Blown Mortgage » Hedge funds

Cut the bull and call it a Depression

Constantine von Hoffman — Fri, 12 Dec 2008 16:18:53 +0000

Guest post by Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing and business.

Two weeks ago the National Bureau of Economic Research officially confirmed what we already knew: we have been in a recession for the past year. This begs the question, how long until we declare World Depression II?

The (disputed) technical definitions of Recession and Depression make them lagging economic nomenclature. Economists debate whether we are in a swamp and say nothing about the ever-increasing number of alligators. The lack of an official declaration of recession mostly just gives the chattering classes something to do while avoiding taking action.

?Is it a crisis??

?There is no crisis!?

?Is there a large, green creature eating my leg??

?There is no large, green creature eating your leg!?

Allow me to go out on a very, very sturdy limb and declare a Depression. The economy isn?t going to recover by the end of next year. There is a only a dim possibility it will recover the year after that. But no one in an ?official? position is willing to be the bearer of that piece of bad news.

Doubt that it is (or will eventually fit the technical definition of) a Depression? Look at the actual numbers.

While the official unemployment rate last month was 6.7%, everyone ? including the Labor Department ? knows that number is bullshit. On page 19 of the report, they also share their broadest estimate of the unemployment rate, which includes the total unemployed (the standard rate) plus ?all marginally attached workers, plus total employed part time for economic reasons? plus all marginally attached workers.? That rate (called ?U-6?) in November? A whopping 12.5%.

And that was the rate LAST MONTH. Before Bank of American cut 30K jobs. Before GM and Chrysler were forced to face the music. Before Bernard Madoff?s $50 billion hedge fund/Ponzi scheme came to light.Businesses continue to fire people in anticipation of how bad the economy will get, thus creating a very ugly cycle of wish fulfillment.

Although foreclosures declined last month as loan modifications bought homeowners some time, that time is going to run out in about six months. Then the tsunami returns.

Nor, of course, is that all there is. As Karl Denninger notes: ?We are doing exactly the same thing that Japan did. We are propping up zombie banks, refusing to force losses to be taken and allowing it all to be swept under the ?TARP.??

T-bills are hitting 0% because people see that a guarantee of no loss is worth the price of no return. Most businesses and state and local governments that rely on credit to cover operating costs are in a ?hope for a miracle? mode.

It is hoped that that miracle will be the next president?s economic stimulus plan. Mr. Obama is all but promising another New Deal. Problem: The New Deal was financed by a nation that wasn?t already broke.

So let?s stop calling it a downturn or a recession. It?s time to face the Depression.

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The Stock Market

phillenbrand — Fri, 21 Nov 2008 15:59:46 +0000

If you?ve turned on CNBC or Bloomberg at any point over the past few weeks, you may have noticed that a popular topic of discussion has been whether or not the market has bottomed yet. Indeed, when the market rallied in late October, a number of the talking heads were claiming that as evidence that we had, in fact, seen a bottom.

Now, before we start bashing the pundits, who clearly took the wrong side of that argument, it is important to note that there are a number of reasons to look for a bottom in the stock market:

The stock market is a leading indicator, and will tend to recover well before the GDP and other indicators take a turn towards positive territory.
Price/earning ratios (PE) are at near-historic lows, making stocks of strong companies look like bargains, or as one Bloomberg guest put it, ?Cadillacs at below Chevy prices.? (a touch of irony there, given the uncertain fate of GM)
Several major companies have reported surprisingly strong earnings, including Google (GOOG), Apple (AAPL), and now Dell (DELL). Notice a trend there? Curiously, these are all technology stocks.
Hedge fund redemptions, or investors withdrawing money from hedge funds, triggered a massive wave of fear-selling, which also correlated with the emergence of the credit crisis. Once the fear subsided, buyers would naturally reenter the market
A huge mountain of cash is sitting on the sidelines, invested in short term Treasury bills yielding as little as .04%
That notoriously problematic $700 billion (+) bailout, and the other activist actions taken by our public officials, including the insurance of money-market funds and other savings (not investment) instrument.

Yet today, November 20th, saw the lowest close in the stock market yet. And curiously, many of the TV analysts abandoned their unabatingly optimistic tones and began to throw around ominous terms, such as ?loss of support levels,? ?uncertain environment,? and the ever-insightful observation that ?this is a bear market.? As Han Solo might say, aren?t you glad they?re here to tell us these things? Especially since cnbc.com is now running an article in which three analysts call for a bottom next February, as opposed to the bottom they thought we might have originally reached.

The fact is that no one can time the stock market. The market is the ultimate equalizer. It can make kings and fools alike, create and destroy hopes and dreams in one fell swoop. That may sound awfully dramatic, but if you talk to people who have had their savings and retirements destroyed, it is very, very real. Presently, the bears are the ones in control, a bear market bubble, if you will. People who have bet against and sold short the market, such as hedge fund manager John Paulson, have made small fortunes for their foresight. To mix metaphors, we are in the midst of a bull-market bubble?for bears. Eventually it will end. But if you spend time trying to figure out when, and in what sector it will rebound, the odds are good that you will miss it. For those of us who are not professional day traders or money managers, it is a waste of time and energy.

My best advice? Listen to these words of wisdom from one of the most unique Wall Street books ever published, Where Are The Customer?s Yachts? Or A Good Hard Look At Wall Street by Fred Schwed:

When there is a stock market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them,? he elucidated. ?Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this?just wait for the depression which will come sooner or later.? When this depression?or panic?becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you?ll have the pleasure of dying rich.

This same advice on stocks can go for gold, real estate, paintings, and vintage Fender Stratocasters. The second you start to chase something you aren?t in control of, the odds are against you. The market will rally, and when it does, history tells us that it will be a violent swing to the upside. But if you buy an attractive asset at a depressed price, and are patient with it, profits will materialize. The American economy is likely to enter a period of economic recovery earlier than the rest of world. The US has had to bear the brunt of the financial crisis for over a year now, but for the rest of the world, it is only beginning. It’s my opinion that this represents an opportunity for value investors, who understand that patience is an investors greatest virtue.

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Mortgage Mess: Is there Profit Somewhere?

Morgan — Mon, 10 Nov 2008 00:58:45 +0000

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

An often used saying when it comes to value investing is that you don’t want to ?catch a falling knife.? Many times just when we think that stocks or commodities or any asset has been knocked down so far it can’t go any lower and buy in, it falls even further than we anticipated. The mortgage market is another area where experts and analysts think they’ve found a bottom, only to find out there really was no floor at all. Some funds, however, think they can make some money in this mess, and they know where to find it. With panic still ruling the markets and hedge funds eating huge losses left and right, one has to wonder where exactly they’re going to make their money in a sea of failure.

Look at Fortress Investment Group as an example. They had thought that bonds in the sector were attractively priced, and they made a huge bet trying to call the bottom. Unfortunately they ended up riding that bet down to yet another bottom, and their numbers show it. The fund had assets of about $940 million, and it’s down 47 percent in one portfolio, 42 percent in another, and 5 percent in a third. That’s as of the end of September, and things haven’t exactly improved since then. It’s possible that their bet may eventually pay off, but I’d be feeling pretty sick right now if I had a seat on that roller coaster.

Bryan Caisse, however, an 18-year veteran of the mortgage markets, thinks he can find some profit potential where so many have failed. He’s currently planning on launching Huxley Capital Management with backing from a United Arab Emirates investor. Supposedly, he claims that other hedge funds have been reckless in their use of leverage, and failed to properly handle liquidity challenges. As he put it, ?Leverage is a very, very dangerous thing in any market; it can be deadly in a market where liquidity is uncertain.? No kidding?

To find these diamonds in the rough, Caisse says he’s looking for Fannie Mae and Freddie Mac mortgage bonds. These bonds are (surprise) trading at historically low levels even with U.S. Government backing. Through the use of ?conservative leverage,? whatever that means, he sees some serious value opportunities, and hopefully profit down the line.

I’m sure I’m not the only one that’s skeptical here, but I can’t argue with the guy’s experience or success. Time will tell whether his into the line of fire strategy will work, but if other similar endeavors are any indication, the odds do not favor him.

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