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August 2007

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6

Bush Speak...

August 31, 2007 – Comments (0)

A good summary of why what Bush proposed today is a band-aid on a gaping wound...

http://www.mcclatchydc.com/homepage/story/19395.html

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9

Bank Spank!

August 31, 2007 – Comments (2)

I have been talking for several weeks about how bad I think things will get for the investment banks & broker/dealers in the near-term, and how ugly their earnings picture will be in the coming quarters.  I don't feel people fully understand the the "horror" that is their balance sheets, equity analysts included, and finally one of them yesterday seemed to get it (sort of) as a Merrill analyst (the #1 ranked Institutional Investor analyst) lowered his estimates for 2007 and 2008 for 4 banks.  People will continue to believe, as their share prices keep falling, that they are too cheap and will think they're getting a great deal, but people forget that banks are very cyclical and when the economy is on fire they make boatloads of money, and they struggle in a weak economic environment.  The difference here is there are far deeper problems than just a slowdown in business.  I will talk specifically about a few of those problems over the next few days, and here's today's topic.  [more]

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11

But Mr. Moody's Said it was AAA...

August 28, 2007 – Comments (8)

There has been a lot of discussion lately involving the major rating agencies - Standard and Poor's, Moody's, and Fitch - and their responsibility for the losses investors are realizing on various securities - mostly ABS backed by sub-prime, and CDO's - as performance has been significantly worse than the ratings they assigned the securities suggested.  People want to blame the rating agencies because they "counted on" the ratings supplied, and the supposed opinions of the rating agencies implied by a AAA rating.  Let's clear up some issues first and see where the responsibility should lie:  [more]

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5

Market Recap 8/27

August 27, 2007 – Comments (1)

For all those hoping that last weeks data (durable goods and new home sales) would temper the negative sentiment in the market, it's time to drop the "wishful thinking" and face reality:  [more]

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5

Weathermen & Economists - A Sunny Forecast...

August 24, 2007 – Comments (0)

Did you ever think about how much economists are like weathermen?: they both spend a whole bunch of years studying a theory which is based on the belief that you can use historical data and computer models to predict future behavior, and then they spend their careers making forecasts that seem not only inaccurate, but almost worse than flipping a coin - every day I check weather.com and there is at least a 20% chance of rain, and every day I read about another economist lowering their forecast for economic growth, and increasing their odds of a recession.  It's a constant game of trying to "update" their model with the latest assumptions, but that is the problem - there's too many unknowns.  There are too many variables which have to be input, and the global environment/economy changes too quick for them to adapt.  People should just stop bothering with them, and instead listen to guys who are in the trenches like Countrywide's CEO Angelo Mozilo - the markets might have taken offense in that he "told it like it is"...slowly but surely people will begin to realize how bad things are, and then it will hit the economists..... after we are already in a recession...  [more]

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5

Boker/Dealer Losses, Fiscal Year Ends...

August 23, 2007 – Comments (0)

It hasn't really been spoken about much, and the equity analysts seem to have not noticed, and I know I have been harping on this, but the broker/dealers are due to report some miserable results for the 3rd quarter (FISCAL year end) which ends pretty soon for some the big boys - Goldman: Aug 25th, Bear: Aug 31st, Lehman: Aug 31st, Morgan Stanley: Aug 31st, and unfortunately we'll have to wait for Merrill till the end of September.  Think about it - the 3rd quarter, which will have included June, July & August were some of the worst months on record for these shops (and we are not even close to out of the woods yet).  Let's start with reduced fees - Debt new issuance...both corporate and structured, were basically at a standstill - some deals got done in June, July was pretty bad, and August has been completely dead.  The secondary markets for whole loans and cash bonds/loans has been a cemetary.  Their hedge funds have both lost money (reduced fees on investment), drove people to redemptions (reduced management fees), and kept out new investors.  Their proprietary trading got killed because of anomolies in correlation between different instruments.  Anything on their balance sheet in terms of bonds or loans have been marked down by multiple points - I'm talking 20 points on aa-rated abs backed by home equity loans, 10 points on aa-rated bonds backed by corporate loans, and forget about the residual and equity positions.  Oh yeah, and the asset-backed commercial paper market (this is a an $891 BILLION problem people!) has basically collapsed to the point where nobody wants to buy this stuff...and if it is getting sold it's at unheard of levels like 80 basis points over libor.  At that level whatever structure the cp is financing is losing money.  Normally the cp is issued at libor flat to libor + 5 for strong high-grade programs, and they invest in assets which yield about 50 basis points over that....so basically this stuff is toxic right now, so banks and dealers have to take billions back onto their balance sheets...this reduces the availability of their balance sheet & reinvestment, not to mention the value of the paper has probably dropped 10 or 15 points in the last few weeks...see what Bill Gross of Pimco said about the ABCP market:  [more]

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6

ABX Remittances Monday - Everybody Ready?

August 22, 2007 – Comments (0)

The debt markets are basically shut down right now - there are pockets of the market where deals are getting done, but at very expensive levels and with few buyers - and everyone is waiting for ABS/ABX remittancce reports on Monday the 25th...and I don't think it's going to be pretty.  The mortgage market is an absolute disaster, and you will continue to see the downfall of homebuilders, lenders, and hedge funds.  Every month will bring new lows in expectations of late payments, defaults, and foreclosures, and house prices will not be rising anytime soon.  The question is does all of this and the liquidity crunch it has caused dent the overall economy and the health of the US economy/markets...I believe it already has and will start to show in the data over the next 6 months - we are talking about substantial amounts of losses in highly leveraged funds/banks and the result will be extreme tightening of credit availability/quality and I'm sure some govt. regulations which will probably make things worse.  The end result is consumer/business spending gets hit and hence the economy will suffer and expectations will be lowered.  Now it's just a question of timing when it really begins to show...  [more]

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4

Which Way is Up?

August 22, 2007 – Comments (1)

This is one of the toughest markets to invest in, when there is so much volatility/uncertainty and trying to time the market can really drive you crazy - it seems instead of focusing on fundamental issues to companies/stocks/economy, everyone is just waiting for the next headline:  [more]

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8

Fool's Gold...

August 20, 2007 – Comments (1)

I have read/heard a lot of people talking about how banks & broker/dealers are extremely cheap right now because of the pullback in the markets and the fact that the market has overreacted to current credit/liquidity issues.  People point to the historically low P/E's and look to the recent past, but here is the problem with that type of thinking:  [more]

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9

It pays a dividend of 200%???

August 19, 2007 – Comments (1)

One of the funniest and most disappointing posts I recently read on a Yahoo finance message board was when American Home Mortage (which my mom worked for) was trading down around a dollar right before they declared bankruptcy, and somone had posted (seriously it seemed) that they were buying in because the dividend yield was 200% or somewhere around there.  They said they found the stock through a screener, and how could you go wrong with a yield like that.  There were plenty of people who replied with enlightening thought such as "what are you an idiot", but I think that type of thinking is a microcosm of today's investing world.  There are so many people who are naive/greedy and think they actually know what they are doing with their own investments, just like they thought they knew what they were doing when they took out a 100% LTV 2/28 ARM mortgage that would cost them 40% of their gross pay at the teaser rate.  In the current market environment, everyone is asking whose fault is it, and every time someone is left holding the bag, there is finger pointing and lawsuits.  People really ought to start looking in the mirror, because if you took out that loan for a house, you really should have done some research, and if you're buying American Home Mortage at under a dollar and thinking it's a steal and it goes to 0...well you have nobody to blame but yourself.  Are there instigators and some people who didn't help the problem?  Sure, the governement, banks, lenders, etc. certainly played a part...but at the end of the day, if you are risking a significant amount of your own capital for anything - whether it be an investment, a house, or even a subscription to a motley fool newsletter - there are an unlimited amount of resources available to do your own research/due diligence and to figure out if it fits into your risk/reward profile.  In terms of the blaming other people type issue, it's a lot like the dot com bubble in that everyone wanted to blame the equity analysts - oh well they said Amazon was gonna go to $800/share so I bought and it dropped 90%...it's his fault - sounds a lot like people today blaming the rating agencies - well they told me it was AAA, so I didn't actually read the prospectus...  [more]

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6

The Problem with the Motley Fool...

August 18, 2007 – Comments (2)

Don't get me wrong, I think the Motley Fool is a great site - provides a lot of free resources to research a large amount of stocks.  The problem is the whole site is geared towards getting you to buy something.  They have articles talking about how individual investors can't hope to beat the market over the long term, and you shouldn't pick investments based on hisorical results...then they try to sell you a newsletter claiming to beat the market by xx% over the last 3 years, or however long the newsletter has existed.  What are they going to do if there is a severe market correction and all of the sudden they are underperforming the market?  It's funny, because the top article today screams that now is a great time to buy, but they say that every day.  Just rambling here, but the whole idea of this site seems kind of hypocritical...  [more]

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5

Is this the end of the rout? Um, no....

August 17, 2007 – Comments (1)

I'm not quite sure why the market reacted so positively to the Fed action today - maybe it was more a combination of 1) it can't go down every day, 2) options expiration day, 3) short covering.  If anything, today just showed that things are a lot worse than any govt. officials have been admitting.  Unfortunately, nothing has changed - the debt markets, while starting to show some signs of life, are basically shut down; there is still a lot of worthless debt which has yet to be reported - hedge funds, banks, etc.  This is just the beginning of what promises to be an eventful rest of the year...  [more]

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5

When will it end?

August 16, 2007 – Comments (2)

CNBC and the likes will tell you the market made a great comeback today, but I think it was a combination of short-covering and the rumor mill...emergency Fed meeting/Bear Stearns buyer.  The funny thing is a fed cut would been absolutely nothing right now since the effective funds rate has closed under 5 for five straight trading days.  Right now, this is just a liquidity issue...there is a flight to quality and nobody wants to take on any risk.  The market may return to "normalcy" relatively soon on that front...weeks, months who knows.  The larger issue is it will become a credit problem - corporate defaults are at an all time low...companies have basically been borrowing for free for years.  Once the default wave begins, then recessionary pressures will begin - who wants to bet on the first default?  I say it's a homebuilder, and before the quarter is over.  There is a silver lining in all of this - after the dust settles there will be some great companies at a deep discount...I mean there are already but who wants to stand in front of a moving freight train???  [more]

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3

The FED Cheerleaders...

August 15, 2007 – Comments (2)

Is it just me, or does it seems everyone and their mother has already realized the "Sub-Prime" problem has spilled over into many other markets and the near-term outlook is bleak, except the Federal Reserve and the White House?  Every other day, whether it's Bush or Paulson or Poole, they come out and say to mr. market don't worry, everything's going to be fine...the problem is contained and the risk is so widely dispersed that this will not affect the overall market.  When do you think they finally admit they were wrong, or are even partly to blame for the mess?  My guess is this won't happen until real disaster strikes - would a Countrywide bankruptcy or something of that magnitude do the trick???  [more]

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3

Hey There Shorty...

August 15, 2007 – Comments (0)

Is it just me, or does it seem like everyone is short in this market...no matter where you look (except China it seems), everyone is waiting for the next negative event/headline to damper the market's mood.  Unforunately, the name of the game over the next few months will be volatility...every economic indicator, every fed syllable, every company's earnings report, and yes every inflammatory headline will be absorbed and priced into the market, and it will to be exciting, scary, and entertaining all in one...let's all hope we get to see Jim Cramer lose his sh*t again...  [more]

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3

All Aboard the Ugly Train...

August 14, 2007 – Comments (0)

Isn't this fun...sitting glued to the Bloomberg screen to waiting for another "end of the world" type story to appear?  Every day seems to bring another hedge fund failure, mortage lender debacle, or bank warning.  The CP market is basically shut down, the debt new issuance AND secondary markets are at a standstill, and existing bond inventories will by the end of August have their worst 2-month run in recent memory.  When you start to see the likes of Home Depot and Walmart disappoint, you know consumer spending is next on the hitlist...say it with me - RECESSION.  [more]

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5

Party Like It's 1999?

August 14, 2007 – Comments (0)

I know the market as a whole is not grossly overvalued, but don't some of the multiples just remind you of 1999-2000 all over again?  I mean you even have some of the same culprits such as Amazon (AMZN), then some new high flyers like First Solar (FSLR), Leap Wireless (LEAP), & Blue Nile (NILE)...I mean even if you love the company and it's prospects, there's just no margin(s) for error and too much of a premium.  I don't think we'll see as dramatic a correction as in 2000, but some names will have to return to reality at some point, which is about half of what they're trading for now...  [more]

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7

Not So Fast, Mr. Market...

August 13, 2007 – Comments (0)

A few things to keep in mind over the coming days/weeks/months...  [more]

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3

Doom & Gloom Continued...

August 12, 2007 – Comments (0)

As you can tell from my previous posts, I have a fairly bearish view of what is to come over the next year or so in the market.  If you thought things have been bad in the last month or so, just wait until banks, home builders, lenders, hedge funds, etc. report results for July & August...because you ain't seen nothing yet.  People took it as a good sign the Fed was finally willing to inject some liquidity in the market, and now feel that with an easing or two the market will have a "soft" landing (to hear Bush say that, along with "plethora" really had me laughing pretty hard), but the worst is far from over.  Don't get me wrong, there will be plenty of bargains out there in this minefield of a market (I have a lot more outfperforms than underperforms), but the next 6-12 months will be ugly...  [more]

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4

An ominous sign of things to come...

August 09, 2007 – Comments (1)

For those who have an optimistic view of the current market, I'm afraid today is a sign of things to come.  I can't predict which way stock prices will go in the near term, but every day will bring another headline such as "XYZ Super Leveraged Enhanced Investor Credit Global Opportunity Fund 36 reported today that due to the US residential real estate crises, the value of the fund has plunged to pennies on the dollar..."  The casualties will conitinue to pile on, and no matter how many times Bush and Paulson perform their "2, 4, 6, 8, everything about the US economy is great" line, we are due for a recession/correction in the next 6-12 months and the party is over.  GDP growth will slow & unemployment will rise as other areas of consumer credit start to feel the pain, businesses have to pay more to borrow, and the shock of falling liquidity really starts to be felt...  [more]

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4

What happened to amageddon?

August 08, 2007 – Comments (1)

Wow, that was quick...3 days, some Fedspeak, some Bushspeak, and the market is ready to forget about sub-prime, slowing growth, the housing bubble that has yet to burst, yada yada, and continue on to seek another record close (which really means, well nothing when inflation is considered & you look at a 10-year chart of the market).    [more]

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