(Yesterday the stock market tanked…with the S&P 500 now below the 40, 50 AND now the 200 day moving averages. It was bad…but not quite bad enough since the volume was a low 1.1B shares and about 50% of that was BAC, C, and GE…the usual suspects. Also, while ever index had a lower high and a lower lower, all missed ‘key reversals’ by about a point thus averting disaster. A higher high, lower low AND close BELOW the prior days low is a very strong technical indicator…normally but not these days. Futures are tentative at best up slightly earlier and now oscillating around unchanged…caution! TB)
…yesterday, Fitch Rating Service let the other shoe drop on California, lowering the state’s rating to BBB from A-, just two notches above JUNK! That is actually a relief but Moody’s (A2) and S&P (A) are still reviewing and Fitch still has it on credit watch – negative as does S&P, while Moody’s has it as stable??? This on the dysfunctional state TB lives in where a failure to pass a budget is an annual occurrence. But the last two years have been unique: in 2008, it took forever to pass a budget as term limits have removed any semblance of order and both houses are sufficiently split between the GOP (a term the Republicans have tossed out …because while it is old it is no longer grand?), so there is no discipline…every legislator for himself! So when they finally passed a budget in October, a huge amount of damage had been done and the balanced budget (sic) was based on old data. Now, another year later (fiscally, but actually less than eight months) we are at the same ‘state’ or stalemate (?) again.
As was the case a year ago, the state cannot issue revenue anticipation notes (RAN’s) without a signed budget. Normally, for about as long as TB can recall, when this happened the banks would buy ‘warrant’s which were short term until the budget was passed then paid off with RAN’s and it worked…the banks got paid handsomely for their efforts and everyone was happy…well the taxpayer wouldn’t have been but he didn’t know what was going on. This charade all came to a screeching halt after 2007 when the banks balked at anteing up when they were hit hard and tax-exempt income wasn’t worth much and besides they needed to raise capital not to squander it on a state that can’t manage its own finances. Actually, TB believes that this all began when Schwarzenegger became governor in a recall election in 2003 (which was also stupid as he had just one more year and the costs were enormous), for the boring but not as stupid Gray Davis (doesn’t the first name say it all?), who was actually a victim of Enron who manipulated energy prices nearly bankrupting (sic) the state. So the new Governator came in and found an easy way out…don’t raise taxes: issue bonds…lots of bonds. So we went merrily on our way…until the mortgage crisis…derivatives crisis…financial crisis.
But while our legislators receive their pay along with other state workers (thankfully, except for the solons…rhymes with felons), the state is relegated to issuing IOU’s to service providers. Last year, many of these went out of business as they could not meet payrolls but the media paid scant attention…so they are damaging the economy even more even as the Feds attempt to stimulate it. The IOU’s are also in the form of state tax refunds which will make people cut withholding in the future in fear they won’t receive them next year either…in the case of the government: better a borrower, right?
So over the weekend TB had a thought: why doesn’t some enterprising bank with some sense of creativity advertize the customers can use those IOU’s to make mortgage, credit card, personal loan payments, etc. without penalty. So let’s say your mortgage payment, and other payments to the banks is $3,000 and you have a state IOU. Why not accept it as payment and credit your account with the balance to be applied to future payments? Sorry, TB forgot the retarded banks…running 30:1 leverage or so but down from 40:1 would never think of doing that for a customer. In point of fact they would be doing it for themselves as that would prevent more loan delinquencies…why to they pay those shortsighted idiot so much? Stupid!
So yesterday, after hearing that bank credit card issuance declined 35% in the first six months over the comparable period last year while delinquencies are running 4.8% (!!!)
TB heard of an enterprising guy in Columbus, Ohio of all places who advertized on Craigslist that he would buy up those IOU’s…at a discount of course. He said that the lowest offer he had was a $2,000 IOU and several were for more than $100,000! Well, above his budget so he decided to make a market in them…and lo and behold, so did Wall Street…see the banks don’t have a monopoly on lack of innovation, Wall Street isn’t far behind! Now TB is concerned about two issues: he is at big risk of running afoul of the SEC as by making a market in the IOU’s he is ‘securitizing’ them. But another concern is scam artists who can create phony IOU’s and buy and sell them at will….and you didn’t think regulation was a good thing! Think people! Oh, and there is precedent for this as back in the late 80’s and 90’s there were fraudulent bankers acceptances…most on the Bank of Sark…TB kids you not…what kind of fool would buy that and later ‘bank discount notes’ which are non-existent securities but which TB researched for a member of his board at the time who despite having confirmed it with the Fed was told that he didn’t know much about investments as his friend had been buying them for years and they always paid off…think Ponzi or Madoff!
California, about a fifth of the U.S. economy and on its own the eighth largest country in the world is just the tip of the iceberg. CNBC this morning had several governors, including Minnesota’s Pawlenti, talking about their worsening situation…the beat goes on…and on…ad nauseum.
Another story this morning is on Long Term Capital Management Founder John Meriwether…who coincidentally TB mentioned yesterday. When LTCM blew up in 1998 with a staff and board of geniuses but who managed to lever themselves, according to some estimates as high as 100:1 (could have happened as asset value was falling faster than they could delever). Less than a year later he founded JWM Partners, yet another hedge fund but one which promised…well sort of…15% returns (isn’t that what Bernie had?), with 15% leverage….yet TB read in 2008 that he had hit 40% but again that could have been due to rapidly falling asset prices. Anyway, today he announced the closing of the fund…that’s two for two John! The question is how much did he pocket and how much did he lose with his own money tied up in the fund…ya know, that isn’t the point as shown by the following article from an Atlantic.com article by Matthew Yglesias (3/19/08):
Fun with hedge funds: “JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter.”
This reminds me of a parable I’m stealing from someone else but I don’t recall who that is. Imagine I find a kind of gambling machine somewhere that works kinda sorta like an enormous roulette wheel. It has 100,000 possible outcomes, and on 99,999 of those outcomes it pays off at a 1:1 ratio. But on the 100,000th outcome, you lose at a 1:300,000 ratio. Obviously, placing a bet on that machine would be foolish. But suppose instead I set myself up as a financial assets manager. People invest money with me, I “invest” it for them by betting on the machine, and then I take 15 percent as my management fee. Well, the odds are that for a while I’ll be earning a good return for my investors. I’ll get a reputation as a genius. The volume of assets under my control will skyrocket, and with it my management fees. And then one day we hit the whammy and everyone loses everything. Except me — I’ve already pocketed all the management fees I need.
I mean, if I did that once, nobody would be crazy enough to help me start up a second hedge fund, right?
TB will leave you with that to ponder as you wonder whether it is wise to pay anyone 2% plus 20 to manage your money…also as of now JWM is down 44% for all those years…including fees and expenses of course. Remember a five year or even ten year track record does not mean a thing…or 14 years as we saw with Bill Miller of Legg Mason fame…in fact the longer you go the closer that six sigma event becomes.
Past performance is no predictor of future performance. Amen!
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Today, TB is attending the funeral of a good friend, Ernie Voigt, who died of cancer, fortunately a short bout. Ernie, who along with Bob Brown (Brownie) who founded Pacific Securities, a powerhouse in the SF Bay Area that participated with Salomon Brothers on big treasury bond issues in the 1980’s. Ernie, who let his friend sleep on his couch for four years while he was a struggling actor…that man was Clint Eastwood. Ernie, whose friends ranged from stable boys to CEO’s seemed to be the epitome of Will Rogers quote: “I never met a a man I didn’t like.” Ernie, who presided over a weekly pick up group of investment professionals in the East Bay. Ernie, who was captain of his camp at the Bohemian Grove. Damn, TB is going to miss him! He was a ‘oner’.
Have a reflectful day and think how valuable your friends are to you!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 8, 2009.
