Eric Boughton

http://www.deschutesadvisors.com

8 Comments

    • NAR Existing Home Sales Report: Bait and Switch Headline [view article]
      This is the same NAR which has sponsored TV ads recently touting homes because "prices double every ten years". Even leaving aside recent housing market weakness, none of the data I have seen agrees with this claim. I have e-mailed NAR for support, have been promised a response, and have yet to hear back. Mar 25 03:07 PM
    • Bill Miller on Crises, Past and Present [view article]
      Market observers who failed to recognize any sort of "top" (like Miller) are unlikely to have any valuable insight into a "bottom". Fundamentally, Miller does not understand the business and financial environment in which he is "investing" today, which means that his estimates of the long-term intrinsic value of securities are likely to have little relation to the true intrinsic value of these securities.
      In a way, his apparent lack of understanding is surprising, given his obvious intelligence and investing experience. However, it seems to me that one of his key weaknesses has been his inability to recognize that the twenty-five year cycle of continuously expanding credit (engineered by the Federal Reserve, and by cooperative public companies and the American people) contains within it the seeds of its own collapse, and that there is a high probability that it is now irreversibly collapsing.
      Unfortunately for Miller, whether this probability plays out over the next few years, or whether further profligacy by our politicians and central banks manages to reflate the credit bubble for a last hurrah, he will probably not survive through the turbulence. I anticipate his various funds will experience dramatic outflows, forcing him to sell into a falling market, and further harming his mark-to-market performance. It will be a little sad to watch, actually, but I will enjoy shorting Amazon as he is forced to sell it.       Mar 25 03:04 PM
    • Corporate Bond Spreads Nearly at All-Time Highs [view article]
      "All-time highs"?! Applying the moniker "all-time" to data going back only ten years is akin to declaring yourself the "world champion" after winning your school's spelling bee. Let's be accurate here: corporate bond spreads have been quite a bit higher during periods prior to the past decade. Feb 22 11:48 AM
    • Last 25 Years - Most Stable Economy in U.S. History [view article]
      Thanks for this extremely interesting chart. I believe that a fair portion of the noted decline in economic volatility is due to the fact that the methods of measuring economic activity have changed steadily since 1900. Many indexes (most notably CPI, but also many other indexes of economic activity) which go into the calculation of GDP are now "seasonally adjusted", "hedonically adjusted", and otherwise "smoothed". The farther you go back in the history of economic measurement, the fewer such adjustments you will find have been made. Therefore, regardless of the underlying volatility of the economy, one would "discover" reduced volatility today.

      That having been said, I do think the general trend is correctly identified: economic hard times are less frequent today, as evidenced by non-adjusted factors such as bank failures, (certain) unemployment measures, etc.

      An interesting question is of course whether this is a sustainable development. If pressed, I would conclude that it is not: that economic activity will go through periods of higher volatility for some 25-year stretch in the next century. I may even be around to see it!       Feb 14 02:48 PM
    • First Federal: Soon-To-Be Sub-Prime Lender? [view article]
      Thanks for the post, Tim.... there is even more to the story.

      At first glance, this is a sleepy community bank with 32 branches, founded in 1929. A closer look reveals dramatic acceleration in mortgage loan production between 2003 and 2005, as the bank more than doubled total assets with almost no growth in branches. What’s more, these loans have characteristics which we see as huge dangers for the company.

      1) FirstFed operates in an area where home prices are at record levels, based on any metric. In many California communities, the median home price is 6-7 times the median income, compared to 3.5-4 times nationally, and 2.5-3 times five years ago. Our thesis is that many borrowers, even those deemed good credit risks, will walk away from their homes if and when home prices fall substantially.

      2) 90% of FirstFed’s loans are ARMs. FirstFed has positioned itself as “the” ARM source in Southern California. As the falling originations highlight, this is great when option ARMs are popular, but can dry up pretty quickly.

      3) 80% of loan originations in 2006 were 40-year mortgages, another sign of a stretched consumer desperate to minimize a monthly payment. A longer mortgage period means lower payments and more opportunity to default.

      4) Many of FirstFed’s loans have negative amortization features. Aside from the increasingly evident risk that borrowers will have to default as soon as the rate resets, negative amortization in FirstFed’s case means that operating cash flows are consistently negative, even though EPS looks healthy. (BKUNA is another name we are short for the same reason.) There was $216 million of neg-am included in 12/31/06 loan balances.

      5) As you point out, half of the loans on FirstFed’s balance sheet are “liar loans”, with either no income or asset information requested, or no verification of the borrower’s stated financial situation. An additional 33% are “SIVA”, with assets verified, but income not verified.

      6) FirstFed gets half of their loans from wholesale loan brokers, meaning there is much more room for the “predatory lending” Congress is currently whining about, and also meaning that FirstFed can easily be misled by fraudulent brokers, who seem to come out of the woodwork in a downturn.

      7) FirstFed seems to have under-reserved for problem loans. Non-performing assets jumped from 0.05% of total loans at the end of 2005 (absurdly low) to 0.23% at the end of 2006 (still lower than most banks). FirstFed also has NO valuation allowance for impaired loans, relying on SFAS 114, which they read as not requiring a valuation allowance for loans under $1 million.

      8) FirstFed finances loan production with high-cost and “flighty” CD’s. In fact, they are one of the largest internet advertisers of high CD rates. This makes perfect sense—after all, one can hardly expect $1.5 billion in “sticky” customer deposits from only 32 bank branches to support $8.5 billion in loans! This may be a great business model when there is a high interest spread between CD’s and mortgages, and when defaults are low--neither is the case today.

      9) The average FICO score for FirstFed borrowers in 2006 was 714, solidly in Alt-A territory. When an Alt-A borrower tries to afford a “prime” house, the borrower may as well be sub-prime.

      10) To top things off, FED has seen high insider selling recently.

      Full disclosure: our hedge fund is short this name.       Apr 10 08:07 PM
    • Three Closed-End Funds of Funds [view article]
      Interesting finds, George. I run a hedge fund that applies the strategy of buying closed-end funds at discounts to NAV, so I am pretty familiar with this area. Every single one of the closed-ends we bought in 2006 (about 30) saw its discount to NAV narrow (or disappear) by the end of the year. Intriguing possibility that the tail end of that could have been due partially to FOF. (Our hedge fund, Matisse Income Fund, is up 23.5% (net after all fees) since inception October '05.)

      We have also seen a number of activist hedge funds purchase closed-ends at discounts, then sue the company to 1) convert to an open-end (discount disappears obviously), or 2) buy back shares at close to NAV. One typical example is Karpus, and their involvement with IMF. Our hedge fund is currently only $12 million, so we don't quite have the size to push the closed-end boards around like Karpus can.

      Wanted to point out your "double discount" calculation on ADX is a bit misleading, however, given that PEO only makes up about a 5% position in ADX. Taking that into account, the net "look-through&quo... discount on ADX only goes up to about 14%.       Jan 29 03:04 PM
    • 'As January Goes, So Goes the Year' - True or False? [view article]
      So much confusion of correlation with causation in the investment business! People need to learn statistics. The January "directional indicator" is an obvious statistical consequence of two facts: 1) January is up more often than other months (65% of the time vs. 58% for a random month); 2) The market is up in most 11 month periods. The correlation of these two variables, even if both were random, would result in the appearance of predictive value.

      Also, I updated your stats back to 1928 and found that January offers a correct prediction of the following eleven months only 67% of the time (down from 71%) for the larger sample size. Over this larger sample, an up January is followed by an up eleven months 78% of the time (down from 86%).

      Further arcanities: an up May (which only happens 56% of the time) is followed by an up June through April 77% of the time, almost as good as January's "power".

      (All statistics use S&P 500 Index data without dividends.)       Jan 05 07:36 PM
    • This Market Requires Prudence and Patience [view article]
      Bill, good general points about cycles. The clearest example was probably 2000, when many value stocks were bottoming while tech stocks were peaking. Simply allowing a disciplined combination of valuations and growth expectations (GARP) to guide one's investing would have led to fabulous returns (and did, for many).

      I would point out, however, that your comment about the daily high and low of the Dow 30 is incorrect as stated. Reported high-low ranges for the Dow, as for all indexes I know of, are calculated based on simultaneous price reports for all index members. If one calculated highs and lows based on the highs and lows of individual stocks, the reported high-low range would be much wider. (Which is your general point, anyway...)       Nov 30 04:59 PM
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