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Sucker's Rally Approaching an End

Techzone 12 is right. The debt is being transferred from the banks to the public balance sheet...which is fair enough, since it was the euphoric delusion of "unlimited abundance" persistently preached by LBJ and others all the way to BHO, Dodd, Frank et al, that created the conventional wisdom that CRA, BS mortgages etc were fine, and then both coerced and incentivized the banks to facilitate the toxic debt, creating both the bubble and its implosion. Rubin and Bill Clinton are the prime perps to recognize here, both for the 1993 restrictions on corporate deductability of income which unleashed the cult of "performance-based compensation", and use of the Boston FED "analyses" on redlining to pressure banks into lowered-standards-unde...

Events have consequences. Marketing master Ted Levitt suggests "The future belongs to people who see possibilities before they become obvious." In the present fiscal toxemia, the names Kyle Bass, Michael Burry, Steve Eisman, and Jeff Greene are among those who recognized the dissonance, foresaw the meltdown, and ignored the conventional "wisdom" while positioning themselves to score billionaire-level victories. The ongoing transfer of toxic costs to the public balance sheet is the price of 45 years of delusional romanticism. As long as our "leaders" ignore this point, there is no reason to take them seriously in anything. Just figure out what they're peddling, and SHORT them, ruthlessly.

On this same "possibilities before they become obvious" theme, CareerBuilder has a 3/09 survey saying 6 of 10 upcoming retirees will take years to recoup losses in their 201Ks, my estimate is an extra 4 years in the workforce, on average, for the next several years. Rough guess, an extra 2.4M jobs needed, maybe more, as this becomes a new norm...likely losers - the college grads in classes of 2009-2012, whose potential employers won't have 2.4M vacancies to fill each year. "Normally", unemployment is a lagging indicator, but a mass boomer postponement has potential to put a whole new spin on "change we can believe in". Read about it in TIME, March 2011, or later.



On Apr 13 02:02 PM techzone12 wrote:

> It's called a sucker's rally, because it sucks you in...
> What we are witnessing is the transfer of debt from the big banks'
> balance sheets to the taxpayer. So all of a sudden, the banks are
> making record "profit"!. Congrats!. It's time to distribute new bonuses!.
> Enjoy the ride!
>

Cramer's Call: Another Rally Top Indicator?

drbob66 is right. So is StoneFoxCapital.

Greg is talking smack. DJI hit 9955 on Oct 6, crossing 10,000, headed south. It hit 6547 on Mar 9, after other lows on Oct 10, Oct 27, Nov 20.

Greg owes Cramer an apology. Or top Jim's 14yr X 24% net return in his hedge fund.

Whichever, good luck, mate.




On Apr 10 07:39 AM drbob66 wrote:

> "On Monday October 6, Cramer went on the today show and told people
> to sell any stock money they might need in the next five years. The
> market bottomed that Friday."
>
> Huh? The market bottomed on October 10th? Really?

Capitally Challenged Stocks That Could Be Diluted or Extinguished

AB - another excellent article.

Don't forget, a lot of firms have another overhang - a need to contribute to defined-benefit pension funds for the first time in years, since the asset pools underlying those funds have possibly suffered erosion. WORSE - the assets in the funds are likely to keep eroding in this new era global financial pandemic.

I get a letter every year from an old employer, cryptically informing me that the assets "met actuarial standards". I'm wondering what circumlocution they will use this time, since it's pending...

The Great American Hole Gets Deeper by the Day

That's not all. Virtually every older S&P firm, the ones that have pension liabilities, will have to make actual cash infusions this year for the first time in a while, since the "assets" are of similar quality to everything else denominated in $$s. The impact of these donations on the pretax bottom lines may be considerable, although I don't have a solid read. I'm not sure whether current talk of estimated $50 earnings for the S&P 500 includes this element. I'm guessing not, since there is enough negative news already, and why be the first to ruin an already gloomy conference call by bringing this up and getting hosed by your analysts and "rating" agencies.

I expect there are hordes of PE firms calculating how hard a drop these effects can cause, so they can buy in at an SPX level of maybe 450 for little more than bonds covering a target's pension obligations and extracting warrants at significant concessionary levels to boot. Sitting on a pool of capital, I'd wait on this event. Think of it as a PE take on "Change we can believe in". Sovereign-capital funds can also play this gambit, as long as their home economies aren't deeper into the tank.

11 Take-Aways from Buffett's Annual Letter

Fred - tasteful number, stopping at 11 entries.

My favorite number is 17, as in how many waves makes a perfect session, the number of syllables in a haiku, etc. e.g. reformatting Ted Levitt:

The future belongs to those who grasp possibilities the quickest.

and, from Onassis:

The key secret of business is to know something nobody else knows.

All Banks Are Insolvent if You Believe They Are

Maybe I'm naive, but wasn't SARBOX supposed to take care of ambiguities of the type you describe: "...the information provided by banks does not allow someone outside to know the proportion of mortgages they hold with Fico scores<600, LTV's>100%, vintage less than 5 years..."

And if not, exactly what are the CEOs of these "fine" banking firms signing off on, on their 10-Qs. It's enough to make me short the market this morning (or buy some SWVOQ puts), even if I hadn't already checked that Asia is down 3%, Europe is set to open down, and the only projections coming from the Obama camp are reduced net-earnings for anyone impudent enough to commit capital.

We Could Soon See 1 Million Jobs Lost in Single Month

Alan -
Your article is probably prescient, but over the last two years we have been running ~2.4M jobs lost monthly...these have been offset by ~2.5M new jobs, according to the BLS's quarterly "Business Employment Dynamics Summary", which come out with about 8-month lags.

In the two most recent reports, 4Q07 and 1Q08, 7.4M jobs were lost each quarter; these were offset by 7.7M new ones in 4Q07, and 7.1M in 1Q08.

To my astonishment, it seems the unemployment rate number that gets so much attention is really the small difference between two far larger numbers, and this has several points of impact:

a) in a credit-starved downbeat economy, it is hard to imagine who wants to continue creating enough new jobs to balance the "normal" rate of job losses;
b) 7.4M jobs lost quarterly = ~29.6M jobs lost annually, or one sixth of all the jobs in the economy...while some of these were doubtless due to attrition, probably 20M involved an involuntary termination, and unless the victims were recluses and hermits, probably 50% of the working populace must have a close personal connection with one of these terminations, so the political implications of 50% or more of the workforce seeing friends and acquaintances scrambling for work are clear;
c) these numbers are as-of 3/08...job creation is not booming, and unless the ~30M new jobs created in '07 are closely replicated, even Obama's 2.5M new jobs is a small drop in a large bucket.

Your projection of a 6M job loss is, from a labor-dynamic perspective, a projection that some sectors will create a total of ~23M new jobs, assuming that the 29.5M loss rate does not increase. Both numbers may include mild optimism, but I hope to be show to be unduly pessimistic.

1Q08 data available at:
www.bls.gov/news.relea...

Annals of CDS Demonization, Michael Lewis Edition

My modest understanding is that writing a CDS was functionally equivalent to selling a PUT on the subject bond. As such you could take comfort from the fact that 10-sigma events rarely occur. and screw Levy, Mandelbrot, et al.

Roger Lowenstein's WHEN GENIUS FAILED points out that LTCM's great discovery was that in times of crisis, all correlations go to ONE. Being a writer, not a mathematician, he did not derive what I call the LTCM corollary, that all the uncorrelated "Gaussian" variables that can be measured using student's T develop another charming feature right from the t-distribution: when the DF<2, sigma is undefined, or more practically, unboundedly large.

Why would anyone care? Try the fact that an ATM option value is proportional to SIGMA, and to the extent that the CDS you've sold someone replicates an option, as suggested above, the price of sell-to-close is also quite high, if you can find a writer. So you are stuck!

This is not only a matter of concern to the CDS writers but a known factor (and irresistible opportunity) to astute players. My take on Lewis' PORTFOLIO article is that he was writing about such people, and he understood how profitable their side was, once they convinced themselves of the epic stupidity staring them in their faces. HIs comments in the ATLANTIC seem consistent.

I agree with gramps2 (2 comments above) but think Felix deserves more slack, until he learns more of outlier-math. That's where your Brownian-motion model holds but becomes irrelevant because the surrounding fluid either freezes or evaporates, a.k.a. a phase change among real thermodynamics folk.

Paulson Kicks Competitors While They're Down

Well, gee, duh, Stalwart.

If we were Paulson, our target audience won't be S-A commentators, but big-$$ managers contemplating where to deploy their next infusion of money. And I'm sure they are already receptive to J.P.'s view.

His secondary audience is his investors who don't have extra cash to deploy, but who may be apprehensive that he may be about to "postpone" redemptions. This both reassures them, and lowers any temptation toward preemptory redemptions. Some of them may be getting daily calls from nervous clients, the type who are buying no-interest government paper these days.

Reverse Merger already cited the Madoff effect.

I don't see Paulson kicking competitors at all, just asserting that his is still a viable enterprise. Now, if I see him show up on Capitol Hill arguing for a bailout, I'll be happy to admit I was unduly optimistic.

Stocks vs. Bonds: Risk-Takers Can Make Historically High Returns

Right about this being a good time to get paid well to take on risk. But...will it be even a better time to take risk later, when a few more cockroaches have surfaced (Madoff II, III...) and the next quarter's round of 401K reports creates another wave of redemptions at Fidelity, Vanguard etc. We are about to enter the most uninspiring earnings season in recent memory, and the outlooks can hardly be expected to uplift the multitudes.

Still, stand ready to jump opportunities as they reveal themselves.

And, good luck folks.

Mort Zuckerman Needs to Take Some Responsibility for His Madoff Losses

DiligentQualified Investor101 is right on target.
The link is at
ascotpartnerslp.com/co...
and everything is exactly as cited.

Perhaps Tom Brown is more prescient than others, given that he didn't bother to even read the link,
ascotpartnerslp.com/
which looks like Ascot's site but isn't, and the NT Times summary, in
www.nytimes.com/2008/1...
both of which lead one to a conclusion that Mr. Zuckerman was acting in good faith and was scammed, rather than stupid.

As long as Tom Brown is ranting about ... "You didn’t have to do a lot of due diligence to see the warning signs. And if you don’t think due diligence is your responsibility, you’ll get what you deserve."...one might expect Tom Brown would show some due diligence himself.

Since his S-A profile says " In 2000, he formed Second Curve Capital, a $550-million-in-assets hedge fund that invests exclusively in financial-services stocks. Brown's original fund, Second Curve Partners, has generated a 20% yearly return, net of fees, since its May 2000 start."...and we now know how thoroughly he "researches" stuff, I'd be more interested in how good his own Second-Curve research is.

On the other hand, DiligentQualifiedInves... did not prove that Tom Brown relied on statements by Mr. Merkins' attorney. But since Merkins, not Zuckerman, is the one taking custody of the money and acting as the fiduciary, it will fall to sterner judges than Brown to determine Merkins' culpability, and the early word is that despite John Polumny's cheap shot at Mort Z, it's Merkin who emerges as the schmuck in this little Yiddish community tragedy.

This just in...NYU suing Merkin too. More to come, I'm sure.

Any snot-dripping comments about NYU, Mr. Brown?


On Dec 24 03:53 AM DiligentQualifiedInves... wrote:

> Mr. Brown, who admits to not reading the prospectus, takes unfair
> aim at Mort Zuckerman by relying on self-serving fabrications apparently
> communicated by Mr. Merkin's attorney. The October 2006 offering
> memorandum of Ascot Partners, L.P. makes only two references (in
> 60 dense, circumlocutious pages) to Mr. Madoff's firm:
>
> 1. "Clearing, settlement and custodial services will be provided
> by one or more unaffiliated brokerage firms. Morgan Stanley &amp;
> Co., Inc. and Bernard L. Madoff Investment Securities, LLC (the "Prime
> Brokers") currently serve as the principal prime brokers and custodians
> for the Partnership." (pages 8-9)
> 2. "Morgan Stanley &amp; Co., Inc. and Bernard L. Madoff Investment
> Securities, LLC (the "Prime Brokers") currently serve as the principal
> prime brokers and custodians for the Partnership, and clear (generally
> on the basis of payment against delivery) the Partnership's securities
> transactions that are effected through other brokerage firms. The
> Partnership is not committed to continue its relationship with the
> Prime Brokers for any minimum period and the
> General Partner may select other or additional brokers to act as
> prime brokers for the Partnership." (page 28)
>
> It would be unreasonable to expect a well informed, qualified investor
> to conclude from the offering memorandum that Mr. Merkin passed all
> investor funds to Mr. Madoff for management and custody. I would
> counsel Mr. Brown in the future to perform at least a cursory examination
> of the facts before making sweeping, potentially defamatory allegations
> against a well-meaning philanthropist and apparent victim.

S.E.C. Short-Sale Ban Was Pretty Much Useless

The summary and graph shown are true, and from the cited authors, but they do NOT come from the cited paper,
(www2.gsb.columbia.edu/...)

Instead they come from a slightly earlier preliminary/working paper from the same authors, "SHACKLING SHORT SELLERS: THE 2008 SHORTING BAN" , available at
www2.gsb.columbia.edu/...

ZJ's text quote comes from the abstract, and the chart is Figure 2 in this cite.

***Just to save anyone the time of chasing down the details***

Apparently I'm not the only one who works with multiple pdf's open at the same time. But, while chasing down the correct paper, I incidentally found a far more interesting paper in Charles Jones' recent working papers, so I get almost instant-karma rewards.

Merry Christmas, Happy Hanukkah, Joyeaux Kwanza, fecund Saturnalia,
...enjoy something!!

Mind Your Value Judgments of the U.S. Economy

Splendid!

Note that government revenue impairment tracks incomes (especially at the top 10% who provide 70% of the take) and corporate profits, if any.

With the boomer retirement cycle coming within the inferred three-year down cycle of Reinhart and Rogoff, and the end of the Bush 43 tax cuts on capital gains, is there much prognosis for recovery before the FICA and Medicare "Trust" Funds get depleted, precipitating a secular financial crisis that won't go away.

More to the point, is there any residual reason to put venture capital into play in an environment where the risks are magnified and the possible net returns significantly lowered by vengeful theories of "fairness".

Or, are the incessantly repeated "eight years of the 'failed Bush administration'" really the last golden age of American entrepreneurialism, before deep-macro effects align to induce a new dark age of real diminished expectations. Like, say, Japan, but without the communal work ethic or cultural cohesion.

The Fed refuses to grant Bloomberg News's request to disclose the recipients of more than $2T of emergency loans from U.S. taxpayers and the assets it's accepting as collateral. "If they told us what they held, we would know the potential losses that the government may take, and that’s what they don’t want us to know."

Good point, Metalhead.

Obvious solution: gift some suitable securities to some enemy combatants (names available from ACLU court filings), and then sue the FED on their behalf for disclosure of the facts, petitioning the same judges who discovered their "rights" under the FOI act.
_________________

On Dec 13 05:05 PM metalhead wrote:
...
> Surely if we can grant "rights" to enemy combatants under the Bill
> of Rights, we can allow our citizens to see the truth of how our
> government is spending the tax dollars of future generations.

Tying Interest Rates to CDS Is a Recipe for Main Street Disaster

so, let's get the recipe right -
a) find firms getting loans from Citi or Credit Suisse, per Bloomberg cite, or
b) scan "candidate" firms' SEC filings for CDS references

c) determine how fast they roll their financing, and how much
d) project news events likely to lower estimates of revenues, etc
e) buy deep-out-of-money PUT LEAPS, say 2010 or 2011 series, strike maybe 20% below current price
f) sit back and let the speculators work their magic, or just wait for the recession to erode the firm's financials anyway
...
is there any way such borrower firms DON'T get hosed, sinking the above strategy??