Monday, July 27, 2009

Sun Tzu Speaks

Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.

Not much to do today. Placed a few stop losses, placed a few limit buy orders substantially lower from here. Waiting otherwise.

The ability of the market to "correct" by going sideways to consolidate gains rather than back down is impressive. But the type of junk rallying today - small cap biotech, Chinese small cap no names under $3, is the stuff of legends. Legends who are getting long in the tooth and late to the game.

Still seems like this market would like to hit S&P 1000 to have everyone throw in the towel and join the parade.

EDIT: Day after day after day of last minute volume spikes. 3-4x the volume of most of the other 5 minute periods the rest of the day. Either traders (humans or computers) exiting their daytrades, or "someone with a mission" with SPY buying without regard to price to mark up the market in the last 5 minutes aka "the persistent buyer".

A Quick Look at the New Housing Number

As we wrote in the weekly summary

New home sales are Monday and Case Shiller housing index on Tuesday. As with every housing report we'll react in "surprise" that June is better than May which is better than April - which happens every year. We'll continue that charade until seasonality stops kicking in I suppose.

Our high on the day so far was just after 10 AM when the new home sales report came out. Predictably, the headlines are in and "new home sales surged". Much like the financial media, the mainstream media never bothers to really look under the hood - whether it be economic reports or earning reports.

As we've said countless times, housing is seasonal. My worry about all this green shootery related to housing as it "does well" in May-August is what happens when seasonality turns against it. Which will happen in the fall.

I could do the following exercise for any number of economic reports but at this point it's a lost cause battle since looking under the surface is more of a mental exercise than anything that pertains to "investing". Hence we haven't been dissecting economic reports as much of late - really why bother? The way to win in the stock market is smile, high 5 your friend and stick to general dramatic themes best explained in 10 seconds or less with generic Kool Aid tags such as "housing good, me happy, buy stock".

The only good thing I saw today was inventories dropped below 9 months. Below 6 months would be good but beggars can't be choosers. Now the irony is... we just celebrated the fact July 17th that homebuilders are INCREASING their new home starts.

Construction of new U.S. homes rose in June to the highest level in seven months as builders rushed to pour foundations...

The Commerce Department said Friday that construction of new homes and apartments jumped 3.6 percent last month

...was better than the 530,000-unit pace economists expected, and was the second straight monthly increase

So just as inventories finally break below 9 months (these are new homes mind you, not existing homes) builders already are scurrying to build more. And yet we rally on both news events. As a bull you can have your cake and eat it too; it's a much more simple existence than a realist - let me tell you.

Let's check the breathless reporting
  • New U.S. home sales rose by the largest amount in more than eight years last month, in another sign the housing market is finally bouncing back from the worst downturn in decades. (8 years! wow, time to call HGTV and get "Flip That House" out of hiatus)
  • The Commerce Department said Monday that sales rose 11 percent in June to a seasonally adjusted annual rate of 384,000, from an upwardly revised May rate of 346,000.
Sounds great! The actual number doesn't matter, mind you - it just has to be "better than expected" versus a group of economists who almost to the man (woman) missed this entire financial disaster.
  • ... exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 360,000 units.
I'm feeling faint.... the news is so overwhelmingly good. Even though sales surge EVERY year in the spring let me shoot this bunny out of a cannon in celebration because....
  • Sales have risen for three straight months.
Now keep in mind this is with taxpayer handouts of $8000 to first time homebuyers, along with unnatural mortgage rates created at the expense of savers in this country via Uncle Ben's actions. More on this later.

So the important question in a SEASONAL number is the year over year % change.
  • Sales of new homes were down 21% versus June 2008.
So despite the handouts and almost multi generational lows in "cheap money" mortgages - including over half the country now in FHA loans (which many times require only 3.5% down) we still dropped 20%. Praise the green shoots.

What was disconcerting if you are a home builder (but not to worry, homebuilder stocks shot up at 10 AM) was the huge drop in month over month prices. Year over year was bad... but the drop between May and June was almost unheard of: 6%. Don't even try to annualize that.
  • The median sales price of $206,200, however, was down 12 percent from $234,300 a year earlier and down nearly 6 percent from $219,000 in May.
So this means either builders are selling smaller homes (which some are) or Americans simply cannot afford (they can't) the old prices... despite the taxpayer handouts and multi generational low rates. This would seem to be a strike at profitability at homebuilders - but we don't really need profits to drive this market up. We just need layoffs and green shoots.

Now the only real good news in the report, and it was mild, was the inventory number (and again, offset by the recent report of a jump in new housing starts):
  • There were 281,000 new homes for sale at the end of June, down more than 4 percent from May. At the current sales pace, that represents 8.8 months of supply -- the lowest level since October 2007.
So that's the new home report from a more in depth perspective - we get these sort of economic reports every week and trying to explain what is really going under the surface is a moot point since the trumpets blaring on financial infotaintment TeeVee is all the market seems to really care about. The writers at Reuters and AP and the like should also spend more than 30 seconds regurgitating data points.

With all that said, I will ask the same question I've been asking for 8-9 months. What happens to the green shoots when taxpayer handouts end (if they ever do?) and Bernanke is forced to stop manipulating rates downward. If this is the type of "strength" we have with every arm of government pushing Americans into housing ....what happens if we (brace yourself) face a horrific world of 6.25% mortgage rates. [Jun 3, 2009: A Country that Cannot Function without Easy Money]

Don't ask that question... just buy stocks. The bunnies are flying through the air. And the $15,000 tax credit for ALL future home owners (not just 1st time) is coming this winter. Our American money trees are endless as are our grandchildren's piggy banks. We don't care how many generations of the future we have to sacrific - we will reflate this housing market, together as patriots.

Mmmm... Kool Aid.

Bookkeeping: Short BHP Billiton (BHP) [Again]

We will try the BHP Billiton (BHP) short again after an unsuccessful attempt middle of last week. The stock peaked intraday at $62 mid June when "reflation" was the sexy trade of the day. We are almost back there - meaning we are about to create a double top (which is bearish) or break through and make a new run. If the former we are positioned pretty well here, if the latter we'll take our marbles and go home. I expect if the computers take this market to S&P 1000 we'll be stopped out very shortly as almost all stocks move in correlation with the market nowadays. Which begs the question why bother shorting individual stocks when they are all just proxies of the stock market (moment of reflection)

We are putting a 3.5% short allocation in at $61.60s range. This will be stopped out at $63.50 which would allow for just over a 3% loss. Our targets remain the same as last week, there are gaps below both $54 and $52. The former target would give well over 12% gain so a 4:1 ratio in terms of win v loss.

Long/short BHP Billiton in fund; no personal position

Bookkeeping: Short 3M (MMM)

I see so many charts like this, but really folks - when the maker of scotch tape begins to gap up on earnings we've reached a state of silly. I am shorting just under $70 with a nearly 4% allocation; what I like about this name is 99% of the time is it not volatile so unlike stocks we've generally been shorting I don't anticipate it opening up 11% any session. So if we are to lose on this position it will happen during an intraday movement and very easy to contain.

There is an easy gap to fill at $65, that is our target (7% gain), we'll stop out over $71.50 which risks 2%.

There are again, COUNTLESS charts that look like this - when this market falls so many stocks will have no support to fall into.

Short 3M in fund and personal account

Niall Ferguson, Nouriel Roubini, Mort Zuckerman Interview with Fareed Zakaria

I've been meaning to post more Niall Ferguson content but simply have not had time to break down some commentaries and articles he has written the past half year, on the blog. Effectively Ferguson is an economic historian with some relatively negative views. [Feb 4, 2009: Vanity Fair - Niall Ferguson: America Needs to Cancel his Debt] If you've been involved with the market more than 3 weeks you probably know who Nouriel is. Mort Zuckerman is the US News and World Report Editor in Chief but more important for business reasons, he is a real estate billionaire. Unlike the green shoot parade folks, he actually was quite negative (also known as realistic) during multiple implosions in 2008.

Totally unrelated, 8000 more job cuts from Verizon announced - which as you know means "better than expected" earnings coming in the next few quarters for VZ. Green shoots.

Sunday, July 26, 2009

Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 51

Year 2, Week 51 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 86.4% (vs 70.2% last week)
25 long bias: 11.0% (vs 16.3% last week)
6 short bias: 2.6% (vs 13.4% last week)

31 positions (vs 31 last week)

Weekly thoughts
Wow, just realized we are just days away from finishing up our 2nd year, and beginning "year 3" - cannot believe it.

Let's go to the charts - we'll start posting NASDAQ since it's the golden child and houses the obvious "go to" sector for the next bull market: technology. I say that tongue in cheek as technology is mostly a bunch of super cyclical businesses that replace "widgets" with "silicon widgets" and therefore have a cachet. Real secular growth? Only in a few pockets folks.

There is nothing bad to say of either chart other than they are quite extended away from any meaningful support level. On the S&P 500 we have (a) broken over both the 200 day moving average (exponential in this case unlike the "simple" a month+ ago) and (b) broken over our double top with early June yearly highs. As I stated earlier this week we now have to lean bullish until we come back to retest the "breakout level" (just under S&P 960) and see how the market acts. Further, until a clear break back below the 200 day moving average happens the trend is up.

On the NASDAQ the picture is even better - as we add the "golden cross"; the 50 day moving average crossing over the 200 day moving average to the S&P 500 picture.

Flies in ointments? #1 The indexes have broken quite a far distance from any major support line and hence are "overdue" for a correction even if mild #2 Both charts now have a serious gap in them - for the S&P 500 906; for the NASDAQ a very easy to remember number 1800. At Friday's close to "fill the gap" the S&P needs to drop 8.4% and the S&P 7.5%. I am fully confidant this will happen, it is just a matter of when - maybe in 1 week, maybe in 10. Usually sooner rather than later on an index (as opposed to individual stocks where it can take years) When that gap fills on the S&P 500 our chart formation will not be quite so positive looking as we will have broken back below the 200 day moving average. On the NASDAQ we'll still be in good shape unless the 200 day moving average jumps over 1800 in the time between now and when the gap is filled.

Let me talk a bit about my positioning. For the portfolio we had an interesting week; we entered Monday with a quite hedged book with shorts we put on in the closing minutes a week ago Friday in American Express (AXP) and Capital One Financial (COF). That was 5% of our 13%ish short exposure; another 3% short in Prologis (PLD) [commercial REIT]. That was balanced by a bevy of long positions, most underweight in size. So we were net long but not by much. I started letting go of some of our "big winners" early in the week, while buying an "insurance" put with 3% of the portfolio that would do well if the S&P fills that "gap" by mid August - the most we could lose was 3%, the most we could make was many times of 3%. We added 3% short in BHP Billiton (BHP) that we had exited long Tuesday (mostly), and immediately went short. I had to exit 95%+ of my credit card short position because they were going to report Thursday and I don't want to be heavy long OR short going into any earnings report.

So by Wednesday we were back to about neutral (that was the only "red bar" on the S&P 500 chart this week) exposure - letting go of some sizeable long positions and punting 5% short exposure via credit card companies, but replacing it with SPY puts and BHP. We exited a few other long names mid week, mostly for "protection from earnings knee jerk reaction" reasons and then the Thursday morning breakout happened. There was not really any fundamental news story to drive the market up that morning (excitement over EBAY earnings? hah) ... and if you don't follow technical analysts the ferocity of the move would make little sense. I continue to believe this market has moved away from one centered on fundamentals, and more on technicals... along with one driven by computers. I've been on that horse for a year and a half and the mainstream media is finally picking it up (more on that in a piece later).

Anyhow, Thursday morning Mr. Obvious said it was a breakout [Mr Obvious: Looks Like It's a Breakout] once we cleared that "double top" with 1st half June 2009, and I took a good sized chunk of cash and went heavy into some S&P 500 calls around 10 AM. I talked about this strategy of "trend days" [Trend Days] 2 weeks ago and frankly if you get 1 trend day right a month, you can sit on your hands the other 29 days. Normally on trend days I allocate a respectable size portion of the portfolio (5 to 10% the past 5 weeks) of the portfolio on an intraday play. This time ,since it was a potentially serious move I went over and above with a 16% allocation on SPY calls. (SPY being the ETF for S&P 500). By 3:00 PM we were out in glutenous fashion after a 2% gain on the S&P 500 between 10 AM and 3 PM; never breaking the "trend" and sitting on hefty 40%ish gains with about 1/5th of the portfolio. Concurrent to that our 2 major shorts (6% of the fund) at the time (BHP and PLD) stopped out for miserly 4%ish type of losses that morning. So in terms of risk adjusted reward - protecting most of the portfolio in cash, but reaching for reward - it was a home run day. Even with the 3% allocation "insurance" puts we had bought Monday, losing 70% of value this week (currently down to a less than 1% allocation of course!)

Obviously chasing 'trend days' won't be a major part of the core strategy but when the market is handing out free money I won't say no. So for now, we still have huge cash exposure and a tiny amount of short exposure - half of it is actually betting against the long bond via a short, not even equity related. If the market drops from here - we're good, 80%+ cash. If it increases in a linear fashion we can try another trend intraday trade long. If it increases in herky jerky fashion we will lag in the near term since I don't want to chase a market that everyone is suddenly ebullient over - even if S&P 1000 now seems a foregone conclusion. We're trying to pick and choose some individual names of high quality that are showcasing strong earnings - i.e. we bought RFMD Friday post earnings when it was up 4% and it ended the day +15%! Wish I had bought more.

I see chart after chart very extended and nowhere near any support - "chasing" as we did with RFMD (and TQNT) Friday is the only "winning" strategy right now. That is great while it works; but when it reverses - since you have an absence of support; things tend to implode quickly. I am more than happy to rebuild most of the long positions we have sold off the past 2 weeks, but not going to chase them up 25-50% in 2 weeks. [Review of Recent Cutback Positions] Especially since we are beating the market by a large margin - no need to take outsized risks although you can almost hear the sweat pouring off foreheads across the country, by those institutional money managers who are under invested. Remember how quickly things change - not a fortnight ago we were coming into a Monday morning where the S&P 500 was about to break down and fear of "head and shoulders" were rampant. Now, the world is a sanguine place of butterflies and rainbows. I'll continue to monitor individual earnings reports and try to pick some out performers to add to the "imminent addition" list - on a pullback. Our list is hampered because I don't want to add positions ahead of their individual earnings reports. Meanwhile we're waiting.

2 name of interest right now already in the portfolio are Allegiant Travel (ALGT) and Quality Systems (QSII). The former reported this week and the market initially balked, but it is bouncing to fill a gap (upward in this case). We cut most of our position but I am monitoring it as it tests $44.50 area to see how it acts from there - fundamentally, I continue to like this story.

As for QSII strangely it has not participated in this rally - that is bearish. On the other hand it has become a coiled spring trading in a narrow range between $52 and $55 for a period of 12 days. The longer a spring is coiled, the harder it breaks. While it gives me great pause to watch a stock not participate in such a strong rally, I'll be looking to give this some extra exposure if it breaks upward, as it right at the top of its recent range. A relatively tight stop loss can protect us to the downside.

As for economic news - there is a lot this week. Just remember if its bad news it's backwards looking; if it its good news on the other hand, 4 hours of CNBC coverage. New home sales are Monday and Case Shiller housing index on Tuesday. As with every housing report we'll react in "surprise" that June is better than May which is better than April - which happens every year. We'll continue that charade until seasonality stops kicking in I suppose. The very volatile durable goods order report is Wednesday - remember if its BAD its "volatile" and hence we cannot attach any significance to it, however if it is GOOD, celebrate it by buying many stocks. Friday is our Q2 GDP print (first pass) - as with all US economic reports nowadays there are so many "adjustments" it is not worth parsing. We just have to be aware of it because of the knee jerk reaction to it... but just remember the logic of "if its bad it doesn't matter - it's in the past".

Aside from that, it's another heavy week of earnings... by the end of this coming week we'll have well over 300 of the S&P 500 companies done with and soon be moving to the smaller and domestic based companies who rely more on Americans versus Chinese. The main hope is they fired enough Americans to "beat expectations" to they can continue the joyous path that their more international brethren have laid. Based on what I saw Friday after not so good reports by Microsoft (MSFT), (AMZN), and American Express (AXP) - I guess we can add "earnings" to the litany of things that don't really matter much anymore by a market driven by program trading guided by computers from a small cabal of financial institutions. Heck it has become so obvious even the New York Times is now printing articles on it. Since I've been talking about the effect of HAL9000 on the markets almost since day 1 of the blog, I am heartened to see this is yet another issue I am not the "crazy old man on the bench with his whiskey, dreaming up things". That said, this "high frequency trading" that has exploded as an issue in the past few weeks is just a new layer of HAL9000 - as I explained through 2007 and 2008 I don't know half the things going on behind the scenes. HFT? News to me. All I know is I've been around since mid 90s, learning more each year and I've seen things increasingly acting "different" the past 2 years [Aug 6, 2008: Computers Run the Stock Market - Why Your Stock Doesn't React Normally]

For those who have been around a while you know I constantly refer to the "supercomputers at the hedge funds" controlling things or at least being the marginal decider of prices. As a participant in markets for a while now I have to say some of the things we're seeing the past year or so are beyond compare.

My thesis has been the quantitative hedge funds really have changed the nature of the markets and trading. The most successful and famous is
Renaissance Technologies, led by Jim Simons. The track record of success there has been fantastic, and it's all computer driven. Success begets copy cat behavior - and a flood of funds trying to replicate the grand chief have been born. Hence when I refer to "algorithms" dominating trading, I am speaking to this bevy of pooled capital, all doing (or trying to do) almost the exact same thing and taking stocks farther (both higher and lower) than makes any logical sense. And this, in my opinion, is simply crowding out people who use fundamentals or logic. The machinations of August 2007 really was the first time this hit me in the face as I was seeing action that were in no way explainable by any reasonable data point.

So even without specifically knowing what is happening in the dark crevices of the market, simply by watching day in and day out for many years, I could tell things have morphed to a different feel (and action). Now in retrospect as these things begin to dominate the markets, they are being exposed. Unfortunately this change has made a lot of what you learned the previous 10+ years mostly moot.... I am adjusting on the fly to think like an algorithm. If you can't beat a market regulated by a toothless SEC and captured politicians, you have to join it.

Boo Yah - it's not your daddy's stock market anymore. Another "financial innovation" that is "improving liquidity" and "making the market even better than before". For a few highly placed firms at least.

Short Interview at Wall St. Cheat Sheet Blog

I did a short interview over at Wall St. Cheat Sheet blog that was posted this week; the link can be found here. We did not have a chance to do the full kahuna so perhaps a secondary interview will be coming in the months to come.

More interesting than myself are some other well known names - first, a lengthy interview with the "godfather" of financial blogging - Barry Ritholtz: part 1 and part 2. Barry of course runs "The Big Picture". One thing about writing a blog, is it is time consuming so I don't have much time to read other people's blogs, but when I did Barry's was always a top choice.

They have also interviewed Rolling Stone's Matt Taibbi, who aside from Vanity Fair appear to be the few in well known magazines to be doing a lot better job of scratching under the surface of Wall Street than the corporate controlled mainstream media outlets. I am sure that is just happenstance. [Jun 25, 2009: Rolling Stone - Goldman Sachs, The Wall Street Bubble Mafia] and [Mar 19, 2009: AIG - The Big Takover]

Last, if you are of the venture capital bent, an indepth interview with Howard Lindzon of the creatively named

But back to focusing on myself....


Speaking of Barry he seems to have a found a rogue CNBC home page [click to enlarge] - my favorite part have to be the tabs across the top. [to properly cite this one I see a reader of ZeroHedge created it] ;)

Updated Position Sheet

Cash: 86.4% (v 70.2% last week)
Long: 11.0% (v 16.3%)
Short: 2.6% (v 13.4%)

This data is updated weekly and can be found on 'Performance/Portfolio' menu tab on the website. As always the total gain/loss (both dollars and percentages) only apply to the open portion of the position; it is does not apply to portions of the position sold earlier.

(click to enlarge)



Saturday, July 25, 2009

The Chinese are Taking Everything Over - Even "The Onion"

Piece by piece, the Chinese are taking over the world. I thought our creditors would wait a decade or two before taking such strict actions, but then again it is their money and they can collect when they wish. It appears nothing is sacred - even our satire laced websites have been bought out. The Onion now appears to be controlled by a Chinese entity - and with that goes my #1 source for finance related news.

Truly China... could you not have left us this one morsel of true American ingenuity?

Front page of Onion screen shot [click to enlarge - if you dare]

Sample video taken from site [must watch - have you seen this productive woman?]

Police Still Searching For Missing Productive, Obedient Woman

Sample news stories...
  1. Star Athlete Signs Contract for Millions of Weak US Dollars
  2. Business Report - Majority of Americans Proficient At Owing Large Sums of Money
News in Photos
  • Clear American Sky a Constant Reminder of Industrial Inferiority

Banks Kick Commercial Real Estate Loans Down Road

One of our big calls in late 2007/early 2008 was the disaster that was to be happen in commercial real estate. Many REITs since then have imploded 80-90%+ before rebounding to some degree as we rejoice over the solutions of flooding paper dollars in every direction, and into every orifice; or PPP as we like to call it. [May 19: Paper Printing Prosperity Defined] It's strange how the issues in commercial real estate - while still somewhat pressing for smaller regional banks - have been tossed out the window as if they are not material or won't matter. Granted, a massive lobbying effort to help the upper crust of society (and by proxy the financial oligarchs) was a "success"...
  1. [Dec 22, 2008: Wall Street Journal - Property Developers Ask for Government Bailouts]
  2. [Jan 13, 2009: Bailout Nation Continues in Commercial Real Estate Land - "Lemme In on that Money"]
  3. [Feb 23, 2009: Fed May Need to Recast TALF on Commercial Real Estate]
  4. [Apr 17, 2009: Surprise Surprise - Federal Reserve Succumbing to Commercial Real Estate Lobby]
  5. And... victory ---> May 19: The U.S. Federal Reserve on Tuesday further widened its safety net for downtrodden credit markets by making older commercial property loans eligible for an emergency program.
... because if anyone needs our tax dollars its guys who have multi hundred million to multi billion portfolios of commercial assets. How they would ever be able to put food on the table without Joe6Pack ponying up is beyond me.

But there seems to be more at play here. There seems to be a very similar issue as is happening in the residential market. A lot of dragging of feet by banks to actually take property back even in cases of very long delinquencies. In commercial they are just "rolling it over" - kicking the can. In the residential market on the other hand, I've read a lot of anecdotal stories of people living in homes "rent free" for month, after month, after month - far longer than the "6 month-ish" that is typical for eviction notices. Part of it a system swamped by foreclosures but there is more to the story... after all if you want to keep up appearances as a "healthy bank" the last thing you want to is to bring back property on your balance sheet and therefore have to finally take the TRUE financial hit.

Since our accounting boards (FASB) sucumbed to government pressure in March and changed the rules, we can now mark to "myth" and as long as the property is not officially foreclosed, the banks can mark it at what they perceive to be a correct value indefinitely. To put it in simple numbers
  1. Gave mortgage out in 2006 at $280,000
  2. Sitting on balance sheet at some value X
  3. Actual value today = $170,000
  4. Proceedings in foreclosure = $120,000
So I can keep it at X on my balance sheet (inflating it) or if I do the actual foreclosure I have to take the $160,000 hit as I "admit" what the value of my "asset" is. I am simplifying this a bit, but that's the 40,000 foot idea. Now multiply that "whistling past graveyard" activity across millions of homes in the United States of Bailout.

So instead, as a bank - I want to show the world I'm "healthy"; I can calculate how many foreclosures each quarter I can actually take the hit on to keep up appearances, and only proceed on those. As for the rest? Kick that can! A lot of consumers are increasing their savings rate since they are sitting in homes month after month "payment free". That's one way to get the national savings rate up - millions with no house payment. Green shoots! And if those "savers" are even more *lucky* they can continue to live rent free until one of a multitude of current or prosposed government housing initiatives comes and showers them with taxpayer money. Another win / win / win (ahem). As long as you are creating a mirage of prosperity that is.

One of my favorite terms is "kick the can" - it is represenative of so many things in the country, political to individual. When you don't want to face an issue - just kick it. Far. It appears the banks are doing it - both in residential and now similar trickery is happening on the commercial real estate side. Rents going down? Tenancy flailing? All issues that should cause us concern? That's ok - here's an extension! Come see us about it in 2012 - we'll talk then.

Let's delve into the details.
  • For the past six months or so, Wall Street has been bracing for what many fear may be the next shoe to drop on the already battered U.S. economy: a U.S. commercial real estate bust that could rival the housing market collapse.
  • Yet, lenders have been keeping that shoe in the closet -- forestalling foreclosures by extending loans, despite rapidly rising mortgage default rates. "In today's environment, it's obviously not very attractive to foreclose on a borrower," said Matthew Anderson, co-founder of real estate consulting services firm Foresight Analytics.
  • The U.S. commercial real estate sector has been grappling with a credit crisis that has dried up some of its most important sources of lending. That has left many borrowers unable to refinance maturing mortgages. Even when they can obtain financing, borrowers are often obtaining much less than they need.
  • But banks have been loathe to foreclose on the mortgages and are extending them. "They're taking loans that don't have a cash-flow problem, but definitely have a valuation problem, and they're pushing those out to the future," Anderson said. Banks account for about $1.7 trillion, or half, of U.S. commercial mortgages outstanding.
Here is the key.. foreclosed loans as a % of nonaccruals is lower NOW than 3 years ago when the economy was "roaring". Just amazing...
  • Yet foreclosed loans as a percentage of nonaccruals has been declining, down to 19.7 percent in the first quarter from over 30 percent three years ago, according to the most recent statistics from Foresight.
  • The practice of extending loans has become so prevalent, it has earned its own catch phrases -- "push-outs," "kicking the can down the road" and "a rolling loan gathers no loss." (I love the last one)
Banks have many reasons not to foreclose.
  1. First, it's an expensive processes.
  2. Secondly, banks are not in the business of owning real estate. When they sell a property, they face the same distressed market their borrowers would face, leaving them saddled with more losses. They also have learned a "perverse lesson" from past commercial real estate downturns, Anderson said. After they dumped bad loans in the early 1990s, banks watched as buyers of the distressed loans, such as Goldman Sachs Group Inc's Whitehall Funds, made a fortune when the market rebounded.
  3. Banks already are dealing with losses from other sectors, such as home mortgages and credit cards delinquencies. Pushing the commercial real estate problem further into the future may allow banks to be in a stronger position when they finally face the issue.
So it appears the problem is "fixed"... err..
  • "Rolling it over does not solve the issue," Daniel Penrod, senior industry analyst for the California Credit Union League said. "But at this point, adding another negative to the current economy could be disastrous. If this were the only factor in the economy that was struggling, we could let it play out with all the other factors. Allowing it to catch its breath for six or 12 months may help shorten the current recession."
  • Property values could fall should loan extensions not be long enough to give borrowers confidence that they will retain the properties. A three to nine-month extension could discourage a borrower from paying for needed maintenance and improvements.
  • Postponing foreclosures may compound a bigger problem of loan maturities ahead. Some $270 billion to $275 billion of loans are set to mature next year. Ultimately, the refinancing of the rolled over loans may soak up the available capital at the expense of new loans.
  • "If it continues, essentially for most of the next decade, we're really just going to be dealing with today's and yesterday's debt," Anderson said.
To conclude, some crazy old school thinking at the end of the article - the horror of such a concept ... to be whispered out loud in this day and age. Please avert your eyes.
  • "If a borrower can't get additional financing, it should be foreclosed and liquidated," Parkus said.

[Apr 2, 2009: US Office Vacancies Surge, Rents Biggest Drop in 7 Years]
[Mar 30, 2009: WSJ - Commercial Property Faces Crisis]
[Jan 27, 2009: As Hotel Vacancies Rise, So Do Risks of Default]
[Jan 6, 2009: New York Times - As Vacant Office Space Grows, So Does Lenders' Crisis]
[Nov 20, 2008: Commercial Real Estate Finally Hitting Home in Financial Media]
[Nov 11, 2008: General Growth Properties Looks to Join Its Tenants]
[Jul 21, 2008: Add Mervyn's to Our Growing list of Retailers Heading to the Great Sunset]
[Mar 4, 2008: WSJ - Building Slowdown Goes Commercial]
[Dec 2007: Credit Downturn Hits Malls]

Ron Paul Day

It's been a while since we checked in with Ron Paul - he is trying to push through a bill to audit the Fed which is going well at the grass roots level (275 legislators have signed up) but the House leadership is dragging their feet. The higher you get up the food chain the more those in power would love to keep things "just as they are, thank you very much". I can only imagine the lobbying going on on this one behind the scenes. What is amazing about Paul is almost everything he proposed would happen financially during the campaign (much of which was laughed at during GOP debates) has come to pass. Uhh, those would be the debates he actually was allowed to attend. I can still hear Fred Thompson snorting towards Paul today.... but that treatment pretty much represents all that is ill in the country. Simplistic idealistic sound bite arguments that are mostly incorrect and nearly always dogmatic "work"; deep thinking realistic concepts that takes more than 4 minutes to explain are ignored or scoffed at.

Hmm... thanks to the power of YouTube we can relive Fred Thompson twisting a cogent argument in a mocking manner - politics at its best ;) (first 90 seconds of this clip)

Below we have a few new videos from Yahoo Tech Ticker and Ron Paul on Dylan Ratigan's show on MSNBC. In Dylan's time on CNBC, he always took the time in between his reporting, to actually comment on the absurdity of so many of the things that were happening in the financial world. Which explains why he is no longer at CNBC... all we have left there is Rick Santelli.

As always let me preface any posting about a political figure with (a) I think both parties are equally excellent - at ruining the country (b) while they hand wave and throw social issues at us in dogmatic fashion to keep people fighting with each other, they are not very different and cling to narrow talking points that disallow the "center" of the country to actually get reasonable things done (c) many will move on after their cushy jobs in the House or Senate to be political lobbyists [at million dollar+ salaries] - i.e. the circle of life (d) they no longer are "representative" of anything but the political donors and (e) of course there are a few exceptions but the system tends to swallow up the exceptions.

How a "Very Pessimistic" Ron Paul Would Fix the Economy

Congressman Ron Paul is "very pessimistic" about the state of the economy, largely because - from his view - the Obama Administration "continues to do the things that created the problem in the first place."

Long a proponent of small government and a staunch opponent of the Federal Reserve system, Paul's main point is that increased spending and higher deficits are not the solution to our problems, but their cause.

"You can take care of people, but never with a deficit, never by expanding the spending," the Texas Republican says in this exclusive video interview, taped in the Capitol Hill Rotunda in Washington D.C. "The more we do to interfere with the correction - the longer it lasts."

Had he been elected, Paul said he would be doing "a lot less" than President Obama and blames Keynesian economics - which advocates increased government borrowing and spending during times of duress -- for our nation's current ills.

While admitting a transition to what he views an "ideal society" won't be quick or simple, Paul's economic prescription includes:

  • Allowing bankruptcies to occur vs. rewarding failure with bailouts.
  • Stop inflation by dismantling the Fed and returning to the gold standard.
  • Encourage savings and liquidate debt.
  • Deregulate.
  • Give tax credits to those who take care of themselves, or the doctors who provide their care.
  • Cut government spending, especially on international endeavors. "We spend hundreds of billions of maintaining our empire around the world. Let's bring that money home," he says.

These recommendations will be familiar to anyone who followed (or supported) Paul's run for the Presidency in 2008. Given all that's transpired in the past year, one suspects he'd be getting a lot more votes if the campaign were happening today.

Ron Paul: The American People Demand Transparency! Audit the Fed!

Congressman Ron Paul doesn’t think his bill to audit the Fed will get past the "power structure”"aligned against it, and here he includes the prominent economists who’ve lobbied the White House and Congress to stop the "politicizing" of the Fed.

But the Texas Republican admits being surprised how much support his effort is getting.

"Why is Congress so sympathetic to transparency?" Paul wonders. "The American people are demanding it. They've awoken and said 'we want to know what's going on with our money. Why are you bailing out the rich guys?' The timing is right. The conditions are right."

So what is Paul afraid the Fed is hiding?

"Just about everything," he deadpans in the accompanying video exclusive, taped at the Capitol Hill Rotunda in Washington D.C. "I'd like to know everything they're doing. We have a right to know what they're doing. They can literally create trillions in guarantees and not report them to us. TARP funds are small compared to what they do."

Reflecting his longtime opposition to the Federal Reserve, Paul notes he's opposed to the system vs. current chairman Ben Bernanke. Still, recent events have heightened his calls for scrutiny of the central bank.

"Imagine if we had all the records that showed every communication between the Treasury and the Fed and Goldman Sachs?" Paul muses. "That would be really something. That's why they're ganging up [to oppose the audit]. They're a lot more powerful than I am. I have no clout whatsoever."


[Mar 25, 2009: Ron Paul - the United States is Bankrupt]
[Feb 26, 2009: Ron Paul Questions Ben Bernanke]
[May 14, 2008: Ron Paul Fox Business Interview]
[Mar 14, 2008: Ron Paul - Tough Medicine is the Treatment]
[Dec 15, 2007: Ron Paul on Jim Cramer]

Friday, July 24, 2009

Wells Fargo (WFC) Offers Car ATM Option

A busy week of earnings, and one more next week. After we get through that earnings season lightens up somewhat and we can get back to our day to day assessments of all the amazing things being done in America to get people to spend money they don't have. But since you are perhaps going through withdrawal may I suggest you place your hand under your jaw while I wave my hand in the general direction of something I've never seen before... Wells Fargo offers a cash out refinance loan...

... on your car.

Upside down on your house? I know how it feels. Never fear - we still have 1 more area to tap. Our cars - the car ATM is here! Hat tip to Clusterstock for this find. We've seen 7 and 8 year car loans as Americans strive for things they deserve (ahem) [Sep 17, 2007: Is a 10 Year Car Mortgage Far Off?]Feb 13, 2008: Car Loans Being Stretched to 7 Years] But now the next iteration of "how to live the life without really ever saving a dime!"

Perhaps this "financial innovation" has been around a long time - I don't know, it is new to me. But really, why not... in fact, aside from major urban areas, its a lot harder to walk away from the car than the house. Even better, they will refinance the loan for MORE than the car is worth! What a hoot! Its like an option ARM loan but for your Chevy!

Here is the direct link from Wells Fargo so you don't think that (as CNBC puts it) "moronic bloggers" are making this stuff up.


Obtaining a cash out refinance loan means applying for a new loan to pay off an existing loan and receiving cash after it is repaid. Cash out refinance loans apply to home loans and auto loans.

You may seek an auto cash out refinance loan to:

  • Change your auto loan terms
  • Access cash
  • Restructure (consolidate) other credit accounts

Cash Out Refinance Loan Benefits

With an auto cash out refinance, you could:

Access Cash

You may be able to borrow more than it takes to pay off your existing auto loan with a cash out refinance loan.

In fact, Wells Fargo Financial is one of the few lenders that will refinance a vehicle for more than its current value. That means access to cash over and above the value of the new cash out refinance auto loan.

Use the available cash however you choose. For example:

  • holiday expenses
  • summer landscaping
  • back-to-school expenses
  • unplanned medical bills
  • vehicle expenses
  • home maintenance

Review of Recent Cutback Long Positions

As I'm looking through some new names to add to the portfolio on the long side; I am similarly looking at names we cut back via "huge run" reasons or to move to the sideline ahead of earnings. Thought it would be interesting to show how they have done since - some of the moves are having me shake my head (in awe). While my strategy to cut back is cautionary in nature and you want to catch the entire move of every surge, even seeing names I sold mostly out of continue to run tells me I'm picking the right merchandise. And we've been able to compensate very nicely with more index oriented positions...

Keep in mind the market backdrop during this time has been nothing but bull... (take that as you may) ;) and as I repeat continuously it is not a stock pickers market - when we're going up, most everything goes. It's just a matter of degree of return. [pls note - I don't have trailing stops in so in some cases I would of used that in lieu of just cutting back at "market"]

I'll list them in chronological order - this is from 7/13 - Meredith Whitney Day (a week ago Monday) forward; we were looking for a bounce at that point anywhere "up to S&P 910" as we were in the S&P 870s and potentially ready to break down (head and shoulders). Obviously it's been much much more than S&P 910 as 1000 is in sight. With such a run and going into many earnings reports, we've been busy in the transaction area.

(Tue) 7/14: Sold down drybulk shipper Excel Maritime (EXM) @ $7.10 - "profit taking" reasons after 16% 1 day jump

(Fri) 7/17: Sold down private equity firm Blackstone Group (BX) around $10.20 - "profit taking" after a one week run of 25%

(Fri) 7/17: Sold down home builder Meritage Homes (MTH) around $19.00 - "profit taking" after a one week run of 30%

(Mon) 7/20: Sold down Brazilian homebuilder Gafisa (GFA) around $21.30 - "profit taking" after a run of 25% in just over a week (p.s. this one should be a good short "soon" - gap to fill and its gone parabolic!)

(Mon) 7/20: Sold down Chinese video game maker Perfect World (PWRD) in $34.30s - "profit taking" after a run of 20% in just over a week

(Tue) 7/21: Sold down miner BHP Billiton (BHP) just below $59 - "profit taking" in a very gappy chart after a run of about 20% in a week and a half (note -we were short for a very quick run, before being stopped out yesterday - still like it short)

(Tue) 7/21: Sold down Skyworks Solutions (SWKS) just below $11.20 - protection from earnings report (added a small portion back this AM)

(Wed) 7/22: Sold down Riverbed Technology (RVBD) around $24.90 - protection from earnings report


Bookkeeping: Selling China Exposure as Chinese Run In - Morgan Stanely China A Shares (CAF)

While the Chinese had admitted that a lot of their stimulus has found its way into the domestic stock market, and being a contrarian does not work very much anymore, I am starting to become less optimistic about the near term prospects for continued price appreciation. Last year around this time I posted a story about how Brazilians were celebrating how immune their stock market was, just before it imploded. In the late 90s you heard stories of taxi drivers giving hot tech stock tips. Than 2000 happened. And in late 2007 we saw a very similar thing in China as I am now reading again - the flocking to markets with newbie money. That doesn't mean it ends in 4 weeks, or even 4 months. It is just something to have your radar on; I was turning negative on China in September 2007 and it took a good 2 months to really taper off and ,the largest IPO ever: PetroChina (PTR) was the signal [Nov 5, 2007: PetroChina the 1 Trillion Dollar Company? Is *THIS* the Top?]

Well in the weekly attempt to call the top in the Chinese market, I wonder if the Chinese valuing Petrochina at double Exxon as the world's first 1 trillion dollar company *is* a near term top? ;)
  • PetroChina became the world's first company worth more than $1 trillion on Monday, surging past Exxon Mobil as the Chinese oil producer's shares nearly tripled in their first day of trading in China.
  • Adding the value of PetroChina shares traded in Shanghai, Hong Kong and New York - and those still owned by the government - the company's total market capitalization ballooned to just over $1 trillion, compared to Exxon Mobil's (XOM) $488 billion.

Ah, nothing like a bubble is there? So even as I was warning of the madness for a good 6 weeks straight (like that crazy guy on the park bench in his trenchcoat) - some of the largest gains in October 2007 (when US markets peaked) were small cap Chinese stocks listed in the US - many were going up 30-50% in a single day. But like all good bubbles, this one ended in spectaculator fashion. Not 5 days after that PetroChina piece I penned [Nov 10, 2007: Chinese Big Caps Struggling Since PetroChina Shanghai Debut]

Sometimes, in retrospect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from
  1. The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]
  2. The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]
  3. The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]
  4. And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]
What is consistent is the speculative frenzy and I have been amazed to watch it move from 1 sector to another.

And the rest was... as they say.... history.


So now we have had in the past week nearly half a million new Chinese brokerage accounts opened... and the largest global IPO since Visa (V) almost 18 months ago. Might be some parallels here.... although perhaps not the full fledged excess we saw back *then*. Remember all bubbles end with a parabolic move... the dry bulk shippers, the Las Vegas casinos, the Chinese stocks, the solar stocks - you had repeated days (and weeks) of 20,30,40% moves that left you awe struck. We have nothing like that yet - just some percolation; and a cool 12 day NASDAQ winning streak (still a chance for 13!)

Via Bloomberg:
  • Chinese investors are rushing to buy into the world’s second best-performing stock market following the end of a ban on initial public offerings and a rebound in economic growth.
  • Individual investors opened 484,799 stock accounts last week, data from the nation’s clearing house showed today, the most since the five days ended Jan. 25, 2008. “The prospect of making quick bucks in the stock market is luring retail investors,”
  • The Shanghai Composite has risen 81 percent this year, trailing only Peru’s benchmark.

China State Construction Earnings just IPO'd for nearly $8 Billion
  • China State Construction Engineering Corp., the nation’s largest housing contractor, raised 50.16 billion yuan ($7.3 billion) in Shanghai in the world’s biggest initial public offering in 16 months. The IPO, the fifth since China ended a nine-month moratorium on sales in June, is the biggest worldwide since Visa Inc. collected more than $19 billion in March 2008.
  • The IPO values State Construction at 51.3 times earnings.
  • State Construction’s sale is the biggest in China since PetroChina Co. raised 66.8 billion yuan in October 2007.
Shanghai overall is now at 36x earnings; but our REALLY long time readers will know the Chinese market is "closed" (i.e. no shorting, no foreign money) so its a bit of a parallel universe. [Oct 13, 2007: Shanghai - the Mystical Land of Premium Valuations] The same stocks that trade in Hong Kong are traded many times for 50-100%+ higher valuations in Shanghai. (well back in late 2007 it was more like 150% higher - its since "cooled down" hah)

You remember Shanghai correct? The magical land where valuations of stocks are 150-225% higher than they are in either Hong Kong or the US for stocks that trade on all 3 exchanges. See this story for a graphical representation,

That's just the arbitrage between the 2 markets, one open; one closed.
  • Still, the rally has made Chinese stocks the most expensive since January 2008, Bloomberg data shows. Shares traded on the Shanghai index are valued at 36 times earnings, almost triple a November low of 12.9 times.
  • At the peak in October 2007, the benchmark index traded at 48.7 times profit,
Much like the US in late 90s and as we're trying again, the government can create any valuation it wants if it chooses to print money and stuff it into the economy. That's a nominal valuation of course. So valuation is relative - certainly China could go to a 50 PE or the US to whatever Larry Summers wants. We were paying 80x for Cisco since Uncle Al said recessions were outlawed in the U.S.; and well over 40x on the NASDAQ as a whole. In the depths of one of the worst recessions in modern history we already appear glad to be paying 20x forward estimates on the S&P when many companies are shrinking ... at least the late 90s were a time of growth. But since the US dollar is just a toy now, who cares - as long as the US peasants see their stock market go up "everything must be ok". Even as they scratch their head why grocery prices just continue to shoot up month after month.

Without digressing too much, valuation is not quite so simple as "what things should be" - fixed amounts of asset chased by ever increasing supply of paper currency can do interesting things.

Back to Chinese investors flood in, and in fact investors from all over the world do as well...
  • Funds investing in the so-called BRIC nations of Brazil, China, India and Russia added $2.1 billion for an 18th straight week of gains, EFPR said. China funds posted the largest gains, adding $243 million, while Indian funds attracted $148 million.
  • “When investors last believed in decoupling back in 2007, we saw substantial hot money inflows into China. That has started to resume.
Perhaps a little caution is in order?

We're going to lock in gains in Morgan Stanely China A Shares (CAF) here at $36.85 (taking it down to a 0.1% stake), and look to buy on a dip, if and when they ever come again ;)

Even the biggest bull on China is getting cautious.
  • I don’t like buying when things are going straight up and China has been going straight up for nine months,Jim Rogers, chairman of Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist,” said in a Bloomberg Television interview in Singapore today. The nation’s stock market may have “gotten ahead of itself,” he said.
Much like Jim I'm a 10-20 year bull on China. The next 10-20 days? Taking the safer route.

Again let me reiterate - these markets can keep going up for months; I am not making any sort of near term call other than pointing out a lot of interesting signs and taking my (virtual) shareholders money to higher ground. To partake, instead I'm making select bets on China via US companies with good exposure there who still are relatively cheap.

EDIT 1 PM: Thanks to reader Andrew for getting us this chart of Shanghai - woosh. It also shows me what a lousy job CAF is doing at 'representing the performance of Chinese A shares''; I should of made a lot more money on CAF if it was following Shanghai accurately. Unfortunately, CAF is a closed end fund in which the premium has dropped from 30% to 0% in the past 3 months; ugly.

[Apr 20, 2009: Bookkeeping - Beginning Morgan Stanely China A Share Fund]

Long Morgan Stanley China A Share Fund in fund; no personal position

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