TB’s Quote of the Day from ‘God Bless the Child’ , lyrics by the late Billie Holiday”
“Money, you’ve got lots of friends
Crowding round the door
When you’re gone, spending ends
They don’t come no more
Rich relations give you
Crust of bread and such
You can help yourself
But don’t take too much…”
Crowding round the door
When you’re gone, spending ends
They don’t come no more
Rich relations give you
Crust of bread and such
You can help yourself
But don’t take too much…”
…TB googled the phrase having heard it is an old Chinese proverb but according to Wikipedia, there is no proof of that but it may be linked to another proverb: ”It’s better to be a dog in a peaceful time than be a man in a chaotic period” (宁为太平犬，不做乱世人; pinyin: níng wéi tàipíng quǎn, bù zuò luànshì rén). TB helpfully adds the translation as we may all be speaking it one day…as “investment biker” and commodities junkie, Jim Rogers (not the “uh oh, uh oh” one) believes as he is insisting his daughter learn Chinese, but what if you choose Mandarin and should have learned Szechwan? Gung hay fat choy!
Today’s Topics:
1. Yesterday’s Fed action
2. ABS pricing flaws
3. Why yesterday was a short covering rally
4. Housing update
The Fed. TB has said here several times that the blessing of writing a financial column is you never have a writers block as there is so much to write about, but that has now turned into a curse as not only is there too much to write about but TB read all weekend and thought he had a full calendar for the week. But then on Monday came the Spitzer revelation which impacted the muni market and indirectly ETF’s. Then yesterday came the Feds new improved Term Securities Lending Facility (TSLF) to the tune of $200B of 28 day repos available to the 20 primary government securities dealers, 21 before Nomura resigned its commission…but what about the rest of us? No problem as will be explained, but the significant points are the following:
1. On Friday, just before the dismal payrolls report was announced the Fed said they were increasing the TAF to $100B…originally $50B…then $60B…and they may go to $200B if necessary.
2. Yesterday they announced the TSLF whereby they will lend US treasury’s in exchange for collateral for 28 days, normally just overnight. While it is for primary dealers only they are the main ones with prime broker accounts for hedge funds…the idea being to halt the margin calls…in other words the dealers become a conduit as the pressure is off them. $200B and could double that as needed
3. In addition to agency debt, agency RMBS they are now willing to accept non-agency AAA/Aaa rated private label RMBS…never before! Interesting when the entire concept of AAA/Aaa has come under scrutiny…what next monoline insurers paper? Remember all that AAA paper Merrill put in their own portfolio unhedged and now toxic waste? Eligible!…at face value? Not clear but how does one attach a value?…scary!
ABS Pricing. TB mentioned last week about MARKIT, an index sponsored by banks that is on the web and was to be the premier source of market values for ABX and CDS derivatives. Once dealers had to morph from mark to model to mark to MARKET they used MARKIT. As with most things…like the models which were in turn derived by backtesting (should be a four letter word yet TD Waterhouse is now offering free backtesting to its clients as a trading tool!…backtested to what in this market?…1929-45?).
Several articles have pointed out that MARKIT is now a very thin market and thus unreliable. Say the market for CDS is 400/600 basis points in other words someone is willing to pay 400 for protection but it is being offered at 600 basis points. The 600 offering disappears and is replaced by say 800 basis points…got it? That is a huge drop in market value for the swaps in your portfolio. According to Dick Bove of Punk Zeigel quote in The Economist, the pricing on CMBX implies losses more than 30 times greater than those suffered to date. Since markets always overshoot on both ends due to the mix of euphoria and revulsion, he is probably right…but we just don’t know as we don’t know where the exposure lies or who has it. If something as vanilla as munis can be leveraged 9 times as Blue River did to the tune of $15 billion then be forced to sell to meet a margin call you see how fleeting a market price can be (worse for them was they were short Treasury’s which rallied 3 points as they tried to cover that position resulting in a spread you could drive a cruise ship thru.(TB will forward full article if interested).
A rally for the wrong (right?) reasons. It all depends on how you are positioned. If you were short the four horsemen (AAPL, AMZN, GOOG, RIMM) you were forced to cover on the Fed announcement…after all does that mean they have the problem solved? Probably not but there were some pretty nice gains from shorting, so if you look at the closing stock summary below you will see that the stocks that have been beaten up the most lately but had been winners…in energy think XOM, CVX for example…were bought back. TB thinks that is all it was as well as the long holders raising the offer price for a short squeeze…that is another downside to the volatility caused by elimination of the ‘uptick’ rule for shorting as well as 45 days to cover shorts! But at least this time it was the shorts turn to pay a price…perhaps in the end if they are burned badly enough it will allow volatility to decline again. The strongest argument was the big volume but that was due to massive short positions! Capische?
TB believes, and it appears from Globex that the rally will fizzle rather than have followthru. If you have access to long term charts…pick a stock, almost any stock…don’t look at one month or three month or even one year…look at the two year cycle we have had as shown below by the Fibonacci retraces or the 5 year charts and their Fib’s. The damage has been done but it is clearly not over yet. In any event, what the Fed did will NOT increase liquidity it will merely keep it from getting worse. No more loans will be made based on this but some of the fear has been eliminated which is a good thing because at the rate we were going we could have had a full-blown market crash. The Fed did the right thing…will it work?
Housing thoughts. In the beginning, Larry Kudlow, Brian Wesbury and others told us (as they did that consumption would not slow and now the only reason it hasn’t fallen is price inflation of food and energy) that the subprime crisis was overblown because it was just 6% of the mortgage market…ignoring that is was 1/4 of the origination’s last year and we were only dealing with 2005 origination’s that were resetting. But the problem was that the delinquencies and foreclosures were not due to resets but loans that shouldn’t have been made in the first place…the resets hit first in Q4 of last year and are building and will peak in the next quarter. That along with the derivitization of those loans into pools which were allegedly A to AAA magnified the problem and spread it globally. Housing is supposed to be about 25% of our economy but TB read where due to a huge condo boom…supported by American’s until the dollar began to weaken…it is a much larger part of several European economies…and 80% in Spain!
Looking at the housing problem here where subprime has morphed into Alt-A mortgages and now even to some prime mortgages, TB wants to make a point: Vallejo may become the first municipal bankruptcy filing in California since Orange County 14 years ago, only the results won’t look as good. We are about to see the first statewide test of Prop.13 which caps the base tax rate at 1% of the purchase price and limits increases to 1% per year. In the long period of property appreciation since 1945 the growth has matched GDP nationally and never before had a nationwide decline but now with huge inventories of unsold homes, delinquencies and foreclosures soaring, and homeowners equity falling to 47.5% and the first time below 50% since 1945 when returning vets got zero down loans (BUT prices were rising), we are faced with lowered appraisals of 25% or more on some areas of the state and after resetting can then be raised again by just 1%. Meanwhile the infrastructure, as a result of overbuilding is declining, agriculture production is shrinking due to sharply decreased farmland replaced with housed. This spells higher state income taxes and more local fees and even implementation of taxes. This will cause an increase in the outflow of retirees…many of them collecting state and local retirements. Businesses too are fleeing the state as it ranks 31st in attracting employees…Art Laffer recently moved his business and 35 above average pay employees to Tennessee…which ranks number five! A sign of the times.
Now assume you bought a tract home…with a conventional mortgage, paid 20% down, and now are watching your equity evaporate as the subprimes, Alt-A’s default and the builder closes out homes at fire sale prices below what anyone else can do…plus its a brand new home with tons of upgrades…you might even get a new car in the deal…taxability a big question mark. Even you could decide to walk if renting is an alternative, you lose your job, or get a better paying one in another area or state. That is how the problem continues to grow…it is far too early to be a buyer…except of TB’s home…offers now taken.
A caveat: TB has been known to overthink a crisis as we all can do…he did so after listening to Ed Yardeni on Y2k. Still, he does not think he is doing that this time…instead the optimists abound and that is a bad sign as rally failures produce ever more selloffs…TB saiz: continue to sell rallies…but buy dips? Only if you are a trader with a screen in front of you all day!…and not on CNBC!
Last night TB watched an uplifting movie…in a way. Awakenings (1990) directed by Penny Marshall and starring Robin Williams and Robert DeNiro…a stunning performance! It was centered on a mental hospital where the patients were almost catatonic. Williams, as a dysfunctional research doctor, observed behavior in the patients and decided to try giving one (DeNiro) L-Dopa over the objections of staff. He came out of his state and returned to almost normal but then his Parkinson-like symptoms came back but in the meantime they gave it to all the patients who responded similarly and in some cases close to his changes (Dexter Gordon had a supporting role and played some beautiful piano…with very few words). The point you were left with was how much we take for granted…simple things. Do you need your BMW? McMansion? How about friends…being able to see and appreciate what surrounds you? Those are the important things and can get you through even if you lose the material trappings. Available on Comcast On Demand…and free! Perhaps some of the best things in life are free!
Have a great day and all the best to you all…thanks for reading!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC March 12, 2008
Richard Wilson on Hedge Funds said
Hi Bill,
Interested in seeing if we could connect our blogs or share articles from time to time. Anyway we can share traffic or grow our sites together? My site has published 500 articles now just on hedge funds and gets 5,000+ pageviews/day.
- Richard