Monday, March 31, 2008

Raising Cash to Stay Alive

Lehman is going to offer 3 million shares of convertible preferred shares to raise $3 billion in cash. Details to come. KKR Financial announced it will sell 20 million in new shares to raise capital. No word yet from TMA, who received yet another extension on the deadline to raise capital to avoid liquidation by its lenders. Also, FNMA and FRE will be making announcements on their own plans to raise capital. All of this capital raising makes it very difficult to be a common shareholders, given the amount of dilution, however, it appears to be the only game in town.

Are We In a Bear Market?

The "contrarian" view last week was to claim that the market had bottomed, financials were cheap, and it was safe to dive in. Two interesting commentaries this weekend (by two of my favorite commentators John Authers of the Financial Times and Alan Abelson of Barrons) claimed that the contrarian to the contrarian view indicated that we had not bottomed. I do tend to be a contrarian in nature, but since I believe we are in a bear market, I guess I am now a contrarian squared?
I find it hard to believe that we have bottomed. Although I currently focus most of my commentary on the financials, due to their importance in the current market maelstrom, other segments of the stock market have begun behaving in a decidedly bearish manor. One of the most interesting observations I made during the previous bear market (without actually knowing it at the time) was that the market seemed to be correcting itself one stock at a time. In January 2000, when Lucent released lousy earnings (or a warning, I can't remember precisely), the stock dropped around 25% in a day. Several months later, Nortel did the same, then Cisco, followed slowly by the rest of the market over the course of the next few years. On march 10th, WellPoint slashed its earnings outlook, followed two days later by Humana. All of the health insurers were punished on the news. Today, Merck and Schering were dealt a blow after the release of details from a study of the cholesterol drug Vytorin. Healthcare stocks are supposed to be defensive so why are they behaving as if they have exposure to the subprime market? Is it safe to put your money anywhere in today's volatile market? Equity investors aren't so sure anymore. According to the Financial Times, investors pulled $100 billion dollars worldwide out of equity funds in the first quarter of 2008. Where did all the money go? Money market funds, which had inflows of $140 billion. When will it be safe to jump back in the market? When I figure it out, I'll let you know.

Friday, March 28, 2008

Jim Cayne sells Bear Stearns' Stock, Risks Death Threats

I don't profess to be an expert in PR, however, if Jim Cayne would've come to me for advice about how to save his job at the end of 2007, the meeting would've gone as follows:

Jim: K10, I don't know what to do. I'm getting alot of flack from the board to step down as CEO because of this stupid credit mess that I had nothing to do with. I already fired Warren. What else should I do?

K10: Well Jim, since I'm not an expert in PR, I can't really tell you what you should do. What I can tell you is what you shouldn't do.

Jim: Ok, shoot.

K10: You should think about scaling back on all the bridge tournaments. It didn't look too good when you fired Warren for playing in a bridge tournament while you were actually at the tournament itself. Also, you probably shouldn't make any large purchases of real estate because all of that information is public and it will certainly find itself into the press if you purchase, for example, a $26 million condo at the Plaza. You know, that's just a hypothetical example. If you step down as CEO, you shouldn't replace yourself with an investment banker, because, well, BSC is really just a highly leveraged fixed income hedge fund masquerading as an investment bank, so it needs a guy who understands risk management and trading and financing not someone who just knows how to churn fees. The other thing is, if there is a massive liquidity crisis in the financial system where your bank is the target of malicious rumors, you should take them seriously and answer specific questions rather than just brushing them off. Also, in reference to my earlier comment about bridge. You shouldn't be at a bridge tournament when your bank is blowing out. Finally, after being painted into the corner and being forced to sell your company for first $2 a share, and then most likely $10 a share, you shouldn't under any circumstances punt all of your stock in the market at $10.85 before the deal goes through.

Jim: Why not? It's an extra $.85 a share.

K10: Because some disgruntled employee who just lost his life savings and thinks you should be working hard to get him an extra couple of dollars out of JP Morgan, might kill you.

Jim: Hogwash! All of it Hogwash!

K10: There's no smoking in here. Put out the cigar, please.

Citi Defends Lehman, TSLF a success, No News Out of TMA

An analyst at Citi upgraded Lehman this morning. Just to show how much stock investors put into analyst upgrades from banks that are having their own issues, Lehman's stock reacted with a resounding $.35 rally on the news. I don't have a clue what is going on at Lehman or if any of the liquidity rumors are true. The options market seems to believe them. And given how rumors can become a self-fulfilling prophecy, I'd be very nervous about betting against them.
The TSLF auction seemed to go well yesterday indicating that the pressures in the money markets may not be as bad as everyone believed. The stock market reacted with a sell-off in financials, which I found somewhat perplexing.
We're still waiting for news on whether TMA is going to make it. No announcements were made on the results of the private placement, so I'm guessing it's not going to happen. In any event, I still contend that private placement or no private placement, owning the common stock is a bad idea.

Thursday, March 27, 2008

Merrill Downgraded Again, But Real Story is Lehman

Although Merrill is set to report earnings in April, and analysts persist in making up numbers to show that they slashed earnings before the earnings release, the real story in the options market is Lehman. Much like the bets in the options market that predicted Bear's demise (please refer to my prior posts that pointed these out before the institution's near collapse), traders are betting that Lehman may be facing the same situation soon, in the next 22 days. Nearly every out of the money put has traded furiously today, with a particular emphasis on the ap 20's, which have changed hands nearly 10,000 times today with several hours remaining in the trading day. What's the story? Rumors must be flying around about Lehman's liquidity. Are the rumors true? Will the rumors be so persistent that they will kill Lehman just like they did Bear?

What Matters Today

In my opinion, two very important indicators of the problems in the credit markets will be released today. The Fed will initiate its TSLF, a 28-day swap of treasuries for MBS. The results of this auction will be extremely important as it will illustrate the severity of the financing problems of the banks over quarter end. The Fed is set to auction $75 billion. If the auction is a success, this is very good news for the fixed income markets and spreads should tighten between treasuries and agency mortgages, because it will be an indication that the Fed has the firepower to control the problem. If the auction is not a success and spreads in the repo market remain wide due to hoarding of treasuries out of fear, it is an indication that the problem is too big for the Fed to fix. I will be waiting for the results to be announced and will hopefully be able to interpret them. If the news in the money markets is bad, I don't believe that the financials can rally.
The other bit of important news should be an update on the situation surrounding Thornburg (TMA, which I have covered extensively in earlier posts.) Although some may wonder why the future of a nearly bankrupt mortgage REIT matters, I believe it is a very important indicator of market psychology. If TMA cannot raise $700 million for the balance of the private placement (yielding 18% and offering the purchasers 48% of the equity at $.01) then the repo lenders will be forced to seize the assets of the company and liquidate. Again, the last thing any bank or broker needs right now is more assets, particularly over quarter end. Furthermore, these assets are alt-a mortgages which face the prospect of deteriorating significantly if the housing market worsens (which appears inevitable.) If these two important events fail today, I think the market could sell off significantly. Otherwise, maybe I'll start to believe all those pundits last weekend who came out and announced that we'd seen the bottom.

A Couple of Updates on a Couple of Lawsuits

This wouldn't be America if everybody wasn't suing everybody else. Apparently,CCU took its bankers to court to try to force them to provide the financing for the private equity deal that appeared to be on the ropes yesterday. The Texas judge has issued an order barring the banks from taking steps that would "interfere or thwart" the closing of the $19.5 billion deal. This is a blow for the bankers who are now on the hook for providing financing at 2007 spreads. The banks (including Citibank, Morgan Stanley, Credit Suisse, Royal Bank of Scotland, Deutsche Bank and Wachovia) will be highly unlikely to sell these loans in the current market environment for anything resembling close to par if there is a bid at all. What they will have to do if the deal goes forward is hold the loans on their books. It is my understanding that leveraged loans are currently trading at around .80 in the market and I'm not even sure if it's possible to sell $20 billion currently. A little math shows an instant loss of $4 billion for the banks. Just what they need. Most assets to carry and more losses.

In happier news, RMBS won the memory-chip trial that went to jury yesterday (see story below "for those with a strong stomach".) The stock managed a nice rally of around $6.5 after the verdict was announced. While that was more than the 25% rally that I predicted, I still give myself bonus points for pointing out the opportunity to my faithful readers. Who needs readers when you can congratulate yourself?

Wednesday, March 26, 2008

For Those Who Used to Have a Strong Stomach...

Anyone betting that the takeover of CCU would actually be completed this week, despite previous delays, is having a lousy day. However, according to the options market the deal isn't dead yet. A significant amount of options activity is screaming, much like the peasant from underneath the pile of dead bodies in Monty Python's "Holy Grail", "I'm not dead yet!" Implied volatility is high (I call anything over 100 high), and some are arguing that the Wall Street Journal's report that the buyout was on the brink was inaccurate. I remain a skeptic on this deal, unless the terms are changed. The last thing any bank wants to do right now is pile more leveraged loans that they agreed to many moons ago on the heap that they already have to mark down. The last thing any private equity player wants to do is pay far too much for a company, despite being incredibly willing to do so a mere six months ago. Needless to say, the results will be interesting.

For Those With a Strong Stomach...

When do I ever talk about tech? It's hard to talk about tech when financials seem to be the focus of the market. However, something interesting is brewing in RMBS, the owner of a bunch of patents on DRAM technology. That is all I profess to know about the company or DRAM technology. Rambus is always in litigation defending those patents, which makes the stock and options ridiculously volatile and interesting to trade. The latest case, which is a lawsuit by three memory makers, Micron, Hynix, and Nanya has apparently gone to jury. Traders of the stock and options like Rambus' chances of winning, as the stock has been bid up. How much upside the stock has on a victory is, well, dependent on the mood of the market. If this were 2000, the stock would go up $100 (as it frequently did on a daily basis in 2000), but seeing as this is 2008, maybe 25%? Anyone with a better guess is welcome to post.

Tuesday, March 25, 2008

Update on Thornburg

TMA has scrapped its initial plans to raise cash through a convert with a 12% interest rate and .75 conversion price. Instead it will offer $1.35 billion of debt paying 18% and offering warrants at .01 a share. So, this deal is significantly worse than the terms they initially sought. According to Bloomberg, a new investor MaitlinPatterson Global Opportunities Partners III has agreed to buy $450 million of the notes. Apparently, there will be a tender offer for 90% of the preferred stock plus warrants equal to 5% of the common shares. Although I fully admit to not being an expert on these types of deals, this sounds horrible for the common stock and I am amazed that it has rallied on the news. But maybe someone with a more sophisticated understanding can explain it to me. I'm waiting...

Merrill Strikes Back!

Merrill downgraded Bank of America in a desperate bid to save face in the analyst earnings downgrade wars! I guess somebody at Merrill got the tap and was told to do some downgrade of some bank or broker. Any bank or broker, just downgrade somebody for the love of God! So BAC was downgraded to a "sell" from "neutral" by Merrill. Furthermore, according to the link above, Fox-Pitt (Who? Never heard of 'em) slashed estimates at Lehman and Goldman. Goldman predicted that the banking industry was carrying around $460 billion of credit losses, of which they had only come clean on $195 billion, essentially coming as close as it could to downgrading itself.

Banks in a Merrill Downgrading Frenzy...

UBS cuts estimates for Merrill. JP Morgan cuts estimates for Merrill. As I've mentioned before in my discussions of analysts estimates of investment bank earnings, I believe they are poppycock. It is impossible to predict how much money any investment bank will make in any quarter because it is dependent on their trading positions. Furthermore, many of these trading positions currently have no markets, so dealers are forced to "estimate" values for illiquid securities. So really, although I believe that Merrill is going to have a lousy quarter, and possibly year, I think these downgrades are more indicative of how the downgraders are doing rather than the downgradee. Because no bank will give out their trading positions to competitors, my guess is that the analysts from UBS and JP went over to their own trading desks and said "how much are you guys losing this quarter?" Then they made minor adjustments and Presto! We have some earnings estimates!

Penny For Your Thoughts?

Former Countrywide Financial President Stanford Kurland has teamed up with Laurence Fink of Blackrock to start a new venture aimed at profiting from purchasing distressed mortgage back securities, sprucing them up and flipping them for a profit. PennyMac will raise $2 billion. Although Fink has a good reputation in the asset management industry (despite his unfortunate name), I have to question why he is teaming up with the fools from Countrywide. The Wall Street Journal article states that the Countrywide executives who will join the newly created firm were involved in risk management which, they claim, had nothing to do with Countrywide's current problems. REALLY??? Do these clowns actually think they did a good job managing the risk of CFC's portfolio? Did they think that furiously granting interest only loans first loans and then also providing the piggyback second loan to borrowers with no assets and stated incomes on inflated appraisals was a low risk strategy? If anything, I blame CFC's ultimate demise on the risk managers! Why? Because these spineless twerps should have stood up to everyone in management that was trying to gain market share and said "No! We will not do these loans! We cannot! It will ultimately destroy the company!" Other banks did draw the line, which is why CFC has the most ridiculous portfolio of REO assets in America. What do these guys know about valuing securities? I would argue nothing. What's going to happen? They're going to get their money, lever it up at 10x capital and wait for the next Fed bailout. Moral Hazard? What moral hazard?

Monday, March 24, 2008

Simple Math on Housing and Mortgages

According to Bloomberg, existing home sales rose more than expected this morning to an annualized rate of 5 million. That is good news. The median sales price, however, dropped to $195,000. That is maybe not such good news, but at least homes are selling and inventories are decreasing.

According to the article, FHLB announced that it will purchase up to $150 billion of MBS to help alleviate the strain in credit markets. Add in $200 billion from FNMA and FRE and you get a total of $350 billion in added demand for MBS. If you assume that 6 million houses (5 million new + 1 million existing) will change hands this year at a median price of $200,000, that adds up to $1.2 trillion dollars in total purchases. Suppose they are financed by traditional 30 year fixed mortgages with 20% down (because really, can anyone get a 5% no doc, option arm anymore?) and total mortgages slated for MBS issuance would be $960 billion. My question is, if FHLB, FNMA, and FRE buy $360 billion, who's gonna buy the $600 billion balance?

Sunday, March 23, 2008

When Can I Go To The Discount Window?

Bernake is currently wracking his brains for yet another facility to thrust at the bond market to bring investors back from the brink of the abyss. It seems like every time he introduces a potential solution, the market breathes a big sigh of relief before resuming its frenzied panic. While it's true that spreads in the bond market tightened last week overall and equities didn't fall off of a cliff, major dislocations remained in the money markets. Despite the fact that the Fed is going to flood the market with Treasuries this week when it commences the $200 billion TSLF( Term Securities Lending Facility), investors are still hoarding treasuries as evidenced by the divergence in repo rates before the long weekend. My sources tell me that treasuries were trading with a zero handle (down to .15) while other collateral was getting financed at much higher rates. Why would investors be hoarding treasuries at ridiculous prices if they knew that a huge slug of supply was going to hit the market in less than a week? I can only hazard a guess: Because all fixed income investors care about right now is getting their principal back. They want to own the most liquid, most secure investment on the planet and that is still US treasuries. So the good news is, even though we may be on the brink of economic mayhem, at least investors still hoard US treasuries and not, say Thai bonds. The bad news is, nobody is concerned with treasury prices getting whacked when the Fed blasts the market on March 27th. And that might mean that $200 billion is not enough. The repo market is HUGE. Literally trillions of dollars change hands every day. While Bernake is addressing the right problem with the TSLF, it may not be large enough.

According to Bloomberg, the Fed is contemplating buying mortgages outright as another solution to the credit (or rather lack of credit) problem. So, let's review everything the Fed has tried so far: They've injected record amounts of liquidity into the repo market. They've agreed to accept anything including spare tires as collateral against their loans. They've promised to provide cash over quarter ends, year ends, out of helicopters. They gave JP Morgan a call option on Bear's stock with a $2 strike price by guaranteeing $30 billion in Bear's debt. They opened up the discount window to those evil primary dealers. And now they want to buy mortgages outright from investors? I have a better idea. Why not open up the discount window to all of America? Everyone complains that the Government is bailing out Wall Street but not Main Street. I have a few credit cards that need refinancing. Wouldn't it be much easier if I could just call up Ben and get some cash, instead of waiting for some dumb lender to have room on his balance sheet again? The funny thing is, if I called Ben Bernake and asked him to open the discount window to me, he would rub his chin and say "Yes, of course! Let everyone come to the discount window! Here's $10 grand! Take it! Take $20! Just take my money! Take my money!!"

Is Frank Lembi the Next Harry Macklowe?

For those who haven't been following the New York commercial property market, Harry Macklowe is the guy who paid the high. He purchased seven properties from Equity Office Properties last year, putting up $50 million in equity and financing the balance of $7 billion with short term loans. He recently defaulted on the loans and is now selling the GM building to raise cash and handing over titles on the seven buildings to his lenders. Why does Harry Macklowe matter? Because he is a perfect example of what was wrong with the lending environment for the past few years that clearly extended beyond residential mortgages. Lenders bent over backwards to give this guy short term loans so he could overpay for properties where the cash flows didn't cover the debt service. You have to wonder, how many more Harry Macklowes are out there on the verge of blowing-out because the credit party is over?

Frank Lembi, founder of Skyline Realty, may be a mini-Macklowe in the making. Skyline has purchased close to $1 billion worth of multi-family properties in the San Francisco market in the past couple of years. The properties were apparently financed with 92% LTV loans (i.e. the company only had to put up 8% of the equity). If you read the two links provided below (one written in 2005, and the other in 2008), you'll see that Lembi's brilliant strategy of outbidding his competitors by about 20% for virtually EVERY multi-family property on the market in San Francisco and then financing the purchases with Wall Street money has paid off huge! Apparently, he is now desperately puking multi-family properties to raise cash to pay the bills. There's that pesky negative cash flow thing rearing its ugly head. 1330 Bush, a property that was financed with a $48.6 million loan from Nomura (according to is now on the market for $34.9 million, after being marked down from $39 million a month ago. Any takers? Anyone? Anyone? Tell you what, I'm $1 bid. And I'll even pay cash...

Harry Macklowe

Frank Lembi 2005 article

Frank Lembi 2008 article

Thursday, March 20, 2008

Richard Bove Saves The Financial Markets...

Crack analyst Richard Bove claimed that the financial crisis was over and it was safe to buy financials. That is a mighty bold prediction. The good news is that he is just an analyst, so if he is wrong, it won't cost him a penny. Traders, those who actually have money riding on the solvency of the financials, may have a difference of opinion. Although today's rally appeared to be a big relief, following yesterday's plunge, following the day before's rally, it's hard to believe all the bad news is behind us, and the financials are a screaming buy. Once again, I must emphasize that several of the businesses that the banks used to be involved in (securitization of CDO's, CLO's, CMO's, huge PE deals, CMBC issuance etc.) just do not exist anymore in the same capacity that they used to exist, and will take years, if ever to return to the same levels as before. The Fed's actions are obviously very helpful, but will they be enough? Some of the sources that I speak to are still terrified of the next shoe to drop, specifically some horrible news to come out of Merrill. The following article discusses the lawsuit that Merrill has initiated against SCA attempting to force it to honor its insurance contract on a portfolio of CDO's that SCA terminated. How this is bullish news, I cannot fathom. Furthermore, if all the bad news is over, why is implied option volatility in the brokers still freakishly high? Something to ponder over the long weekend...


Wednesday, March 19, 2008

There's No Stigma, Except When There's a Stigma...

GS, MS, and Leh admitted to borrowing from the Fed discount window. They did this because the Fed opened the discount window to brokers this week (formerly only open to banks) and insisted that no stigma would be associated with borrowing from the discount window. In the past, borrowing from the Fed's discount window was only done as a last resort. Drexel went to the discount window, only to be denied.

discount window

At any rate, given the bludgeoning of the brokerage stocks today, apparently, there is a stigma. Although a case can also be made that the negative action in brokerage stocks was related to the pummeling of the commodities market. Rumors were flying around again about massive liquidations, this time in commodities funds as opposed to fixed income hedge funds. If the bull market for commodities is over, brokers would suffer, given that this is one of the few remaining money makers for them. It will be interesting to see the release of the fed discount window data on thursday after the close of the market, particularly since this thursday is an options expiration...

Speaking of Alt-A...

Holy Mother of Dilution! TMA (remember them? nearly bankrupt alt-a lender) just outlined its plan to stay in business and it is UGLY. Apparently, it has secured a one-year reverse repo from 5 counterparties (the nearly bankrupt BSC, C, CSFB, Greemwich, RBS, IBS) who have agreed to provide $5.8 billion in financing in return for warrants to purchase 47 million shares for $.01. Yes, I did say a penny. This represents 27% of outstanding shares. ADDITIONALLY, TMA has to raise $1 billion, which they plan to do by issuing a convert that pays 12% and has a conversion rate of $.75 a share. They will use the proceeds to pay margin calls. Translation? TMA is toast!


FNMA and FRE Cleared For More Leverage...

OFEO, FNMA and FRE's regulator is reducing capital surplus requirements for the two firms. What does this mean? FNMA and FRE can now buy more mortgages because they are no longer constrained by capital requirements. What does this really mean? They can pile on more leverage! Leverage is great! Anyone can make money getting highly leveraged, as long as they have a government guarantee when the market panics and is afraid to lend money during a credit crisis. Remember about a year ago when the Government hated FNMA and FRE? All those accounting scandals? Remember when FNMA and FRE lost billions of dollars last quarter? Yeah, me neither. We always forget those pesky things in an election year.

Fannie, Freddie get OK to buy more mortgages

Alt-A Means "We Don't Pay"...

Delinquencies in Alt-A loans continue to rise...

Alt-A Delinquencies Continue to Rise

According to the article, 11.7% of current outstanding balances of securities rated by S&P in 2005 were delinquent in Feb, 15.9% of 2006, and 14.3% of 2007. Seriously delinquent loans, those at least 90 days past due or in foreclosure continued to rise for all three vintages with 2006 (about 10%). I blame it all on Bernake. Note that Bernake took over the reigns in 2006. Instead of continuing to tighten to squash the ridiculous excesses in lending, he allowed it to continue. Now everyone is "shocked" at how poorly these securities are performing. And the Fed's answer? Slash interest rates again, bail out the banks, and start the process again...

Tuesday, March 18, 2008

The Market Will Rally 400 Points Every Tuesday...

I really wish I could've told you that at the beginning of day instead of the end. But let's try it again next Tuesday. Cue the Fed to cut another interest rate, any interest rate. Watch the market rally 420 points again. The only problem with the tactic is with Fed Funds at 2.25%, we're running out of rates to cut...

What We Really Need is an Investigation or Two...

The SEC has decided to open an investigation into possible manipulation of Bear Stearns' stock by evil traders during the crazy events of the past week that ultimately led to the demise of the firm.

SEC investigation

Furthermore, New York City's Comptroller, who oversees the city's pension funds, will investigate if there was any deception by Bear Stearns or if the bank failed due to sheer stupidity. Apparently, the city's pension funds owned some Bear stock and they want their money back.

NYC Comptroller Investigation

So which is it? Was the firm manipulated and ruined by a bunch of traders as the SEC suspects? Or did Bear mislead investors and mismanage itself into bankruptcy within two days as the NYC Comptroller alleges? Because it can't be both, can it? In any case, if I had to guess, I'd bet that the SEC may be on to something. The amount of Bearish activity (the pun is intended) in the options at the beginning of the week was very suspicious (please refer to previous posts). Significant bets were placed on the stock dropping over 50% before options expiration (March 21st). You just don't see that kind of trading in options unless a biotech company is waiting for the results of a phase III trial which will determine if the company ever makes money. Or a company with significant intellectual property is waiting for a ruling on a patent dispute. In any case, it just doesn't happen during the normal course of trading. If I were the SEC, I would start in the credit default swap market. Apparently buyers of credit default swaps drove the spreads wider, and the sellers of the swaps went to the options market to buy puts to hedge their risk. So if the options buyers were just hedging, then the CDS buyers were really speculating that the company would default on its debt. The irony is that the CDS buyers may have gotten scorched as JP and the Fed are now backing Bear's debt, which means the spreads have narrowed significantly. It's the CDS sellers who hedged with options that printed cash. At any rate, there's a great story in here somewhere of who was behind the rumors, because the rumors were incredible. As much as Alan Schwartz, Bear's CEO, tried to quell them, he couldn't keep the rumors from destroying the firm.

Will Bear Stearns Rise From the Ashes?

My "inside sources" are pointing out that the Bear Stearns trade may not be over.  Now, the speculation goes something like this:  Bear Stearns shareholders hate this deal, for obvious reasons.  They still have to vote to approve it.  They are going to vote no, and give the Fed the middle finger.  Out of spite, they'd rather get $0 than $2 a share, and let the Fed deal with the aftermath of trying to get the money back on the $30 billion in illiquid securities that it guaranteed so that JP Morgan would agree to purchase Bear.  Also, maybe the shareholders assume that after the Fed eases and the new $200 Billion dollar Treasury/MBS swap with the broker dealer community commences on March 27th, spreads will have improved so much that they will be able to get a better deal on their portfolio.  In fact, spreads in the agency markets have narrowed considerably so maybe they have a point.  In any case, crazy volatility persists in the options market.  The april 20 calls are .40 bid.  That kind of crazy bullishness on a broker we haven't seen in a long time...  

Lehman and Goldman Report "Good" Earnings...

The earnings game on Wall Street continues.  Despite drops of over 50% in profits and over 35% in revenues, the brokers earnings were "good" because they beast analyst estimates (including my own estimates which I made up out of thin air a week ago.)  While it is true that the brokerage firms shares have all declined precipitously in the past year, have we really hit a bottom?  And do last quarter's earnings really matter.  After all, Bear Stearns was set to report very decent earnings yesterday before it went bankrupt in two days, so I don't know how much stock I put in these numbers.  
Aside from the Fed's easy money/ignore inflation policy of the past few months that is certain to help the brokers with the cost of carrying their huge fixed income positions, it is hard to imagine things returning to the go-go days of the mid-2000's.  We were in a credit bubble, that has got to be clear to everyone by now.  And housing has yet to bottom as evidenced by yet another decline in housing starts reported this morning.  The Fed is widely expected to ease again today by 100 basis points.  Will it be enough? Or is the market going to sell off again as it has following every other attempt by the Fed to save the financial universe?

Monday, March 17, 2008

Who's Next to Fail?

Despite all the Fed's promises to bail out every bank in America, rampant speculation about the next financial institution to fail continues.  The April 10 puts in Lehman have changed hands 15,000 times today and are currently 1.85 bid.  The price of volatility doesn't seem to matter, investors will pay anything to hedge their brokerage exposure.  Exchange stocks are getting pasted today as well (CME, NYX etc.)  Perhaps investors are thinking that no one will be left to trade if all the BD's fail?  Commodities, with the exception of gold are also taking it in the chin.  Maybe investors are selling liquid assets to get long cash?  Despite all of this, President Bush made another statement this morning claiming that our economy was strong.  He supported the Fed's actions and stated that capital markets are working efficiently.  Makes me wonder if the guy paid attention in his Macro class during business school.  You can't claim that capital markets are working efficiently if the Government is bailing out our banking system!  As a very astute friend of mine asked me today while we were discussing the state of the markets:  Who's going to bail out the Fed?    

Sunday, March 16, 2008

JP Morgan pays $240 million for Bear Stearns...

making Bank of America's purchase of Countrywide for $4 billion look mighty expensive.  This news is not terribly surprising given that Bear was on the brink of failing on Friday until JP Morgan bailed it out with the Fed's guarantee.  Bear's CEO, reassured the markets at the beginning of the week by declaring that the firm had ample liquidity and $17 billion in cash.  This announcement sent a very strong message to the markets:  You'd better get your money out now while we still have $17 billion.  A wave of customer defections followed on Thursday and Bear literally ran out of money in about a day.  Let this be a lesson to all of you leveraged vehicles out there!  If you need to borrow around $150 billion a day to finance your $300 billion inventory of garbage (which was Bear's short term borrowings around year end), $17 billion in cash is chump change!  At any rate, JP got a good deal on a building in New York City (Bear's headquarters which they owned), although I'm thinking they're going to need to look for some new tenants...

Needless to say, tomorrow will be a very interesting day in the markets.  Looks like the markets didn't like this news one bit, as equity futures are down sharply.  The Fed may be forced into a 100 basis point cut in the fed funds target tomorrow, a day before the meeting if the market starts plummeting.  This time, we won't be blaming it on Jerome Kerviel...  

Wednesday, March 12, 2008

A Few Comments Before Vacation...

Bear Stearns upgrades Thornburg!  Of all the rumors circulating around, these two come up on the list of most likely to go bankrupt before march options expiration.  I'm sure that Bear Stearns wishes it could upgrade itself, but upgrading Thornburg may be its best second option.  

According to the credit markets section of the Wall Street Journal, the Fed's announcement did very little to improve liquidity in the repo market for anything other than treasuries.  Spreads in the bond market did come in a bit, which is good news, but are still at pretty wide levels.  I'm not sure what they are doing today because my "inside source" is also on vacation!  The big question is, can we make it until March 27th, when the Fed's new program will begin?  Or is some other unexpected blow-up in the wings beforehand?  If spreads start to narrow significantly, I'd guess FNMA and FRE would be a good bet to own.  Why FNMA and FRE and not the brokers?  Because they take just as much risk as the brokers but have a government guarantee!

I'll be out the rest of the week.  Enjoy the markets!  Thanks to all of my loyal supporters (all three of you!)

Tuesday, March 11, 2008

Richard, I have a Bove to pick with you!

Who is this guy Richard Bove from Punk Zeigel?  Better yet, who is Punk Zeigel?  I had never heard of this guy or his firm until a few months ago when he came out with an upgrade of Goldman Sachs claiming they had "superior technology" and therefore could never lose a penny in the market.  About a week later when it became clear that all the investment banks were getting the beatdown, he turned around and downgraded Goldman Sachs.  Both times he was on CNBC chirping about his analysis as if it was news.  He came out today with a downgrade of Bear Stearns, and revised downward his earnings estimates for Bear (note that Bear is down oh, about 60% from its highs).  First, let's just be clear about one thing, nobody and I mean nobody has any idea what the investment banks are going to report this quarter.  It is impossible to forecast.  Although a portion of their earnings comes from fee-based businesses, they are all in the business of proprietary trading.  Unless you know their trading positions, which banks would NEVER disclose to a two-bit analyst, you have no idea if they are going to lose $10 a share or break even.  You can't rely on their balance sheets from year end because all of their trading positions, liquidity needs, and hedges are totally different than they were 3 months ago.  In fact, given that most of the less liquid securities have ceased trading, the banks themselves really have no idea how much money they made.  But given all of the above, I'd like to throw my hat in the ring...I predict that Bear loses $6 a share, Lehman $3, MS breaks even, and GS loses $1.  These are all completely random predictions, but if I'm right then maybe, just maybe CNBC will call me for a comment the next time brokerage earnings are imminent.  I guarantee that what I have to say will be slightly less moronic than Mr. Bove's drivel from the past few months.

Eliot Spitzer Hates Wall Street...

but loves sex with prostitutes.  Forget the Fed's action today, Spitzer's demise may be the reason why the investment banks rallied this morning.  Is there anything else to be said about this topic?  Not if I want to keep this family friendly...

Is Bear Stearns Going Bankrupt?

Anyone?  Anyone?  After unbelievably bearish option activity yesterday (supposedly spurred by rumors the firm is having liquidity problems that cased severe widening in Bear's credit default swaps,) the stock had a nice recovery this morning on news of the Fed's liquidity injection.  However, it has now given up its gains and is down on the day.  This does not bode well for the investment bank.  If I had to guess which investment bank was going bankrupt, I would certainly pick Bear given its lack of diversification from fixed income, particularly mortgages.  However, I do believe that if Bear goes bankrupt before march options expiration, the other brokers should take it on the chin as well.  I guess I'd rather short a 160 stock (hint hint) on its way to 50 rather than a 58 stock on its way to zero.  Call me crazy...

The Fed's Move...

Bernake and his cronies have announced a new lending facility that will lend treasuries to primary dealers in return for agency debt for 28 day periods (according to Bloomberg).  The interesting thing is that they will accept agency and non-agency AAA rated private-label residential mortgages as collateral.  What's interesting about this, is that back in the old days when I used to be a repo trader (90's), the fed never accepted anything other than treasuries or agency bullets as collateral in their repos.  This was because they could not price the securities.  So my question is, did the Fed suddenly get more sophisticated in its pricing abilities?  Or are they just willing to do anything to bail out the banks?  In any case, the market loves the news, futures are up sharply.  Given the rumors floating around yesterday about Bear Stearns going bankrupt, this is good news in the short term.  However, if defaults continue to increase in mortgages, the Fed is just delaying the inevitable outcome that banks will have to continue to write-down more assets as they go bad.

Monday, March 10, 2008

What's Going to Stop the Slide in the Financials?

Does anyone know?  Because I don't.  We seem to be trapped in a downward spiral.  As spreads widen on fixed income securities, values decline, margin calls are made, collateral is seized, and more selling causes further declines.  What's interesting and different about this period in the markets is that spreads continue to widen as the fed eases and pumps more liquidity into the market.  How is it going to end?  Probably with a bailout of some large financial institution.  Makes me wonder who is buying financial stocks at these depressed levels...

Blackstone loses $170m, Schwartzman regrets expensive birthday party

Actually only the first half of the headline is true.  Blackstone Group really did lose $170 million last quarter but I doubt if Steve Schwartzman regrets spending $3 million on his 60th birthday party, the highly publicized event on 2/13/2007 that curiously marked the end of the private equity boom.  Why do the earnings of the private equity group even matter?  Because its lousy earnings are a proxy for all private equity earnings.  Lousy earnings coupled with an impossibly difficult deal environment translate into fewer deals which lead to less business for Wall Street.  Less business for brokers means less fee revenue to help offset all the write-downs they have to take on their inventory.  This does not bode well for the quick recovery in bank earnings that most chipper analysts were expecting due to the fed interest rate cuts...  

Friday, March 7, 2008

Tool of the Day, March 7

It might be a little early to designate the tool of the day considering the turmoil going on the market...but really, this guy takes the cake.  According to, Donald Fandetti, a Citigroup analyst cut Carlyle Capital shares to a sell this morning AFTER they failed to meet margin calls and got a notice of default.  In case my buddy Don is not clear on the concept, you want to issue sell ratings on companies typically BEFORE a company defaults and gets liquidated.  Note to Vikram Pandit:  Giving this useless tool the axe may help with your overhead problem.  

Mozilo Convinced Board He Was Grossly Underpaid

Does anyone actually know what corporate boards do?  If so, please explain, because I am perplexed.  While Countrywide Financial (CFC) was busy giving everyone in America a cash-out-refi-interest-only-no-doc-option-arm, what was CFC's Board doing?  They certainly weren't busy scrutinizing the company's moronic lending practices.  Just a quick look at CFC's REO portfolio of homes, which ranges from $40,000 houses in Sacramento to $3 million homes in ritzy parts of California, shows that they did not discriminate when it came to shoddy underwriting.  Well, as it turns out, they were busy hiring compensation consultants to try to figure out how much to pay CEO Angelo Mozilo.  According to the WSJ, the House Committee on Oversight and Government Reform is due to question Mozilo to figure out why, after two compensation consultants told the board to cut back Mozilo's pay, they opted to listen to Mozilo who asked for more.  According to an email Mozilo wrote to the board expressing his disappointment he claimed that "Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions..."  So, what did the Board do?  Instead of telling Mozilo to take a hike and hiring my 8 month old baby, who would have only asked for a stuffed frog as compensation, before running the company into the ground, the board opted to pay Mozilo $250m from 1998-2007 (not counting the $406 million from the sale of stock.)  Somehow I doubt that leaders of unions were personally calling the board and pressuring them, and suspect that Mozilo was the one doing the pressuring.  The good news is that Mozilo has been cordially invited to testify in front of the Committee and that might make for some good television...  

Thursday, March 6, 2008

"Peloton says sorry for $2bn losses..."

but thanks for the fees you paid us last year!  According to the Financial Times, Peloton Partners, the formerly $2 bln, now worthless hedge fund, offered 7 reasons for its spectacularly swift decline.  It could have summed up nicely by telling investors to read "When Genius Failed", the book that gives the hilarious account of how Long Term Capital blew-out in 1998.  It's the same story, with slightly different details.  However, in what was called an emotional conference call, Ron Beller, co-founder, tried to score sympathy by sharing that staff and partners had invested $127 million in the fund and lost it all.  Granted, that is alot of money to lose and I feel sorry for them, but I'd like to point out that most of that money more than likely came from the fees that Peloton collected from its investors when it posted 87% returns last year.  Moral of the story?  Every 4-10 years a leveraged disaster occurs.  It's why Warren Buffett always has $40 billion in cash sitting around.  Because when spreads widen unexpectedly and everyone is dying to invest at amazing levels but can't because they are losing their shirts, my buddy Warren steps up to the plate and knocks it out of the park.  God, I love that man!

How to Lose $36.49 a share when your stock is only trading around $30

Redwood Trust (RWT), the Mill-Valley based REIT reported a net loss of $1.1 billion or $36.90 a share.  The CEO claims you shouldn't pay any attention to the losses and called them "misleading."  "We had to do huge market value adjustments which don't affect either taxable income, cash flow, or dividends."  According to the article in the Marin Independent Journal "The accounting standards that Redwood has been using - The Generally Accepted accounting Principles (aka GAAP) fail to recognize that the risk of the securities that Redwood has bought has been packaged into new securities and resold."  So, while I see his point, I still think it is absurd to tell investors to ignore a write-down that basically wiped out all of their shareholders equity and caused a negative balance.  Although RWT is in better shape than most REITs at the moment (TMA comes to mind) it is leveraged which should make all the investors breathe a big sigh of relief every time they make it to the next that fat dividend! 

Wednesday, March 5, 2008

Tool of the Day Report

Every day as I skim the financial news, it is inevitable that I read a story about a guy (analyst, investor, banker, you name it) who is prominent enough to be quoted in the financial news, yet is worthy of much mockery.  What amazes me about the seriousness of financial market reporting is how often the humor is overlooked.  Only Alan Abelson (one of my heroes), of Barron's is capable of consistently capturing the ludicrousness of much of the market participants.  During bull markets, everyone is a genius, or appears to be.  It is only during periods of extreme market volatility and bear markets, does the absurdity of Wall Street get exposed.  So in honor of the "credit crunch", this column will be dedicated to bestowing the title of "Tool Of The Day" on the person with the most idiotic action of the day.  The noteworthy contenders for the award are:

*Johnathan Wood of the hedge fund SRM Capital Management.  It was reported in the Deal Journal of the WSJ that he thinks Bank of America is not paying enough for Countrywide.  Let's review for a moment that Countrywide was battling bankruptcy rumors, practically taking down the FHLB as it ran out of liquidity, and taking enormous hits to the value of its portfolio due to surging defaults from all the stupid lending it did during the boom.  But this guy thinks BAC is not paying enough?  Well, perhaps his opinion is skewed by the fact that he owns 37.1 million shares of Countrywide.  Something tells me he didn't buy those shares when the stock was trading below the current bid from BAC.

*Cameron Kuhn, a major developer in Orlando and Jacksonville Florida who is having all sorts of issues including defaulting on his loans, possibly losing his own house to foreclosure, and facing lawsuits from what seems like everyone who has done business with him.  According to the Wall Street Journal Property Report, he blames the credit crunch.  That's good stuff.

But the winner of the Tool of Day award has got to be....

*Richard Shane, the analyst from Jefferies who came out with some cutting edge financial analysis today predicting that Thornburg Mortgage Inc.(TMA) had a 1 in 4 chance of going bankrupt.  He bravely slashed his rating from a buy to a sell and cut his price target from $14 to $3.75.  The stock, which was trading with a 3 handle already during the day on rumors that TMA was receiving huge margin calls, immediately dropped to $2.  Of course, the stock dropped on the real story of the day which hit the wires about a minute after the moronic analyst downgrade...that TMA's lenders were seizing collateral because they had failed to meet margin calls.   So my question to this tool is:  Is he patting himself on the back now?  Does he actually think he helped investors with his incredibly tardy downgrade after riding the stock down 80%?  Jack Grubman would be proud.  Jack Grubman, for those who don't remember, had strong buy ratings on several telecom stocks in 2001, most of which went bankrupt with the strong buy rating intact, with the exception of Worldcom, which he downgraded from a strong buy to a sell when the stock hit $1.  Jack Grubman received the Tool of the Year Award for 2002.