spread malicious rumours about its liquidity and then bet on the falling share price. One speculator is thought to have made as much as £100 million - which would make this the biggest single act of theft in British criminal history, for theft it is. The response of the City's regulator, the Financial Services Authority? It issues a statement saying it will "not tolerate" such criminal activity. As they pocket their ill-gotten gains, the rogue traders must be trembling in their boots.
And then more:
A hedge fund based in London set up a "dirty-tricks unit" to manipulate share prices and get illicit information on companies in an attempt to make millions on the stock market, an insider has revealed...
Front companies were set up to allow the hedge fund traders to pose as independent researchers or journalists.
Negative information on companies was then distributed to leading investment banks in the hope that rumours would spread and some share prices would fall.
Now we have Cramer on television wanting to re-establish the uptick rule since it was abolished in July 2007. It's his next "they know nothing" campaign.
You know when you have a lost cause? When you are the only one championing it out loud except for a few fringe players whom you may not want to make common cause with.
I am talking about the combination of shorting without upticks -- perfectly legal -- coupled with rumor-mongering -- legal if you believe it so really hard to prove -- and failing to deliver after you raid down a stock...
I am saying that it is easier to knock down stocks if you don't bother to find stock to sell and don't have to worry about delivering, which is how the current system has devolved.
I am saying that without the uptick rule to slow things down, it is much easier than ever to take a stock and crush it.
I am saying that it is easier than ever to rumor a stock down, simply make up stuff, and spread it, especially to the traders who help you get the trade on, particularly options trades.
When Lehman said they would forensically look at all the trading in it's stock and options, we started the April Fool's rally!
Lehman Brothers on Tuesday said it had sent information to the Securities and Exchange Commission about possible abusive short-selling in its shares in recent days.
Erin Callan, Lehman chief financial officer, said the SEC was examining whether hedge funds acted in concert to drive down the bank’s share price in the days following the near collapse of Bear Stearns. Such behaviour could constitute market manipulation, subject to civil and criminal sanctions.
Now prices are recovering in bonds and spreads. Look at the ranges here!
Investopedia has this to say:
The introduction of indexes like the CMBX has led to massive growth in the structured finance market, which includes credit default swaps, commercial mortgage-backed securities, collateralized debt obligations and other collateralized securities. Trading in the CMBX tranches is done over the counter, and liquidity is provided by a syndicate of large investment banks.
While the average investor cannot participate in the CMBX indexes directly, they can view current spreads for a given risk class to assess how the market is digesting current market conditions, making it a potentially valuable research tool.
How about sub-prime?
You can get a rough overview here:
What happened to the 2008 index?
"The new series, the Markit ABX.HE 08-1, was scheduled to launch on 19 January 2008. The decision to postpone its launch was taken following extensive consultation with the dealer community. It follows a lack of RMBS deals issued in the second half of 2007 and eligible for inclusion in the forthcoming Markit ABX.HE roll. The Markit ABX.HE 07-2 remains the on-the-run series until further notice."
What happened to securitized auto loans? It didn't happen.
Why? Here's a great read on it:
The market is only going to efficiently price a security when there is reasonable two-way flow. In other words, when a price is reached where there is a reasonable number of traders on both the short and long side. Is this what's been happening with the ABX index? No. Whatever you think of where actual value is on various ABX contracts, it certainly isn't a two-way market. Buyers of protection have dominated that market for about a year now. Of course there has to be a seller if there is a buyer, but I've persistently heard that sellers of protection have overwhelmingly been either paired trades along the capital structure (e.g., long the 2007-1 BBB and short 2007-2 BBB) or short covering.
Now one can look at any of the specific structures in the ABX library and make a case that the price should be higher or lower. That isn't the point. The point is that the ABX never developed natural buyers of risk. Once home equity structures became distressed, there were some buyers of cash bonds. But these are the kinds of buyers who want to comb through the structures and carefully analyze every dollar of cash flow. That kind of buyer is looking for a cash-flow diamond in the rough. Selling protection on the ABX is a bet on home equity spreads in general tightening. That's not the kind of bet distressed buyers like to make.
Meanwhile, with so few home equity bonds actually trading, the ABX became the only means of estimating a market value on home loan bonds. So right or wrong, the ABX became the "mark to market" for pricing many different types of mortgage-related paper. Buyers who were careful to buy higher quality home equity paper complained, as they believed they had better structures than those on which the ABX is based. But it didn't matter since there were no new deals with which to compare, the ABX is all auditors had to use as a base.
The negative feedback was severe. (Notice I didn't say it was a "loop") Any real money buyer who tried buying high quality home equity paper saw their marks based on the lower-quality ABX. Portfolio managers are hard-pressed to buy bonds, regardless of the fundamental value, if the mark is going to be substantially lower. With no real money buyers and liquidity very poor, it became impossible to securitize any mortgage-related paper.
What would have been better for all involved is if the market had been allowed to price bonds individually based on individual risk characteristics. Perhaps the dislocation in the mortgage market was too severe for that to have realistically happened. But the ABX caused everything to be priced on a lowest-common-denominator basis. That really didn't help anyone other than the shorts.
So given all this, it seems obvious why various market participants aren't too eager to create another ABX monster. Its true that default rates on auto loans are likely to rise significantly, both due to normal recessionary pressure as well as the weak housing market.
As we have huge shorts in stocks, we have even bigger shorts in credit. Knock down an index, and then get your mark, and then take 20% of the "phantom" profit that you can't realize for the year end or the quarter, since your position, and every other hedge fund, cannot be monetized because you have the same playbook and positions bigger than the index that you're getting your phantom mark!
But if this was the case, you'd then have a huge rally starting on the first day of the next quarter as the shorts in stocks and credit try and scramble and cover their positions, where they got paid on, of which they didn't monetize!
They are just like the homeowner who cashed out on their HELOC before the house fell in value. How ironic is that?
And you just thought it was just April's fools rally!
"I have a dream. I refuse to accept the end of man. I believe he will endure. He will survive. Man is immortal, not because alone of God's creatures he has a voice, but because he has a soul... a spirit capable of compassion... and sacrifice... and endurance. About America and Americans, this is particularly true. It is a fabulous country, where miracles not only happen, they happen all the time. As a nation, we have, perhaps uniquely, a special willness of the heart."
Saturday, April 5, 2008
...Here's how the accounting works: When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value....
LEHMAN, FOR INSTANCE, REPORTED EARNINGS in its most recent quarter of 81 cents a share, above the consensus estimate of 70 cents. However, the $600 million gain from the reduced value of its liabilities essentially added about $400 million, or about 70 cents a share after taxes. Excluding that gain, Lehman's profits would have been below the consensus.
Morgan Stanley reported $1.45 a share in first-quarter net, versus a consensus estimate near $1 -- what indeed it would have made without liability-related gains.
During 2007, Lehman reported $900 million of these gains; Morgan Stanley, $845 million; Goldman Sachs, $216 million; and Merrill Lynch, $1.9 billion.
When Merrill Lynch and some other major banks report results in the coming weeks, investors should carefully examine them and strip out any liability-related gains, because they merely reflect a worsening in bond investors' perceptions of the firms.
With the stock prices of securities firms rallying last week on news of Lehman Brothers' successful convertible-preferred sale and hopes that the worst may be over for the financial-services industry, debt spreads have tightened. That news is being welcomed on the Street -- even if it means a reversal of debt-related accounting gains of recent quarters.
Thursday, April 3, 2008
It also helps that Bernanke is engendering confidence in the financial system.
Systemic risk? It's off the table.
What will the shorts do now?
It is a "serious puzzle" that no one is buying this "supposedly undervalued" paper, Paul Tucker said, adding that unless these frozen markets restarted soon, the credit crisis would reach a new intensity...
Just as remarkable, however, was his statement about parts of the mortgage-backed securities market, which has ground to a standstill amid fears that the instruments could be tainted by sub-prime defaults.
He said: "Financial markets have swung from a prolonged period of underpricing risk to now plausibly overpricing risk on at least some products.
"The serious puzzle... is why there is a dearth of buyers for the supposedly undervalued paper."
A number of US firms are looking to follow the example set by UBS, which this week put securities linked to US mortgages into a separate subsidiary with a view to eventually reducing its exposure to the troubled assets, which have been responsible for more than $30bn of losses so far.
The Wall Street banks’ plans, which are yet to be finalised, would enable banks to move at least some troubled assets off their balance sheets by selling large stakes in the funds to outside investors.
Lehman Brothers, which has been forced to deny rumours about its financial health over the past few weeks, is believed to be one of the banks considering a spin-off, or sale, of some of its assets.
“We want to continue to move illiquid assets off the balance sheet,” Erin Callan, chief financial officer, told CNBC this week. The bank declined to comment further.
In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.
Then he said this about Bear Stearns:
Providing new details about the deal, which was arranged behind closed doors during the weekend of March 15, Mr. Bernanke said he and his colleagues at the Fed did not know until March 13 that Bear Stearns faced bankruptcy and that they quickly realized a failure to act would create a global crisis.
I guess that's when you say the situation is fluid.
Tuesday, April 1, 2008
The banks have bought themselves some time, and despite the ugly headlines, you have to get bullish and be buying on this news.