Fund Performance Period 13

The mutual fund is now on schedule for a summer 2010 launch. If, after reading the blog content you might have an interest in participation, please consider reading why this blog exists.

1. [Jan 2008: Reader Pledges Toward Mutual Fund Launch]
2. [May 2008: Frequently Asked Questions]
3. Our story in Barron's [A New Kind of Fund Manager]
4. [November 2009: General Updates, Questions]

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For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year (Investopedia.com) as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up.  Hence while the website and portfolio began in August 2007, we're "starting over" in terms of performance with portfolio "B" as of early 2009.  Detailed history on latter 2007 and 2008 can be found on the above mentioned tab. Under the new tracking system, our thirteenth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

This period was holiday heavy with the latter 2 weeks shortened by holiday hours.  The first 2 weeks and most of the 3rd the S&P 500 remained range bound in the same range it was stuck within almost all of period 12; we called this "the box" (S&P 1085 to 1115/1120).  At the end of week 3, and through week 4, Santa Bernanke Claus descended on the people, and in light holiday trading a breakout ensued.  News flow was very quiet and unlike previous periods the dollar was strong, not weak.  However this did not lead to a selloff in the general market, although it struck precious metals hard.  Small caps, after struggling versus large caps for months, finally began to show signs of life in the second half of the period.  However, despite the small breakout - many gains in this period happened "off hours" - especially premarket.  The Greek fiscal situation was a source of concern during this time frame, but not enough to derail the market.  A Federal Reserve meeting during week 2 of the period was a non event.

For the 13th "four week" period the fund returned -0.4%, versus the market's +1.1%, so an under performance of -1.6%.

On a cumulative basis the fund is now +77.5%, versus the Russell 1000's +21.0%, so an out performance of +56.5% for our "year to date" if you will. (thus far 52 weeks)

Please note we did not start this year on Jan 1st... so this is not an apples to apples "year to date" performance but obviously close.

Our yearly goal of beating the index we track against by 15% was successful in 2009 although we struggled in the last 4 week period.  Neither absolute performance (making money) or relative performance (outperforming the market) were achieved in the period.  So a period where the only person we made rich was the broker handling trades, but a very satisfying year.

*** Long/Short Discussion below

General: Period 13 was a struggle - very little movement occurred most days, and what little there was, mostly happened in premarket or the first 15-30 minutes of the day.  This only helped those positioned overnight and with a high cash position that was not us.  Then the rest of the day was a lot of churn which only helps quant traders trade amongst themselves and collect rebates; while we sat blankly staring at the wall.    Buying "breakouts" on the market overall failed in this period as it did in period 12; something that helped performance greatly in the summer and fall of 2009.  With that said, no great mistakes were made - it was simply a period where the market was so range bound, and so many stocks were range bound - there were very few opportunities to exploit.  We spent week 2 changing over the portfolio, culling out some smallish positions we had with bad charts, and adding an array of new names.  A late day selloff on the very last day of the period (Dec 31st) pushed us from slightly positive for the period to slightly negative, which was unfortunate.

Please note on the right margin of the blog is an archive in which you can see all these events in chronological order, clicking on any link within the sentences below will take you to that transaction - a summary below:

Week 1: The S&P 500 was in week 5 of the "box", we began the week high in cash (75%), 21% long, 4% short. Our short exposure was mostly not "real" shorts but long volatility and long the US dollar; but due to market behavior we classified them as short. 

• Top holding AsiaInfo Holding (ASIA) bought out a competitor right before an IPO and started the week off well, with a 25% gain, we sold half our position into that strength.
• After quite substantial drops in both gold and silver we began a very slow rebuild of the positions (that we had cut to nearly 0% exposure), but we were not willing to add more until we saw how these precious metals would react once they hit some support levels.  Essentially I was adding 0.3% into both gold and silver every few days during this week.

Mid week, the S&P 500 had fallen to the very low end of its multi week/month box at which time I wrote: 

Dip buyers have been rewarded non stop for 9 months straight, so we'll see if the Pavlov dog response appears again. Until the pattern blows up (and it will someday), traders will keep repeating what works - creatures of habit.

Another reminder, until we exit the box.... the longer the base, the stronger the ensuing move. I am now expecting a move of 7-10%ish on the index, one way or the other, once we leave this trading range.

And so dip buyers came back in, once more.

• TriQuint Semiconductor (TQNT) was trimmed, on a failed breakout.
• Almost all of our EnerNOC (ENOC) was sold for a 11% gain in 1 week; as it had run into resistance and I wanted to lock into gains in case it fell back.
• Closed one of our "short" positions - that was a long volatility position we had on iPath S&P 500 VIX Short term Futures (VXX) for a tiny gain.  Our timing was perfect on this as we bought it ahead of Thanksgiving and the underlying instrument we were trying to capture, the VIX was 17% higher the day we sold.  But due to the poorly designed ETF we only received 1%... very disappointing.
• Fuel Systems Solutions (FSYS) dropped 10% on news we could not find, so as it approached a support level we added exposure....
• .... which we were stopped out of the very next morning as the stock continued its free fall.

 
Week 2: The S&P 500 was in week 6 of the "box", we remained mostly sidelined 80% cash, 17% long and the rest short but mostly pseudo sort via "long dollar" (UUP calls).  we made a lot of changes to portfolio composition this week.

• Restarted stakes in 2 positions last held in 2008: Insituform Technologies (INSU) and American Superconductor (AMSC); the former water/sewage, the latter electrical grid.  Both plays on "even more" stimulus.
• After selling down EnerNOC (ENOC) the previous week, the stock pulled back than burst back through resistance so we added exposure on the breakout.
• Stopped out of the majority of Brazilian homebuilder Gafisa (GFA).  
• Discover Financial Services (DFS) only matched earnings estimates, and the stock sold off sharply post earnings, so with a broken chart we decided to exit completely.
• Began new positions in Rackspace Hosting (RAX) and Sourcefire (FIRE); the former web hosting/cloud computing; the latter internet security.  Both had excellent charts.
• After dripping and drabbing back into the precious metals, we decided to sell almost all silver as it began breaking support.
• We were stopped out of most EnerNOC (ENOC), which stunk because the next week it exploded higher.  This had been our largest position as we thought the breakout the previous week would lead to good things.  We were right, but shook out.
• Began a new position in Braziliam chemical maker Braskem (BAK) as the stock pulled back to a key support level.
• After cutting almost all our Fuel Systems Solutions the previous week, we closed out the last bit since we were adding so many other positions and don't want the # of portfolio holdings to be too large.
• Continuing to right size the portfolio we closed out the last of our Blackstone Group (BX) and Morgan Stanley China A Shares (CAF); we are still interested in the former as a position later in 2010.
• Covered the majority of our one "true" short, iShares Xinhua China 25 Short (FXI).  

Week 3: Shortened holiday week (Christmas); we were still in the "box" to start the week but with the propensity for the market to go up during holiday weeks we thought there might be upside coming.  There was... it was on almost no volume but it is what it is - the market rallied each day this week.  We entered positioned 78% cash, 19% long, and 3% short - almost all of it the "long dollar" pseudo short which was working very well.

• Restarted position in Skyworks Solutions (SWKS) with a relatively hefty stake as the stock had been doing a nice job of basing and looked poised to break out.
• A reader had mentioned Human Genome Sciences (HGSI) looked ready to break out as well, so as it began its move we jumped in with a new position;  this was 100% a technical trade unlike most of our position.
• Sold half of one of our best positions of the past few months, Atheros Communications (ATHR), as it had posted a quite massive rally to reach summer 2008 highs.  That locked in the gains.  Our strategy from there was to buy on any decent sized pullback or any move over summer 2008 highs.
• After cutting our smallish silver stake to nearly zilch, we did the same with gold as it struggled.
• Began a position in DragonWave (DRWI) a small 3G equipment vendor.
• Braskem (BAK) which we had just started the previous Friday, rallied 9% in 2 sessions so we sold most of the position as it rallied to near $17, its previous recent highs.  Strategy here was to buy back the stake on a pullback or if it broke back north of $17, signaling a new leg up.  After we sold it, it stalled for a week or two, so this was the right short term move.

Mid week the S&P 500, finally broke over S&P 1120, but since the volume was missing and it was a holiday week it was a tricky moment.  Further almost all the gains had been happening in premarket rather than during the day!  We tried some index longs on the "breakout" but it was a limp move and we quickly exited.  Of course the very next morning the market was bid up in premarket - frankly as we predicted.

• Restarted a position in healthcare stock Myriad Genetics (MYGN)
• Sold our 'pseudo' short in the long US dollar (UUP calls) for a hefty 27% gain in just over a month as the US dollar hit the 200 day moving average.  If we had sold the previous day the gain would of been 41% but we were a bit asleep at the wheel and missed out.

As S&P 1120 was breached, albeit almost all of the move in premarket - we ended the week 57% long as we went to open presents.

Week 4: Shortened holiday week (New Year's).  With egg nog Kool Aid firmly in hand, and S&P 1120 as our new "floor" we came into the week at 42% cash, 57% long and with our pseudo short (via US dollar) gone, under 1% short.

• Closed Chinese insurer CNinsure (CISG) as it had been range bound for months on end, and we had many new positions; just culling some names to keep the portfolio from having too many names.
• Began a starter stake in Chinese telecom supplier Telestone Technologies (TSTC), as this incredibly strong stock pulled back to a support level on the chart.  The hope was that it would fall back further so I could enlarge the position at cheaper prices - did not end up that way.
• A sell off in the closing 30 minutes of the year smacked our index longs around and we cut back (suffering losses) as the S&P fell below 1120.  These 30 minutes took us from a small gain for period 13 to a small loss.

/

[Jan 30, 2009: Fund Performance Period 1]

[Mar 2, 2009: Fund Performance Period 2]
[Mar 30, 2009: Fund Performance Period 3]
[Apr 27, 2009: Fund Performance Period 4]
[May 28, 2009: Fund Performance Period 5]
[Jun 21, 2009: Fund Performance Period 6]
[Jul 20, 2009: Fund Performance Period 7]
[Aug 17, 2009: Fund Performance Period 8]
[Sep 14, 2009: Fund Performance Period 9]
[Oct 13, 2009: Fund Performance Period 10]
[Nov 9, 2009: Fund Performance Period 11]
[Dec 8, 2009: Fund Performance Period 12]

S&P 500 Breaks Over 1140 as All Who Doubt are Trampled

After Monday's big surge, we saw almost no selloff at all Tuesday and Wednesday which you simply have to respect.  A market who consolidates big moves by going sideways rather than falling back is not one you want to stand in front of.  Just moments ago the S&P breached S&P 1140 and the move out of the base the index had built for 6 weeks (S&P 1085 to 1115/1120) continues.  I continue to believe we have a 7-10% move out of this base which would take us somewhere north of S&P 1200, and I've put my money where my mouth is as this is the most net long we've been since March/April 2009.  My worry is my view has now become consensus - but that has also not stopped the bulls.

Further complicating matters is the jobs data tomorrow.  It really does not matter what the actual number is, all that matters is the reaction to the number.  Even if I knew job gains were to be +35,000 or job losses -35,000 I have no idea what the market wants.  Does it want stronger numbers because that means there is "recovery", or does it want weaker numbers so that easy money can flow for yet another 12 months straight?  Who knows.

We have about 90 minutes left in the session; if the market can surge to close out the day I plan to lower my index long exposure by selling into strength ahead of a lemming reaction tomorrow morning.  That won't change my view that we indeed should have more upside to go in the near term as Nov/Dec 2009's "box" (base) was the first one the market has built in over 2 years... hence a powerful move should ensue.

Reuters: DragonWave (DRWI) Rally May Hold on Another Upbeat Quarter

I was excited to see a story by a news agency on little known DragonWave (DRWI) - our smallest company by market capitalization, so I thought it worthy to bring over.  This is yet another name we recently purchased a started position in, HOPING for the stock to FALL so we could buy more - but at least wanted some skin in the game.  Since very few stocks are allowed to fall anymore we are only left with our 1%ish exposure. 

Looking at the chart - like almost everything we hold which has run up... it is very extended (look at how far away from the 50 day moving average it is) but the chart is in great shape.  When these stocks are so strong I like to put on the 10 day moving average on the chart, and you can see DragonWave is hopping and skipping along for 4 weeks mostly not even coming all the way back to this green line.  It creates a conundrum because I see so many stocks in the same position - breaking out, but well overdue to pullback.  I've cut some of our names in this position to lock in profits, but am letting others ride.

Specific to DRWI if the move continues until earnings, we'll do our normal protective stance and cut back right before the release - of course missing out on any "better than expected" post rally move, but also protecting ourselves from the potential 20-30% haircut that can come when overextended stocks meet disappointing news.

Via Reuters:

• DragonWave Inc, a Canadian radio transmitter maker, is expected to give an upbeat outlook topping analysts' expectations, led by higher revenue from its key customer Clearwire Corp (CLWR), raising hopes that the stock may rally further.  DragonWave's shares have surged almost 11 fold in the last one year as wireless service providers have scampered to roll out and improve their mobile broadband networks.
• The Ottawa-based company designs and manufactures microwave equipment for broadband wireless systems for network operators and service providers worldwide.  Wireless service provider Clearwire, which is building a WiMax-based nationwide network in the United States, accounts for more than 70 percent of DragonWave's revenue. (which is the risk we outlined in our December piece)  Analysts say DragonWave, which is highly dependent on the growth of WiMAX networks, needs to enhance its customer base of large service providers to get rid of the often unpredictable order patterns. (amen)
• Though revenue dependency on a single customer is a concern, DragonWave could witness more growth as bigger players such as Verizon Wireless and AT&T (T) play catch-up in deploying their next-generation networks.  Verizon Wireless, which is testing 4G service, plans to deploy it in 25 to 30 markets by the end of 2010, while AT&T plans to start the service in 2011.
• "I am expecting a strong quarter with very good sequential growth, primarily driven by accelerated deployments at their largest customer Clearwire," analyst Michael Walkley of Piper Jaffray said, adding that Clearwire could represent a greater percent of revenue this quarter.  The company, which currently expects its revenue in fiscal 2010 to exceed C$150 million, may further raise the outlook, Walkley said.
• "While we expect that third-quarter results will be dominated by Clearwire-related revenue, we believe that non-Clearwire revenue will be driven to a new record by orders from Globalive and Yota during the quarter," Canaccord Adams analyst Peter Misek said in a note dated Jan. 4.
• Misek, who has a "buy" rating on DragonWave stock, expects large wins from North American carriers will provide the company with a strong footing entering calendar year 2010.  "They (DragonWave) have been accelerating their deliveries to Clearwire. This should be a strong quarter for them and probably should be strongest for the year," analyst Todd Coupland of CIBC World Markets said.

[Dec 22, 2009: Starting Stake in DragonWave]

Long DragonWave in fund; no personal position

BHP Billiton (BHP) Forges Ahead with Plans to Develop Their Own Potash Reserves

This is quite an interesting development as mining giant BHP Billiton (BHP) has been mentioned often as a suitor for one of the few, huge potash miners.  Instead it appears (for now at least) the company is going to strike out on its own to develop potash assets.  As long time readers know, a potash mine takes a LONG time and a LOT of money to develop [Nov 16, 2007: Potash Expands Mine for $2 Billion]... money is not an issue for BHP since they are a huge company with a deep war chest, but it will take quite a few years to build out the infrastructure and get up and running since these are virgin mine sites. 

This does have the potential to change the structure of the potash sector long term, which until now could be described as an oligarchy.  Or BHP could simply make itself the oligarch by not only developing its own potash sites, but combining that with a purchase of one of the few major producers in the world.  (although the time to do that was 1 year ago when prices were a fraction of what they are now)

Ironically at the moment we own both BHP and the largest potash producer... so for our purposes it's a bit of a moot point which way this develops.  However, for all those who love to run up fertilizer stocks by dropping a rumor on the Street combined with buying a slew of call options to indicate "something is up" (a fun hedge fund game) - if BHP is intent on simply becoming a competitor rather than an acquirer, that is one less company to continuously throw out there to the financial media as a potential buyer of said assets.  That won't mean the hedgies won't keep playing the game...

Via Fortune:

• Everyone who eats food should encourage mining giant BHP Billiton to forge ahead with plans to develop what could become the world's biggest mine of potash, the potassium-rich substance that is a vital fertilizer for farmers worldwide.  BHP Billiton is drilling test shafts and doing other preliminary work on a site in Saskatchewan, Canada, called Jansen. BHP Chief Executive Marius Kloppers has spoken excitedly about potash as a great diversifier for the Anglo-Australian giant's iron ore-heavy mining portfolio.
• This is frightful news for the oligopoly of Russian and Canadian potash producers, which have controlled 70% of world production for decades, and which have been working together, a la the OPEC oil cartel, to keep prices high amid crimped demand.  (that last phrase is a bit "over the top" and revisionist, considering potash prices were in the basement just 5 years ago)
• Back in 2008, amid global food shortages, spot prices for potash reached $1,000 (trebling Potash Corp.'s income to $3.5 billion in 2008). [Apr 23, 2008: Potash Hits $1000 on Spot Market] It was those high prices that attracted BHP to the industry. Potash stocks were the darlings of day traders then. Shares of most producers have since fallen by half, with fewer pops like the one seen over the last few sessions.
• Traders will likely bid 'em up again later this month when Canpotex, the Canadian producers trade group, finalizes its annual supply deal with China. Charles Neivert, a veteran analyst with Dahlman Rose in New York, says any price higher than $350 a ton and volumes of more than 750,000 tons would be very bullish--in the short term.
• In the years to come, look for the earnings and valuations of the potash oligopolists to fade as BHP becomes king of the fertilizer heap. (again that is a bit of a generalization - it all depends on how much demand there is and how much supply BHP can bring online)

Wall Street nowadays considers next week "long term" so fussing over a project that won't even begin until 2011, and will take 2-4 years to get up to speed is quite laughable.  As a true long term investor it's important to know, but considering 60-70% of all volume in the markets these days are based on 1/5000ths of a millisecond high frequency trading - this sort of news only applies to humans.  And only a small subset of humans who still look out past a few days or weeks.  

• Though a final investment decision on Jansen won't come until 2011, analysts like Neivert consider the mine a certainty. BHP is likely to invest $3 billion in the mine, which could be generating 8 million tons of potash a year by 2022. Potash Corp. has annual capacity of more than 15 million tons and Mosaic roughly 10 million tons.
• Neivert believes BHP's entry will shake up the potash market, potentially driving down prices that have already plunged 60% from their 2008 peak.

8 million tons would be impressive, making BHP almost as important as Mosaic (MOS).  But first we have to see if this is the true ability of the mining site and second we have to see what demand will be in the coming decade (I expect far higher) as an increasingly crowded Earth, with less and less arable land struggles with food production.  That said, it does change the game even if its 5-7M tons of capacity.  Just not yet.

• Unlike the oligopoly producers, it is BHP's custom to own low-cost, high-volume mines, then operate them at full capacity. If prices get low, other more marginal producers will be forced to cut unprofitable volumes first. Really, $350 a ton is still a very good price; potash went for $100 a ton in 2004.

Now unlike some of the generalizations above, that point above BHP's style of operation is much more relevant and interesting.

• Don't tell that to Potash Corp. Chief Executive William Doyle, who has repeatedly stated his belief that farmers need to get used to paying high prices for potash because it is key to preventing worldwide food shortages. In an effort to keep prices from plunging even more, producers have reduced production, laid off workers and refused to cut prices further despite mounting inventories. Farm groups have sued the potash producers for collusion, so far unsuccessfully. Even though fertilizer costs farmers just pennies per bushel, it adds up.

More on the rumors that "financial engineers" like to spread to help make their quarter...

• Last year the rumor was that BHP ($50 billion in annual revenues) was looking to buy Potash Corp., Mosaic, or Intrepid Potash outright. Forget about it. Even though their shares are half what they were in 2008, investors are still banking on unreasonably high potash prices--making these companies too pricey for BHP to take over. "Their sense of the value of their product may have gotten out of line," says Neivert.

It also appears one of the other mining giants Vale (VALE) is getting into the game; the irony being that many of us consider the mining giants (BHP Billiton, Vale, and Rio Tinto) to be oligarchs themselves!

• BHP isn't the only oligopoly-buster out there. Brazilian mining giant Vale do Rio Doce is developing a potash mine in Argentina.
• And China, which sees food security as an issue of national importance, has indicated it will work to double its own domestic potash supplies to as much as 8 million tons per year within a decade (it currently uses roughly 10 million tons a year). "To keep the country stable," says Neivert, "food is a huge issue." (not quite so easy for China to do, it is not like a plant where they can just build 500 of them; they need to have access to actual potash mines - of which there appear to be only so many worldwide)

Long BHP Billiton, Potash in fund; no personal position

Damage Control Team Arrives to Save Geithner

The damage control team is not liking what they are seeing from this morning's Bloomberg article.  The message being sent out is once Geithner was nominated for Secretary of the Treasury he was recused from all decisions.  While the original emails appeared to have started right before Geithner's nomination in late 2008, the following 4 months of decisions came after he had been nominated - hence he had no impact on the decisions.  (cough).  Of course Geithner did not take office until January 2009 so if we are to believe the Wizard of Oz, Tim was the 3rd most important man on Earth in the financial crisis (after Bernanke and Hank Paulson) and the only person on Earth capable of filling Hank Paulson's shoes when the new Administration came to power - yet he was not at all involved in this decision making, and apparently for a period of 2 months (Nov/Dec 2008) he was doing nothing and responsible for nothing.  In the heart of the worst financial crisis in our history.


How convenient.


So despite his branch of the Federal Reserve starting these directives just before he was nominated he was not at all involved in any decision (cough).  Although he was the only man on Earth not named Hank Paulson who was involved enough, and knowledgeable enough with all the levers being pulled to take over as Secretary Treasury.  These are the political talking points you are to know, as you fall asleep tonight knowing the government is working hard for you...

This also leads to the question of WHO(m)? was behind these decisions and 5 months of emails trying to stall, if Tim was busy spending 2 months between nomination and start of his work knowing nothing and doing nothing?  Someone apparently with no name but powerful enough to spend the US taxpayers money like a drunken sailor and more than happy to try to keep it under wraps for as long as possible.

The spin continues....

Geithner's New York Federal Reserve Pressured AIG to Delay Disclosures

I wrote a few times in 2008 and early 2009 that as historic and mind bending the times we were living through then were, that when all the details of what was happening behind the scenes leaked out in the coming years ... that's where the truly fascinating information would be found.  How short are memories are - all the furor over the direct handout to investment (and other) banks the world over, led by our friends at Goldman Sachs (GS) via AIG swap agreements - is but a distant memory. 

Today, Bloomberg reports that Timothy Geithner's Federal Reserve branch - the most powerful as the home to our major financial oligarchs - pressured AIG to delay disclosure to the public on payouts to banks involved.  After all, Tim is a career bureaucrat, and as you quickly learn in Washington - when information is not convient, only release the bare minimum.  Then, with American's incredibly short attention span - you can showcase the full ugly to the light of day months (or if you are really good: years) later when Americans have moved on to a new season of American Idol.

If you are not familiar with the story, a flailing AIG (which should not even exist anymore) owed our financial oligarchs a lot of money.  Most companies on the verge of bankruptcy - in a ploy to try to stay alive - settle with their creditors for perhaps 20, 40, 60 cents on the dollar; depending on how bad their financial situation is.  But since the most important people to our government (the bankers) were involed, the US taxpayer's money came to the rescue to make sure they were paid not at 30 cents on the dollar, not at 60 cents on the dollar, but 100 cents on the dollar.  Because the last thing we want to do is to put the gravy train of political contributions ahead of the citizens of the US.

Since these sort of things tend to peeve the American people, it was important for Mr. Geithner to delay the disclosure at the time of the payments... and instead let the details come out many months later when the firestorm had passed.   In return for such good deeds and protecting the bankers, Mr. Geithner was of course promoted. 
We were not fooled...

• During the original bailout [Oct 17, 2008: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG]
• 5 months later when the details were actually released [Mar 6, 2009: AIG Counterparty Furor Grows]

Stories like this remind me never to feel any pang of pity for the man as I almost did a few months back [Nov 19, 2009: Tim Geithner Under Fire (Videos)]


***********************

On to today's Bloomberg story

• The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
• AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008.
• The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

I don't know Mr. Issa's politics, but I do know he has been one of the few people in Congress who actually has been fighting for disclosure and transparency without relent the past 3 years, so let me applaud him on that front.

• The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.  
• “It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”
• Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps.

Again that last point is so important... when a company you are dealing with as a counterparty is going belly up, you are thankful to get anything back.  In AIG's case the losses were so severe, 20 cents on the dollar most likely would of been a miracle.  But with your grandchildren's help, US and international banks were allowed the gift of 100 cents on the dollar.  Tim Geithner demand no negotiations.

• The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye.
• The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures.
• AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.

Of course the Fed's legal counsel is washing its hands of the matter ... in perfect legalese talk:

• “Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”

This is laughable beyond comment.  As if AIG's legal team was going to do an end around the "counsel" of the New York Fed and do a disclosure that they were being pressed not to do. 

AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion for Maiden Lane facilities to buy mortgage-linked assets owned or backed by the company.

[Mar 1, 2009: NYT - AIG: Propping Up a House of Cards]

The Ultimate Solution for Debt Laden Americans Found in Kuwait

While I laugh at this story today, I suppose we cannot really discount anything here in the United States of Subprime.  Things we'd have laughed at a decade ago, now seem to be part of normal every day life.

The Kuwaiti Parliament has a solution for the debt of its consumers.   Have the government buy it all, write off the interest, and reschedule the payments.  This is so outrageous that even the Kuwaiti central bank and its executive branch of government is rejecting it outright.  But you know somewhere in America, a Congressional representative just had a light bulb flicker to life in that cloud over his/her head....

*please note, this is not an actual Congress member

Via FT.com:

• Kuwait’s parliament on Wednesday approved a bill that could force the government to buy all $23.3bn of consumer loans in the country, write off the interest and reschedule the payments, despite government opposition to the plan.
• The government plans to ask the emir, Sheikh Sabah al-Jaber al-Sabah, to reject the law, and the central bank has said that the bill includes legal and technical violations and cannot be applied, according to Kuna, the state newswire.  Nonetheless, the Kuwaiti parliament, which has been locked in a long-standing conflict with the Sabah-dominated government, passed the bill on Wednesday to help indebted nationals.  The passing of the bill ratchets up the heat in a drawn-out conflict between the executive and legislative branches in one of the Gulf’s few near-democracies.
• Thanks to the US invastion of Iraq in 2003 and soaring oil prices, Kuwait’s economy has surged for much of the last decade and spurred locals to go on a borrowing spree. While the government has run a series of healthy budget surpluses thanks to oil exports, the global recession has hurt many Kuwaitis, who borrowed to invest in wilting real estate and stock markets.
• This has led to a populist clamour for the government to bail out its indebted citizens, as it did on at least two previous occasions – after the Souk al-Manakh stock market crash in 1982 and following the Iraqi occupation in 1991.  
• “It’s good news for Kuwaiti consumers, who are highly leveraged, and anything that helps them is good from a macro perspective. But as an economist it’s difficult to be positive on something like this,” a Kuwait-based economist said on Wednesday.  “There’s a question of moral hazard, and how this will affect consumer behaviour in the future,” he added. (it's quite obvious how they will behave, they will keep repeating the behavior - see 1982, and 1991, and now you are in the same boat.   This is the same behavior we now have trained our financial oligarchs to engage in over the past 15 years - and now are training the American people themselves to engage in.)
• The law – which stipulates that the government use KD8.5bn ($29.5bn) in state deposits at local banks to bail out all consumer loans – can be rejected by the government, but the assembly can overrule that with a two-thirds majority.
• If the bill is implemented the Kuwait Investment Authority, the country’s sovereign wealth fund, would incur a loss on returns of KD2.9bn ($9.9bn), Mustafa al-Shimali, the finance minister, told parliament last month. This would cost the government up to KD3.7bn ($12.8bn), he said.

Fact is sometimes stranger than fiction.

Let us pray no one in Congress reads the Financial Times.

Brazilian Stock Market Closing in on All Time Highs

Quite a remarkable performance by the Brazilian Bovespa Index. After a 83% gain in 2009, it has recaptured the 70,000 level and is only 4.5% off of its all time high of 73,517.  This despite efforts to keep the flood of US pesos from over heating its markets and economy. [Oct 20, 2009: Ben Bernanke's Money Printing Parade Forces Brazil to Slap a Tax on Outside Investors]

[click to enlarge]

Much like a stock that returns to old highs, I'd expect this move to stall as the index revisits (if and when) the summer 2008 high.  However, much like a strong stock, after that cursory pullback from the retest of old highs - one could expect a short term consolidation period and then a successful push through in an ensuing attempt.  We shall see how it works out ... as we pointed out yesterday, even Mark Mobius - who loves his international stocks - has turned cautious on emerging markets.  Amazingly, Brazil - while no longer cheap - actually trades at a massive discount to the slow growth developed market indexes. 

• The Bovespa fetches 20.8 times reported earnings, near the highest level in six years. The index trades at a 40 percent discount to the MSCI World Index of 23 developed countries, according to weekly trailing price-to-earnings ratios compiled by Bloomberg.
  

Longer term, as the US market has gone nowhere in the past decade, the Bovespa has quadrupled. Brazil remains the most intriguing longer term opportunity in the Western hemisphere - if not the world. 

[Oct 27, 2009: Goldman Sachs - "Hazardous" to Underweight Brazil]
[Sep 23, 2009: Brazil's Credit Rating Raised to Investment Grade]
[Aug 11, 2009: BW - Brazil's Coming Rebound]
[May 16, 2008: Brazil is Sexy]

China Passes Germany as World's Largest Merchandise Exporter

Many people assume either the United States or China is the world's largest exporter of "stuff" - that was certainly my assumption until I really dug into the numbers.  However - until now - that belief has been incorrect; the actual leader for quite a few years has / had been Germany.  [May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US]

Turning bolts, Germans were told - often by other Germans - had no future in Germany. The persistence of heavy manufacturing symbolized the country's inability or unwillingness to transform itself into a modern, services-oriented economy like the United States or Britain, two oft-used yardsticks.

Today, the manufacturing sector in Germany is growing as a proportion of the country's total economic output, and Germany looks set to outpace far larger economies like China and the United States as the world's largest merchandise exporter for the fourth year running.

"The critics have one point in that the Germans are dependent on the 'old economy,"' said Andreas Rees, chief Germany economist in Munich for UniCredit. "But paradoxically that is an incredible strength of Germany right now."

While there were signs this summer that China was poised to move into a "tie" with Germany [Aug 26, 2009: China Poised to Tie Germany for World's Lead in Merchandise Exports], China appears quite impatient and according to the Wall Street Journal will pass Germany this year.

• China took over the mantle of the world's top merchandise exporter from Germany in 2009, according to the latest figures, aided by a global economic crisis that has taken a greater toll on other trading powers.  China exported $957 billion of goods in the first 10 months of 2009, compared with $917 billion for Germany.  No changes in November or December are expected to overturn the Chinese lead, trade experts say. China is likely to publish trade figures for the full year next week.
• China's claiming of the title of world's largest exporter was widely expected, with annual growth in its exports regularly exceeding 20% during the past decade.  China in 2007 overtook Germany as the world's third-largest national economy, and is on track to soon surpass Japan to become the second-largest economy after the U.S. [Oct 5, 2009: NYT: China Set to Pass Japan as World's 2nd Largest Economy]
  
• China's ascendancy has been accelerated by the international financial crisis, from which it has suffered less than other major economies.  With trade in tatters around the world, Chinese exports fell 20.4% during the first 10 months of 2009, compared with 27.4% for Germany and 21.4% for the U.S. The trade figures don't include transactions in services, which are significant in developed economies but a weak point for China.
• "Most of the products China produces for the global market are life necessities," says Huang Huiguo, chief executive of Kingsons International, a Guangzhou-based exporter of leather bags.
• China's currency, the yuan, is tied to the sinking dollar, helping to keep the country's exports competitive on price. (you're welcome) Those factors helped Chinese goods gain market share in the U.S., Europe and Japan last year.
• Many of China's exporters earn relatively slim profits churning out goods designed and marketed by other companies.
• For Germany, the rise of China has brought opportunities as well as challenges. The country is "our biggest competitor but also our most dynamic market," says Jens Nagel, a trade expert with the German Exporters Association.  
• Many German companies say their exports to China and other emerging economies are buoyant again, but that sales to the U.S. and other European countries -- which are Germany's biggest market -- are recovering more slowly, if at all.
• Germany's primary economic problem isn't that they country exports too little, but that its own consumers don't spend enough, which holds back its domestic service sectors, many economists say.  (perhaps we can trade some Americans for Germans and help balance out both economies; we'll export some of our spenders - especially those who enjoy buying things they have no chance of ever paying for - and import some nice German savers who we can then loot to help pay the bills for the Americans who spend with no chance of ever paying it back - problem solved.)

Bookkeeping: Adding Back to Gold (GLD) Silver (SLV) as Both Rebound Nicely

There was a question if the strength in the dollar we saw in December was a year end "squaring off" or a counter trend move that could last a few months.  Thus far as 2010 unwinds it appears it was more of a year end tactical retrace.  That said, it is not a completely lost case for the dollar yet - after such a quick spike up, one should not expect the any instrument to crash right through a long term moving average, in this case the 200 day.  The currency is still sitting nicely over both the 20 and 50 day moving averages and could be building a consolidation base for the next attempt to push through the 200 day moving average (green line below) - let's keep an eye on it.

But as the new year began, and a rush back into risk assets ensued - gold and silver look no different than the typical Las Vegas casino stock, Chinese small cap stock, or whatever dart you wish to throw to start off 2010.  A nice sharp rebound in the first 2 sessions of the year and a solid start this morning as well.

With the "coast clear" - both silver and gold bouncing back over some moving averages - I have added back to Ultra Silver (AGQ) and Powershares DB Gold Double Long (DGP), with about a 1.5% allocation into each.  I think there are easier opportunities in the near term in some equities, so I am not going to focus that much on the precious metals for now.  Also I want to see what the dollar does in the coming weeks because it could still be setting up for a 2nd attempt to push through resistance and if it does, seeing what gold and silver does in that scenario will be interesting.

If the moves in these 2 metals do continue upward; the next interesting spot to see how they react will be if they reach old highs.  As always, before the gold bugs attack - I like these metals for the *very* long run as protection against what central bankers are doing to their currencies the world over....

*I am using the charts for the ETFs rather than the metals themselves for illustrative purposes, since stockcharts.com doesn't update the metals charts until after market close.

Long Ultra Silver, Powershares DB Gold Double Long in fund; no personal position

David Walker CNBC January 2010 Video

One of our absolute favorites, ex-US Comptroller David Walker, returned to CNBC this morning to cohost.  The fact this gentleman, who had been warning about the issues of our national fiscal irresponsibility for a decade+, decided the only way to try to enact government change was to actually LEAVE government - showcases the truly dire straits we are in.

It almost seems quaint now that he/we were stressing over budget deficits of under half a trillion a year [Jul 28, 2008: US Budget Deficit to Half a Trillion] back in the "good ole days", when we just finished off a year of roughly $1.5 trillion, with $1 trillion+ deficits ahead of us for as long as the eye can see... [USDebtClock.org] 

6 minute video below [email readers will need to come to site to view]






Earlier David Walker related (all worth your time)

• [May 23, 2008: David Walker on CNBC this Morning]
• [Nov 23, 2008: David Walker in Fortune Magazine]
• [Mar 26, 2008: Annual Spring Entitlement Warning Falls on Deaf Ears]

[Aug 24, 2009: Cumulative Deficit Estimate for Next Decade Increased by $2 Trillion.... Since May]

[Aug 26, 2009: US Federal Budget in Pictures]

[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making] 

[May 29, 2009: In 1 year, US Taxpayer on the Hook for $55,000 More per Household]

[Aug 7, 2008: I.O.U.S.A. Movie Trailer]

Charles Biderman of TrimTabs Claims US Government Supporting Stock Market

I'll let this story speak for itself, but it is quite striking to see some relatively prominent people now asking the questions we, and a few other websites in the dark corners of the internets (sic), have been asking for a very long time.

• [Jun 29, 2009: Larry Levin - the Visible Hand and Invisible Hand is Everywhere]
• [May 27, 2009: Daniel Shaffer Notices the "Invisible Hand" aka Plunge Protection Team]
• [Jan 9, 2008: An Amazing Blunt Commentary on the Plunge Protection Team

Just 2 weeks ago we noted in [Dec 23, 2009: One Strange Year]

According to TrimTabs.com, this year has seen

1. OUTFLOWS from U.S. stock funds all year
2. RECORD AMOUNT ($311 billion) of new stock offerings (includes IPOs, secondaries, and converts, but particularly a large offering of secondaries in the second half of the year);
3. Announced cash M&A, as well as corporate stock buybacks, AT THE LOWEST LEVELS FOR ANY YEAR THIS DECADE.

And

Hmm....

1. U.S. stock funds: $32 billion OUTFLOWs
2. U.S. ETFs: $18 billion OUTFLOWS
3. International stock funds: $26 billion INFLOWS
4. International ETFs: $35 billion INFLOWS
5. U.S. bond funds: $370 billion INFLOWS
6. U.S. bond ETFs: $39 billion INFLOWS  

Yet the domestic stock market goes up and up and up... on pitiful volume, as opposed to 1999 when volume surged as every tax driver and barber was piling into the market.  I'll go back to my grassy knoll and let Biderman take over from here.

Via CBS Marketwatch:

• Charles Biderman, chief executive of TrimTabs Investment Research,a research firm that tracks liquidity flows in the market is the latest and most credible person to charge that the Federal Reserve and the Treasury (in league with top Wall Street firms) is rigging the stock market.
• We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.  (I believe it's called "magic" Charles)
• The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.
• "We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?"  (someone's been reading my blog...)  The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index on a monthly basis. (especially in premarket when the market is thin...recall so much of the rally in the spring and summer was overnight, rather than during the day )
• Biderman acknowledged that he had no direct evidence that the Fed and other agencies have intervened in the stock market.
• Conspiracy theories about the so-called "plunge protection team," or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak.   The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.
• "The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets."
• "While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs," Greenhaus wrote in a note.

Of course this sort of talk is massively conspiratory, but one must ask why a person whose firm is all about accurate data flow would go out on a limb like this other than truthful inability to explain what is going on inside the Matrix.

• Market analysts, however, were quick to debunk the theory. Yes, the government had a heavy hand in rescuing the financial system and the economy as the system started collapsing in late 2008 and throughout 2009. But the huge boosts of liquidity through the system found their way to stocks by the usual means, they said.
• "The idea that this is magic is nonsense," said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. "This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market." (Barry, I believe in magic - especially of the central bank sort!) :)
• Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said.
  

From this seat it is not the degree of the market rally that strikes me as "suspicious" - as I believe in reversion to mean and the drop in 2008 and early 2009 was SO dramatic; hence a huge rebound would be expected.  Instead it's "how" it has happened that causes the senses to tingle - especially if you've watched the market day after day for years upon years..  So much of this epic move has been overnight or premarket.  Whenever a key technical level was about to be broken to unleash the sell orders in the computers, a mass of buying occured from out of the blue - even on days there is limp volume. We had months on end mid 2009 where "3:30 PM" buying set off fireworks (remember that?)  And "V shaped" moves after any sell off usually are seen once every year or two.  We now see them almost every monthl stocks were never consolidating after minor selloffs; they simply rocketed back up. Repeatedly.. So it's not the SCOPE of the rally that raises this writer's eyebrows; it's the COMPOSITION of the rally.

Combined with a gentleman named Summers who worked at hedge fund DE Shaw and knows how the quants (HAL9000) think and work... and a President who told us 2 days before the ultimate low in the market (March 2009) he thought stocks would be a good buy.... and a market that saw net outflows in equities, along with massive new share issuance, and very low corporate stock buybacks, et al - and you have to question the "coincidences".

That said, I am sure the bodies will be buried where we can never find them and all I can do is play along and make money in the alleged charade.  So play along I shall....

/Returning to seat on grassy knoll.

WSJ: The Treasury Department's Christmas Eve Massacre of the US Taxpayer

Long time readers of FMMF know of our calling out warnings of the disaster that was to become of Fannie Mae and Freddie Mac, or what we call FanFredron (i.e. Enron).  I'll outline some of the history below - but the steps taken on Christmas Eve to open the US taxpayer to unlimited losses for the next 3 years borders on unconstitutional.  Frankly I have no idea how the Treasury Department got away with being able to transfer monies in unlimited amounts without Congressional approval (checks and balances anyone?) but it must of been part of the original bailout originated in 2008.  If your neighbors of friends don't follow this sort of thing, it is very important they understand what they now are being exposed to - because without an engaged populace, this sort of abuse can continue and expand.  It's already been taken to levels not imaginable just a few years ago.

I was detached from the news for a few days during the holidays but I knew there was a Dec 31st, 2009 deadline for FanFredron - after which point Treasury would need to go to Congress to extend/expand the bailout.  I thought they'd increase the liabilities from $400B to something larger, but in no way, shape or form did I expect "infinity" to be the answer.  I attempted to write a post about this subject last week, but was filled with such disgust after doing further reading I could not even finish writing it, so it was discarded - and I tried to attach myself back to the Matrix where there are no worries, and only pleasures.  At least for the holidays.

There is a very nice WSJ opinion piece, which aside from 1 throwaway paragraph attacking Democrats, does a great job of describing the issue in a way even your financially "not interested in economics" acquiantences can understand.  It really peeves me when this is made up to be a "Democratic" situation - when both parties are part and parcel to this crime against the taxpayer.  FranFredron was the LARGEST lobbyist (by dollar amount) for decades - their handouts went to both parties, and looking the other way was done by both parties.  While the Wall Street Journal is a conservative paper, I think it's ridiculous to make this out to simply be a Democratic issue - the bloody glove fits both parties perfectly well.

In short - how did we get here?  I summarized it when the bailout happened September 2008 here [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]  Ironically as the housing market began to degrade in winter 2007-2008/spring 2008 the politicos ... rather than reducing risk, actually took steps to increase risks on these entities, [Feb 27, 2008: OFHEO Increases Allowance for Fannie Mae] [Mar 19: Fannie, Freddie Layered with MORE Risk]  in their traditional kick the can down the road strategy.  Unfortunately, unlike most other problems in the US where kicking the can works for years or perhaps decades - the wall was only 6-8 months away.  The can stopped there.

Our warnings about the stupidity of INCREASING risk of these entities went unheeded, and Hank Paulson showed up in the summer claiming he had a bazooka and that FanFredron would not need a bailout.  Then a funny thing happened... the Chinese got nervous about their holdings and in a very public way wanted "guarantees" on their FanFredron holdings.  You see, FanFredron were quasi public institutions at the time - they were able to be run as private corporations - able to lobby Congress, able to pay exorbitant salaries - but with a "wink wink" backstop that was always implicit.  Well as you recall the world was a crazy place at the time, this was post Bear Stearns but pre AIG, Lehman, Citi, Bank of America bailouts or bankruptcies.  You can only imagine what the Chinese said to Hank Paulson, because within days of their public insistance that their investments be protected, FanFredron were effectively nationalized.  So the (wink wink) implicit backstop became an explicit backstop and Hank Paulson's bazooka looked the fool. 

Hank promised us it would only cost "up to $200B, i.e. $100B each" to bailout FanFredron.  As with almost every bailout, handout, government program it was classic bait and switch.  It didn't take long for "up to $200B" to turn to "up to $400B".  And yet we didn't do a full nationalization - because that's socialist and we don't do socialism in America... that's "European".  So we're still paying these CEOs top dollar and pretending these companies are actual public entities... they have stocks that trade, even as we funnel tens of millions almost every quarter into their carcasses.  I stopped keeping track by mid 2009, since it's just non stop and never ending and the actions of late are meant to increase future losses, not stop them.  [Nov 14, 2008: Freddie Mac First to the Trough] [Jan 25, 2009: Freddie Mac Saddles Up for Another $35B] [Mar 12, 2009: Fredie Mac is Back for More of Your Grandkids Money - $30.8B] [May 8, 2009: Fannie Mae with Next $19 Billion Bailout]

As part of this "conservatorship" (don't call it nationalization! you don't want to be deemed a European!!!) FanFredron were supposed to be shrunk over each ensuing year.  But as you well know Fannie, Freddie, and FHA are now almost the entire US housing market - the fully subsidized US housing economy.  (the irony should not be lost on people who want to avoid calling the US socialist in any manner)  As noted above, somewhere in the agreement must have been a footnote that said up to Dec 31st, 2009 the Treasury could do whatever they wanted with the taxpayer's money without Congressional approval.  And that leads us to the Christmas Eve massacare of the US taxpayer - where for the next 3 years, unlimited losses are allowable (throw out that $400B figure!) and the companies no longer need to shrink, but can instead grow.

p.s. if you are wondering what is happening at the FHA..... we are following the exact same path that took us down the FanFredron disaster. [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"]  We are documenting this disaster as it unfolds just as we did FranFredron.

And that essentially leads us where we are today... a trail of bad decisions, followed by a more recent trail of broken promises (cost, duration of the bailout, size of the entities, any hope of winding down these carcasses, etc).  And this is one, of many reasons, I constantly refer to what we now have as a fully subsidized US economy - entire portions are fully backstopped and being run by the government.  Fannie and Freddie are now run purposefully as money losing operations with constant taxpayer handouts - so that we can reinflate the housing market with easy money [Nov 20, 2009: NYT - With FHA Help, Easy Loans in Expensive Areas]  All it costs is a few trillion dollars of debt for future generations to deal with.  Or maybe more depending on the Administration's plans... there must be a larger master plan to pull this stunt on Christmas Eve.  One might surmise something along the lines of massive principal forgiveness for underwater Americans but who knows.  We've already seen the plan for FanFredron to allow people to rent their own homes back from the agency, and I suppose having the taxpayer pay for fellow citizens' mortgage payments would be the next "logical" step - it has already been floated  [Jul 15, 2009: Reuters - Obama Mulls Rental Option for Homeowners, along with Paying Mortgages for Unemployed]  The possibilities are endless when you give a blank check to yourself in the cover of the night... Christmas Eve style.

***********************************

Here is the full WSJ opinion piece - outside of the political dogma paragraph it's something everyone in America should read and understand.  A few snippets:

• The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
• The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers.  (this is where you laugh - do you notice a continuing themes in all our solutions?  Borrow from 1 credit card to pay off the other?)
• The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.  The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

Now one part that never struck me is how these entities can be used to hide US financial obligations.  By not fully nationalizing them and instead putting them in a cubby hole out in space, the US government is pursuing the same tactics Enron did.  Having "off balance sheet" entities, so that when someone looks at the books they don't get the full picture.  Did we learn any lessons from Enron?  No - instead, most of our major financial oligarchs saw the brilliance of Enron and devised similar schemes through the 2000s; they too were able to make their balance sheets look spiffy by hiding things in off balance sheet world.  How did that work out?  Pretty much the same as Enron.  So what does the US government do?  Follows the exact same game plan - FanFredron is the off balance sheet entity - only they have an unlimited printing press to "fix" any problems that might arise. So as losses continue to pile up and these carcasses are used to subsidize the entire US housing market - the government doesn't have to "officially" take the hit... it's Fannie and Freddie - the "independent" entities that take the hit - and we'll just shovel taxpayer money into them while wagging our finger at those 2 smoking hulks while saying "tsk, tsk".:

• Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies.
• Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.

• This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.  Unlimited bailouts will now allow the Treasury to keep them in conservatorship.
• With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
• That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase.
• All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
• Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks.

So as you see housing data improve in the future (or as you marveled at least year's improvement) please understand there should always be cost-benefit analysis.  We celebrate the "good" without looking at the enormous costs born to countless generations after us.  Remember this as Wall Street exhalts in joy at the housing "recovery" to come - bought and paid for by these schemes that have no hope of ever being paid back unless we go to a national 60% tax rate.

• In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.

Mark Mobius of Templeton Funds Cautious on Emerging Markets Due to IPO Flood for 1st Time in Long Time

Famed international fund manager Mark Mobius is one of Bloomberg's favorites; I see a story quoting him just about every week in their news stories.  As a long time international investor, he has been incredibly bullish throughout 2009 which is why I pulled up this story.  I actually did a double take when he expressed caution; the reason being a flood of IPOs might finally sop up some of the massive caiptal central banks have injected into the global financial system.  We'll see.

• Emerging markets are attracting more money from initial public offerings than industrialized nations for the first time ever, a warning sign to Mark Mobius that the record rally in the shares may turn into a 20 percent decline.
• Faster economic growth may help China, India and Brazil produce the biggest increases in IPOs and almost double sales to $200 billion worldwide, according to Matthew Johnson, the New York-based head of the global-equities syndicate at Barclays Plc. Poland alone may offer more than $10 billion of state-owned companies, according to estimates by UniCredit SpA.
• “When you look at the size of some of these IPOs, they’re pretty massive,” Mobius, 73, who oversees $34 billion of developing-nation assets at Templeton Asset Management Ltd., “At the right price, the IPOs will be absorbed, but you’re going to have some hiccups. It’s too much supply coming out.”  
• The combined value of China’s sales would be more than twice the $40 billion to $50 billion in the U.S.
• The 2009 sales exceeded industrialized nations by 160 percent, the first time developed countries attracted less money, annual Bloomberg data starting in 2000 show

As for valuation?  Does it matter anymore?  Stocks are simply a commodity that has supply and demand... you throw more fiat money from every corner of the globe, chasing a relative fixed amount of assets - and prices go up.  Economics 101.   That said, if these were normal times...

• Companies in the MSCI Emerging Markets Index trade at the highest levels relative to earnings since 2000 after the gauge surged 75 percent and IPOs in developing economies raised $77 billion.   The 767 companies in the MSCI Emerging Markets Index valued at an average 24.2 times earnings, data compiled by Bloomberg show.

They even snuck in Marc Faber into the story:

• “There are some clouds on the horizon,” said Marc Faber, 63, who publishes the “Gloom Boom & Doom” newsletter. “For sure, the supply of equities will go up because the valuations are up,” he said in a phone interview from Da Nang, Vietnam.