Tuesday, September 30, 2008
In Europe, where some blame a phenomenon of "casino capitalism" that has become deeply engrained from New York to London to Moscow, there is more of a sense of shared responsibility. But Europeans also blame the U.S. government for letting things get out of hand.
You got that last sentence right, Eurodudes. Our inability to get our fiscal house in order remains a huge problem. Maybe we can get the IMF to force the U.S. to restructure its debts just as it did for Latin American serial defaulters. Oops, hold on, the U.S. is the chief funder of the IMF! So much for that idea. Don't worry, our Asian creditors know where to find us, and they won't need any help figuring out what we owe them since their kids are better than ours at math. Lost in the noise is French President Nicolas Sarkozy's call for a new Bretton Woods agreement. The good news is that he's generous enough to come to the U.S. for the meeting. The bad news is that the U.S. will be paying the bill for hosting any such meeting, long into the future.
U.S. national debt: $10 trillion.
U.S. federal gov't unfunded / unfundable middle class entitlements: $53 trillion.
Throwing away global hegemonic status on a debt-fueled consumption binge: Priceless.
Monday, September 29, 2008
I doubt that Constellation's board will seriously consider the competing $35/share offer from Electricite de France SA, given the regulatory difficulties it would entail.
My play? I'm selling uncovered Jan 09 calls at 35, effective tomorrow. I'm sticking with MidAmerican's valuation of CEG at $26.50 and betting no other U.S.-based suitor will come calling. I had originally intended to sell Oct calls at 30, but I figured I'd take the longer expiration in case Uncle Warren raises his bid to placate shareholders who'd prefer EDF's higher offer.
Nota Bene: Anthony J. Alfidi holds uncovered calls on CEG.
The markets are responding appropriately, with massive declines. I remain long gold (IAU) and bearish on both financials (XLF) and the broad market (SPY).
As such, I've decided to buy out my uncovered call on Bank of America at a loss. I don't like that, but it beats having to unwind it after the bailout bill is signed into law. The bailout will artificially propell BAC's price to a new unsustainable high. After this turkey is signed into law, I'll think about re-opening my short call on BAC.
I'm keeping my uncovered call open on Merrill Lynch, in the assumption that BofA's buyout will be done by January.
Just remember this: No matter how hard the financial class tries to change the rules in the short run, Mr. Market always wins in the long run.
Sunday, September 28, 2008
The government is resisting guaranteeing some of Wachovia's assets, as it did for Bear Stearns when it engineered that company's sale to JPMorgan Chase & Co, and is also opposed to taking over Wachovia unless its financial position deteriorates more rapidly.
Haven't we heard that one before? None of us should be surprised at just how rapidly a financial institution can deteriorate these days.
Saturday, September 27, 2008
Friday, September 26, 2008
Thursday, September 25, 2008
"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual (WM) provides another reminder how tenuous things are."
I bolded the part about uncertainty to make a point about how free markets, when allowed to operate without too much meddling, resolve uncertainties about valuations. The stock market's recent wild volatility is due in no small part to the tendency of institutions like WaMu to hang on in a zombie-like state while well-meaning folks in Washington try to fund unnecessary bailouts. The WaMu solution is in fact the correct one: Liquidate an unhealthy bank, merge it with a healthier one, and start over. Equity shareholders suffer, depostors are (mostly) protected, and bank loan officers rediscover the conservatism of narrower yield spreads and well-documented risk profiles.
And what of the acquirer? Read what JPM's CEO had to say.
"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
They would have done it anyway, without a new government liquidity facility providing a shortcut, and they're willing to risk diluting their existing common shareholders by going to the capital markets to raise another $8B. That's how capitalism works. JPMorgan Chase may very well have its own balance sheet problems, but the risk they take in acquiring WaMu is borne by their shareholders, not the taxpayer. I'll admit that they had an advantage over other potential suitors with their existing Fed backstop from the Bear Stearns deal, but if they had passed on this deal it would have been closed by Wells Fargo (WFC) or another bank waiting in line.
Unfortunately, trillion-dollar bailouts will destroy the effectiveness of any natural shakeouts. Please, politicos, no more bailouts! Let the recession run its course and America will be healthier that much sooner.
Nota bene: Anthony J. Alfidi does not hold any position in WM, JPM, or WFC at the time this commentary was published.
I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.
My analysis: Mr. Gross' assumptions are far too optimistic. The average distressed mortgage may have a value of 65 cents on the dollar (doubtful!), but in testimony on Capitol Hill yesterday Ben Bernanke made it clear that the Paulson Plan will make allowances to overpay for the mortgages it will buy. The intent is to keep banks' balance sheets healthy by sticking it to the taxpayer. The real purchase price may very well be closer to 80 cents on the dollar for the average bad mortgage.
Furthermore, financing at 3-4% assumes that today's rates on 10-yr Treasuries will stay that low into the forseeable future. No way! The massive amount of bonds to be issued under this plan will drive Treasury yields through the roof, at least to 8%. The net yield spread to the taxpayer will thus be no better than zero, even in a best case scenario. My back-of-the-envelope calculations may not be as sophisticated as the models Mr. Gross' research staff used to do the math for his op-ed, but they are a heck of a lot more intellectually honest.
I suspect that Mr. Gross' disingenuous offer to manage the Paulson Plan's acquisition and liquidation process free of charge is an attempt to cherry-pick those MBSs that will have an outsized effect on PIMCO's own holdings. Given PIMCO's size in the bond market, there is no way to avoid the possibility of a conflict of interest. That is precisely the problem with any version of the Paulson Plan: too many insurmountable conflicts of interest.
Wednesday, September 24, 2008
Tuesday, September 23, 2008
I am fond of poetry, although I am by no means a scholar of Robert Frost's work.
Sen. Feinstein / Boxer, I am writing to ask you to vote NO on Treasury Secretary Henry Paulson's financial bailout plan. This plan will enrich Secretary Paulson's Wall Street cronies and reward their greed and incompetence. Adding over $700 billion to our national debt will make future Americans poorer and hold our nation hostage to the foreign central banks and sovereign wealth funds that have become our creditors. Holding the American taxpayer responsible for a financial mess caused by private indebtedness will destroy the free enterprise system that has made America prosperous.
Please vote NO on any and all bailouts.
Anthony J. Alfidi
San Francisco, CA
I also sent a similar email message to my Congresswoman for the 12th District of California, Rep. Jackie Speier (D-CA). I took these actions because I believe in free market capitalism and the future financial solvency of my country, the United States of America. Feel free to do likewise, if you care about freedom.
Monday, September 22, 2008
The most convincing reason I need to employ fundamental analysis over technical analysis is offered by the real world success of Warren Buffett. This old article from Fortune explains it all.
He got his first books on the market when he was 8, bought his first stock (Cities Service preferred) at 11, and went on to experiment with all manner of trading methodologies. He was a teenage stock ''chartist'' for a while, and later a market timer.
(I)n early 1950, while a senior, he read Benjamin Graham's newly published book, The Intelligent Investor. The book encouraged the reader to pay attention to the intrinsic value of companies and to invest with a ''margin of safety,'' and to Buffett it all made enormous sense.
Warren Buffett did not become the world's greatest investor by overlaying moving averages on top of stochastic oscillators in a point-and-figure chart. He did it by researching the hell out of quality businesses that he understood and sticking with them through good times and bad times.
Unfortunately some people swear by charts to make money. I like these people, because their irrationality and frequent trading eventually lead to the mispricing of quality companies. Give me that volatility-induced discount to intrinsic value, active traders! Come on, I know you want to pull that trigger. I'll be patient while you wait for that Fibonacci retracement. It makes it that much easier for me to make money in the long haul.
Why bring this up now, with all the fun financial activity hitting the wires lately? Because I've covered a lot of those topics already. Because I'd have to debunk technical analysis anyway at some point. Because I don't like doing stupid things with my money. And because it's my blog, and write about what I feel like covering.
Sunday, September 21, 2008
Saturday, September 20, 2008
Friday, September 19, 2008
I am now becoming concerned that Treasury Secretary Henry Paulson is trying to relive his investment banking glory days at Goldman Sachs, like an aging football player who thinks he just has to last one more season. The deal announced today won't be fully understood - let alone paid for - until after Hank Paulson is long gone from government service. We now have a trifecta of sorts:
I'll Be Gone: Mr. Paulson won't be around to see this bailout through.
You'll Be Gone: You, a specimen of Homo investus, will see your retirement savings decimated by asset deflation, dollar inflation, and surprise taxation.
They'll Be Gone: The preppie CEOs, bankers, and portfolio managers who agitated for this bailout will stick around long enough to collect a final severance check, and then stick the rest of us with their bill.
In a side note, Rolfe Winkler got it right today when he traced today's wild market rally to a short squeeze driven by the SEC's "temporary" ban on short-selling financial names. This one actually caught me unawares. I was a bit concerned about the rally upending one of my own positions, an uncovered short call on XLF with the strike price at 24. When XLF opened at a hair above 24 this morning, I decided not to push my luck. I closed it out today at a loss rather than risk the strike price being activated. Oh well, it's a tax loss. My long put on XLF remains in place. Thanks a lot, Plunge Protection Team, for screwing up the Alpha-D portfolio this month with your "timely intervention".
The stupidity of the U.S. government's bailout of all things financial - mortgage-backed debt, money market funds, investment bank shareholders - is staggering beyond belief. No need to repeat here what plenty of other commentators have to say. I will add my brief take: The success of this bailout depends completely on the willingness of foreign investors to swallow $500B-$1T of new U.S. government debt within the next several years, starting Monday. I simply don't see how that is possible without a massive increase in yields for any Treasury (10yr and up).
Uncle Sam has delayed The Crash by about a month. If the move to prop up money market funds sparks a flight from bank deposits, we'll see a run on healthy banks as well as sick ones.
It's still not too late to prepare for economic annihilation, if you're so inclined.
Otherwise, it's IBG/YBG/TBG and finally WBG: We'll Be Gone.
Nota Bene: Anthony J. Alfidi holds a long put on XLF and short calls on MER and BAC.
Wednesday, September 17, 2008
A day after Fed officials seized control of American International Group Inc., the Treasury yesterday acted at the Fed's request to fortify the central bank's balance sheet with $100 billion in new cash. Fed officials can use the proceeds to pump money into financial institutions fearful of lending to each other, or to catch the next insolvent bank that's unable to raise capital.
So where's the Treasury going to get the cash to pay for this new loan to the Fed? From debt issue, of course.
Treasury Secretary Henry Paulson has worked with the Fed to manage the financial sector's cash crunch. The new bill auctions will help to ensure financial institutions have ready access to Treasury securities, which have been in short supply recently as firms try to maintain liquidity.
Treasuries won't be in short supply for long, and there's plenty of demand for safety in the market. Investors fled risky assets his week for the stability of Treasuries, driving yields below inflaton.
Yields on U.S. Treasury bills nudged ever closer to zero on Thursday as investors fled equities to the perceived safety of sovereign debt and fears grew about U.S. money funds after one had its ratings slashed to junk. One-month Treasury yields
dipped to just 0.010 percent, from 0.040 percent late in New York on Wednesday.
Rolling short-term Treasuries in an age when tax receipts are declining in a recession does not make for a pretty Federal budget picture at all for 2009. I'm sticking to my belief that the yield curve will have to steepen at some point in the near future, and I'm not even thinking about going long fixed income until the Fed has begun raising rates.
Tuesday, September 16, 2008
The Federal Reserve said Tuesday it would provide up to $85 billion in an emergency, two-year loan to rescue AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
The Fed provided the loan, but does the Fed own the shares? And are the shares common or preferred? Let's see if the Fed's official statement provides more clarity:
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
If these shares can override both common and preferred, then that's a whole new class of equity. Call it superannuated equity, steroid equity, or some other name with the creativity to match this deal.
What I'm wondering is whether this new loan has been arranged to somehow cancel yesterday's action by the state of New York to allow AIG to borrow from its healthy subsidiaries. Here's the potential conflict: If AIG still borrows from its subsidiaries (presumably the state-regulated ones), it's going to have a hard time getting Uncle Sam's approval to sell assets that are now encumbered by the Fed's two-year loan. Memo to Uncle Sam: Call Gov. David Paterson in Albany, NY and get him to rescind his loan approval; this will give you fewer headaches over the next few months as you unwind AIG's derivatives book.
There must be some fine print in the Fed loan agreement, because labeling the "U.S. government" as the equity owner doesn't clearly delineate who in the government will supervise the loan, exercise the dividend veto, etc. Which agency now owns AIG? Fed, Treasury, Area 51, who exactly? Maybe it serves AIG right to get an agreement like this where the publicly unavailable fine print potentially gives them the short end of the stick. Big issuers like AIG have been selling annuities to senior citizens for years by glossing over the fine print, so this deal is AIG's karmic payback.
The U.S. government is selectively nationalizing its financial services sector. Future MBAs from Wharton and Harvard will have to send their resumes to the Office of Personnel Management at the rate things are going. If my dark prediction comes true, then maybe a military veteran with civil service preference points can finally get a hiring advantage over these Wall Street trust fund preppies!
Maybe in the future we can just cut out the middle man and buy life insurance directly from Uncle Sam. The Amtrak business model is on its way to your brokerage account.
Nota Bene: Anthony J. Alfidi personally holds no position in AIG. However, as a taxpaying U.S. citizen, Mr. Alfidi and all other U.S. taxpayers now indirectly own AIG through their new broker, Uncle Sam. Think about that one.
Monday, September 15, 2008
I'm further surprised that BofA ended up as Merrill's purchaser, given Merrill's previous joint ventures with HSBC. I guess HSBC found Merrill's culture not to their liking. Perhaps HSBC is keeping its powder dry for a future acquisition . . . UBS? The HSBC Hexagon can probably digest the UBS Three Keys without much outside help, unless the venerable folks from Hong Kong and Shanghai have some ungodly counterparty exposure to trades with Lehman.
Back to the main story. I wouldn't be posting this if I didn't think I could make some money from what's happening. This buyout perfectly fits my special situations strategy, so today I placed market orders to sell call options on MER (Jan 09 @ 31) and BAC (Oct 08 @ 35). The $31 option for Merrill is slightly above the estimated per-share value of Merrill ($29-30) that Bank of America has offered, and the $35 option for BAC is slightly above BAC's closing price prior to the buyout announcement. I may roll the BAC call next month, and the MER call will most likely expire worthless next January.
"Be fearful when others are greedy and greedy when others are fearful." Thank you, Warren Buffett. I owe it all to you.
Nota Bene: Anthony J. Alfidi holds short calls on BAC and MER. He has no positions in WB, HBC, UBS, or GS at the time this commentary was published.
Sunday, September 14, 2008
A failed plan to rescue Lehman Brothers was followed Sunday by more seismic shocks from Wall Street, including a government-brokered takeover of Merrill Lynch by the Bank of America for $50 billion.
Thanks for nothing, you well-bred preppies! Now you're out on your hind quarters; brother can you spare a dime? MUUUUUAAAAAAHAHAHAHA!!!! Maybe you can call your rich mommies and daddies to get full custody of your trust funds! You'll need to liquidate them if you want to keep those oh-so-posh Lower Manhattan converted lofts of yours. Welcome to the world of austerity, you spoiled brats. This is what you get for not listening to people like me who rely on competence and integrity to make up for lack of a pedigree. Tune in to this blog, preppies, if you'd like some insights on how to make real money.
Meanwhile, the long-awaited Big Crash is probably upon us as of tomorrow. Will the DJIA go to 10,000? 9000? Even lower? Who knows, but I am very glad that I've been bearish on XLF for the past few months.
Futures pegged to the Dow Jones industrial average fell more than 300 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index Monday morning. Asian stock markets were also falling.
Need more info to prepare for tomorrow?
U.S. stock index futures tumbled late on Sunday, pointing to a sharply lower Wall Street open on Monday on fears the meltdown in asset values in the U.S. banking system could impact the broader U.S. economy as credit is restricted further while U.S. house prices continue to fall.
I'll be thinking about going long again, but not until later this month when the dust from all of this chaos has settled. Stocks and their indexes will soon be on sale at record low prices!
Nota Bene: Anthony J. Alfidi holds a long put and short calls on XLF, and holds short calls on SPY and IWM. He holds no position in LEH and never has, thank God.
Saturday, September 13, 2008
On Tuesday, two days after the takeover, officials at the Congressional Budget Office announced that the deal had bound the government so tightly to the firms that their business operations, assets and liabilities should be included in the government's balance sheets.
Yesterday, Office of Management and Budget director Jim Nussle said he had decided differently, but may "reevaluate their budgetary status in the future, should conditions change."
Note the political wiggle room left wide open in that last quote. The OMB will get its chance to "reevaluate their budgetary status" before you know it.
You can't have your cake and eat it too. You can't announce in loco parentis control of a prodigal son without having to answer to his creditors. You can't take over two out-of-control mortgage pool issuers without assuming responsibility for the debts they've incurred.
Welcome to the Sovereignty Crunch.
Friday, September 12, 2008
Thursday, September 11, 2008
Any decision to add Fannie and Freddie to the budget wouldn't automatically translate into an explicit government backing for the companies' combined $1.7 trillion in unsecured debt and $3.5 trillion of mortgage guarantees. Granting the full faith and credit of the U.S. would require an act of Congress to change the companies' legal status.
I like how some market observers suspend their disbelief when examining the Treasury's actions, as if they're watching some Hollywood action fantasy. Allow me to clarify: The U.S. Government has made it absolutely clear that it has committed its full faith and credit to the solvency of Fannie Mae and Freddie Mac's debt obligations, placing its own solvency at great risk. Mainstream commentators seemingly don't want to come out and say this, because if they said it now they won't have anything fresh and entertaining to write about for the next few months.
Here's a thought: Why not just fold these two bankrupt zombies into Ginnie Mae? Would that really require a team of Constitutional law specialists or a change in the law?
Wednesday, September 10, 2008
Tuesday, September 09, 2008
Monday, September 08, 2008
Sunday, September 07, 2008
This is the day that marks the beginning of the end. Today's announcement of the conservatorship of Fannie Mae and Freddie Mac is the beginning of the end of several very important things . . .
. . . the end of the post-World War II financial system
. . . the end of the U.S. dollar's hegemony as the world's reserve currency
. . . the end of short-term U.S. Treasury debt as the ultimate safe haven for global finance
. . . the end of the United States as the world's sole superpower.
All of these things must now come to an end because the assumption of Phoney and Fraudie's financial obligations will require the U.S. government to issue massive amounts of new debt to supply these GSEs with enough capital to stay afloat. The new debt will need to be issued at much higher interest rates than the 4% or so currently available on 10year T-bonds, just to make it attractive to foreign central banks already loaded to the gills with GSE debt. With Helicopter Ben unwilling to raise the Fed funds rate, the yield curve will quickly steepen.
This new debt is eventually going to be inflated away by Helicopter Ben's printing presses. Mark my words.
Hello, massive infation. Goodbye, U.S. dollar hegemony.
Secretary Paulson will have to fire his bazooka after all, and its backblast will blow the U.S. economy out of the water.
Friday, September 05, 2008
Thursday, September 04, 2008
A high-level panel of financial officials should be given broad authority to quickly determine whether a failing company poses a sufficient threat to the entire U.S. economy, he recommends. If so, the company would be shut down.
He's actually describing the current ad-hoc relationship that the Fed has begun building with the Treasury Department, although he doesn't name it as such. The quote above neatly summarizes the government's response to Bear Stearns' collapse. And I thought I was alone in my penchant for stating the obvious.
"We need laws that specify and limit the conditions for bailouts -- laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan wrote in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World."
I'm not convinced that a new set of laws will mean much to policymakers with so much (already de facto) new power. The Fed's charter gives it a legal mandate to fight inflation, but Helicopter Ben chooses to ignore it.
"Much as we might wish otherwise, policymakers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances," Greenspan says.
It almost sounds like the Maestro has learned something from his own injections of liquidity into the economy after 9-11. This may be as close to a mea culpa as we will ever hear from Mr. Greenspan for his contribution to inflating this decade's housing bubble. Perhaps I'm reading too much into this.
Tuesday, September 02, 2008
Monday, September 01, 2008
"The current stance of policy, while understandably calibrated for responding to the immediate financial crisis, will make it difficult to achieve our mandate for price stability over the longer term," Federal Reserve Bank of Kansas City President Thomas Hoenig said in remarks prepared for delivery at a central banking conference in Argentina.
He's a dissenting voice, so let's see if Helicopter Ben can keep a lid on him at the next FOMC meeting. One problem is that he focuses on core inflation, a Nixon-era politicized gimmick designed to fool people into thinking inflation is lower. His call for supervision of non-bank institutions is a harbinger of things to come. Look for this meme to sprout full-bloom after The Crash.
"To return to my analogy, this means doubling back across the river to a more historic central banking role, and making clear a future crossing would be rare," he added. "And we must accept that the credibility of such an assertion will depend critically on how future crises are handled."
Too late! We've already crossed the Rubicon (and that analogy is more potent given America's imperial pretenses). That "future crisis" is maybe a few weeks away, because as soon as Alt-A and prime mortgage delinquencies explode, the Treasury will have a heck of a time figuring out how to nationalize Phoney and Fraudie without collapsing the stock market. I don't see how they can succeed, which is why I'm out of U.S. equity indices and in gold.
Sure, I talk my book. Just like every investment professional should.