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?


Anonymous said...

Hello Jim,

I think Tanta pointed out that MLynch, GS et al were at the table with BSC about a month ago. Suddenly ML gets up screaming and runs for the exit with a wet spot on the front of their pants.

So, they seem to the first group to cut their losses. The debt is all exhausted in the market. No where to go but down.

The larger question that looms in my mind will be the relationship between Moody's and the other bond rating agencies. They rated all this garbage AAA or something like that. Many of the bonds are held by pension funds and Frannie Mae and Freddie Mac.

I think the SEC should be investigating the relationship between bond rating houses and the big banks that packaged all this garbage. Probably ought to carefully examine the models if they were based on any real basis or just cooked books so that the investment banks could package them and sell them off to pensions.

I worry that this transfers the bad debt to many public pensions which will fail and go to the federal insurance.

This is a bigger scandal than the Arthur Anderson accounting scandal. It will probably turn out that the investment banks colusion with the rating agencies defrauded people. Rating agencies had zero buisness rating these things at all since it seems they didn't have a model.


Jim in San Marcos said...

Hi Anon

You hit the nail on the head.

Merril Lynch owns half of Blackrock investments, a real biggie. So they have to have a pretty good idea what lays ahead.

In the 1929 depression almost 5,000 banks went under in less than a year. That can't happen with FDIC insurance, but investment funds have no such protection. You won't lose your shares in the fund, the value will drop.

I don't think that we are looking at anything grossly illegal. But as you suggest, the federal government may have to cover some of these retirement plans.

The irritating thing about this whole mess, is that it is not visible ---yet.

Thanks for the post, its a hell of a good summary of what's going on.

Anonymous said...


It's Thursday and everything is still o.k., how many times are you going to cry wolf before you don't have the face to do it anymore.

So, when do you expect your predictions to come true? A broken clock is right twice a day, but you Jim can't even keep up with that.

Stay negative on the economy and you'll eventually be right, all the while you will miss huge gains in the market.

You're a smart guy, I'm sure, but very narrow minded. Take the blinders off, there is a time to be a bear and there is a time to be a bull, but you my friend are always a chicken, and chickens don't make any money.

Anonymous said...

One would think that a person so negative about your posts as Anonymous 7:20 p.m. would be reading and posting to the bull blogs instead. Wonder if you hit a major nerve?

Thanks for the post. I agree that the ratings companies should be brought to account, in a very public way, for their obviously gross errors in rating this debt.


Jim in San Marcos said...

Hi Anon 7:20

You’re too kind! I guess you haven’t read very much of this blog. I am not afraid to say something because I could be wrong. This is only a blog. While everyone is busy pointing to the real estate bubble, I have been pointing to bigger and more important concerns.

Investing and gambling are two terms that are the same for most people in today’s market. If you think that Google is a good investment at $525 you’re playing with fire. The stock market, the bond market and the real estate markets go down from here.

We are coming up on a situation that only occurs every third generation. It is a sure shot money maker if you have cash to invest. You can’t call an exact date for a calamity of this sort, but it is a certainty at this point in time. Bear Sterns has lit the fuse.

Cash will be king, real estate and bonds could be the steal of the Century.

The real estate bubble collapse was a trigger for the hedge fund bubble which will in turn trigger the debt bubble. Each bubble will collapse faster that the last probably by a factor of 3 to 5.

You argue about me being like a broken clock that is right twice a day. I’ll go you one better, I hope to be right on this just once in my lifetime.

As for being a chicken, I own real estate, gold silver, and stocks. I’ve been in the market since 1972, when nobody made money. I am though in 70% cash at the present time.

This blog isn’t about being right or wrong. If you think about it, we can all be right, we just can’t all be right at the same time. All this blog does, is give you some lead time on the near future. You can’t read what hasn’t happened yet in the Newspaper.

Jim in San Marcos said...

Hi Anon 9:02

Thankyou for coming to my defense.

You hit upon a valid point, the rating companies. But I don't think they knew how to handle this stuff.

It kind of like 1929 and the holding companies same sort of scheme, different structure and the same result. Leverage was the name of the game.

I expected 4 more hedge funds to bite the dust before the weekend, but there was only one.

It's very easy to assess the value of a property that has a mortgage in default, it becomes more complex when it is bundled into a bond, then it becomes a real boondoggle when it gets separated into tranches.

The higher up the abstraction, the greater the loss. So if the actual mortgage is discounted to 40% all of the related abstracted derivatives would lose drastic value on the way up the abstracted ladder.

Re-evaluating the ratings on this debt really messes with the mutual funds and retirement funds. It doesn't look good at this time.

Anonymous said...

“It's Thursday and everything is still o.k.”
Kinda reminds me of …
“As depression worsened across the United States in 1931 and 1932 Texans eventually had to recognized its existence, then attempt to combat its devastating effects.” - The Handbook of Texas.

“Stay negative on the economy and you'll eventually be right…”
Stay negative??? That’s like saying… stay in the water long enough and you’re bound to get wet. Does anyone even have the time to read all the negative stuff that is already out there? There’s piles of new stories everyday.

Anonymous said...

The PPT antics just keep on coming! This entire week the news was all bad (housing, CDO's, Oil price, inflation, slow GDP, weak dollar) and even this data (propagada) has been "hedonically freshed up". and still all the key stock indexes were heading down. Enter the Plunge Protection Team (now a full time job for many - probably several hundred people -to the rescue to push up all market above key psychological values; Dow > 13400, NASDAQ > 2600, SP500 > 1500, plus knock down Gold below $650 and monetize 10yr Tbond to get yield back down close to 5%). All US markets are now so clearly being manipulated that you would have to be very dense not to see it.

Jim in San Marcos said...

Hi Cranky

Thanks for your support, I can't figure out Anon 7:20. It's not like I get paid to write this blog. Can't figure out where he is coming from.

Jim in San Marcos said...

Hi Anon 1:47

I just posted an article that might give you some insight into the stock market.

I don't think you can artificially keep the market up, but you can play games that have a very good return.

The major gold miners have a cost of production of about $300 per ounce, so when they buy a futures contract at $625 for September delivery, it guarantees that their mine will be in business. So gold is going to be supplied to the market.

I think that the biggest thing not realized by investors, is that the market is not rational.

Anonymous said...

Jim, I notice you say you're in precious metals.

I've been thinking about this lately, but when you look at the graphs of metals prices over the past 10 years, they look not too far off from graphs of real estate - do you think metals are less subject to crash than real estate right now, and if so, why?

Love the site, and I'm guessing 7:20 is just another used house salesman unhappy to see the commission well running dry.

Jim in San Marcos said...

Hi JimatLaw

I don't look at gold and silver as investments, but rather as an inflation indicator. If you envision currency as a lake filling with water, gold is a measuring device that gives you the depth of the water.

With world population increasing, the demand for gold should become more pronounced. Governments can't print gold or silver, so it's a real tangible form of stored wealth.

Most people believe that Gold in the US doubled in price in the last 4 years. But when you examine the price of gas doubling, it’s more likely the rest of the world has revalued our currency 50% downward.

The downside price of gold use to be about $300 per oz., that was the cost of mining it (it could be considerably higher now). Silver on the other hand, is pretty much the by product of mining copper and other metals. So if the price of silver shot sky high, you don't go double copper production for the 8% silver content.

20 ozs of gold is equivalent in value to 85 pounds of silver dollars. So if you’re not into lifting weights, you might not want to buy too much silver.

To answer your question is hard. If you have 20 years to retirement I would advise putting 10% of your assets into gold and silver.

Real estate is going to collapse only because it was a bubble. Gold and silver are a measure of value. When you think about it, the only reason our silver coinage disappeared, was because of its value. The government can’t print gold and silver, I guess that the McCongress must have passed a law making it illegal (God Bless those Clowns for their infinite wisdom).

Hope this is of some help