Saturday, March 29, 2008

Rattle your Congressman's Cage

Here is a link to a site just starting up called "Stop the Mortgage Bailout."

A lot of politicians are suggesting a fix along these lines. Maybe we can help them sort it out with a letter or two. Usually if there is enough controversy over an issue, your elected officials will decide to do nothing.

Thursday, March 27, 2008

The Tears of Reality

Examine a horse race with 10 horses and the winning horse getting $20,000 in prize money. Anyone can place a bet on one of the horses; all it takes is $2. Notice the disconnect here, the owner of the horse has a max gain of 20K. On the other hand the bettor has a gain on a win determined by the odds and the amount bet, he could bet thousands and win millions.

The owner of the horse that wins could be compared to the actually owner of a stock, the bettor represents an options position. The real game in play is not the stock, but rather the side bets. I could be shot again for this analogy, it isn't the greatest, but it gives you an insight to what follows.

A company sells stock to start up a business to build widgets. This would be labeled a business investment and would create jobs. Anyone buying options relating to the performance of the stock, is not creating product or any new jobs, this is speculative investing.

Let’s now jump to the commodity’s Market. The standard S&P 500 contract is 250 times the size of the current price of the index. If the S&S&P 500 is currently priced at 1,500 points, the value of this contract would be 1,500 * 250 = $375,000. The margin requirement for this contract would be $22,500 and maintenance margin would be $18,000. So if you wanted to participate in the SP 500 it would only cost you 22.5k to control 375K in the futures market. You are not buying even one share of stock; you just bought a future on the whole S&P 500. Plus you haven't created one widget or even one new job!

If the stock market took a 2,000 point drop in one day, it could literally vaporize the abstract markets (Futures like the S&P 500 and Index Options). The thing people gloss over here is that fact that these derivatives are abstract options linked to an “event generating item” (i.e. a stock like IBM). You are not in possession of an asset; you are in possession of an insurance contract at best. Some estimates suggest there are 52 trillion dollars worth of derivatives out there involving stocks, bonds, commodities, home loans, currencies etc.

Investing in these "derivatives" is kind of like swimming in a crocodile infested lake; you are going to get eaten alive. "Let's do Lunch," kind of sucks if you're on the menu!

If 52 trillion dollars turned into tears, it could give a new meaning to "Cry me a River." It would certainly add some reality to this "hypotheticated financial morass" that appears to be some fairy tale run amok. Maybe "Ben Bernanke" is the sequel to "Don Quixote."

Monday, March 24, 2008

Open letter to Ben

No humor in this post. This is a full page ad that I missed that ran in the WSJ March 18 page A5. As a personal note, this ad cost the user $90,000. Some people do put their money where their mouth is. I tip my hat to this man. He didn't have to do it, but he did it anyways. Thank you Sir!

To: Mr. Ben Bernanke



“Dear Mr. Bernanke:

I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.

I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won’t buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage syndicated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren’t standing in line to buy.

Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??

Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These “servicer advancements” put funds back into the trust to be paid out to junior security holders. The “servicer advances” are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.

Similarly, “first mortgage syndicated bank loans” issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. Many, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also not widely understood and are sometimes even disguised in the loan documents.

Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Many “last out” AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won’t touch any of this garbage at any price remotely close to what it originally sold for.

The Fed may be walking on very slippery ground. My fear is that the Fed has little more understanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.

Is the US Government taking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.

I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Fed, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.


Andy Beal
6000 Legacy Drive
Dallas, Texas 75024

Sunday, March 23, 2008

Up in Smoke

I was just surfing the local trustee sales for my zip code and figured this looks a little wild. I copied 5 consecutive sales.
Double click for a more legible picture

Look on the right side of the table:
-------------------------------Notice of Sale Amt: $503,088.39
---------------------------------Opening Bid Amt: $370,000.00
-------------------------------------------Sold Amt: $370,000.00

The Opening Bid Amount and Sold Amount are the same. That means no one bid on the property. The bank got it. The difference between the Sale Amount and the Sold Amount (133K) are the secondary liens that have just dropped off the title.

Those 5 trustee sales had over a half a million dollars total, of secondary liens -- up in smoke, on the court house steps. This money was loaned by someone, somewhere. Now it's gone.

San Diego County holds a Trustee Auction and nobody shows up? It kind of makes you wonder about those second trust deeds. How many is Bernanke going to buy?

Thursday, March 20, 2008

Tooth Fairy Runs Amok at Bear Stearns

Congress is moving to look into the Bear Stearns take over. It makes sense; Bernanke is spending money like a Congressman. Last week he "loaned" 30 billion dollars to J P Morgan who in turn loaned it to Bear Stearns a non bank. This saved Bear from bankruptcy. J P Morgan then bought Bear for zero dollars (Of course they will pay for Bear Stearns' N Y office building, which some value at a higher price than $2 per share). This deal seems to have a peculiar smell to it!

To top that off, J P Morgan (a good pirate name) gets reimbursed for any loses incurred taking over Bear Stearns. If I understand this right, the Fed is guaranteeing funds of a non bank. This all transpired over a two day weekend. A 30 billion dollar deal went through with the snap of some fingers, no investigation, no nothing (so they claim).

Probably a lot of employees at Bear Stearns think that maybe bankruptcy would be the way to go. Spread the pain around a little. There is more than enough for everyone.

Wall Street thinks that Bernanke has saved the day, the DJIA is back to normal. Ask one question, who in their right mind would loan 30 billion on worthless assets to a non bank, just to keep the status quo? This defies comprehension! The only way to describe it is "Tooth Fairy Economics and/or March Madness." If regular every day bankers think this stuff is pure crap, why argue?

We have gone from "lender of last resort," to “the last 'non compos mentis' lender.” If this deal is allowed to stand, it implies the possibility of a Federal Reserve bailout of Fannie Mae without Congressional approval.

Is Bernanke really loaning Fed funds? If a bank defaults on paying back these Fed loans, guess who gets the collateral? Transfer of ownership is a sale. At that point it is is no longer a loan; you bought it sucker! Bernanke has overstepped his mandate. Congress spends our tax dollars not the Federal Reserve.

This mess is a little like using battery acid to remove a coffee stain on a white shirt. It kind of works, but it doesn't solve the problem. It only makes it worse.

Tuesday, March 18, 2008

The Giant Shadow

Let’s look at this 420 point rise in the Dow Jones Industrial Average. If you owned one share of each of the Dow stocks, you made $51.66 dollars today. In order to get the cash amount, you take the rise in the Dow (420 points) and multiply it by .123 which equals $51.66. The stock market does it the other way around. They take the increase in the Dow thirty and divide it by .123. This might lose some of the new viewers, click on this link it explains the whole process

Picture an ant crawling across the floor at night in front of a lit flashlight lying on the ground; it would cast a giant shadow on the wall; Super Ant. That shadow is our Dow Jones Industrial Average and the SP500, SP100 etc all rolled into one. The ant represents the actual stocks. The shadow represents the abstract markets. The owner of the SP 500 gets paid on the size of the shadow not the actual size of the ant. As the ant walks away from the light the shadow gets smaller. It’s called leverage and it can kill you.

Then, on the Bear Stearns bail out, the real disturbing thing is the 30 billion that was loaned for 28 days to cover the collapse. The government has guaranteed that JP Morgan won’t lose a dime on this package. That’s so touching; it’s so nice to know the Fed fixed this mess at no cost to the taxpayer. On top of that there is no real inflation. The real good news, no one has lost a dime over this whole mess. Believe that and you must be over medicated.

It’s a little like taking a whiz in a half full whiskey bottle. The drunks are so happy that there is more booze than they thought. The irritating thing is that "drunks" in this example are an euphemism for "taxpayers."

Copyright 2008 All rights reserved

Sunday, March 16, 2008

Bear Stearns Executed

No Blindfold no cigarette, Bear Stearns got taken out and shot.

Double click for larger image

From the picture, notice that Bear closed at $57 on Thursday and closed at $30 on Friday. To add insult to injury, they were sold to J P Morgan for $2 a share over the weekend.

On Thursday the stock had a market cap of 6.7 billion dollars. At the close on Friday that figure was 3.54 billion. At $2 per share the market cap is 236 million dollars.

I'll bet you can't find an investment institution anywhere that even owned one share of this stock (tongue in cheek). 6.7 billion billion dollars went poof and it only took one business day (weekends don't count)! Bear Stearns is a real dynamite stock, just look at the damage.

Copyright 2008 All rights reserved

Saturday, March 15, 2008

More Bang for the Buck

The Fed is going to bail out Bear Stearns. What a laugh, they sold all of the good stuff last June when they had to raise cash. Whatever is left probably has junk status (they were highly leveraged when they hit that speed bump).

Presently it appears that Bear Stearns is being nailed with very large cash withdrawals; hedge fund derivatives comes to mind, 52 trillion dollars worth are out there somewhere.

Sources state that Bernanke stepped in to keep Bear Stearns from collapsing. It would have left financial markets in chaos and would have taken several weeks to sort out. The aggravating thing about all of this is that it wasn’t done on the spur of the moment; figure Bernanke had at least thirty days warning. Federal accountants had to have been crawling all over their books for weeks. This is a non recourse loan (it almost sounds like someone got a commission for writing it)! It does make one pause to wonder what the Fed is going to do with these securities. They kind of get to keep them.

Using the “Cockroach Rule,” it’s only a matter of time before another sick hedge fund appears. What is becoming apparent is, no one wants to buy real estate securities. There is NO MARKET. You got ‘em; you keep ‘em (or go talk to Ben).

Here is where I get shot for generalizing again. Let’s figure that 40 to 60 percent of the world’s assets no longer exist. They have vaporized. Current value does not equal book value. The million dollar house listed on the books is only worth 400K right now. Let’s assume that half of all the worlds money is in retirement funds. In this scenario, the losses are still invisible (the retirement draw down is still years away). Only if the demand for payment forces the fund to convert investments to cash, then the loss becomes apparent. Remember one very important point, real people lose or gain money, financial institutions only manage it.

From Bernanke’s point of view, supplying liquidity can help the funds avoid marking the bad assets to market. His goal is to stop a forced conversion and keep the losses hidden. The amount of money loaned to Bear wasn’t revealed; my guess, about 30 billion (that’s what they had in the two hedge funds that collapsed).

Right now there is a “bank” run on Bear Stearns. There are two possible scenarios. BS was less than truthful to Bernanke about the depth of the financial mess that they are in, or it’s real bad, beyond imagination. Some people out there are starting to cut and run. The first 10 to 20 percent of investors converting to cash will get their money the rest will get an “education.”

The Fed is “Insuring” a non bank??? I guess you need to be thoroughly medicated to comprehend the implied implications. There are two ways to throw your money around; the way Bernanke does it or the way the ex Governor of New York did it. I think the Governor got more bang for his buck!

Copyright 2008 All rights reserved

Thursday, March 13, 2008

The Illogical Mutual Fund Market Reprinted

Reprint, originally appeared June 7, 2006

Our Mutual Funds and Investment Retirement Accounts have built up assets, by "investing" in the stock market and the bond market. They know nothing about the psychology of the market. However, they do know how to purchase stocks and bonds. The real problem, the market is not logical in its execution, to borrow some famous words by Mr. J.P. Morgan, "The market fluctuates."

As long as the market goes up, mutual funds and IRA's will do OK. It's the drop that will ruin the investor. At first, most will hold on, those profit and loss statements only arrive every quarter. No one will even notice the initial drop. Want to pull the money out? Well, the penalties are more than one would expect. There is the early withdrawal penalty from the fund, and income tax consequences--what a nightmare. Adding insult to injury, the losses are not tax deductible.

The question that comes to my mind is this; while the market goes up everyone hops on and rides the wave, when the market starts to drop, where is the alternate plan of action? This drop in the market will leave the mutual fund managers in a vacuum. People will soon realize that these managers don't know any more than anyone else. If these guys are so good at what they do, why do they need your money? Answer; there is no risk if they use your money.

Investments recommended by the government tend to burn you in the long run. The government has always done its best to mess up the person saving for retirement by changing the rules after the game has started.

What happens when all these fund managers start to sell? The real question you need to ask is, "Who's going to be buying?"

Copyright 2008 All rights reserved

Tuesday, March 11, 2008

Things that go Bump in the Night Reprinted

Reprinted from 9/5/2006 and edited

These are things that can keep you awake at night.

Ever heard of a big mutual fund going bankrupt? Even if you haven't, do you know the name of the one you own?

What happens when the baby boomers retire and ask for their money, is it there? It doesn't have to be there. They haven't asked for it (yet)! Your fund manager could be on his second tour around the world on his (yours technically) private yacht.

Ever heard of a retirement fund insured by the FDIC? Does it matter? They don't insure investment losses anyway.

After 34 pretty good years, isn't the stock market due for a 5 to 10 year downward slide?

Why would the big boys be buying 30 year bonds--how much lower can interest rates go before you say, spend it, inflation will eat it up?

How can a hurricane triple insurance rates in Florida, but yet the threat of a housing collapse has done little to long term interest rates?

How can Fannie Mae package a ton of junk and have no problem selling it? Nobody mentioned that "Risk had left the market." Can you say "retirement fund investment?"

Something is ready to DROP, not sure what it will be, but it WILL go BUMP in the Night.

Copyright 2008 All rights reserved

Saturday, March 08, 2008

Our Future, Written Today for Tomorrow

There is still four months of school left before summer. Governor Schwarzenegger has reduced California’s school budget by 4.4 billion dollars. What happens next is a slow process (figure the following as a worst case scenario, they still might find some additional funds).

Let’s Pick one school district in our grand and glorious state of Kalofornya; Poway Unified School District. Their share of reductions amounts to 15.5 million dollars. The school district will shave 7.8 million off what they need cut by laying off 150 employees (mostly teachers). So March 15 the pink slips go out. These teachers will finish out the school year in June. Add to a housing surplus, a teacher surplus.

Carry the math forward. 7.8 million divided by 150 employees averages out to $52,000 in cost reductions per employee let go. If California schools cut teachers to cover half of their budget reduction, then 50% of 4.4 billion is 2.2 billion dollars. 2.2 billion divided by 52K equals 42,307 planned school lay offs for next September. Of course the 2.2 billion that they would have been paid won’t be spent stimulating the economy, now will it?

Here is a quote from Harpers magazine November 1933 "Deflating the Schools," by Avis D. Carlson

During the first two years of the depression the schools did business about as usual. By September 1931, the strain was beginning to tell. Salary cuts were appearing even in large towns, and the number of pupils per teacher had definitely increased. Building programs had been postponed. In a few communities school terms had been considerably shortened, and in others some of the department and services were being lopped off. . . .

During the 1932-33 term the deflation gathered momentum so rapidly that many communities had to close their schools. By the end of last March nearly a third of a million children were out of school for that reason.

The budget cuts for California are around 14.5 billion. 50% of that is 7.25 billion. Divide that by 52K. It suggests that 139,423 people could be laid off in California next year (don’t wear pink if you work for the state, it’s too suggestive).

Let’s do some Congressional math. Instead of giving California 14.5 billion dollars to help out the county’s largest state economy, they’re going to give away 150 billion dollars to taxpayers. It kind of makes sense; your kid is going to need a High Definition TV to watch when the schools close. Plus make sure to save the cardboard box, it could come in handy if you lose your home.

Copyright 2008 All rights reserved

Saturday, March 01, 2008

Tar and Feathers, an Inflation Fix?

Paulson just said that the government is not going to bail out the speculators in the housing bubble. That’s good news, isn’t it? They have finally realized how big the mess is - - - too big to fix. They didn’t quite say that, now did they?

The price of gas went up 9 cents today. I paid $3.33 a gallon this afternoon. If I had bought it in the morning it was only $3.24. I guess that will teach me. Buy on the way to work, not on the way home.

The commodities market has gone through the roof. Wheat which use to trade at $3 per bushel, is now at $25 per bushel. Platinum is at $2,000, gold is approaching $1,000. A tear down house in the LA ghetto may well be worth 500k by next year. That would imply a minimum wage here in Kalifornia around 35 dollars per hour. The increase in income would generate the tax money the state needs and the homeowner would no longer be upside down.

It’s neat how inflation can solve our present problems. Mom and Dad are now going to want to live in your spare bedroom. Their monthly Social Security checks might cover groceries. Growing old could be "The New Adventure Nightmare of a Lifetime" (coming soon to a theater near you).

God bless Congress, they’re going to save baseball from steroids! Maybe if we tarred and feathered one or two of those pompous asses, they’d catch on to what they should be doing. They need to cut spending drastically. There is no free lunch. Just ask any fisherman, it's refered to as bait.

Copyright 2008 All rights reserved