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    • ON: Sat Sep 6th 19:47 PM
      Commented on:
      Bill Gross: Politicking for His Own Bailout
      Why bother pontificating about how we got here, who is to blame and why? Why not think about how to make money! The Federal government is poised to take a significant portion of the domestic housing market onto its balance sheet. What are the ramifications? Does anyone think that interest rates are going down because of that action? Anyone want 10 yr U.S. Goverment paper at 3.6%, when the government is going to have to continue to borrow if it wants to maintain the subsisidy, through low cost borrowing, for housing. All the government is doing is interjecting its credit worthworthiness between the American home buyer and the predominately Chinese and Middle Eastern providers of capital. Eventually, the overseas holders of the mighty U.S. dollar will tire of earning negative real rates of return. Investment ideas, short long dated Treasuries,or go long TBT the double short ETF on the Lehman 20+ year bond index.

      In the short term, perhaps the hombuiders will rally as market participants believe that liquidity will return to the mortgage market. I would short any strength take your pick of names or use the XHB. The government simply won't have the capacity to reflate the market. All Paulson et. al. are trying to do here is to stabilize home prices. What will probably happen is that home prices will find a bottom but transaction volume will decline and inventories will remain high as the market won't clear due to a wide bid/ask spread and a general lack of creditworthy buyers. After a bailout, I doubt regulators will permit the wide range of "affordability products" to be offered again by banks. Banks will probably be weak too as they continue to be hobbled by a lack of capital and a trouble loan book. It will take some time for potential homebuyers to repair their balances to the point where they can afford 10% down on a Southern California or Northeastern U.S. home.

      Asset prices (stocks, bonds, real estate) need to decline for equilibrium to be restored to the market. The government can't keep asset prices at their high water mark through manipulation of short term interest rates. The phantom wealth created by Greenspan is gone! Somebody had to lose the money, it is now just a process of realizing all those unrealized losses. The result will reveal itself in one of two forms, losses at financial institutions as debtors default or long term diminished capacity of debtors/average Americans to consume and invest either because they are debtors who have overpriced assets or they are investors who will never be able to realize the phantom gains. I don't think PIMCO will ever be able to monetize all of its overvalued bonds. Great paper profits and a nice bonus for Bill Gross as the government keeps rates low. Watch out when they lose control.
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    • ON: Sun Aug 24th 13:05 PM
      Commented on:
      4 Tidbits from Third Avenue Value Fund's Q3 Letter
      Third Ave Funds are likely to continue to be poor performers. From a macro perspective U.S. real estate is going nowhere any time soon, due primarily to the ongoing credit crisis. I don't have an opinion about Hong Kong or Japan but the weightings in cash and troubled U.S. stocks portend underperformance and continued redemptions. If this fund group has to start selling core positions, e.g. the large stakes in relatively small companies, the positive feedback loop will move in a negative direction. (Positive feedback loops amplify or accelerate trends, negative feedback loops dampen or decelerate trends). The managers of this fund have fallen in love with some stocks that are facing tremendous headwinds from macroeconomic conditions. Don't make the same mistakes fund management is making and fall in love with the fund because it has done well in the past. It will be of no consolation when your investment in this fund underperforms, that Mr. Whitman's investment also underperformed.
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    • ON: Sat Aug 16th 12:14 PM
      Commented on:
      The Hedge Fund Hustle
      This is one of the dumbest posts ever. Lets' see a hedge fund manager (of course it has to be a hedge fund manager, not a prop. trader from an investment bank) manages to make 5% in one month net of fees and commissions and this is a bad thing? How often does prop. capital turnover at investment banks, specialist firms, commodities trading groups? Is it so evil when those who don't charge 2% and 20% do it? And what are the imputed fees paid by shareholders of investment banks and other trading firms to the internal prop. desk traders who get bonuses, car service, expense accounts. Maybe the hedge fund shouldn't have paid any commissions by doing zero trades and made no incremental return for the month.

      If trading is so bad, why do we have markets that are open all day and night. Why not just have one price for all trades done on a given day? High frequency traders provide liquidity, to the venerable (sarcasm intended) long only managers, long term investors and all the other constituencies that claim to suffer from excessive trading and volatility. Buy and Hold Long only is a completely mediocore strategy. When you benchmark against annual returns of an index long only is fine. If you were to benchmark against some other measure of maximum potential return in the market, hypothetically say the absolute value of the whole years daily market changes, long only looks pathetic. Theorectically a trader could go long or short the S&P 500 (a popular benchmark) at the end of every day, analogous to betting red or black on roulette. The maximum return if you are right every day dwarfs anything produced by a long only manager. Oh and you can make money in an up market, a down market, and a flat market. The stock market isn't an odds based game like roulette where you can caluculate your expected return. There is information available which allows investors who gather and correctly analyze the information the opportunity to gain an advantage. Market participants who either don't gather the information or don't correctly analyze it and trade/invest accordingly get "fleeced" by those who do. You wouldn't gamble in a casino without knowing the rules of the game, it is no different in trading markets, just that the game is more complex.

      No systematic risk comes from trading firms, whether they are hedge funds, prop desks, entering the public markets and providing liquidity. Systematic risk is introduced when someone decides to lend the traders and investors too much money, i.e. LTCM, the mortgage brokers, FNM, FRE etc. The biggest systematic risk in the market right now is derivatives trading. Which is why Bear was bailed out. The large banks seem to think that they should provide nearly limitless capital to investment funds to make bets in the CDS market. The banks and insurance companies also seem to think the counterparties in the CDS market have the creditworthiness to back all the CDS written. This is the same fallacy that lend to the problems with MBIA and Ambac et. al. That is the real potential problem.
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    • ON: Tue Aug 12th 18:31 PM
      Commented on:
      Sears Faces Risk If Economy Doesn't Improve
      Sears will probably not go bankrupt, but it will trade much lower. The real estate is not worth anywhere near the optimistic values based on assumptions made at the real estate peak. Watch for some data points on pricing coming out of the Mervyn's bankruptcy. Cap rates are headed up and rent per square foot is not going up, particular for locations that show declining sales. Given that Sears is such a poor retailer, none of it's competitors who are the ultimate buyers or end users for the locations are going to step up and pay a premium. Target, Costco, et. al. are going to wait for the fire sale. There is no hurry to buy since few retailers are expanding. What mall REIT is going to pay up for a space that needs to be reformatted or substancial TI to be re-tenanted, to say nothing of the releasing risk? A few quarters more of poor operating performance and the short term financing well will dry up. Then comes the fire sale! What if ESL has some liquidations and needs to sell stock to raise cash, where do you think the price will go? I think you can figure out what position I have in this stock. When your longs go wrong sell!
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    • ON: Mon Jul 14th 09:17 AM
      Commented on:
      Senator Schumer's Careless Remarks Result in IndyMac's Early Demise
      There is a very simple test to see if Senator Schumer caused the demise rather than just hastened it. When the portfolio of (bad) loans is run off, if the government loses money after the uninsured depositors already took a 50% loss then Schumer had nothing to do with the underlying economics just the timing. The regulators should have shut this pile of crap down long before it cost the American taxpayer any money. If the government makes money and returns some to shareholders then Schumer caused the demise.
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    • ON: Sat Jul 12th 23:03 PM
      Commented on:
      Many Banks Will Eventually Fail
      If you are looking for shorts, i.e. banks that will be trading at $0.00 in the near future, look for high NPAs, toxic loan products, construction loans, Alt-A, low doc/no doc, neg am. The question is how to make money!
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    • ON: Sat Jul 12th 22:58 PM
      Commented on:
      Who's to Blame for IndyMac's Failure?
      IndyMac serves as a warning to uninsured depositors at all financial institutions. If you have uninsured deposits, you should review the creditworthiness of the bank to which you have lent money. Yes your deposit is a loan. Get your money back and put it with a sound institution. The extra few basis points of yield are not worth the risk. The credit risk is mispriced because you are receiving an interest rate that assumes FDIC insurance. Even if you have an insured deposit, look back to the Resolution Trust days. Insured depositors were paid in full but in many cases lost access to their money for a significant period of time (months). There is a reason a bank has to pay an extraordinary rate to attract deposits.

      A few key indicators of a general lack of soundeness. 1) Common stock trading at a significant discount to book value, less than 80%. In general, a declining stock price is an indicator of default. See work by Moodys-KMV 2) NPAs non-performing assets greater than 5%. High levels of NPAs are a good indication that the bank is either a poor underwriter or has taken undue risk with your money 3) lack of cash earnings. Neg-am and the use of interest reserves in construction lending may overstate real earnings, as the loans typically don't default until the neg-am reaches its maximum and the loan recasts.

      Schumer was not wrong. The regulators who have been applying traditional measures of solvency to non-traditional loan products are completely at fault and completely incompetent. I have no doubt there will be many more seizures to come out of the Alt-A, option ARM and construction lending crowd. Wall St. recognized this a year ago. Too bad Schumer is just waking up now and the cost to the taxpayer goes up every day these banks are allowed to stay in business throwing good money after bad in the hopes of some miraculous recovery in the housing market. And no the run on the bank didn't kill IndyMac just hastened the inevitable failure.
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    • ON: Sat Jul 12th 08:35 AM
      Commented on:
      5 Steps For Saving Fannie
      The privization model started to fail a year and a half ago when the mortgage REITs imploded. Does their model, lend money, securitize the loans, buy RMBS sound familar? Sure it does! It is Fannie's and Freddie's model too the only thing that kept the banks and GSEs afloat was the lack of margin calls. With insured deposits at the banks and the implicit guarantee of credit at the GSEs, no need to worry about repaying the borrowed funds. As long as the regulators who are beholden to the politicians, allow the game to continue, there is fun for the whole family. Oh sorry a tax bill for generations!

      The solution is to let them fail and end sudsidized loans for housing. But the politicians want to continue to give away money to buy votes. After all if you own a house, you are unlikely to move to another congressional district. Let them fail. Let the bond holders take a hiarcut. Unfortunately, I am sure our government willpay bondholders 100 cents on the dollar, but hopefully over 10 or 20 years in that perverse government accounting way that ignores the time value of money.

      Back to the solution. The first American dream most people have is owning a car. Ford and GM found a way to finance that purchase without the government. I'm sure homebuilders and banks can find a solution (or commit thier own capital) without the assistance of Senators Schumer and Dodd and their misguided housing bill.
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    • ON: Mon Jun 23rd 10:42 AM
      Commented on:
      Countrywide: Potential Short Squeeze in the Offing
      There is no need for any short to cover CFC. Upon closing of the merger a short position in CFC will be automatically converted to a short position in BAC as required by the securities lending agreement that pertains to the borrow of CFC. Consider also that if a merger arb. player is taking a position for a deal break they will also be long BAC both to capture the potential upside on BAC (arbs. long CFC will be short BAC and cover if the deal breaks) in a break and to hedge against a siginificant move up in BAC. Not only does the 6% discount matter but also the absolute price of BAC.
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    • ON: Wed Jun 11th 11:42 AM
      Commented on:
      Downey's Aversion to Home Equity, Construction Lending: Key to Its Survival
      Disclosure my fund is short FED, FirstFed CA

      Just a few comments on DSL. NPAs are over 13%. LTVs listed are at orgination, so the portfolio would have a much higher current LTV ratio if the V portion was marked to market. Therefore loss severity is poised to increase. Run some scenarios at different severity ratios and determine if the current provision for loan loss is adequate. If not, which I don't think it is, you need to make a reduction in book value. Provision probably needs to more than double to just to cover current NPAs, then make some provision for future deliquencies. There goes some more book value. Then there is the farce of negative amortization. Subtract that accumlated neg. am. interest of $375 million from book value (not to double count with the general provision for loan loss) put this in the specific loan provision bucket rather than the general provision. As soon as these loans recast to fully amortizing, the borrower who couldn't pay even the interest only portion certainly won't be able to cover interest plus amortization of principle. The company is never going to collect that inerest which has been added to book value through earnings. These two adjustments alone get you to a current mid twenties book value. Properly reserved then the book value is is the mid to high teens. Then apply a discount and maybe the stock looks cheap at $4. The problem is pretty soon you run out of regulatory capital and there goes the only "asset" the company has (the deposit base) as the FDIC gets another bank to take over the deposit liability. Finally if you really think this company could survive, look at the on going business, no bank is going to be able to originate exotic products for the foreseeable future so normalized origination volumes will never recover (forget about trough origination volumes). As the performing loans run off so will interest income decline so even if the company could survive a significant discount to book value would be warranted. Cramer missed the complete change in the business model of these formerly conservative lenders, which is why he hasn't said a word about them.
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    • ON: Wed Apr 30th 11:36 AM
      Commented on:
      No Uptick Rule: A Convenient Scapegoat?
      The demise of the NYSE floor probably has more to do with the increased intraday volatility for NYSE stocks. Formerly, the specialist would stabilize prices and help eliminate the effect of the different times to market of buy and sell orders. The specialist and floor traders disseminated information, like which brokers had shares to buy or sell. Also the introduction and refinement of algorithmic trading has removed liquidity from the market. No longer are there sizable orders lined up on the book. Finally the legions of mediocre 'traders' for mutual funds are happy with a VWAP execution, a few thousand shares at a time to get the average price, rather than trying to actually profit from trading prowess. Unsustainable stock prices will always correct. In the short term, investors should have the fortitude to trade (buy stocks) when the evil short sellers execute a bear raid. Long term investors have nothing to fear from short term volatility. No company was ever driven out of business by a bear raid. Short sellers on the other hand have been carried out by company initiated short squeezes.
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    • ON: Mon Apr 28th 13:54 PM
      Commented on:
      Regional Banks: Too Small to NOT Fail
      This article is spot on. The facts are in the latest 10-Qs of the smaller regional banks and thrifts. The market has confirmed the facts by valuing some of the entities at less than book value and the options market has near term probabilities of failure for some smaller banks at 20%. While it may have been leverage that decimated the investment banks, it is going to be the bad real estate loans that are destroy this segment. The proposed legislation that will allow the FHA to buy mortgages after they are written down will only help the more conservative underwriters. The government is probably not going to step in and save a bunch of $50 million to $500 million market cap sized banks, and without any real franchise value, PE and other banks aren't going to be buyers either.
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