H. Michael Arguello_

10 Contrarian Reasons for a Bottom

I agree we are retesting previous support levels (now as resistance). I see the rally going forward another day or so and failing to breach the 1,000 mark - then another leg down. We have alot of bad news coming out this coming earnings season, with broader market implications beyond just the financials. Retailers get crushed due to a dead shopping season (ht emalls near me have been dead and I do not live in a high unemployment area), the financials bleed some more, and this time the energy titans come down.

It is interesting that the way the DOW is constructed is price sensitive; a change in the value of XOM is far more potent than a greater move in % in BAC. Energy is the last man standing sector wise but energy's base is getting whacked due to weak demand. Margins are built on top of commodity prices (if it costs me x dollars, I charge 125% x sale price; a decline in x means a decline the 25% that is my profit margin) and with energy prices tumbling so far so fast - watch out the Q4 on energy. THAT will lead us to the bottom imo.

Wall St. bought into the lows of 2001 b/c thats when tech bottomed for the most part - 02 was when the effects finally spread out into the broader market. Same thing; financials ahve been nuked, and as the former heavyweights in the various indexes their demise has caused a great deal of the collapse in index valuations. Now the broade rmarket is starting to feel the impact.

I see Q4/Q1-09 earnings being the bottom as investors across the board get a taste and run for cover, one of these two seasons. Just my $0.02

Follow the Mutual Funds: Solar Is Bottoming

Disagree, solar in general is in for a bumpy ride these enxt two years. Credit for financing projects is non-existent, neither at the retial level nor at the commercial level. The subsidies provide dby Europe are expiring so that goes out the window as well. You will see some Solar companies go bust in the current environment and the liquidation of their inventories will crush panel prices in the short term. Throw in the fact that oil at these prices makes traditional energy dirt cheap, and solar is in for some serious heartache.

The frustrating part is that this has happened before, in the late 70s/early 80s. We NEED solar to mature but the economics of it simply will not hold up. I see Obama keeping the solars on life support, but I dont think he will be able to convince customers to buy solar without credit given how cheap oil is. The weaker players will go under. Stronger players like FSLR will hopefully survive and when the economy turns around, be there to siphon off oil demand. Here is to hoping.

I do think FSLR will survive so I like that recommendation, I dont care for the weaker solar players. A long FSLR/short SPWRA might be an interesitng position.

No positions in Solar at the moment.

Harvard's Portfolio: Top-Heavy in International ETFs

I have to disagree with the strategy and I feel sorry for the Harvard fund if they pursue this, at least in the short term. Most people here in the developed world think the developing world has some magic hat whereby they can grow forever regardless of economic conditions. Having lived in the third world, I can tell you reality is very different.

I think you will see a nasty crisis hit emerging markets very shortly. You have major patron states in the developing world about to crash and when they do, they will take their client states down with them. For example, Iran, Venezeula and Russia. With oil under $75/bbl, both have precarious finances. The Russian markets have all but collapsed without high priced oil (and the the war in Georgia); a default by Russia, looking increasingly likely, would send ripple effects as debt underwritten/backed/su... by Russia would also suffer. That extends out beyond just Russia as Russia has been using its commodities might as part of its foreign policy these last few years.

Venezuela actively backs Bolivia and Ecuador's govts (financially) as well; with oil prices so low, the higher cost producers like Venezuela will be pushed to the brink. That will take down Hugos friends (its already in process). Iran is very similar, supporting Syria and a few others with its oil wealth.

The prospect of having multiple defaults throughout the emerging world all happen at the same time is like 1997 on steroids (which began when Russia defaulted on its debt, coming soon to a theatre near you!). You will see a currency crisis; the current downturn in EM currencies is nothing, it is simply an unwinding of their appreication during the last 24 months due to the commodities boom.

With re: the invincible Chiense dragon, I think you will see red ink for the first time in China. Their economy is heavily dependent on exports - the US has no manufacturing base since China makes it all for us. When you see retailers hurt - you are seeing the Chinese hurt, it just takes an extra quarter for it to filter through due to the intermediation of the retail industry. Blend in a Chinese asset bubble popping, specifically in real estate and stocks (already in progress) and you have a nasty recipe for a downturn. I have family who are importers of goods from China, one just got back from a trip to his suppliers there. Apparently, its alreayd starting to get ugly with huge layoffs and many firms simply shutting down.

I have no positions either way at the moment although I am contemplating a position in a short EM ETF. The overall picture is really bleak for the EMs - the only BRIC nation I would even dream of investing in right now would be Brazil, altho I am more inclined to short them all. Best of luck to all, if you are going long EMs, be prepared to sit tight for a decade or two.

The Trouble with Recession Averages

There is actually another alternative to default...we can inflate our way out of it which appears to be the government's new approach. Sorry, $10 trillion in debt is a meaningless figure without some sort of purchasing power index to understand it. $10 billion in 1930 would have been an extraordinary figure - today its trivial in govt finance terms. I am reminded of the skit in the Austin Powers sequel that drove home that point.

Mind you it can cause some short term severe pain as in the hyperinflation of the 70s, but it can wipe out the value of debt which, with the exception of TIPS, are generally not inflation indexed. Question is, who gets to be the new Paul Volcker lol since Paul is joining the inflation team. There are no easy answers, but given a choice between a depression, a period of hyperinflation to wipe out the value of debt, or a massive default and shattering of all faith ind ebt forever, I choose hyperinflation. Granted, I am a net debtor at this stage of my life lol, so works for me!

Has Hank Paulson Been a Good Treasury Secretary?

Sorry but I strongly disagree, Paulson has been god awful as Tres Sec. The man is at the heart of the corruption that is strangling the country. Notice that he has been appointing numerous of his associates from Goldman to posts not only in the government but also in the companies he has been bailing out. For example, I absolutely LOVE how he saw fit to appoint a 36 year old Technology Investment Banker to oversee the $700 billion TARP, took a GS board member and made him CEO of a large Life Insurer (his AS experience is insuffficient imo) in lieu of putting in place the guy who built the company from scratch, etc who had the added benefit of bringing additional capital to the table. In addition, I beleive Paulson is far more interested in bailing out his former buddies than he is in fixing the problem. Notice how he bankrupted his former rivals but has rushed to the defense of every other firm. He duped Congress into giving him $350 billion and has basically refused to divulge what he did with it. The man is slime imo and thats a very strong statement about a government bureaucrat.

We will not begin to improve until Paulson is replaced. I dont know if Geithner will be a great Tres Sec or not; but the bar is so low from Paulson that he will look like a great Tres Sec regardless.

Combating Cascading Short Spirals

Thanks for the comments all.

Turkeyeys, I agree that a short circuit breaker by itself is insufficient. However with realtime short information being made available, special situation funds could take out short attacks. If the shorts stop at 19% per day, a daily basis is more than enough time for Spec Sit funds to do their homework. The problem right now, in my opinion, is that the current time window the shorts have been using to overload the system with sell orders is too short of a time to research a company and go the opposite way. The bear raiders have the advantage in that they know how many fiat shares they are creating whereas long investors are flying blind on the fiat float.

Once a company has collapsed more than 25% in share price in one day it begins the downward spiral of downgrades and panic amongst investors and creditors.

Short selling has its uses in the market, but the current abuses on the Street require a response. The uptick rule would be nice but truth of the matter is, modern buy and sell programs can easily get around it by using computers to trigger minor upticks with a buy prior to large sell orders.

Mortgage Delinquencies Continue to Climb, Watch Out for Other Loans

I agree with Miami on the POAs, I'm gonna have to disagrere with Willi. As a former supervisor of mortgage originators, I would frequently test job candidates and existing LOs to see how well they understood POAs (I was not a fan of POAs and they were not necessary in my market like they were in FL and CA).

Only 1in7 were able to understand the concept of a negative amortization loan tied to a variable rate structure and the financial explosion that would occur in a rising rate/depreciating market. To be fair, I got the impression many didnt give a damn beyond the commission and simply didnt want to learn. Still, having World Savings reps running around with their claims that their u/w models had been backtested thru the Great Depression did not help.

Is AIG a Buy Following the Government Bailout?

An interesting read. Like others have posted, I have to disagree with the assumption that the $85 billion can be used to value the equity of the company.

The situation is that the government has loaned up to $85 billion to AIG via a credit facility for up to two years. In exchange, the debt must be repaid from asset sales and carries an 11% interest rate. In addition, the government demanded extra compensation in the form of warrants that grant a near 80% stake in the company. The point of the warrants is to discourage other companies from trying to use Uncle Sam's credit; its a punitive measure to push private market participants back into the private market unless there really is no other way.

On the flip side, I do believe AIG is solvent, simply not liquid. As a result, the loan will allow them the time ot liquidate in an orderly process. In the end shareholders will get some renumeration, but I do not know what will be left after the asset sales - no one does until the bidding begins.

The company is too much of a conglomerate to figure out what it will fetch, although history tells us that large conglomerates tend to bring more in pieces than as a whole (see Ma Bell/AT&T+Baby Bells for example).

Countrywide: Potential Short Squeeze in the Offing

If shorts see other shorts getting squeezed, it could very well create a short covering rally, which is typical in a bear market. We've had several during the recent downturn and given the high degree of short interest in the marketplace right now, it’s very possible. Add in the recent rumors of a Wachovia acquisition by JPM on Friday (courtesy of CNBC) and it has potential to be a catalyst for a short covering rally.

I believe (based on nothing but my own speculation) that most of the current CFC shorts are shorts betting against the deal going through. Shorting Bank of America, even with Countrywide's liabilities, is a very different venture than shorting CFC. Shorting a stock with a 9.5% dividend yield (as of Friday close), strong balance sheet, a large unrealized gain on an investment (the China Construction bank options and existing shares, currently have a net gain of approx. $27 billion) etc. is a nasty prospect. If CFC is not taken over by BAC, there is the prospect of a bankruptcy and that would make every short’s day. With BAC, no analyst I am aware of is forecasting the company goes out of business – as such, your potential gains are capped at some point and your potential liability is extremely high as the stock has the ability to appreciate a great deal form its current levels.

It does not help that at current prices, shorts are facing a ~ 6% squeeze immediately upon the transfer of the position. ALSO, the way the BAC deal is structured, at .1822 shares of BAC for each share of CFC, all non-integer quantities are being paid out in cash. So if you have 1,000 CFC shares, you get 182 shares of BAC and .2 x Price of BAC in cash (about $5.42 at Fridays closing price).

Plain English, shorts have to pay out the equivalent in shares of BAC AND a small amount in cash. It’s very similar to holding a short position through a dividend. This is assuming your broker allows you to hold through the acquisition (not all brokers do; retail brokerages in particular tend to place more restrictions on such events). Regarding trading at a higher price than the acquisition, it has occurred several times since this deal was announced. It would not surprise me one bit to see it re-occur, albeit briefly, in the current circumstances.

Anyways this scenario is POSSIBLE, and it appears to be developing. CFC shares, on a % basis, held up far better than BAC shares during Friday’s market and indeed, throughout much of last week. That indicates to me some shorts may be starting to cover and that is exactly how short covering rallies begin.

All in all, I felt it was worth discussing. Thank you for reading.

Another Gift from the FASB

I’m going to have to disagree that there is not more paper coming down the pipeline to fill the L3 holding tank.

Sorry, but the figures the banks have written down are not even the bulk of the delinquencies. The majority of subprime ARM resets occurred in Oct 07 and will go thru 6/08. This is fairly well documented. It also takes about 6 months from a reset before a borrower is even classified in default (3mo before borrower cannot keep treading water and 90 days past due before bank starts becoming aggressive and marks it down). In some banks cases, like Wachovia, they are refusing to count anything under 180 days as a write-down (a recent article pointed out they had 5.1 billion in loans that were 120-179 days past due they were refusing to write down). This is in comparison to the 1.1 billion or so they have written down.

The numbers and timing of current defaulted loans are PRE-BULGE of the distribution of ARM resets; throw in some creative accounting (Wachovia may not count the loan as in default on its books, but it seems to count it as a default on credit reports and court actions - dbl standard there) and fact of the matter is, the major banks have alot more to come.

Too many people are trying to dismiss the recession/bear market and say it’s over. FYI, the S&L crisis of the 80s took years to work out and it took the major banks about 6 quarters of heavy losses to swallow - and that was with partners who had balance sheets (albeit light ones) to help shoulder the load of holding bad paper on your bal. The current model, next to none of the major originators had any amount of capital worth mentioning in their capital structure.

In short, the banks have alot more write downs, the bulk is to come and is not behind us, and there is no one else to dump it on. Confidence is a key piece of the US banking system and I certainly understand the govt's and the exec's attempts to build it back up. But until they come clean, they will not have it. The losses will have to be written off eventually - else we really risk becoming like the Japanese during the 90s (big banks refusing to write off loans, govt bailouts, no growth and possibly even deflation, near zero interest rates, etc.)

Hmmm, kinda sounds like what we are doing now.