TKO

After trading largely higher in the morning on a positive data dump, stocks spent the lunch hour headed straight for negative territory. At midday, the Dow -0.2% to 9,690. S&P 500 -0.3% to 1,033. Nasdaq -0.4% to 2,037. Crude +1.4%. Gold +1.7%.

still plenty of skeptics out there despite the data.
either that, or profit taking -- though it seems rather excessive over the past few days.

McClatchy's Greg Gordon goes to great lengths to document how Goldman Sachs (GS) peddled over $40B in new mortgage-backed securities even as it secretly placed bets on a collapse.

There will always be haters for those that do not lose as much or earn something when others are losing. I love how the spotlight on Goldman Sachs increased as the world markets began to fall.

Your comment, sir, is a very good example.

Goldman Sachs, whether you hate them or love them, are extremely talented at managing money. Anyone who deals with the major banks, investment firms, and capital markets know that their client service, valuations and risk management is top notch compared to the rest -- Barclays is right up there as well. There's a good reason why they are highly regarded.

Being "well connected" may not be the reason for their profitability but the effect of their abilities.

On Nov 01 11:45 PM Rolo wrote:

> You know Vladimir, I call it FRAUD not "unethical hedging" lol.

Early weakness in stocks has given way to a sudden turn for the worse as energy and basic materials lead the way down. The Dow now -1.2% to 9845; S&P 500 -1.3% to 1052; Nasdaq -1.1% to 2075. Crude -1.8%. Gold -0.7%.

low volume drop. profit taking is what it seems.

Goldman: Want to Rethink That GDP Downgrade?

Please stop explaining that most of the GDP growth was "temporary" -- this was on purpose. The government and just about everyone knows that the "temporary" growth is not sustainable. They are not meant to be sustainable in the first place. Anyone who sees this as a conclusion that the world will not be able to recover is missing the entire point.

In Recessions, "Temporary Factors" are often required to prevent the economy from dipping farther. Without them, the economy would indeed be in a much worse position. The government acted as the spender of last resort.

The idea of a government stimulus is not to prop up the economy indefinitely. It is often used to temporarily stabilize demand for capital goods, prevent enormous capacity destruction and, most importantly, do just enough to introduce a turnaround in expectations.

The economies around the world are extremely fragile. Expectations are the greatest contributor to outlooks, and thus, spending patterns. Naturally, the first step towards any recovery is a change in expectations. That is the point of this stimulus.

Yale's legendary financial wizard David Swensen says it's time to buy TIPS: "We've had this massive fiscal stimulus... and it's hard to see how that doesn't translate into pretty substantial inflation." Much, much more in Swensen's interview on Consuelo Mack's WealthTrack. More on TIPS from the Treasury.

With TIPS, by definition, you are earnings a real rate of interest on top of inflation. By digging a little further, you will realize that housing, transportation, and food/beverages make up about 75% of the pie. Which basically means, unless those 3 factors tick up, you shouldn't be expecting a whole lot of upward movement in the CPI.

But here's the trick, CPI is a basket. Individual components could inflate more so than other components. Housing is in a deflationary cycle that probably won't be picking up anytime soon, but Energy and Agricultural Products (Fertilizer) are actually on an uptrend. If Housing actually does stabilize, Energy and Agricultural Products would be in much greater demand (And higher prices).

Not to mention, commodity-linked equity is forward looking -- so it accounts for future increases in prices; inflation and TIPS does not.

So if you are going for a full-blown inflation play, it would be much wiser to invest in an Energy or Agricultural Products (i.e. Potash) ETF because of the "forward looking" component.

FT's Martin Wolf makes the case for taxing the financial industry, like polluters, for the massive negative externalities it creates.

What in the world...

So let me ask you this. What's the difference between a centrally planned economy and a free market economy with regulations, taxes, and subsidies? Sooner or later, the government effects from regulations, taxes, and subsidies will overpower the 'free market' and dictate the movement of the economy -- which is analogous to a centrally planned economy.

Of course, the intention of the 3 items is not to 'plan' but thwart or limit the potential damage to consumers alike -- which is fine. But if the rules keep adding up, the end-product would look much the same as a centrally planned economy.

I am not arguing for or against this. But in a matter of time, the "free market" will be bogged down by so much law and regulation that it may actually negatively affect long-term growth infinitely - the cost of being compliant through the various channels will just become so enormous that the benefits of regulation may be less than the cost (i.e. have you seen how much audit and law firms charge?)

For example:
- Free Market where anything goes
- Free Market with 1 billion page book of rules attached; By the time anyone figures out what you can and cannot do, the equivalent non-regulated Free Market most likely already went through the exploitation, crisis, aftermath, recovery stage and on to growth.

The worst part of it all is that, by the time anyone else theorizes this, it'd be extremely hard to prove -- how do you exactly test out such a theory if the government dictates the entire economy's movement.

Home buyers who bought the "median priced single-family" home at the 1979 peak are now under water.

Here's why this is misleading.

It's inflation adjusted. A home purchased in 1979 at 2.5% inflation over the past 20 years would be worth 110% higher in nominal value today. Although your real home value has not increased since then, because you are paying a mortgage on the price of the home 20 years ago, your mortgage rate most likely has not increased substantially since then either. The only thing you've lost here is opportunity cost because the nominal value of your home is still 110% higher.

Saying that people who purchased a home in 1979 is underwater is severely misleading because of this.

Barron's Calls a Bottom

We might be going into a bigger dip then we anticipate. But considering most of the global stimulus packages will not be taking effect until 2010, perhaps we need to start thinking slightly ahead and wonder -- what if we grossly overshoot the stimulus requirement in 2010?

What we might be seeing is a deep U-shaped curve in the stock markets. With all of the pessimism surrounding the markets, a trigger to alleviate all of that could send the markets flying. Until then, we might be heading down for quite some time -- and in force. I would not be ruling this out. Perhaps an unintended bubble may be created a few months out - and another slight burst before we go marching on our way.

WSJ digs up a "confidential document" that names AIG's counterparties - who collectively have received $50B of the $173B the government has used to bail out AIG (AIG).

the bailout money wasn't given to not just top up their capital base. clearly, AIG required the money to also pay out obligations -- that's probably where the $50B can be attributed to. The rest of the funds? Possibly future obligations - known and unknown.

Guaranteeing Bank Stock Prices Is Not the Answer

This plan is more or less a bundle of put options being sold by the banks with a strike much higher than the current price, but the banks get no premium upfront. The direct value is completely negative for tax payers because there is no way they can directly win with this deal.

However, the indirect effect could be:
1) An increase in shareholder wealth for these banks. The net effect would, at the very least, be a 0 sum game with few people (shareholders) being made better off with many people (tax payers) being made worse off.
2) An increase in investor confidence. The $7 trillion or so in cash sitting out of the equity markets may be reinvested back in, either in the forms of equity or other investments, as there would be a decreased level of uncertainty.
3) As private capital starts to move back in, leading indicators may start to pick up steam towards the positive renewing hope for economic recovery. Manufacturers forecasting a prolonged recession may revise their forecasts and put on hold potential layoffs in light of this.
4) And so on.

The doom and gloom surrounding this world today began with the subprime debacle. Banks started to tighten up, preventing much needed loans for continued economic growth. Manufacturers saw less opportunity for growth, lowered their expectations, and it snowballed into large scale layoffs.

Folks, you can blame this on overextension of credit, but what stopped the economic growth wasn't the overextension of credit -- it was quite the opposite -- it was the lack of credit. It is when the expectations began to turn sour, and because of leverage, it simply magnified the snowball that occurred.

What drives this world is nothing more than consumer and investor psychology. What this world needs is confidence.

Real Estate: Apocalypse Now

Your interpretation is compelling at first sight, but I believe you are looking at the wrong variables here. When I choose to buy a home, I will look at my income level and determine the 'band' of home prices I can afford. We all need to live in a home, one way or another, and we will most often choose a home that is most desirable out of the homes in the 'band' of prices.

The view that homes are investment vehicles are totally wrong. They should be viewed more as an alternative to rent, which is an expense.

As for a better graph of the real estate picture: static.seekingalpha.co...
I give credit to Tim Iacano for his article: seekingalpha.com/artic...

If we take a totally different angle and compare median home prices to median household income, and factor in a historically low interest rate at this current time, real estate almost seems undervalued.

The truth lies somewhere between your interpretation and Tim's interpretation.

Barron's Plan to Save the Economy - For Just $200B?

The numbers seem staggering but, step back and think about it for a second. Go back to the basics and think what a derivative is. It is an instrument where value is derived from some other instrument. The numbers you are speaking of are most likely notional/nominal amounts and not actual dollar values of the instruments.

For example, if I were to sell 100, 100 strike april expiry, put option contracts on IBM at a cost of $9/option... I now have a $1,000,000 obligation in few months time if IBM stays below $100 by expiry. All for a $90,000 premium.

So now what, my asset is $90,000 and my liability is $1,000,000? No.

The $1,000,000 is the nominal value but the asset (options) based on time of trade is worth $90,000.

If i close this trade out by buying back the put options before expiry/exercise, I can immediately close out the $1,000,000 nominal amount and book a gain or loss based on the dollar amount that changes hand on the close.

The example above is only of one type - equity options. The nominal/notional value is small in comparison to swaps where the notional is often greater than $100,000,000 per deal.

You can't simply look at the notional value to determine risk. Risk is far more complex than that - in fact, it is a very gray area that brought us into this mess in the first place. We use quantitative theories to arrive at some formula to calculate a number that can be interpreted in some way to determine how risky something is. If everything breaks down as it did in the sub-prime mess, we begin to question the number, the calculation, the formula, and the theories. This uncertain area is what we should be scared about -- NOT the notional values.

On Feb 16 03:25 PM phdinsuntanning wrote:

> buying Venezuelan sovereign bonds
> probably have more hypothesis to end
> the subprime mess. 200 billions are peanuts,
> look at how much is at risk
>
>
> Top of the list remains JP Morgan Chase Bank. It held $91.7 trillion,
> yes, trillion in derivatives in the third quarter of 2007. One year
> later, it held only….$87.7 trillion! A shrinkage of $4 trillion.
> Now, JP Morgan’s assets are only $1.7 trillion in 2008, better than
> the $1.2 trillion they had in 2007. At least one financial institution
> is getting some benefit from the crisis and US government bailouts,
> but with a huge risk.
>
> Bank of America was third in derivative contracts in 2007, now is
> the second. In 2007 its Derivatives were at $32 trillion and in
> 2008 are $38.6 trillion! its assets were $1.2 trillion in 2007 and
> $1.3 trillion in 2008, so they increased their assets in only 100
> billion dollars ( close to the size of the refined copper market),
> but its Derivatives rose by $5.4 trillion. Pretty risky.
>
> Citibank is the third now US bank with more derivative contracts
> and holds $35 trillion in Derivatives, one trillion more that the
> $34 trillion in Derivatives of 2007. With total assets more or less
> unchanged of $1.3 trillion it looks in a pretty risky position to
> me.
>
> thanks Elaine for the data

Is Potash Corp. Overpriced?

Reasons why you should sell:
- Lowered current demand due to Global Recession

Reasons why you should buy:
- China's commitment to urbanization -- less farmers, more manufacturing/service based (Pressure on farmers that remain to be more efficient)
- The requirement of subsidies around the world to provide farmers an incentive to produce (Current food prices are too low)
- Fertilizer prices are holding their own versus many other cyclical commodities like oil, metal prices, gas, etc.

Conclusion:
If you are shorting a fertilizer company now, you are shorting all of these expectations that are already built into the share price. If the world tips over from here, stock piling food will be next. If it moves up from here, you eliminate the most important reason to short while all of the long reasons remain.

Disclosure: I am long AGU at $29 on TSX.

The Tyranny of Corporate Capital Allocation: Who's Really the Investor?

If someone says a stock is undervalued, they are considering either or both of these two things: 1) Expectations of Growth and 2) Liquidation Value. Intrinsic Value is a funny term because it's not really real -- it's a combination of both of the two things I referenced with various probabilities assigned to them to arrive at some expected value. The latter one is easier to determine because you're taking a snapshot as of some very short period of time - but you're also depending on executives to make the right decision in shutting down when it makes more economical sense to do so (then to continue and pursue business continuity at the cost of shareholders). When a company is trading below book value, be warry for that very reason. Companies are run by humans and no executive wants "ran company out of business" on their resume regardless of whether it makes sense to do so for shareholder value preservation. For that reason, a discount need to be applied to account for a range of liquidity values.

It's all very complex, but in the end, you're really looking comparing expected value vs. stock price. How is this any different from choosing a growth stock? I'm sure there are details which are looked more heavily by one set of investors over the other, but it really comes down to the expected value vs. stock price comparison.

Labeling yourself a growth, income or value investor is just a difference in labels. You're all doing the same thing. We're all really value investors.

White House is willing to increase the $50B already pledged to stem foreclosures, top Obama advisor Lawrence Summers tells Bloomberg, with focus on reducing monthly payments not principal. "Going directly at the problem means addressing affordability by addressing payments."

The problem we have today is that those who are 'fine' do not wish to sacrifice anything because those who are 'not so fine' appear to have put themselves in that position. Whether that's true or not doesn't even matter anymore. Soon you will realize that, what was once a small problem (subprime loans) has grown bigger (full-blown financial crisis) and it'll continue to grow bigger (global economic crisis). We are somewhere in between the full-blown financial crisis and global economic crisis.

While we bicker and complain about who's to blame and explain why we aren't willing to help because it's "not my problem", the economies around the world will continue down in a tailspin. Those underwater will cut their spending, which will affect various companies who will need to layoff workers due to decreasing demand, who will then begin to cut spending due to layoffs, who will then become a statistic to be forecasted into macro-economic models, which will then provide trends for various companies to layoff workers due to forecasted decreasing demand, and so on.

What's important here is not the finger pointing -- this can be done later when we AREN'T in a full-blown crisis. What's important here is to stop this tailspin with one big push, turn all of the forecasts around (because they are all really interpolations of data anyway), and curtail this tailspin from going down further.

I am not talking about optimism or pessmism here. I'm speaking realistically. Expectations and forecasts drive our spending/consumption patterns, not the current situation. The current situation is poor as we all know it, but if the future looks less bleak or 'better', it can be enough to send the trends back the other way. This is what the governments around the world are trying to do, and with the amount of force and quickness they are doing so, it will only be a matter of time before one of these economies start turning the other way. The problem is, however, if the largest of the economies do not turn within a similar time-frame, the downward trends will overpower the push. A global push is necessary with a global problem.