Sunday, 31 January 2010 23:00

The Volcker Rule Has Merit

Volcker is correct in that banks conflicts of interests need to be stemmed. One would not have to worry about over regulation if one does not attempt to regulate every single act or attempt to guess what might go wrong. What needs to be done is to use regulation to disincentivize banks from engaging in activities that engender systemic risks and/or harm clients. By putting everybody on the same side of the table, you don't have to worry about outsmarting the private sector.

From CNBC:

Published in BoomBustBlog
Thursday, 21 January 2010 23:00

Follow Up to the China Short Thesis Debate

I have included ETFs that have exposure to the industries discussed in the post "Some Light Shown on My Developing China Thesis". The list of ETFs can be found here: pdf Chinese ETFs with Exposure to Real Estate, Banks, Insurance and Export Industrials 2010-01-22 02:27:03 377.96 Kb.

The subscriber download to the aforementioned post is pdf "A Note On Potential Short Opportunity Opinions in China 2010-01-21 01:13:06 475.18 Kb " which is available to retail and pro Subscribers as a 6 page PDF document, Pro subscribers are invited to the discussion/debate between myself and my analysts
on the merits of the China short as it compares to the up and coming
European Sovereign Crisis short opportunities I will be publishing very
soon (a preview is available here:
Deflation, Inflation or Stagflation - You Be the Judge! - please excuse the fact that I compressed several European nations into EU charts).

I want it to be known that we are still formulating the empirical thesis behind the short, but I have decided to keep all subscribers abreast of the deliberations in real time, as well as offering the tools that I would use to take action if I deemed it prudent.

Published in BoomBustBlog

In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges. Click graphic below to enlarge.

inflation_correlation.png

For those "gold bugs" who have never ran the numbers, gold offers less inflation protection than your house does. The same goes for WTI crude and probably most other categories of oil.

Published in BoomBustBlog

Following the empirical evidence that banks share price moves are outstripping their fundamental performance, I have decided to run the same analysis with REITs that have beat the S&P 500. In the chart below, General Growth Properties had to be stripped out since it had a 3,000% return, it made the rest of graph participants illegible. Click to enlarge.

reit_over_broad_market.png

The metrics used to segregate the companies were:

  1. TTM NOI / Current EV
  2. Y-o-Y Growth in Rental Income
  3. Q-o-Q growth in Rental Income
  4. Y-o-Y Growth in NOI
  5. Q-o-Q growth in NOI
  6. Y-o-Y Growth in FFO
  7. Q-o-Q growth in FFO
  8. EBITDA/Interest expenses
  9. Total debt-to-Gross real estate investments
  10. Total Debt-to-Current EV
  11. Trailing 12 months EBITDA
  12. Trailing 12 months interest expenses
  13. Trailing 12 months NOI
  14. Plus a whole host of other performance related criteria. All in all, very rich and informative model for those interested in the space.

A heat map was created to visualize the trend in fundamentals for those companies whose performance bested that of the broad market. As one may have guessed, the heat map is throwing off a lot of red, with implied cap rates (NOI/EV) going up as quarter over quarter net operating income declines in the face of both rising share prices and drastically falling rents and land values. Below is a snapshot of the heat map. Although this is a subscriber download, there is definitely something to be gleaned from trends highlighted below. Twilight zone, here we come...

Published in BoomBustBlog

Following the empirical evidence that banks share price moves are outstripping their fundamental performance, I have decided to run the same analysis with REITs that have beat the S&P 500. In the chart below, General Growth Properties had to be stripped out since it had a 3,000% return, it made the rest of graph participants illegible. Click to enlarge.

 reit_over_broad_market.png

The metrics used to segregate the companies were:
  1. TTM NOI / Current EV               
  2. Y-o-Y Growth in Rental Income               
  3. Q-o-Q growth in Rental Income           
  4. Y-o-Y Growth in NOI
  5. Q-o-Q growth in NOI
  6. Y-o-Y Growth in FFO
  7. Q-o-Q growth in FFO
  8. EBITDA/Interest expenses
  9. Total debt-to-Gross real estate investments
  10. Total Debt-to-Current EV
  11. Trailing 12 months EBITDA
  12. Trailing 12 months interest expenses
  13. Trailing 12 months NOI               
  14. Plus a whole host of other performance related criteria. All in all, very rich and informative model for those interested in the space.

A heat map was created to visualize the trend in fundamentals for those companies whose performance bested that of the broad market. As one may have guessed, the heat map is throwing off a lot of red, with implied cap rates (NOI/EV) going up as quarter over quarter net operating income declines in the face of both rising share prices and drastically falling rents and land values. Below is a snapshot of the heat map. Although this is a subscriber download, there is definitely something to be gleaned from trends highlighted below. Twilight zone, here we come...

Following the empirical evidence that banks share price moves are outstripping their fundamental performance, I have decided to run the same analysis with REITs that have beat the S&P 500. In the chart below, General Growth Properties had to be stripped out since it had a 3,000% return, it made the rest of graph participants illegible. Click to enlarge.

 reit_over_broad_market.png

The metrics used to segregate the companies were:
  1. TTM NOI / Current EV               
  2. Y-o-Y Growth in Rental Income               
  3. Q-o-Q growth in Rental Income           
  4. Y-o-Y Growth in NOI
  5. Q-o-Q growth in NOI
  6. Y-o-Y Growth in FFO
  7. Q-o-Q growth in FFO
  8. EBITDA/Interest expenses
  9. Total debt-to-Gross real estate investments
  10. Total Debt-to-Current EV
  11. Trailing 12 months EBITDA
  12. Trailing 12 months interest expenses
  13. Trailing 12 months NOI               
  14. Plus a whole host of other performance related criteria. All in all, very rich and informative model for those interested in the space.

A heat map was created to visualize the trend in fundamentals for those companies whose performance bested that of the broad market. As one may have guessed, the heat map is throwing off a lot of red, with implied cap rates (NOI/EV) going up as quarter over quarter net operating income declines in the face of both rising share prices and drastically falling rents and land values. Below is a snapshot of the heat map. Although this is a subscriber download, there is definitely something to be gleaned from trends highlighted below. Twilight zone, here we come...

Just the other day I stated "Why does everyone confuse a bubble with economic progress" in a post about a very probable bubble in China (see "It Doesn't Take a Genius to Figure Out How This Will End" then get your chuckles on with "Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!"). Well, as if on cue, Stocks, Metals Decline Around World After China Curbs Lending; Yen Weakens:

Jan. 7 (Bloomberg) -- Stocks fell around the world, driving the MSCI Emerging Markets Index down the most in three weeks, and metals declined after China moved to curb lending. The yen dropped after Japan’s new finance minister said he would welcome a weaker currency.

The MSCI emerging markets gauge slipped 0.7 percent at 9:45 a.m. in London, led by China as the Shanghai Composite Index plunged 1.9 percent, the biggest decline among benchmark indexes tracked by Bloomberg. Futures on the Standard & Poor’s 500 Index lost 0.3 percent. Copper retreated from a 16-month high and oil snapped an 11-day rally. The yen weakened against all 16 most- traded currencies.

Central bankers in China, the engine of the global economic bubble recovery, sold three-month bills at a higher interest rate for the first time in 19 weeks after saying their 2010 focus is controlling record loan growth. The Federal Reserve said in the minutes of its latest meeting that the U.S. economic recovery might require additional stimulus measures to be sustained.

Bubble Blowing Growth will probably reverse slow this year as tight credit will damp the artificially derived and probably outright lied about demand side,” said Zhang Ling, who helps oversee $7.2 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “That will dash investors’ hope of another year of fast bubble blowing growth.”

Published in BoomBustBlog

Note to my subscribers and readers for the year end and the new year.

I will be the first to admit that 2009 was a disappointing year for my investment results. Although the first quarter of the year was the strongest that I ever had during the Asset Securitization Crisis, and I clearly saw the trend reversal coming at the end of the quarter (actually almost to the day since I put a comment out on BoomBustBlog that I was preparing for a very aggressive bear rally, but that granularity in timing was more luck than anything else), I significantly underestimated the length, breadth and depth of the trend reversal. I want all to be clear that I am not making excuses, but the probably reason for the lack of clarity was rampant and clandestine intervention in the equity and debt markets (moe on this later). There has been a lot of chatter in around the web about my performance, and although I am very disappointed at how the year turned out, I would like to put this into perspective. I am not a daytrader nor a swing trader and my research is not aimed in those directions. My stated investment horizon for the research on the blog is 3 to 18 months with a likely targeted range of action of 6 to 9 months. Since I rely primarily on the fundamentals and can't control markets and stock prices, I need to wait for my thesis to pan out.This entails taking some volatility at times. Of course I am the first to admit that the most aggressive rally in 70 years may be a bit much, but one must be able to ride the ups and downs of irrational market moves until one's thesis plays and your are proven right or wrong.This recent bear market rally was probably a once in a lifetime event, and in the case that it was not, we now have the tools to deal with it on an invested basis - even as a pure fundamental investor.

Click any graphic to enlarge.

historical_performance_-_2_years.png.png

Published in BoomBustBlog

For all of those who feel China is going to take over the free world, just remember that when you blow a bubble (particularly a balance sheet bubble) it is bound to pop. The damage from the pop invariably does more harm than the boost from the bubble. It has always been the case, particularly when leverage is involved - which makes the impact that much more devastating. If anybody can attest to this, it should be us Americans (British, Spanish, Irish, those from Dubai, Japanese...).

Methinks that before China gets a chance to become a preeminent world power, their profusely blown asset bubble (by way of a most accomadating fiscal policy) will blow up in their face and they will go through what the US, Japan and UK just (is still) went through, exacerbated by the fact that they are still a net export reliant economy when the bubble blowing is removed. With the developed world in sluggish mode, they will have very little to fall back on as their asset prices collapse to equilibrium and debt from their steriodal lending system is left under or uncollateralized and unable to be serviced.

Why does everybody confuse bubbles with economic progress?

From Bloomberg:

Published in BoomBustBlog
Tuesday, 29 December 2009 00:00

Thoughts on Ackman's GGP analysis and trade

BoomBustBlogger NDbadger commented in the "It was bound to happen. Reggie Middleton vs Ackman vs Hovde on GGP!" thread:

I didn't find Hovde's analysis compelling. Would have liked Ackman to have spent more time on the dilution issue, as NOI will be shared by more shareholders. Also looks like he is using a post bankruptcy cap rate, which is aggressive, at least for now. That said, so far he is doing a masterful job navagating the company through bankruptcy. If he succeeds, this will truly be one of the great investment stories of our time.

I feel that the term "aggressive" is putting it lightly. Barring insider information or a connection with the judge (which he very well may have), no one really knows how GGP will emerge post bankruptcy, hence attempting to pro-forma using assumptions based on more assumptions of cap rate post emergence is literally a financial version of fantasy football.

Published in BoomBustBlog