Financial, Real Estate, Stock Markets Trends and Current Affairs

Bernanke is showing that he is willing to go far and wide to right what he sees as wrong. To think, just a few weeks ago, screaming heads such as Cramer were saying the Fed needs to do more, yada, yada. Well, it appears that this Fed is potentially doing to much. An interesting excerpt from Bloomberg :

Fed Chairman Ben S. Bernanke, trying to restore confidence to financial markets by averting a collapse of Bear Stearns, is pushing the central bank into new territory. Yesterday's announcement shows the Fed acting like a bank liquidator -- a role traditionally performed by the Federal Deposit Insurance Corp. -- for Bear Stearns, a firm whose main regulator is the Securities and Exchange Commission.

``Bernanke has taken the bit in his teeth,'' said Tom Schlesinger, executive director of the Financial Markets Center in Howardsville, Virginia. ``I can think of nothing in recent or distant memory that remotely resembles what the Fed is doing here, certainly within the context of the central bank's operations.''

The Fed last week agreed to help JPMorgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of U.S. mortgage bonds. In an effort to shore up Wall Street's other firms, it also agreed to become lender of last resort to all 20 primary dealers in Treasury notes.

BlackRock Selected

The Fed said March 16 it would provide financing to JPMorgan for $30 billion of Bear Stearns assets. Yesterday, it released terms of the funding, including some details on the company managed by BlackRock. The Fed said JPMorgan will shoulder the first $1 billion of any losses, disclosed that the loan will be for 10 years and carry the 2.5 percent interest rate charged to commercial banks at the discount window.

Fed officials defended their role in the Bear Stearns rescue as necessary to prevent a broader financial panic. Credit markets have been roiled by concerns that borrowers won't repay debt, and funding has dwindled for securities firms, hedge funds, and mortgage banks.

If you remember how I said I invest - form an investment thesis,
research the hell out of it, gain a cheap position, sit back and see if
your were right or wrong. Well, you all know how negative I am on the
global macro scene - and I have shared that I think Bernanke, et. al.
will blow the "Mother of All Bubbles". Morgan Stanley's global
strategist have chimed in on this as well.

Recent news bytes:

• Bloomberg: Treasuries rose and three-month bill rates plunged to to 0.56%,
  the lowest level in almost 50 years on speculation credit market losses
  will widen (e.g. ex-LTCM Meriwether's fund facing losses, Thornburg
  Mortgage Inc. may go bankrupt, Merrill suing monoliner over recalled
  $3.1bn CDO guarantee)
• RGE Montitor: Flight to quality trades:
  -
  The rate on the three-month Treasury bill, viewed by investors as a
  haven in times of trouble, dropped 32 basis points to 0.56% on Feb 19;
  - Capital preservation trade: buy Treasuries sell stocks;
  - TED spreads (= LIBOR- T-Bill) spiking upwards in all markets
  - 2-year swap spreads widening
• BNP:
  Signs of interbank lending stress and liquidity hoarding eased after
  Fed actions on March 16/17; spreads on the rise again in US, UK and
  Euro market. Interbank spread decomposition shows that crunch is driven
  by upward trending credit premium since 2008 instead of liquidity
  premium as was the case in H2 2007. Fed interventions ultimately can
  address liquidity, not credit concerns.
• Fed, BoE, ECB intervening in their respective markets
• Krugman:
  Flight to quality and cash hoarding lead to Treasury yields close to
  zero--> if there is no compensation for holding Treasury paper,
  investors prefer to hold cash--> normal monetary policy channel via
  buying and selling of Treasuries breaks down (i.e. liquidity trap). He also points out that TED spreads - between 3-month Libor and 3-month treasuries - are now
  back to where it was, saying that the results of the rate cut and the
  new liquidity measures must be disappointing to the Fed.
• Yves Smith
  at Naked Capitalism backs up my assertion that all attention has focused so far on US banks, but European banks are in at least as much trouble, citing research that some European banks have written off senior and
  mezzanine tranches of CDOs to a large extent, while others have not at
  all, quoting CreditSights, whose model indicates a shortfall in
  write-downs of over $3bn for Barclays, RBS and SocGen, and of over $6bn
  for UBS .

Lehman
has been in my bearish sites, but until now I have not put the
microscope on them. That will change very soon. I am also intensifying my
research on Morgan Stanley since I feel they carry the most credit
risk, leverage and level 3 asset concentrations (bullsh1t risk) on the
street. I will also start covering the borrow short buy long funds that have been going bust lately like TMA and Carlyle Capital which are still over $10 per share. I had a short position on KFN, which I unfortunately closed out a while back. I am looking into to going back in, although to do so would be a bet that they will be wiped out of existence since their share price has fallen so much thus far. They have the exact same problem Carlyle Capital has (had?).

I am very close to spreading out to the European and Asian banks. I know they are in serious trouble, it is just that I have but so much to dedicate in analytical resources and time. I hate running in blind. Anyone who has experise in any of these areas (or any other areas of interest), feel free to start a post, thread or user group - or contact me to share info and thoughts.

The Naked Capitalism Blog
alleges the collateral pledged by prime brokers to the Fed via commercial
banks will be valued by the commercial banks. Since they often hold the
same collateral, this facility may induce them not to write down their
own assets and put on excessive valuations. One way to counter this is to try to identify the classes of assets and put our own gross marks on them. This is what I did with GGP and the monolines. It may not be the most accurate in some cases. GGP is quite accurate in my opinion due to ample supporting data and proven robust modeling, the monolines were educated guesses just like everyone else's opinion on valuation. What makes the monoline situation believable is that you can be off by a whopping 25% and still see how they are in trouble because the losses x leverage x macro trend is not very ambiguous.

...and for those who haven't read the popular Money Trap article, click here,

From the WSJ:

Stocks were unable to
hold onto Tuesday’s 400-plus point rally in the Dow industrials and
attendant rallies in other indexes, and steadily marched lower through
the afternoon, until news of a lawsuit filed by Merrill Lynch against a
unit of bond insurer Security Capital Assurance, alleging the company
is trying to avoid obligations of up to $3.1 billion under seven credit default swaps.
Merrill’s own CDS widened on the news, moving to 250 basis points from
210 basis points, according to Phoenix Partners Group, and the stock
market dove, with the Dow giving back a good lot of the previous day’s
massive rally.

I stated several
times in the comments that the CDS market may very well lead us into
the next serious leg down. Many of the guys who wrote these either
don't have the cash to pay up or are wrapped up in hedges using CDS
which will easily get @#$@ed up once one leg of the hedge falls.

As far as I can discern, Lehman effectively had a run on the bank Monday. They admitted portions of it in the WSJ article I linked to earlier, and word is that many clients left to the tune of several billion dollars. They same appears to be happening in the UK, this is after:

• one of their largest mortgage banks faced a run and had to be nationalized,;
• The biggest US investment banks, numbers 1, 2 and 5 just ran to the government for emergency funds and investment bank 5's shareholders just got wiped out.
• Investment banks 1 and 4 reported 50% drops in earnings and revenue, but rallied because analysts dropped expectations enough to say that they were beat;
• They then started to recommend "buys" on each other;
• The mechanism used by the Fed to prop up the I banks was used only once before, and that was during the worst economic period in the history of this country - the "Great Depression".

It doesn't take a detective to figure out all is not well in Smallville! There is probably a big negative waiting in the near future for the financial sector. The problem is that I have not fully deduced what it is, yet. I am growing extremely suspect of the Fed's move. I definitely understand why they felt they had to do it, the issue is the true facts surrounding the move and what the repercussions are. I think the US tax payers can kiss that $30 billion dollar back stop goodbye.

My blog has been quite popular as of late,
most likely because it may appear to some that I have a crystal ball.
My last 5 or so warnings have resulted in 50 point or so price drops in
the shares of the companies in questions. Let me be both modest and
honest. I am not that smart and do not have a crystal ball. There is a
simple premise behind all of this that allows me to understand what is
going on, but this premise does not get any press play and is not
harped on by the analyst community. Many major players in our financial system are simply insolvent.
Plain and simple. The liquidity issues that you see are simply a result
of that insolvency, not a cause. When you lever up on assets at the top
of a bubble and that bubble pops, you become insolvent, delevered or
not. If forced to delever, the balance sheet insolvency now becomes an
income statement insolvency as the cash outflow outstrips the cash
inflows, but it all stems from the original balance sheet insolvency -
not the other way around.

Borrowing more money, no matter what the
terms, will not aide you in your dilemma. That is, of course, unless
you can borrow large amounts of that money quickly on non-recourse
terms. But that is not really borrowing money, it is someone giving you
money with the option to pay it back.
It is the equivalent of a straight bailout, isn't it? That is what just
happened last weekend, which leads me to the next paragraph...

I have been alleging that many investment banks, monoline insurers, home builders and commercial banks are effectively insolvent. Nouriel Roubinin wrote an accurate piece on the topic.
Between that and the the five or six major analytical pieces that I put
together, I believe a pattern emerges (please take note of the dates
the pieces were written and the share prices at the time of the post).
I believe the pattern is indisputable. You could have made a fortune on
the short side of these analyses, and you could have lost a fortune on
the long side, just ask the employess and shareholders of Bear Stearns,
Ambac, MBIA, Lennar, etc. My condolences go out to the rank and file
employees of all of these companies whose savings have been lost in the
share price devalution. Hopefully, there is a lesson to be learned
here:

• 
  Are the Mortgage Insurers in Serious Trouble? 9/3/2007
  

• A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton -11/13/2007

• 
  Tie-in to the Halloween Story11/21/2007
  
• 
  Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity 11/29/2007
• Follow up to the Ambac Analysis 12/4/2007

More on Insurers and Insurance

• 
  The Commercial Real Estate Crash Cometh, and I know who is leading the way!

More on Commercial Real Estate

• 
  Lennar Insolvent: Enron redux???

More on Residential Real Estate

• 
  Banks, Brokers, & Bullsh1+ part 1
• Banks, Brokers, & Bullsh1+ part 2
• Money Panic
• Bear Fight
• The Breaking of the Bear
• The Riskiest Bank on the Street
• Here comes the CRE Bust (Quip on Lehman Brothers)
• Is Lehman a Lemming in Disguise (from a conributing individual investor)
• Liquidity vs Insolvency
• Bear Stearns Bear Market, Revisited

More on Investment Banks

As you can see, the path was not impossible to determine as
practically all of these companies shared the same catalyst to their
downfall - excessive leverage at the top of an asset and credit cycle
bubble. Now, the Fed is attempting to lend directly to institutions
that it has no jursidiction over. If I am not mistaken, the Fed's
balance sheet is only good for $400 billion dollars or so. There are a
lot of potential "runs on the non-bank" coming down the pike, enought
to drain the coffers. This is an ingenious, albeit very risky endeavor.
Moral hazard abounds. I know the Fed believes that they have nixed the
moral hazard argument in the butt by wiping out the Bear Stearns
shareholders, but this is an imperfect argument. The shareholders have
to approve this $2 buyout deal, and $2 is low enough to risk a battle
with the Fed and their agents. This is a major flaw in the plan that I
see as coming back to bite the markets. If this happens when the next
shoe drops, I can see the Fed getting overwhelmed.

As an investor and analytical pundit, I will be looking for the next
shoe to drop, which I believe I have found. I will keep you posted.

According to the WSJ.com, Lehman did a phenomenal job at damage control, most likely learning their lesson from Bear Stearns.

Goldman
and Lehman beat estimates, but that is not as positive as the press is
making it seem. Estimates were lowered. If you lower the fence, it
doesn't mean you jumped higher to get over it. They lost a lot of
money on illiquid securities. The Fed's work has backstopped companies
against liquidity runs, but after Bear Stearn's, the banks trust each
other even less than they did last week.

We are sure to get a
dead cat bounce here. I am still quite bearish on the investment
banking industry, though. The revenue and earnings prospects have
diminished significantly, and the cause of this mess (devalued housing)
is still on a sharpening downward slide. The key is to look at the
results of the mortgage insurers, mortgage bankers, and homebuilders to
see where the bankers will be the following quarter.

I also
believe the leveraged loan, consumer finance and high yield markets
will start showing evidence of the cracks that have been forming over
the last year or so.

And those BSC calls that were going for a few pennies yesterday were a
good deal when nobody wanted them. Contrarian investing at its best!!!

From CNN:

British billionaire Joe Lewis is working to
block JP Morgan Chase's 236 mln usd takeover of peer Bear Stearns
(NYSE:BSC) in order to negate a 1 bln usd loss he now faces as a major
shareholder of the ailing investment bank, the Daily Telegraph reported.

Lewis, whose Tavistock Group is Bear's second largest investor with a
9.4 pct stake, is understood to be deeply unhappy with JP Morgan's 2
usd-a-share offer, the newspaper added without naming sources.

Lewis is involved in a number of alternative strategies, including
talking to potential rival bidders who might act as a white knight, it
said.

Other options he is considering include voting against JP Morgan's
offer at the scheduled shareholders' meeting, something that would only
work if he were to garner the support of other investors.

JP Morgan bought Bear Stearns for $230 something million, about 7%
of its closing price Friday, and about 2% of what it was trading for 2
weeks ago. On top of it, this was an all stock deal with the government
funding more tha 100% of it (the Fed will be financing $30 billion of
non-liquid BSC securities, the back stop that I said would happen).

To
put this into perspective (I'm a NYer, so I am quite familiar with the
landscape), the BSC headquarters is worth at LEAST $1 to $2 billion.
Between the clearing infrastructure, asset management, structured
product assets and real estate, there is at least a $1.5 billion
immediate gain here. How much that will be offset by litigation risk is
an unknown. The CEO got up on CNBC and clearly told the world that BSC
had no problems. Lawyers must be getting a boners in real time.

I
will admit to a big mistake that I made. I hedged my gains at $35
Friday to lock in the profts. Those calls are literally worthless now.
I shouldn't be complaining since my gains as of this post are averaging
over 800% on this trade, it was the largest position in my portfolio,
and that was after taking profits last week. Just thought I would be
honest and let everyone know that I am far from perfect, thus as I have
said so often, no one should be taking anything I say as investment
advice.

Now, as for Monday's trading.... I am not a trader, and
I believe in medium to long term investment horizons, but there is a
LOT of opportunity to be had here. Lehman is probably going to get a
drubbing. Morgan Stanley is being overlooked by the Street. Citibank
will get no love. I already covered on WaMu, with all of the
opportunities abound, I don't believe that I should be trying to dabble
below $10 when I have ridden shares down from last year in the $30's.

I
fear Goldman will be seeing a lot of devaluation. Don't forget the
companies that we have covered earlier in the blog. There financing is
damn near gone. GGP, the builders, etc.

The Fed is working hard
to help the country. That is undeniable. They have cut rates, extended
financing directly to non-banks, cut more rates - but, and as I
thought, the markets are ignoring these actions and driving financials
down and commodities up.

Lehmans asset make up will make it a
target in US trading. I will probably attempt to expand my position and
will be willing to pay premiums. My small position is quite profitable
already. I will attempt to expand the financials on my list in
aggregate, and MS (who is my 2nd largest position in the financials)
will be expanded as well.

One thing of note - The Fed's attempts to prop up the market should
help most banks, but the issue is that the bank's problems are that of
solvency and not liquidity. Liquidity problems have popped up, but they
are a consequence of the market being fearful of insolvency. The Fed
has created a limited backstop against general liquidity issues, but if
there is another run on the bank the Fed will not be able to afford to
stop it. Even if they could, they can't stop all of them by supplying
money. If there is a run on the bank, Lehman is next in line. I mention
this because if you really read my pieces - Banks, Brokers, & Bullsh1+ part 1
and Banks, Brokers, & Bullsh1+ part 2 you should walk away appreciating the risk between large private
investors and the I Banks. The I banks are starving for liquidity to
balm their solvency issues, so if they get money from the Fed you can
bet your booty that they will not be lending it back out (I was told that the banks were told by the Fed to allow their clients to borrow through them to the Fed window, but seeing is believing). They will
also be very jittery about collateral and credit risks, which means
more margin calls. The calls will be devastating. That means that if or
when banks start calling in collateral, the crash just may occur in the
hedge fund/private institutional investor arena before the actual I
bank arena. I that happens, the collateral will devalue futher as
deleveraging occurs, and it will put a liquidity strain on the I banks
again as they bang against the Fed's lending facility. I can't
guarantee this will happen, but it is a distinct possibility.