The stock market seems to still be going up, but there is a game that might be going on right now. It revolves around unsophisticated investors shorting the market.
Every stock held in “Street Name” by your broker is available for shorting. In other words, the guy next to you in Star Bucks on his laptop could be borrowing your stock to short the market, Neat Huh?
Let's fleece the shorts. Here is what you are looking for, stocks that aren’t widely held by institutions. You want stocks that are being aggressively shorted that have a market cap of 20 to 90 million shares. Lots of bad press helps, even if you have to make it up.
Let’s pick KB Homes. The stock is trading at $39. There are 76 million shares outstanding. 17,646,073 shares are short right now with a turnover of 2.4 million short shares per day. Normal volume day is 3.5 million shares.
A group of “investors” get together and pool about 100 million in cash. On Monday, the group will establish their call options positions. Then they start buying shares; one million shares on day one and two million shares on day two. On day three, they go in like they are going to buy three million, but by that time, the shorts are running for the exits and buying to get out of their position.
The group will now sell into the shorts. If the group demanded delivery of the certificates for shares purchased, this could really put some hair on the dog. You can’t short a delivered certificate only stocks in "Street Name." This in turn, would dry up the number of shares available for shorting, which would drive the price further up. The group running the squeeze would cover the delivered certificates they are holding with $40 puts purchased when the stock pops through $70.(note,when you take delivery, it takes up to three weeks to get the certificate)
The only reason the squeeze is so successful, is because the average investor, has no concept on how the market can work against all logic. This is easy money. So when you see the market take off, the shorts are being burned.
The best time to start the “Harvest,” about one week before the expiration of the put and call options (third Friday of the month)—you get the most bang for the buck. The real clincher, this isn’t illegal in most foreign markets. It’s so simple even a hedge fund could do it!
Again, I could be shot for over simplification, there is a lot more that can actually play into this model and this isn’t a training manual!
Friday, June 29, 2007
Tuesday, June 26, 2007
Life Boat Seating on the Titanic
So let’s see, over the weekend, you read a newspaper, and found out that owning Bear Sterns meant you were about to lose some money. To put it another way, somebody has just yelled fire in a crowded movie theater.
Nothing happened Monday or Tuesday. Some offered up a bit of info on the ratings on CDO’s (Collateralized Debt Obligations). They are not rated correctly because nobody knows exactly what they are worth. That’s a real gem.
So what is Bear Sterns going to do next? You can’t sell the CDO’s if there are no buyers. Can they buy them all up??? That would definitely upset their stock holders.
So before Bear Sterns goes stern up, maybe they will give the order to launch the lifeboats. Personally I think that the order has already been given (the "names" have a seat and a check in hand). Lets face it, who wants to be the last guy out? Isn't it his job to turn off the lights?
Nothing happened Monday or Tuesday. Some offered up a bit of info on the ratings on CDO’s (Collateralized Debt Obligations). They are not rated correctly because nobody knows exactly what they are worth. That’s a real gem.
So what is Bear Sterns going to do next? You can’t sell the CDO’s if there are no buyers. Can they buy them all up??? That would definitely upset their stock holders.
So before Bear Sterns goes stern up, maybe they will give the order to launch the lifeboats. Personally I think that the order has already been given (the "names" have a seat and a check in hand). Lets face it, who wants to be the last guy out? Isn't it his job to turn off the lights?
Saturday, June 23, 2007
The Monday Morning Run
The WSJ reports that Bear Stearns is injecting 3.2 billion into their hedge funds to stave off the risk of a fund collapse. It was either that or risk having the junk, marked to market and that is not something that any fund wants to see happen.
I would bet that the cash infusion is just a ploy, a stall for time. They are not going to do it. The mere suggestion of a 3.2 billion dollar bailout, suggests that the people in charge are over medicated.
On the street, they are openly laughing at the bond rating services. The reality gap for a lot of these bond ratings could be labeled downright unbelievable. Bankers refer to Equity Tranches as Toxic Waste and now you hear references to them as Radioactive Waste. Even if S&P gets the ratings straight, there are a lot of financial institutions that will have to sell anything re-rated BBB. That could mean a 50% loss of equity. Talk about some mad fund managers! The retirement funds have the weekend to figure out what to sell.
So come Monday morning, it looks like Bear Sterns is in the cross hairs. The words "Coup de grace" come to mind. It kind of has the feel of a 1930’s run on the bank. Where’s Jimmy Stewart when you need him?
I would bet that the cash infusion is just a ploy, a stall for time. They are not going to do it. The mere suggestion of a 3.2 billion dollar bailout, suggests that the people in charge are over medicated.
On the street, they are openly laughing at the bond rating services. The reality gap for a lot of these bond ratings could be labeled downright unbelievable. Bankers refer to Equity Tranches as Toxic Waste and now you hear references to them as Radioactive Waste. Even if S&P gets the ratings straight, there are a lot of financial institutions that will have to sell anything re-rated BBB. That could mean a 50% loss of equity. Talk about some mad fund managers! The retirement funds have the weekend to figure out what to sell.
So come Monday morning, it looks like Bear Sterns is in the cross hairs. The words "Coup de grace" come to mind. It kind of has the feel of a 1930’s run on the bank. Where’s Jimmy Stewart when you need him?
Thursday, June 21, 2007
Hedge Fund Meltdown
Bear Stearns two hedge funds are in real trouble. Here is a quote from the Wall Street Journal. "Two big hedge funds at Bear Stearns Cos. were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall Street and investors.”
The interesting words are “rescue plan developed over several days fell apart." It looks like quite a few people outside of the firm knew about this as early as last Friday. So if outside firms were let in on the financial problem, it must have been obvious that something was wrong probably as early as the middle of May internally.
There are three players cited; Merrill Lynch, Bank of America Corp and Goldman Sachs Group. The interesting party is Merrill Lynch, which owns approximately half of Blackrock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. As a footnote, a new IPO called Blackstone came out today, I wonder if there was confusion in China over the translation of Blackrock Vs Blackstone?
“Merrill Lynch & Co., one of the hedge funds' lenders, said it would move to seize collateral -- much of it mortgage-backed debt -- from the two funds and sell it,. . . . . . managers worked with a handful of other key lenders, including Goldman Sachs Group Inc. and Bank of America Corp., to pay off the funds' $9 billion in loans. . . . “ Quote WSJ.com
The peculiar thing about seizing these assets is that trying to sell them is going to make things worse. The two funds together had about 1.5 billion of investor capital and probably 10 times that in bank loans. What is pretty clear at this time is that the investor’s equity has taken a hell of a hit. Merrill said that it sold 850 million in mortgage related securities, yesterday. . Looks like they did OK at the auction or maybe they didn’t sell the real dogs.
The "Names" are going to want whats left of their seed money back and they have to give 3 months notice. So, April means a June withdrawal, and June means a September 1 withdrawal. These two funds are toast, but it’s going to take a while. Look’s like there is 15 to 20 billion to unwind here.
Before we had the question, who was funding this real estate bubble? I think it could be the hedge funds. A fund could gather several big investors “Names” and then borrow 10 times the amount in the kitty. The people who loaned the hedge fund money, aren’t really saying much yet, but they have the biggest share of the pie to lose. This might involve a lot of retirement money.
We may see one to four new hedge funds hit the dust next week. Remember this isn’t something that just happened; the ones that drop in the coming week, have been hanging on by their fingernails for months now.
Things are really starting to unwind. The two that went down this week, sold the good stuff first and that didn’t fix it. Merrill stepped in and sold the crap and it kind of went OK. Maybe Merrill figured that what ever price they get today is going to be higher than when the next one hits. Maybe they know something that we don't, and it could be in their portfolio.
The interesting words are “rescue plan developed over several days fell apart." It looks like quite a few people outside of the firm knew about this as early as last Friday. So if outside firms were let in on the financial problem, it must have been obvious that something was wrong probably as early as the middle of May internally.
There are three players cited; Merrill Lynch, Bank of America Corp and Goldman Sachs Group. The interesting party is Merrill Lynch, which owns approximately half of Blackrock, one of the world's largest publicly traded investment management companies, with more than $1 trillion in assets under management. As a footnote, a new IPO called Blackstone came out today, I wonder if there was confusion in China over the translation of Blackrock Vs Blackstone?
“Merrill Lynch & Co., one of the hedge funds' lenders, said it would move to seize collateral -- much of it mortgage-backed debt -- from the two funds and sell it,. . . . . . managers worked with a handful of other key lenders, including Goldman Sachs Group Inc. and Bank of America Corp., to pay off the funds' $9 billion in loans. . . . “ Quote WSJ.com
The peculiar thing about seizing these assets is that trying to sell them is going to make things worse. The two funds together had about 1.5 billion of investor capital and probably 10 times that in bank loans. What is pretty clear at this time is that the investor’s equity has taken a hell of a hit. Merrill said that it sold 850 million in mortgage related securities, yesterday. . Looks like they did OK at the auction or maybe they didn’t sell the real dogs.
The "Names" are going to want whats left of their seed money back and they have to give 3 months notice. So, April means a June withdrawal, and June means a September 1 withdrawal. These two funds are toast, but it’s going to take a while. Look’s like there is 15 to 20 billion to unwind here.
Before we had the question, who was funding this real estate bubble? I think it could be the hedge funds. A fund could gather several big investors “Names” and then borrow 10 times the amount in the kitty. The people who loaned the hedge fund money, aren’t really saying much yet, but they have the biggest share of the pie to lose. This might involve a lot of retirement money.
We may see one to four new hedge funds hit the dust next week. Remember this isn’t something that just happened; the ones that drop in the coming week, have been hanging on by their fingernails for months now.
Things are really starting to unwind. The two that went down this week, sold the good stuff first and that didn’t fix it. Merrill stepped in and sold the crap and it kind of went OK. Maybe Merrill figured that what ever price they get today is going to be higher than when the next one hits. Maybe they know something that we don't, and it could be in their portfolio.
Saturday, June 16, 2007
How to Buy a Dream Home in San Diego
So you want to buy a house and have no money just a good credit rating, we can fix you right up. Here is "The Dummy’s Guide to Home Finance."
You look at a house for sale and see a range on the price from $589,900 to $549,000. What you are looking at is the kickback for no money down financing. The buyer goes to the owner’s agent and says I need financing. I’ll go 589k if the owner will sell for 549K and pass the rest to me under the table. There is a million ways to run the deal, but the easiest is to get a relative of the buyer to front the money to be rebated after the sale. Plus the spread is negotiable (in case you are having a blond moment).
So let’s run through one. The buyer lines up the cash down payment from Dad for $40k. Now when we go to escrow, the seller will designate a bill to be paid, by the escrow agent of 40k upon sale of the house, to your father’s sister for “home improvements” (the relative you pick should have a different last name to avoid being too obvious).
It’s not like this is something new, but the way its advertised, shows that the seller is ready to be approached on that level. To the real estate agents, this is a zero sum game. The buyer and seller get what they want; the seller unloads the house, the buyer gets a no money down purchase, the agents get their commissions and everyone is happy. The bank financing the deal, is none the wiser. Nobody ever seems to go to jail on this sort of arrangement. That could change.
This also makes property values appear normal and of course the new couple has their dream home that they always wanted.
Sigh, to be young again, I guess you start to perceive reality and gain wisdom with age.
You look at a house for sale and see a range on the price from $589,900 to $549,000. What you are looking at is the kickback for no money down financing. The buyer goes to the owner’s agent and says I need financing. I’ll go 589k if the owner will sell for 549K and pass the rest to me under the table. There is a million ways to run the deal, but the easiest is to get a relative of the buyer to front the money to be rebated after the sale. Plus the spread is negotiable (in case you are having a blond moment).
So let’s run through one. The buyer lines up the cash down payment from Dad for $40k. Now when we go to escrow, the seller will designate a bill to be paid, by the escrow agent of 40k upon sale of the house, to your father’s sister for “home improvements” (the relative you pick should have a different last name to avoid being too obvious).
It’s not like this is something new, but the way its advertised, shows that the seller is ready to be approached on that level. To the real estate agents, this is a zero sum game. The buyer and seller get what they want; the seller unloads the house, the buyer gets a no money down purchase, the agents get their commissions and everyone is happy. The bank financing the deal, is none the wiser. Nobody ever seems to go to jail on this sort of arrangement. That could change.
This also makes property values appear normal and of course the new couple has their dream home that they always wanted.
Sigh, to be young again, I guess you start to perceive reality and gain wisdom with age.
Wednesday, June 13, 2007
The Sale of the Century
Interest rates on bonds are not rising because of inflation. They are rising because the people are selling into a scared market. As rates rise smart money comes into the equation. There seems to be a complete disconnect between the media and the bond market.
The media thinks that when the Fed raises interest rates, bond rates go up. Forget that idea. Bond rates go up when there is lack of buyers.
The Fed raises and lowers the discount rate, but it means very little. At one time we were the major player. Time has changed all of that. This is now a global market, and as a global market, the U.S. is just a small frog in a big pond. Bernanke is pushing on a string, the market is too big.
We might have the most regulated fair market in the world, but that doesn’t bring in the big bucks. It’s the other markets that are hawking their wares for our retirement dollars. Of course, most of what they do in foreign markets would be illegal in ours anyway.
So the 10 year rate is jumping up a bit. The real question to ask is, “What’s happening to the 30 year bond at 4.5%. If interest rates hit 9% this bond has had a 50% haircut. Someone yesterday suggested that it could hit 7% this year.
So if it does go to 9% aren’t you happy that your mutual fund locked you in at 4.5%?
So let’s see, if you bought a 100K 30 year bond at 4.5% and wanted to sell it to raise cash, you would get 50K in cash in a 9% market. But if you were the buyer, you get 9% on your 50k and 100K when the bond matures or when rates return to 4.5%. It kind of makes a stock trader look like a small time piker.
The media thinks that when the Fed raises interest rates, bond rates go up. Forget that idea. Bond rates go up when there is lack of buyers.
The Fed raises and lowers the discount rate, but it means very little. At one time we were the major player. Time has changed all of that. This is now a global market, and as a global market, the U.S. is just a small frog in a big pond. Bernanke is pushing on a string, the market is too big.
We might have the most regulated fair market in the world, but that doesn’t bring in the big bucks. It’s the other markets that are hawking their wares for our retirement dollars. Of course, most of what they do in foreign markets would be illegal in ours anyway.
So the 10 year rate is jumping up a bit. The real question to ask is, “What’s happening to the 30 year bond at 4.5%. If interest rates hit 9% this bond has had a 50% haircut. Someone yesterday suggested that it could hit 7% this year.
So if it does go to 9% aren’t you happy that your mutual fund locked you in at 4.5%?
So let’s see, if you bought a 100K 30 year bond at 4.5% and wanted to sell it to raise cash, you would get 50K in cash in a 9% market. But if you were the buyer, you get 9% on your 50k and 100K when the bond matures or when rates return to 4.5%. It kind of makes a stock trader look like a small time piker.
Monday, June 11, 2007
The Sleeping Dragon
Interest rates are starting to creep up. With all of this money sloshing around on the globe, it seems a little odd, doesn’t it? Remember back to the Savings and Loan debacle? Banks in trouble raised their rates to draw new funds in. After a few bank failures people started to understand why those rates were higher.
Financial institutions raise interest rates for two reasons, to attract capital to cover losses, and to take advantage of business investment opportunities.
So in today’s world, there is no risk (just ask anyone), but there is a rising interest rate. This tends to imply that financial institutions are calling for more cash. Whoever has the highest rate gets the money.
The interest rate on the 10 year T-bond is increasing. In times of stress, people purchase treasuries. So without the perceived risk, the "investor" moves away from Treasury bills to financial instruments paying a higher rate.
Are investors demanding more interest, or is the government asking for more money than what is being offered? Maybe a little bit of both. But one thing is obvious, the dumb money will chase rates.
Rates are rising and it’s not because of housing demand. What could be causing it? Several other large bubbles come to mind, there is the credit card bubble, the China bubble and our stock bubble. There is absolutely no mention of foreign banks having any problems and that sounds peculiar in itself.
The sleeping red dragon is beginning to stir. The concept of risk will soon be rediscovered. How many bubbles are in your portfolio?
Financial institutions raise interest rates for two reasons, to attract capital to cover losses, and to take advantage of business investment opportunities.
So in today’s world, there is no risk (just ask anyone), but there is a rising interest rate. This tends to imply that financial institutions are calling for more cash. Whoever has the highest rate gets the money.
The interest rate on the 10 year T-bond is increasing. In times of stress, people purchase treasuries. So without the perceived risk, the "investor" moves away from Treasury bills to financial instruments paying a higher rate.
Are investors demanding more interest, or is the government asking for more money than what is being offered? Maybe a little bit of both. But one thing is obvious, the dumb money will chase rates.
Rates are rising and it’s not because of housing demand. What could be causing it? Several other large bubbles come to mind, there is the credit card bubble, the China bubble and our stock bubble. There is absolutely no mention of foreign banks having any problems and that sounds peculiar in itself.
The sleeping red dragon is beginning to stir. The concept of risk will soon be rediscovered. How many bubbles are in your portfolio?
Friday, June 08, 2007
The Disappearing Money Supply
With the housing bubble, one thing that people don’t really comprehend, is that no matter how low prices go, there will always be an owner of every house that is standing. The real hard part of this nut to crack is the perceived evaporation of value. If it was sold at 2 million last year and is sold today for 1 million, there is a real reduction in the money supply. The asset is being marked to market. Whether the owner sells it at a loss, or it is sold after a foreclosure, the loss is real.
Let’s examine the 12 trillion dollar real estate market. If everything got marked down say 50%, there would be a loss of 6 trillion in the money supply; this is people money, not government money. This contraction in asset value will leave people short of cash and further stress the banks for funds. Interest rates will have to rise.
When we finish marking everything to market, there will be people who have nothing left. They were leveraged and it’s all gone. Others with little debt may now have the option to buy assets at fire sale rates.
Just using the real estate market, example from above, the 6 trillion represents a massive contraction of the money supply. But on the brighter side, about 30% of homeowners own their house outright. Here are people who have capital to invest. It’s these people, who will be the new real estate investors, probably at 10 cents on the dollar. It’s going to get real fugly, but the market will be orderly (we hope).
FDR had to close the banks back in 1933, but “it’s different this time.” You can’t really close a mutual fund or investment program. They are going to trade all the way down to absurdity. Historical note: between October 1, 1929 and August 31, 1932, 4,835 American banks failed and that can’t happen with FDIC insurance today.
-----------------------------------Quiz Question-------------------------
Nobody today, keeps their money in a bank they keep it in a ____________ (fill in the blank).
So if your mutual fund is insured and buys shares of Google at $508 and Google drops to $8, it’s a real comfort to know that your fund is insured. You get to keep the $500 dollar loss and management gets $7.99 for management fees. Just think how lucky you are that your fund isn’t buying the China market! Are we rich yet???
Let’s examine the 12 trillion dollar real estate market. If everything got marked down say 50%, there would be a loss of 6 trillion in the money supply; this is people money, not government money. This contraction in asset value will leave people short of cash and further stress the banks for funds. Interest rates will have to rise.
When we finish marking everything to market, there will be people who have nothing left. They were leveraged and it’s all gone. Others with little debt may now have the option to buy assets at fire sale rates.
Just using the real estate market, example from above, the 6 trillion represents a massive contraction of the money supply. But on the brighter side, about 30% of homeowners own their house outright. Here are people who have capital to invest. It’s these people, who will be the new real estate investors, probably at 10 cents on the dollar. It’s going to get real fugly, but the market will be orderly (we hope).
FDR had to close the banks back in 1933, but “it’s different this time.” You can’t really close a mutual fund or investment program. They are going to trade all the way down to absurdity. Historical note: between October 1, 1929 and August 31, 1932, 4,835 American banks failed and that can’t happen with FDIC insurance today.
-----------------------------------Quiz Question-------------------------
Nobody today, keeps their money in a bank they keep it in a ____________ (fill in the blank).
So if your mutual fund is insured and buys shares of Google at $508 and Google drops to $8, it’s a real comfort to know that your fund is insured. You get to keep the $500 dollar loss and management gets $7.99 for management fees. Just think how lucky you are that your fund isn’t buying the China market! Are we rich yet???
Saturday, June 02, 2007
The REO Auction Heimlich Maneuver
This is our third update using semi logarithmic paper plotting California Foreclosures. It looks like the train to hell, is on schedule. The number of foreclosures is increasing at a steady geometric rate, and we are in the prime buying season for real estate. That gets a little scary when you realize that home purchases taper off after school starts. So that factor could exacerbate the problem. We are presently at 34,000 foreclosures (sounds like a pilot giving and altitude report) and if it keeps up at the present rate, it doesn't look good, come November. Double click on the chart for a larger, more depressing, image
---------------------------Data courtesy of Foreclosure.com-----------
There is a little whisper running around about the hedge fund insurance for these mortgages. They might not have to cover loan fraud. Looks like the underwriters for these loans have found a loophole.
People are slow to realize what is happening (auction wise). The bank takes title to the property at the foreclosure auction. (who's going to bid at that price?) We know that it's not going to move as an REO real estate listing. So what happens next? The banks in an area get together and have an auction to clear out their REO's. They've had two in the last month, one in LA and the other in San Diego I believe.
20,000 to 30,000 foreclosure houses will have to be sold in California in the next year, a majority will be REO bank auctions. No Realtor involved, as is, cash on the barrel head. What's not realized is that this auction party has only just begun. That's a lot of houses to sell in a down market; the price has to be right. The buyer can't do a "No Doc." You might want to write your Congressman and request that they put Realtors on the Endangered Species List. Don't be shocked if you get a letter back saying they will look into it.
Banks are just managing the property for the lien holders, whoever and where ever they are. The real pain for the debt holders has not set in yet. If we have a full year of REO auctions, prices are going to drop off a cliff.
San Diego currently has 21,300 real estate listing. The Realtors claim that's about 9 months of inventory. San Diego banks alone, either have to move their 4,600 REO's at auction or there will be 25,900 real estate listings. If you examine the graph, this is the only solid approach to the problem. They have to keep up with the new stuff coming in.
The lien holder has new problems. The tax based price for the REO is the foreclosure sale amount (full retail if it was a 100% loan). Now as a new land owner, they have property taxes to pay, of 1% per year. The lien holder loaned the money expecting a 6% return, gets no return and is dunned for taxes and maintenance. Talk about feeling used and abused, I thought that only happened when you got married.
---------------------------Data courtesy of Foreclosure.com-----------
There is a little whisper running around about the hedge fund insurance for these mortgages. They might not have to cover loan fraud. Looks like the underwriters for these loans have found a loophole.
People are slow to realize what is happening (auction wise). The bank takes title to the property at the foreclosure auction. (who's going to bid at that price?) We know that it's not going to move as an REO real estate listing. So what happens next? The banks in an area get together and have an auction to clear out their REO's. They've had two in the last month, one in LA and the other in San Diego I believe.
20,000 to 30,000 foreclosure houses will have to be sold in California in the next year, a majority will be REO bank auctions. No Realtor involved, as is, cash on the barrel head. What's not realized is that this auction party has only just begun. That's a lot of houses to sell in a down market; the price has to be right. The buyer can't do a "No Doc." You might want to write your Congressman and request that they put Realtors on the Endangered Species List. Don't be shocked if you get a letter back saying they will look into it.
Banks are just managing the property for the lien holders, whoever and where ever they are. The real pain for the debt holders has not set in yet. If we have a full year of REO auctions, prices are going to drop off a cliff.
San Diego currently has 21,300 real estate listing. The Realtors claim that's about 9 months of inventory. San Diego banks alone, either have to move their 4,600 REO's at auction or there will be 25,900 real estate listings. If you examine the graph, this is the only solid approach to the problem. They have to keep up with the new stuff coming in.
The lien holder has new problems. The tax based price for the REO is the foreclosure sale amount (full retail if it was a 100% loan). Now as a new land owner, they have property taxes to pay, of 1% per year. The lien holder loaned the money expecting a 6% return, gets no return and is dunned for taxes and maintenance. Talk about feeling used and abused, I thought that only happened when you got married.
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