…it’s the only thing. These days there is no substitute…certainly not auction rate securities. Last week money market fund assets rose to $3.15 trillion…but don’t look for it to migrate to stocks soon.
Overnight top headlines on Bloomberg:
*Rice climbs to record, corn approaches new high after governments curb exports…what a great plan ethanol was! Worse, if they were going to do it, why not lift tariff on imported ethanol? Stupidity!
*Bernanke joined by Geithner and Cox as Congress seeks more Bear Stearns details…this is bad!
*Euro falls as retail sales drop signals US slowdown spreading to Europe…so much for that idea!
*Bank of England say US banks will cut lending to homebuyers and companies.
*BayernLB reports $6.7B in subprime writedowns; profit plunges 82%!
A cursory glance at the above should tell any reasonable reader that the bottom for stocks is not in yet! Yesterday, ADP numbers showed a very slight improvement in the jobs forecast for 2008 to 318k. Tomorrow we will get the real numbers for March and they won’t be pretty. Good reason to rally?
Today’s Topics:
1. Stocks, hedge funds and Bear Stearns
2. It’s a recession…why? Because TB says it is!
3. Housing
4. Hedge funds
1. The more TB thought about the April Fool’s joke of a rally it became apparent what really happened: Window dressing by hedge funds. Yesterday, TB reported on the record cash levels of hedge funds in the first quarter…$90 billion out of $1.6 trillion in assets or 5.6%! Investors do not like this when they are paying 2% fees. Now think to what happened on Feb. 29 and we now know that hedge funds still held $68 billion in cash…where do you think they put it? 1 month T-Bills each maturity of which is about $65B…so do you see how yields got down to 0.30%…it was not a flight to quality in the traditional sense but excess demand caused by money funds with a decreased number of alternatives and the hedge funds building a cushion against margin calls on derivatives…starting on the 28th three big fixed income funds had huge margin calls forcing them to sell massive amounts of long muni’s and cover shorts in treasury’s. These margin calls forced selling in other areas and so the Dow plunged 326 points on February 29th.
Recall that February 29th was quarterend for Goldman, Lehman, Morgan Stanley and Bear Stearns. That in itself was bad but to show how bad it was they did the unthinkable (for a second time after they failed to support their auction rate securities), and entered into margin calls. When the smoke clears TB thinks that that event was a blink by Bear Stearns that caused hedge funds to cancel their prime broker agreements (also if a counterparty is cut below investment grade all swaps are canceled), and TB believes talk among one another leading to huge shorting of Bear stock and buying put options. Time will tell but TB feels confident he is right on this. That they did this is despicable but hey, this is America!
Now on to quarter end for most companies and year end for Japan. After what happened in February and with reporting to their own clients ahead hedge funds held high cash levels…you want your investors and lenders to know you can handle those pesky margin calls after all.
If the situation wasn’t so serious, yesterday’s Senate hearing grilling of Bernanke would have been laughable. Politicians just can’t help themselves…we heard everything from Ted Kennedy pontificating and TB has no idea what he was getting at to a Senator who told us the entire tulipmania story without a quaetion.
NJ Governor John Corzine on CNBC this morning about Goldman Sachs being the smartest guys in the room…TB has questioned this, especially on their huge short ABS play, that it was more luck and furthermore that they should not have paid out those huge bonuses knowing what was coming. Corzine said that when he was at Goldman they made many large errors…on bets like the recent profitable trade. The word he is searching for is: LUCK. Like overleveraged hedge funds and oil companies: should huge bonuses be paid on ‘luck’ which is likely to reverse the next go round? Makes you wonder about that revolving door between government and the US Treasury doesn’t it?
Then along came Sen. Chris Dodd (D-CN) and Chairman of the Senate Banking Committee…he agrees with the Bear Stearns bailout yet when grilled by Cramer did not seem to want to enforce the rule against spreading rumors on financial firms. But why didn’t someone ask him why he will not bring to a vote the two nominees for Fed Governor? We have just 5 now…and to take the action we did in l’affaire Bear, it requires FIVE for a quorum? Two governors are going off the board soon…this is unconscionable and TB has told HIS Senators that it is…he urges you to do the same before we do have a system meltdown. Dodd has proven why he should not have been a candidate or President! So Dodd says that he concurs but isn’t sure they did it properly…what a guy…typical politician like the rest of those bimbo’s! Now can you imagine if the Fed had failed to act, they would be holding the same hearings only screaming at Bernanke that he failed to prevent it…and for the record it is the NY Fed, not the Federal Reserve, that is responsible for maintaining stable markets…TB heard no mention of that fact…and where was the NY Fed President at the hearing? See…much ado about nothing…more drawer slamming!
2. TB keeps wondering why nobody can bring themselves to call this a recession…just say it, get it out of the way and then look for solutions…don’t keep deluding us, Mr. Paulson (won’t even say Bush who is as oblivious as when he was first informed of 9/11), keeps coming up with new ideas…all of which have failed…speaks with no conviction as dictated by his stammering which he just does not do. Finally, TB got the answer: Economist Irwin Kellner who TB has followed for decades was asked that question. He replied that it isn’t a recession until NBER (National Bureau of Economic Research) says it is…this can come several quarters later so Kellner said he will not use that term.
Now think about this…we need some number crunchers to analyze data ad nauseum to tell us we are in a recession? Kellner is afraid to pre-empt them? If this is the case, heaven help us as some recessions like 2001 are not so apparent but a blind deaf mute could figure this one out. Martin Feldstein now heads this auspicious group and on March 14 he said we face a “severe recession.” Good for you Marty, but why is everyone else afraid to utter the R-word…and at the worst possible time: with a lame duck President in an election year! You now know how the Japanese felt at the Battle of Midway with the unexpected attack brilliantly conceived by Admiral Spruance…they couldn’t decide whether to arm the planes with bombs or torpedoes…and in fact kept changing them…so that planes, gasoline, torpedoes, and bombs were all on deck…that folks is where we are today! But Bernanke spelled it out yesterday so now perhaps we can work on a solution…after the elections! Too little, too late IMHO.
Then on the housing crisis Kellner said that the government should buy up foreclosed properties to put a floor on them…with the idea of putting in a floor of prices. A floor on prices when to any rational person looking at the most simplistic of charts were are at least 15-20% overvalued nationally and 40-45% in some areas that were particularly hot. He then suggested a return to the old lending standards, mortgage cannot exceed 3 times annual income…so let’s say the average is $50,000…a $150,000 home? If so, then the numbers TB just tossed out are woefully inadequate…especially in New York or California.
Yesterday, we learned from the Mortgage Bankers Association that mortgage applications plunged 22.7% in the prior week reversing much of the prior weeks gain. Purchases declined 11.8% more than offsetting the prior weeks gains while Re-Fi fell 38.1% after gaining 82.2%. Note that the surge in Re-Fi has been largely caused by filing multiple applications so that too is distorted. Meanwhile the contract mortgage rate remains little changed…despite 300 basis points in cuts by the Fed! TB also recently learned that Existing Home Sales include foreclosed real estate. Thus, even the modest pick up we had in February (ex-Cal), had little impact on the supply…you will know when the selloff is over when supply gets back from 10 months to 6 months of sales…and that will take a long, long time.
4. According to Alphaville, Russell is shuttering two of its funds of funds after assets rell to just $2 billion, one third of where they were just six months ago. Redemptions had been closed and they will now pay out the money in three instalments. Meanwhile, according to Greenwich Associates, risk averse hedge funds grew sevenfold in 2007…yes, but did they truly reduce risk…or just make money for managers?
Sometimes it isn’t fun to be right…and this is one of those times…hang loose! All the best,
TB
