Wednesday, March 5, 2008

Ambac + Tech = BULL


I've been particularly silent in recent months due to a very busy schedule helping my paying customers survive the crash of this epic credit bubble. Also, the fact that, well, what else can I say? I don't want to be blamed for piling on---as easy as it would be. But I felt compelled to comment on a couple of occurrences today to help anyone a bit new at this game understand the kind of high stakes shenanigans that continues unabated even after nearly every shred of self-respect has been eviscerated by the parties involved.

Markets were headed for another total shellacking today when again, it was reported on CNBC USA that the consortium of banks meeting now for something like 45-days straight are again very close to hammering out a bailout of monoline insurer, Ambac Financial (ABK). I'll address that never ending Broadway presentation in a moment. But in addition to this was word that John Chamber, CEO of tech behemoth Cisco Systems (CSCO) declared that he has grown more confident in the company's long-term revenue growth target of 12 percent to 17 percent, despite prior worries about the U.S. economy. Of course, news of his euphoric utterances was deemed fabulous for the tech sector in general even if it failed to help shares of his own company finish in the green today. Chambers reportedly threw markets a bone at a Morgan Stanley (MS) conference when he said that his company will hit some "bumps" in the U.S. economy, but such bumps would likely be both short-lived and "shallow." Given Chambers' track record of being two-parts market cheerleader/bubble enabler and one-part, CEO, It never ceases to amaze me that his mindless drivel is given even an ounce of credence by grown men and women whose job it is to "manage" other people's money.

Let's take a trip down memory lane where the same Chambers made similar market-moving declarations:


On August 8th, 2007, John Chambers, following his company’s 4th quarter earnings report says: "It's the strongest global economy I've seen in my career." Chambers says, "I know there have been a number of mixed views about the strength of the U.S. IT spending, especially in large accounts. I am very pleased to share with you not only that our U.S. business was very strong, but the balance was good across all customer segments." Of course, since Cisco's August highs in the low $30's, shares have dropped by over 25% as the tech sector, especially semiconductors, have experienced a near free-fall. Anyone using Chambers' self-serving posturing on that day last August as a reason to buy shares of Cisco or even tech in general has now suffered a meaningful financial set-back.


But than, just six-months later on February 6th of this year, following his company’s 2nd quarter earnings report, Chambers described the current business environment this way: "It's the most cautious I've seen CEOs in the U.S. and Europe in many years." How can that be? From "best" to nearly worst in 180-days?!?! During that post-earnings conference call last month, Chambers warned that orders slowed rapidly from December to January in the United States and Europe.

Naturally, the enabling U.S. financial media (CNBC USA) clung onto those euphoric comments by Chambers last August as if it were gospel. But Chambers, merely a fallible human, whose comments are likely more self-serving than predictive of future business conditions or stock prices has hence helped lull countless numbers of CNBC viewers into a pretty vicious technology bear trap. So again, today's comments probably had more to do with the fact that fellow tech behemoth, Intel (INTC) warned on its prospects and that the tech-heavy Nasdaq was again flirting with breaking thru its' 52-week lows.

Lastly, I've concluded that the best plan for a bailout of moniline insurer Ambac (ABK) is to never actually reveal a plan--just always be close to hammering one out. Today seemed to be yet another page from this single page playbook--or pamphlet. Announce how close you are every Friday around 3:30 PM or if markets are on the verge of breaking some major support. That's the Ambac bailout plan as best as I can tell. The anticipation of a potential deal has to be worth more to markets than any half-baked concoction the world's premier financial engineers can possibly foist upon us.

Tuesday, February 12, 2008

"Parade of denial"


Absent stating the obvious, as you can tell by my less frequent blogs, there is little to add. I could mention AIG's (AIG) revelation today that the insurer had a "material weakness" in its internal controls over financial reporting and oversight of its hedging portfolio resulting in four-times the losses previously reported. But we are now in an era where the cleansing process of the world's financial sphere will continue unabated for some time and should it really be all that surprising? With that said, ironically enough, the prvailing theme here in London and in New York is fear--fear of being left behind when that sure to come rally lifts-off like a rocket!!! Paradoxically, investors remain pretty well entrenched in denial with only a smattering amount of acceptance of the kinf of animal we're up against. But this is miles and miles away from "revulsion;" that final phase of a bear market where investors quite litterally ask to be taken out of their holding, no matter the price and cost.


No sooner had I been podering the above, did I receive a rather poignant chronilogical encaspulation of the unwinding of this credit behomoth from my acquaintance, Stephen Giauque, over in the States. Better than most summaries I've come across, he lets you see how grudgingly the "bulls" have been pulled into even acknowledging the problems at hand. This process of "price discovery" has been exasperated by the very institutions that profess to be the biggest admirerers and proponents of free markets and its solutions for most anything under the sun. Enjoy:



"Parade of denial" (Source: Stephen Giauque, 2/8/08):



  • Goldischlocks: “No housing bubble”

  • Goldischlocks: “A mere leveling-off” of real estate

  • Goldischlocks: “Soft landing” for real estate

  • Goldischlocks/ Dots connected: Problems emerge, but “contained” to subprime, commercial real estate still booming

  • Dots connected: Two Bear Stearns (BSC) hedge funds collapse due to leveraged bets on mortgage paper

  • Treasury Sec., Hank Paulson, rep for Goldischlocks: “I believe this country has very strong economic fundamentals. We are making what I believe to be a successful transition from a rate of growth in this country that wasn't sustainable to one that is sustainable.”

  • Goldischlocks: “Tech and a looming cap-ex boom will offset subprime problems”

  • Goldischlocks: “Private-equity activity is sustainable (not a bubble) and will supplant the real estate slowdown”

  • Goldischlocks: “Problems spread a tad, but contained to Alt-A (low-prime)”

  • Goldischlocks: Credit problems are isolated to U.S. shores, international and emerging markets will not be affected. “Decoupling” theory takes hold (foreign markets can thrive even if U.S. slows)

  • Ben Bernanke, Nov. 2007, rep for Goldischlocks: “The slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate, and the labor market has tightened further.”

  • Dots connected: Derivatives such as CDOs and CLOs collapse

  • Dots connected: SIVs (structured investment vehicles) are unable to “roll” essential commercial paper

  • Dots connected: Commercial paper seizes-up, hedge funds in Australia, Canada and the U.K. collapse

  • Dots connected: 100s of subprime and Alt-a mortgage lenders file for bankruptcy

  • Bailout I: The Fed and Treasury promote a rescue plan for SIVs—Super SIV

  • Bailout II: The U.K. is forced to bailout one of the countries largest mortgage lender, Northern Rock

  • Bailout III: Countrywide Financial (CFC) gets emergency funding from Bank of America (BAC)

  • Dots connected: “Independent” credit rating agencies come under scrutiny for their apparent reluctance to downgrade billions of derivatives and mortgage backed paper. Questions emerge concerning conflicts of interest between “Independent” rating agencies and their compensation from the very companies being issued a rating

  • Bailout IV: The Fed surprises markets with a surprise cut in the discount rate

  • Bailout V: Fed cuts its Fed funds rate from 5% to 4.75%

  • Bailout VI: Fed cuts its Fed funds rate from 4.75% to 4.5%

  • Dots connected: SIV bailout plan collapses. Banks balk at committing capital to definite money losing endeavor

  • Dots connected: LIBOR rates continue to rise even after Fed’s rate cut as banks cling to capital reserves, causing costs of adjustable loans linked to LIBOR to also increase

  • Dots connected/ Bailout VII: Countrywide Financial appears to be on verge of collapse, Bank of America (BAC) announces buyout

  • Bailout VIII: The Federal Reserve along with the Bank of Canada, the Bank of England, the European Central Bank, the, and the Swiss National Bank announce the establishment of a temporary Term Auction Facility (TAF) as a means to temper liquidity constraints among banks

  • Dots connected: Rating agencies downgrade billions worth of derivatives and mortgage paper, long after everyone and grandma already know said securities are actually junk

  • Bailout IX: The ECB injects the equivalent of $½-trillion into the European banking system

  • Bailout X: Fed cuts its Fed funds rate from 4.5% to 4.25%

  • Bailout XI: White House and Treasury announce “Hope Now” plan as a life raft for current subprime borrowers

  • Dots connected: Citigroup (C), Merrill Lynch (MER), UBS AG (UBS), Morgan Stanley, et al., announce massive write-offs

  • Bailout XII: Dubai, Singapore, China and Kuwait sink billions into U.S. financials to plug holes, take equity stakes

  • Goldischlocks: Bulls promote foreign sovereign wealth funds as willing investors (saviors) of struggling U.S. banks and brokers

  • Dots connected: Monoline insurers of CDOs, mortgage paper and municipal bonds suffer massive price drops on credit scare

  • Dots connected: Stocks sell-off, tech and international are among the hardest hit. “Decoupling” theory in doubt

  • Dots connected: 31-year old trader for Societe Generale blamed for massive $7.2-billion trading hit

  • Bailout XIII: Fed panics, slashes Fed funds twice in eight days

  • Bailout XIV: White House and Congress agree on tentative $155-billion stimulus package including $600-$1200 tax rebates

  • Dots connected: Research reveals “Hope Now” mortgage bailout plan has helped as few as 100 borrowers

  • Dots connected: FBI raids 14 mortgage companies investigating fraud and insider selling

  • Bailout XV: New York Attorney General holds closed-door meetings with banks, hopes emerge for a monoline bailout

  • Goldischlocks: Stocks recover over 1000-points on hopes of Ambac (ABK) and MBIA (MBI) bailout

  • Dots connected: Non-farm jobs report shows first monthly loss since 2003

  • Goldischlocks: “If we do have a recession, it will be short and mild”

  • Dots connected: Bailout of monoline insurers is DOA, stocks crumble

  • Dots connected: Rating agencies threatened with class action lawsuits

  • Bailout XVI: Reportedly, discussions on bailout of monoline insurers tentatively back-on
    TO BE CONTINUED…………………..

Wednesday, January 23, 2008

Precious bullets


It's been humorous to hear the likes of Larry Kudlow and Ben Stein (since when did this guy become a market expert? Didn't he write speeches for Tricky Dick Nixon and play an Economics professor in Ferris Bueller's Day Off?) blast away at Ben "Helicopter" Bernanke for being to tight with his monetary policy. Bernanke has now caved on every occassion. I had friendly bets with a number of friends after yesterday's close here in London that he would do an emergency rate cut before this morning's opening in New York. He did. EZ-money!! I wish betting futball was this easy. This was first emergency rate cut since Greenspan's more obvious slash prior to the first day of trading following the 9/11 terrorist attacks. I'd be remiss if I didn't remind readers that stocks continued to get thrashed for another 18-months following that rate cut--which was followed by even more rate cuts all the way to an eventual 1-percent Fed funds rate. That episode was meant to save us from a crashing technology and dot-com bubble. This rush to free money is in hopes to save us from an even more ominous and far more dangerous mortgage/real estate/derivatives/hedge fund/private equity bubble. I would place the probability that today's not-so-surprising Fed rate cut also happened to cooincide with a low in stock prices at somewhere near zero chance. Even as panic among retail investors was palpable (according to some friends that manage money for retail clients), the institutional side saw today as nothing but a great buying opportunity. I listened to CNBC US in the afternoon here in my London office as one by one, nearly every commentator tried to sooth viewer angst, "This is normal and healthy and we've gotten through much worse in the past," they said. Folks, if you take any advice from CNBC, your totally doomed. These folks are pretty much clueless.

So as Ben Bernanke was throwing bails of hundreds out of his helicopter, stock futures in the U.S. were nearly at their lows by the time markets opened in the U.S. I told a colleague that I had never seen such a muted response to a supposedly blunt tool. Although stock indexes in the U.S. closed not to far from their highs on the day, the last time stocks closed lower on the same day of a Fed rate cut was that day in September 2001. Of course, Ben Bernanke and his other impotent FOMC members did not want to have to cut prior to its meeting next week. The fact that they could not hold out for another 6-trading days is indicative of sheer desperation. The Fed just sunk a couple more precious bullets into this unwieldy beast and the beast did not go down. We're in deep.

Sunday, January 13, 2008

Less than zero


Its no coincidence that on the same day, Countrywide Financial (CFC) was bought out by Bank of America (BAC) and JP Morgan (JPM) was said to be a rumored suitor for Washington Mutual (WM). As I said, news of both occurred on January 11th. Both companies are set to announce earnings this month which will be accompanied by more massive write-downs of mortgage related debts; and both are in dire need of fresh capital. I had said on my January 10th blog, the night of January 9th EST in the states, that barring an announced bankruptcy by either of these, my top two candidates for some kind of confidence shattering bankruptcies, markets may have indeed set themselves up for at least some kind of bear market bounce. Most disturbing was the heavy slide into the close on Friday, even after the pre-arranged, forced marriage of Bank of America with Countrywide and a rumored JP Morgan save awaiting Washington Mutual. Given the ugliness of the close on Friday, more market managing news was released iafter the close in hopes of a avoiding increasing odds that a dislocation was in the cards when markets open on Monday, January 13th. The Wall Street Journal reported that Citigroup (C) was close to squeezing China and Saudi Prince Alwaleed bin Talal, already a major shareholder, for somewhere between $8 to $10-billion combined. My contacts that are well versed in the dark matter of the financial universe have indicated to me that barring a buyout, Countrywide Financial (CFC) was destined for ZERO and probabilities of the same fate for the largest S&L in the U.S., Washington Mutual (WM) had also increased substantially. What deal did the Fed's make with Bank of America to buy an asset that is worth less than zero? Regardless, its a shell game. Transferring the toxic assets on the books of Countryfried to that of Bank of America does not make them disappear. Its the summation of these assets that sit on the books of financial firms throughout the world that matters. Repackaging them won't make them go away. Especially as confidence deteriorates making a credit spiral even that much more difficult to arrest. And with gold now at a fresh new all-time nominal record, monetizing these assets is looking to be increasingly difficult for the world's central planners, Mssrs Bernake, Paulson, Trichet and King.

Thursday, January 10, 2008

Bounce


Baring an announced bankruptcy by either Countrywide Financial (CFC) or Washington Mutual (WM) in coming days, markets likely began its first bear market bounce of 2008 today. But with so much shrapnel flying amongst the likes of these, Ambac (ABK), MBIA (MBI), PMI Group (PMI) and even little regional banks such as BankUnited (BKUNA), any bounce seems likely to be short-circuited.

Saturday, January 5, 2008

Breach


Today had that feeling of heart dropping realization that we've climbed to spectacular heights, peaked over the precipice just as it dawned on us that we had no cogent plans, nor the proper equipment to traverse safely back down the face of the mountain. Even I have been stunned by the shuddering weakness across virtually every sector and every market just four days into the New Year. I certainly expected a much better attempt to ramp things higher given the plethora of like-minded investors and traders that delude themselves with self-reinforcing theories such as "The January effect" and technical breakouts, breakdowns. As the financial markets flailed, George Bush and his Working Group on Financial Markets met behind closed doors today to discuss the dire state of the world's financial system. And the action in gold and oil, both setting new all-time highs this week helps to crystallize the the dire trap in which these folks, Ben Bernanke and the U.S. Federal Reserve find themselves. Further attempts to print their way out of history's greatest global financial imbalance will be futile to stave-off a deflationary spiral in "good" assets such as home values, stocks and bonds while adding fuel to the explosive rally in unproductive stores of value such as gold, silver and oil. The world's central banks find themselves helpless and impotent. The dam has been breached.

Friday, December 21, 2007

Research In (Slow) Motion (Train Wreck)


The same machinery (Wall Street) that brought you collateralized mortgage bonds, CDOs, SIVs, Enron and WorldCom will no doubt be falling over themselves in the morning with the usual ridiculous upgardes and fresh new price targets for shares of Research In Motion (RIMM) after their "stellar" earnings report after markets closed in the U.S. tonight. The company reported sequential revenue growth (since its last quarter ending Sept.1 2007) of 21.81% and revenue growth since its quarter ending March 3rd, 2007 of 79.8%. Growth in "Net Income" was 28.8% and 97.1%. Pretty good, huh? Meanwhile, "Trade Receivables," "Other Receivables" and "Other Current Assets" (most likely factored receivables) grew from $654.4-million at quarter-ending March 3rd to $1.243-billion at quarter-end, Dec. 1, 2007--a 90% increase. The $653.15-million increase in receivables since its March ending quarter compares to its $742.1-million increase in reported revenues. All but $88.95-million of its increase in revenues since March 3, 2007 can be attributed to RIMM's selling into its retail channel. Absent some good old channel stuffing, Research In Motion is in effect just Research In (Slow) Motion (Train Wreck).