Mastery

Oil Guesses Are Wrong Again, Contango Grows

I suspect the contango is largely artificially created by Mexico's trades with Goldman and Barclays through which Mexico is reported to have hedged its entire 2009 production. See www.emii.com/articlepr...
Obviously massive put option hedges created sales at the front end of the curve during August September and October which have pushed this sharply down against the massive purchases at the back end. In turn this has created profitable cash and carry opportunity which have resulted in higher inventory numbers as storage is brought to capacity. This also appears to have walloped gasoline prices and for the first time in over 20 years gasoline has been consistently for more than 30 days trading below crude. Watch this space though next summer by which time much of the trade must unwind as Mexico's Puts start being exercised. It seems pretty criminal to me that Goldman is spending its new found Paulson TARP capital guaranteeing Mexico's Oil price at $90 a barrel, entering huge put option purchases with Buffet on European stocks, investing in a leveraged buyout fund as well as in its 2008 bonus pool.

GM: More Bailout-Worthy than Citigroup

I take fundamental issue with the author's assertion that "credit default swaps are clearly destabilizing." Actually credit default swaps help to reduce market risk by transferring credit risk from the debt market to the equity market and hence remove market risk not add to it. Thus a holder of GM loans or bonds can be protected from the credit risk implicit in that position by a credit default swap hedged with either equity put options or equity short positions or a short sale of GM bonds. Thus risk has been removed from the market and not added to the market. The inheritently destabilizing effects of CDS come instead when insurance companies like AIG or MBI who were active in these markets take way too much leverage or assume way too much risk for their capital.

Adjusted Case Schiller Housing Data

Fascinating! I agree with much of what has been said. The OFHEO indexes say much the same thing. Average Year on Year appreciation is slightly under 6% a year averaged over a 20 year period. This is almost identical to per capita Federal spending appreciation year on year over the same period as well as with appreciation of per capita disposable income. This also matches the UK inflation rate almost identically as well as the appreciation of the price of gold. By contrast Stock market appreciation over the 20 years to August of this year was nearer to 10% average annual year on year appreciation. Thus substantial part of the stock market collapse seems related to overheating of equities rather than simply the credit crunch from the housing bubble which (on a long term basis anyway) is something of a myth EXCEPT in that it encouraged consumer borrowing through home equity loans, sub-prime, second mortgages or onerous consumer finance and largely based on an illusion of wealth creation from home equity that on a TRUE inflation adjusted basis simply did not exist. In turn this lenders were fuelled by easy capital from the banking system and from a Wall Street flush with cash direct from the Fed after the dot com bust and from absurdly overvalued equity markets creating compulsory purchase through indexation.

Let GM Fail

With a market cap now of only 1.3 billion GM should float GMAC off to shareholders and then sell $2bln in new GM shares to its pension and healthcare funds which should be handed to UAW to run. Not only could that trigger a massive short squeeze on the 17% short interest from those who have sold the stock to write CDS's on GM debt but also, if done correctly, (for instance through special purpose vehicles and partnership structures), it may provide massive personal tax rebates both to the company itself and even on a personal basis to its workers. This would enable GM to stay in business and its workers to keep their jobs. GM could then be split into 'good' GM and 'bad' GM which would make it easier to negotiate with the debtors and banks accordingly. Bear in mind GM's balance sheet has $36 billion in provisions for deferred taxes PLUS $20 billion for prepaid pensions. Clearly there is also a lot of fat that can be trimmed....

The Case for Derivatives

Smash seems to miss the point. The entire stock market, futures markets and debt or bond markets are built on risk/reward ratios: from credit card lending at 24% return to cushion against high default levels to the US Treasury borrowing at less than 1% because it is considered risk free. The market is and always has been Caveat Emptor.
Buying shares is the same as selling put options and buying call options. Buying bonds the same as selling credit default insurance. HOWEVER the real risk issue here - purchasing a house and a pension fund are likely the most risky investment most individuals will make in their lifetime. Indeed so important does the government consider these activities are to the economy that they provide very substantial tax breaks for both. However both involve very risky investments in leveraged real estate as well as stock markets which as 100 years of experience has told us are volatile creatures. In 2007/2008 we saw house values dropping 25% (up to 50% in some areas), stock markets dropping 60% AND energy prices (oil) rising year on year by over 75%. These were the real culprits of the market collapse. What caused these three was only partially a subprime and derivative problem: it was basically almost entirely the Federal Government (a) pumping unnecessary liquidity into the market at the time of the dot com crash and therefore sustaining an already overheated stock market which by 2007 because of pension and blind index fund and hedge fund investment had reached absurd valuations (b) the collapse of the dollar and simultaneous rise in oil prices because of Bush's mid east wars threats to Iran, Syria and in Lebanon and as a result of the collapse of the dollar and high oil, the consequent massive trade deficit causing sovereign disinvestment (c) Federal Reserve lying about inflation which as any moron can tell has been running at almost 5% for some 20 years.(the same as the average rise in Fed Spending per capita, the average rise in the price of oil over the past 20 years, the average rate of inflation in England over the past 20 years AND the average rise in house prices as described by OFHEO AND with asset price inflation as measured by the stock market running at double this against anemic real growth (that is growth adjusted for that inflation number.)
It was the pressures of the above that resulted in massive deleverage and disinvestment as well as a collapse of the stock market to correct levels AND in turn which caused mass bankruptcy on Wall Street under simultaneous pressure from hedge fund fraud, auction rate preferred fraud, subprime fraud and derivative fraud AND the whole mess made worse by massive market manipulation in fast becoming illiquid markets by high frequency trading hedge funds and major investment bank proprietary trading desks causing obscene volatility and forcing further liquidation.
As if this were not enough Basle II in 2008 required banks to remove corporate and personal loan risk from their balance sheets and instead take mortgage and derivative (ie off balance sheet) risk thus paradoxically effectively removing massive capital from the system at the time it needed it most.

Why Yahoo Finance Is Wrong About Buffett

A) Exchange traded Goldman Sachs Preferred stock is down about 30% in value since Buffet invested - see NYSE listed GS-B This means that a five billion investment in GS prefs made then might indeed therefore now be said to have lost 30% of its value as measured against the market performance of pref shares..
B) Even if the warrants were purchased as part of a package in combination with the pref shares they still had some value. To suggest WB bought them for free is ludicrous. GS is not in the business of giving away options on its equity for free! Looking at traditional Black Scholes models to value this it has indeed lost half its value.
I think it therefore entirely reasonable to say that Buffet is down $2 bln on his $5bln investment on a mark to market basis.
What is also ignored in this discussion is the huge number of put options Berkshire Hathaway wrote on Stock Indexes in 2007 - see the 2007 letter to investors. If these are properly marked to market they must be costing Berkshire billions and billions. What about the other 94 derivatives such as credit default swaps. Was this the reason for Buffets very public announcement of investment in GS - was this an alternative to putting up margin?

Why Yahoo Finance Is Wrong About Buffett

A) Exchange traded Goldman Sachs Preferred stock is down about 30% in value since Buffet invested - see NYSE listed GS-B This means that a five billion investment in GS prefs made then might indeed therefore now be said to have lost 30% of its value as measured against the market performance of pref shares..
B) Even if the warrants were purchased as part of a package in combination with the pref shares they still had some value. To suggest WB bought them for free is ludicrous. GS is not in the business of giving away options on its equity for free! Looking at traditional Black Scholes models to value this it has indeed lost half its value.
I think it therefore entirely reasonable to say that Buffet is down $2 bln on his $5bln investment on a mark to market basis.
What is also ignored in this discussion is the huge number of put options Berkshire Hathaway wrote on Stock Indexes in 2007 - see the 2007 letter to investors. If these are properly marked to market they must be costing Berkshire billions and billions. What about the other 94 derivatives such as credit default swaps. Was this the reason for Buffets very public announcement of investment in GS - was this an alternative to putting up margin?

'No Bank's Books Are Trusted': Bloomberg's Weil is Imagining Things

This is a case of glass half empty and glass half full. Weill is saying that GAAP accounting does not reflect market value of bank books and therefore cannot be trusted as an accurate reflection. This largely does not contradict Brown. The key fault in Tom Brown's logic however is found in the following conclusion that the devaluation of these cashflows is simply "the result of screwed-up market mechanics, not underlying deterioration in the cash flows the underlying assets generate." Here we have the rub. All else being equal then if these cash flows continue being generated then Brown is correct; however all else is not equal. The very mechanics of the market have and are of themselves creating substantial deterioration in the cash flows. For instance loans are to GM - a company essentially at bankruptcy point partly BECAUSE of the 'screwed up market mechanics'; many of the loans are to oil product 'pipeline' entities such as Semgroup - bankrupt because of the 'screwed up market'. Loans to SLM - a company whose existence depends on low cost of capital and funds to make student loans but whose secondary market debt shows market pricing on its borrowing cost at 13% - way above where it can realistically lend to students. Other loans are backed by commercial real estate - essentially underwater because of the 'screwed up market' which has reduced commercial real estate prices by as much as 50%. whilst the ability of such entities to continue to generate cash flow to sustain a par valuation of those loans on bank books must be extremely doubtful. Was it any coincidence that Basle II was in the midst of implementation at the time of the credit crash and therefore from a GAAP point of view removed (on paper anyway) substantial value, capital from bank books and created the market rush to deleverage?