Sunday, August 31, 2008

ALT-A's Pay Option Arms in the news...

The Economist had a piece about the impending Pay Option Arm (POA) debacle that will engulf this nation shortly.
Prices in America’s housing market may have slumped, but the pain for a significant subset of homeowners has barely begun... The bank’s [Barclays] Nicholas Strand says that roughly 1.4m households, most of them in California, hold a particularly nasty type of adjustable-rate mortgage called the “option ARM”. Although the overall value of option ARMs is lower than that of subprime loans—some $500 billion, according to Mr Strand, compared with about $1 trillion in subprime loans—their sting is more venomous.

But the real crunch will come when the mortgages “recast”, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011.

An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank. Wachovia stopped originating loans that allow negative amortisation in June, and is setting aside heftier reserves to cope with expected losses.

Given this market's bi-polar behavior and very short time frame I do think there will be a 6 month tradeable bounce approaching in the financial stocks. However, I ultimately expect that in the second half of 2009, they'll get clobbered again by this POA implosion.

Saturday, August 30, 2008

Friday, August 29, 2008

Fertilizer Fundies

The charts for Mosaic and Potash Corp. indicate they are still recovering from their respective breakdowns, but make no mistake, the long term fundies for these companies are still very-much intact.

When it comes to food production there are many fundamental problems facing the world (ie natural disasters, corrupt governments, lack of infrastructure to distribute food, etc.) but two problems often cited by the fertilizer companies are:

1) Exploding demand for food. "Shockingly" as people in the BRIC countries rise out of poverty they demand more food. Specifically people moving out of poverty begin to change their diets from starch to protein-based. This dramatic change in diets is driving the grain-intensive production of livestock (you gotta feed cattle a whole lotta crops to get them fat and tasty). Oh yeah, the world's population will also grow by 2.5 billion people in the next 40 years (from 6.7 to 9.2 billion people).


2) Less farm land exists (urbanization, pollution/environmental degradation) and yields from most existing farm crops are down considerably. The end result is that the supply of food is a lot harder to develop than it's been in the past as is reflected in this graph which shows current global food supplies:


As you can see, the stock-to-use ratio (which is just supply divided by demand) is at historical lows meaning that farmers have no choice but to spend considerable money on restocking their crop inventories. Likely these farmers will do whatever it takes to maximize yields from their existing farms, increasing their usage of fertilizers.

Given that macro perspective here are Potash Corp's internal expectations based on their production ramp up 16 million tons of potash by 2011 (I think 2012 is when we'll see the top).


Of course, these numbers are from management's perspective (I have heard these companies called the "dot-corns" given their parabolic charts) nevertheless I do believe that we are living in a "world of shortages" and that food is simply another item we in this country take for granted.

Shorting Technology...

This Dell News is not good:

Dell (NASDAQ:DELL) , the world's second-biggest personal computer maker, on Thursday sounded a sour note on the economy, warning that the slowdown in information technology spending that has gripped the US in recent months has begun to spread to Europe and parts of Asia.
The warning came as the company reported worse-than-expected profits for the second quarter, sending its shares down more than 10 per cent in after-hours trading. It came two weeks after Hewlett-Packard (NYSE:HPQ) , Dell's bigger rival, trimmed its sales guidance for the coming months.

This bad news might be a catalyst for a breakdown in other tech favorites, which are dangerously close to closing below support:





POSITION: LONG QID @ 42.50

TARGET 45
STOP 41

Thursday, August 28, 2008

More writedowns for financials...

Granted these aren't obscene writedowns, only $10 billion, but when you are this capital constrained every penny counts (Citi just announced they are cutting back on colored copies).

The auction-rate fiasco is not over for banks. Having bought back about $55 billion of the paper, they are now faced with the reality that the bonds are only worth about $.80 on a dollar. The means the firms who were forced to take them off shareholder hands will probably have to account for $10 billion in losses.
According to Reuters, "The timing is not ideal given the balance sheets of a lot of these companies," said Walter Todd, portfolio manager at Greenwood Capital.

Even with this set of news, I still think that we will experience a major head fake coming from the financials and this overall market (ie we will rally from here). It is very obvious that this market is COMPLETELY ignoring the impending ALT-A POA debacle; Cramer just said the bottom in housing will come in Q3 of 2009, the exact time POA resets will be at their worst. My assumption is that "The Street" is looking at stabilizing subprime defaults and assuming that the worst is behind us.

Tuesday, August 26, 2008

Major shrinkage for the Europeans...

Apparently Europe's population will be shrinking in 7 years as death rates will begin to surpass birth rates. The situation is so bad in Europe that immigration won't even make up for it:

"From 2015 onwards," the document says, "deaths would outnumber births and hence population growth due to natural increase would cease. From this point onwards positive net migration would be the only population growth factor. However from 2035 this positive net migration would no longer counterbalance the negative natural change and the population is projected to begin to fall."

Now with a combined total of 495 million people, the 27 nations that make up the EU would increase their population to a total of 521 million in 2035 before falling back to 506 million in 2060.

Population growth obviously has serious socio-economic implications for Europe as well as the global economy (remember the world is flat)

The document did not spell out these likely shifts, but they could include reduced funding for schools, heavy burdens on welfare and social security systems, and perhaps even a political push for much larger immigration, which is currently deeply out of favor with most European voters.

In case you're wondering how the U.S. stacks up:

The document deals only with population trends in Europe. According to another report published last year, the United States population will increase from 301 million to 468 million in 2060, including 105 million new immigrants.

No shrinkage in the U.S., well except for this guy...

My thoughts on the market and oil...

don't matter. As Brian Shannon over at Alphatrends says: "The market doesn't care what you think." I know that's an obvious statement but it's important to stay humble and recognize that the market acts differently than you. The market is an irrational entity trading 99.99% of the time on fear and greed (markets are only efficient in the long run).

So with that said, I abdicate my thoughts on the market to who else but the market makers (aka the big funds and institutions that push stocks/commodities up and down). Are they right all the time? Of course not; but if you read enough research reports and stick with the most successfull groups you'll be right more often than you'll be wrong. Remember, even the best baseball players connect 30% of the time when they hit (I go with the baseball metaphor, because that's what Buffett chooses).

So here are some oil thoughts from Goldman Sachs. Why Goldman? Because they are one of the few market makers who have actually been right lately. It seems like all the other big players got too fat and happy and forgot that groupthink is bad for business. That's a $500 billion dollar psychology lesson.

Synopsis:

Goldman Sachs reiterates their call for $149 by years end.

"Although the recent correlation in dollar and oil prices is clear, it is important to emphasise that each of these assets are driven by multiple, varying factors ... Put differently, there is more to oil than the U.S. dollar and vice versa."

Let's not forget that China also took several million cars off the road for their Olympic preparations these past few weeks. Is it a coincidence that oil prices collapsed around the same time? I think not.

Technical Trade...

WSP Holdings - Chinese company that makes tubes and equipment for the oil industry.

WSP also has a:

Forward P/E < 7
PEG < .50
ROE = 29

But none of those fundamentals matter because this is a technical trade (just look at the pretty lines on the graph and pray they keep moving up ;-)

Target 9.50
Stop at 8.20

Long WH

Monday, August 25, 2008

Roubini on this market...

"It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”

Flawless synopsis.

Evidence that Fannie and Freddie are best of breed

To paraphrase Mark Twain:

There are three kinds of lies: lies, damned lies, and the stock market


Time of this very rare market sighting is 10:00 am on the west coast.

Time to buy financials?


I think not (thx Calculated Risk)

Saturday, August 23, 2008

I need you back Moly...


Ok so Thompson Creek (the most respectable pure moly play out there) missed Q2earnings as their production costs soared 32% yoy (from $5.66 to $7.49 a pound). I am venturing that most of this cost spike had to do with surging oil prices (those big ass trucks that carry the moly from the mines basically run 24-7). However, now with oil apparently peaking (at least for the next 6 months), I am going back to Moly.

This decision isn't just because of oil prices, but because the industry fundamentals in moly are too good to ignore (shortages in 2008, 2009 and 2010 - that's what CPM Group says). Apparently, I am not the only one who has noticed moly's positive outlook as smart ass hedge fund manager Daniel Loeb holds a stake in TC with more than 4 million shares.

Positions: Long TC

Friday, August 22, 2008

De-leveraging sucks...credit cards are next

An interesting article here. The running theme seems to be that America's lifestyle is nothing more than an illusion feuled on massive mountains of debt (shocking right). Whether this illusion is perpetuated by stocks, houses or credit cards, the point is that we always fall from our respective highs and when we do it's not pretty.

Synopsis:

Real Wages (inflation adjusted wages) haven't grown, so Americans have been using debt (ie negative savings rate) to fuel their ever growing consumption habits.

Since the market sucks, and housing has tanked (meaning no more HELOCs) Americans have turned to the last (most expensive) cash machine left: credit cards.

Credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.


But now even that cash machine looks like it's about to break down as the appetite for securitized credit card debt has been cut in half in the last 5 months.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.


However, Congress isn't going to let credit card companies just hike up interest rates on cards, nevertheless, the end result of this legislation is that it will tighten lending/underwriting standards even more (this is actually good for the long run but VERY PAINFUL in the short run). Interestingly, Meredith Whitney spoke about this legislation a few months back - credit cards come up around at the 2 minute mark):



So what does all this mean? We are going to have to consume less and recognize.

F*CK The Treasury Department...

Apparently Hank Paulson, who sold billions of these toxic debt instruments when he was working at Goldman, wants to spend our tax dollars keeping the GSE's private.

I get bailing out the debt holders in the GSE's. Have you seen the list? China, Russia, Japan, etc...a lot of foreign creditors that we don't want to piss off. But the what is this shit about helping the equity holders???

I don't want part of my paycheck buying stock in either Fannie or Freddy (can't we build a school or something with that money instead?). Also, I sure as hell don't want to bailout assholes like Bill Miller, who made dumb ass bets and deserve to be dragged through the streets and laughed at by third rate bloggers like myself.

Brazilian Real Estate is rocking...

And apparently Sam Zell (another person you want to listen closely to) has noticed.

Synopsis:

Billionaire Real Estate Mogul Sam Zell is expecting a wave of consolidation in Brazil's publicly traded real estate sector (mid 2009 and 2010)

Sam Zell's Equity Int., which owns a lot of Gafisa, expects Gafisa to snap up a bunch of recent housing IPO's at distressed levels (oversupply and cheap shares)

"We've actually received calls, it's fascinating, from two or three founder CEOs, who are -- I don't want to say waving the white flag -- but are pulling the white flag out of their pocket," he said. "I don't know how long it will take for them; I don't know how big the flag is."

Why so many struggling homebuilders? Housing surplus? Lack of demand? Nope. Poor investor relations departments are the cause...

Many of the founders behind the new public realty companies, while highly entrepreneurial, were ill-prepared to deal with the level of disclosure investors demand, he said


"As they get punished, they are now deprived of equity and debt capital. And that freezing out is now sweeping, call it the bottom third," he said.

This bottom third is trading 40% off their highs, talk about easy pickings

Brazilian Housing Market fundies are as follow: 185 million people with a housing shortage of 7-8 million. in fact the fundies are so good that:

Investors believe Brazil will outstrip Mexico in size, demand and investor return. Mexico has been the poster child this decade for investing in emerging market home-building.

There are hurdles including lack of a strong securitization market, and uncertainty about who will be left standing in this fledgling market. My money is with Sam Zell and Gafisa.

Sunday, August 17, 2008

The Great MBIA Debate...

remember a few months back when Cramer was warning everyone about the danger MBIA & AMBAC presented to the financial system. In case you forgot, MBIA and AMBAC insure billions of mortgages for regional and investment banks, so if they go under these numerous banks will have to endure further charge offs. Well it now appears that the two of them are rallying hard and now many "experts" (aka guys who were buying them at $25-30 dollars) are calling a bottom.

Now I honestly don't know whether MBIA and AMBAC can survive this mess, but what I do know is that these two promised everyone that they would make good on their payments and now with defaults rising those insurance promises are looking bleaker and bleaker. I recently read a NYT article which summed up this debate over the bond insurers:

In the debate over the fate of MBIA, a key question is whether or not the pace of mortgage defaults is likely to increase, level off or ease up. Mr. Brown, for his part, believes that the crisis is working itself out: “The pig (that is, poorly underwritten and fraudulently secured loans) is steadily moving through the python,” he wrote on his blog.

Mr. Brown might believe the defaults have peaked but I respectfully disagree given my stance on ALT-A POA's not to mention the small cracks forming in Prime mortgages. Therefore I believe that more pain is in store for these two insurers and the banks they do business with.

Thursday, August 14, 2008

When Bill Gross speaks, listen up....

PIMCO (I call them PIMPCO - cuz I am stupid like that) recently released its investment outlook and it doesn't look good.

The Backdrop:
-We are still in a de-leveraging process
-Debt and credit are the "mother's milk" of capitalism. Without them we can still transact but not as efficiently; hence Central Banks do their best to supply us with just enough milk to maintain economic progress, but no so much that we ignite rampant inflation (too much money chasing too few goods)
-Sometimes the "milk" is bad and we have de-stabilization in the markets (aka we wait for milk but nothing comes out)

Given that, I now give you Mr. Gross:

"The housing bubble was well inflated by low interest rates, easy, and in some cases fraudulent credit, a lack of federal and state regulation, and a gullible public who read the history books for the past half century and knew full well that home prices never, ever go down. Not much of an enigma there. No riddle to be solved it would seem. It was simply a fairy tale too good to be true."

-This is the Nasdaq bubble placed in the hands of more "citizen" investors (the people that make up 70% of our GDP growth)

Housing can morph a froglike economy into something resembling Godzilla. That is because it is the most levered asset class and the one held by more “investor” citizens than any other. U.S. homes are market valued at over 20 trillion dollars with nearly half of the value supported by mortgage finance of one sort or another.


-Mr. Gross notes that now the economy is coming down from its "Godzilla-like high" and is now reverting the mean as 25 million homes purchased after 2004 could become "upsidedown" (I personally don't think its that high)

-Either way, however, the losses from the impending defaults and walk-aways (why would you keep paying if your house isn't worth as much as your loan?) could reach as high as $1 trillion dollars (that's a lot of chedda)

The “upsidedownness” in many cases results in foreclosures, or outright abandonment and most certainly serves as an example of what not to do for millions of twenty-somethings or new citizens choosing between homeownership and renting. The dominoes fall month-by-month, forcing prices ever lower as shown in Chart 1 provided by Case-Shiller. An asset deflation in turn becomes a debt deflation, as subprimes, alt-As, and finally prime mortgages surrender to the seemingly inevitable tide. PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”


-Another problem with losing a trillion dollars is that the banks believe they won't have to "mark to market" because...

GaveKal’s Anatole Kaletsky points out that “the whole point of a bank is to exchange short-term, liquid liabilities for long-term illiquid assets whose value is hard to gauge.


-However the problem with that theory (while correct in 99% of cases with banks) is that it doesn't work in this housing market given the enormous surplus of inventory and no amount of intervention/bailouts can re-inflate this housing market, so the banks will have to eventually "bite the bullet" on loan losses.

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again.


-Gross also notes that although the Fed has made capital abundant, mortgage rates have actually risen considerably, which shows that Banks and the broader market do not want to lend for homes as they are crappy investments.

Up until this point, the joint efforts of the Fed and the Treasury have been directed towards maintaining the stability of our major financial institutions, recapitalizing their balance sheets in “current form,” and lowering the cost of mortgage credit. All are crucial to any solution, but it is this third and last point where markets have failed to cooperate. With Fed Funds having been lowered from 5¼% to 2%, it would have been logical to assume that the price of mortgage credit would go down as well and that the price of homes would at least slow their current descent. Not so.


-When the cost of credit goes up (as often happens with de-levergaing processes) the discount rate rate goes up and present value of assets (stocks, bonds, homes, etc.) goes down. Conclusion: More pain ahead.

Monday, August 11, 2008

So much for Vegas...



Juxtaposing MDR with FLR in after hours action (both released earnings today), I can't help but think...

1) Always stick with best of breed. I knew going into the "casino" that FLR/FWLT were better firms than the MDR/CBI cohort, yet I sitll chose the latter because it had been "beaten down" more and appeared cheaper.

2) I had the right idea just the wrong execution. Global infrastructure is not dead as FLR/FWLT's numbers indicate. Even MDR is seeing pretty decent growth (19%), they missed by 1 penny (.77 vs .78 EPS) so frankly I think the after hours reaction is a little overdone. Nevertheless, this "casino" trade backfired in my face and now I learned two expensive lessons.

Position: Sold MDR A.H.

Sunday, August 10, 2008

Time to hit the casino...

While I don't consider investing in the stock market to be the same as gambling, there are certainly times when investors can "roll the dice" and take a chance on a break out. I believe the easiest way to play "casino" in this market is with earnings reports (either you beat expectations or you miss/guide in line-they're the same to wall street). With that said, I plan to take a little chance and put some cash down on MDR tomorrow.



The graph is terrible and is signaling "the end is nigh" for the global infra plays, so I will make the small bet that MDR reassures the street about their future earnings prospects. Does MDR beat the .78 cents consensus? I don't know, but looking at their exposure to oil, coal, and infra, coupled with a pessimistic street view (indicated by the graph) I believe conditions are ripe for a slight bounce. Viva Las Vegas.

Position: Long MDR

Saturday, August 9, 2008

Good reads...

In no particular order...

Calculated Risk
RGE Monitor
Mish's Economic Trends
The Big Picture
Bonddad's Blog
Mr. Mortgage
ClusterStocks

New York Times
Wall Street Journal
Minyanville
SeekingAlpha
I-bank Coin
FinViz

Google News

Buy stocks!!! Or....

Here's part 2 of my series featuring "Economic Realists"....



Meredith has been so money calling this financial catostrophuck, and in case you haven't noticed she ain't too shabby to look at.


Here's our third (albeit slightly eccentric) realist...Mr. Mortgage



His research on the impending Option ARM debacle (within the ALT-A world) is quite eye-catching indeed.



Here's his blog...pretty good stuff.

By the way David Faber, the one actual journalist at CNBC, has also discussed the impending ALT-/POA implosion:

http://www.cnbc.com/id/15840232?video=816253819

Buy stocks!!! Buy stocks!!! Or....

you can listen to the realists...



Remember the WSJ said that Roubini's RGE Monitor is one of the best economic websites. I agree.

My biggest take away from the video was hearing all the potential shoes that can still drop in the credit world...hence the $1-1.5 trillion in losses.

-Near prime (think Alt-A, I have a good Mr. Mortgage video on that)
-Prime (We now have 1% delinqunicies here, that's 3x 06 levels)
-Commercial Real Estate (by product of dying consumers, btw consumption is 70% of GDP)
-Credit Card Loans (still haven't reached charge off levels of last downturn - more to come - especially since revolving credit now stands at more than $2.50 trillion outstanding)
-Auto loans (This is a big uncertainty)
-Student loans (It's definitely hard to receive one now than a year ago)
-Leveraged loans (Private equity is non-existant)
-Muni bonds (Think of Vallejo's recent bankruptcy, and Arnuuulds minimum wage decision in CA...lots of issues)
-Industrial/Commercial
-Corporate Bonds

Remember all this basically stems from one major source: The Housing Depression

Here's why it's a Depression

Demand has peaked...


But supply is at all-time highs and looks to keep growing...




Lower demand + Tons of supply = Lower home prices for all of us = More "underwater" mortgages = More delinquincies/walk aways = More supply....wash, rinse, repeat.

A lot of good info here.