The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Former paid subscribers to the printed version are now receiving LIFETIME subscriptions, and subscriptions to the printed version are no longer being accepted. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
Remembering last year, I came prepared. A lunch, and soda, packed in a cooler in the car. Peanut M&Ms in the pocket in case of a hunger attack. Ten dollar bills to pay for the parking.... oops, this year the parking fee was raised to $12, a 20% inflation rate.
The first day I went to a seminar (don't recall which one) where the usual question was asked, do you think the stock market will be higher or lower at the end of 2008? Most hands went up for higher; only a few for lower. (Remembering 2007, I kept my hand down.) I have come to the conclusion that this yearly survey has no predictive value; most people are perennially bullish.
In between seminars I had time to explore the
Gaylord Palms. Fancy place. Last year the interior
courtyard of the hotel was under construction; this
year it is finished, and it is an elaborate warren of
grottoes, fountains, waterfalls, streams, ponds, turrets,
an African-wilderness-style restaurant, and even live
alligators. I suppose, at $280 per night for a room,
one is entitled to a little scenery. (By the way, the $12
parking fee is charged for everybody, including hotel
guests. Nobody gets a break.) A few pictures follow:
Turns out the rep wasn't even a Manas employee.... he was a hired promoter (publicist?) to push Manas to the public. I listened to him, and to the others at the booth (some of whom were Manas employees) until their attention was diverted and I managed to slither away. I really don't go for the hard sell.
Later in the evening when I returned home, I described my Manas experience to my wife. Remember, it's her job to hassle the exhibitors while I go to the seminars, and she was planning to go with me for one day, the next day, Thursday; so I asked her to particularly focus on Manas. Actually, I said, the stock might be a good buy, but I was turned off by the aggressiveness.
Thursday mid-afternoon I caught up with her for lunch.... our box lunches eaten at an elegant table in the courtyard area.... and we exchanged experiences. She had spoken with Mr. Gold Jewelry. Seems that on Wednesday night the Manas people thought the reception was for exhibitors only, not the public, so they hadn't bothered to dress up. (On Thursday, they were all attired in business suits.) As for the gold chain necklace, it was an anniversary present from his wife, and he wears it all the time. (I wonder who gave him the gold rings and bracelets?) My wife suggested to him that conservative investors from non-Florida parts of the country (like starchy New England) might be turned off by the flashy gold, but I think she made a minimal impression.... didn't seem like he was about to change styles.
Hesitantly, I approached the Manas booth with my wife. Mr. Gold Jewelry was very nice and somewhat apologetic, but still exhibited a strong personality. However, I did spend quite a bit of time talking to Neil Maedel, who is a director of Manas. He had made his fortune helping to develop other small oil exploration companies into larger outfits and/or acquisition targets, and he is expecting to replicate this formula with Manas.
He spent a great deal of time explaining the corporate strategy, which is to search out potential oil fields in former communist countries, prove them, then farm out their development under royalty agreements. He also described some of the financing arrangements which make this possible.... including a recent deal with the Russians which fell through because of the global credit crunch.
Finally it became obvious to me that, with the megadeals that Manas does, the amount of money they were going to raise from small investors at a money show was minuscule by comparison, so I asked him, why did Manas even bother to be an exhibitor? Clearly they didn't need any small investor money.
His reply was that small development companies such as Manas need a solid cadre of outside, loyal public investors.... a real investor base.... in order to get decent rates of interest for their financing. Otherwise the lenders perceive financing for only a small group of insider-owners to be too risky, and charge a higher rate of interest. I have to take his word on this, but it does make sense.... a public persona does increase transparency.
Anyway, as suggested by my wife, who likes the nice people at Manas (even Mr. Gold Jewelry, the hired promoter), you will find added to the Inheritance portfolio this month 100 shares of Manas Petroleum. This purchase clearly violates Investing Principle #586, Never buy an oil stock promoted by a man who wears a gold chain around his neck. At least this year's purchase, Manas, is diversified among several countries, as contrasted with last year's purchase, which is primarily a Mongolian gold mine.
One other good investment idea for me turned up at a seminar I attended to hear Adrian Day and Richard Band, well-known contrarian investors, speak. None of their recommendations was really right for me (for the most part, no meaningful dividends, just hoped for capital gains). But the seminar was presented by the Gladstone Companies. There are three of these, all business development corporations: Gladstone Capital, which lends to small businesses; Gladstone Investment, which invests in small businesses; and Gladstone Commercial, which leases space to small businesses. Because there is some leverage (very conservative) with these operations, the ongoing credit crunch has terribly depressed their stock prices, and their dividend yields are 9+ percent, with dividends paid monthly.
Just my kind of investment.... steady income with the
potential for future growth. During a recession,
hopefully the worst that will happen is that there will
be no increases in the dividend rates. So you will see
that this month I have added some of each (GLAD,
GAIN and GOOD) to the Inheritance portfolio.
Look at this most recent jump from December, 2007 to January, 2008. Foreclosures increased a whopping 4.92%, yet in December, 2007 the 90 days delinquent bucket was only 3.79% (If every 90 day delinquent loan went to foreclosure, the jump would only have been 3.79%) How could this happen? The evidence suggests that people are walking away 30 days or 60 days delinquent without even waiting for foreclosure.
Other Interesting Aspects Of This Cesspool
Note the credit score line. The FICO score for this mortgage pool is 705. (Those interested in what makes up a FICO score can find out at myFICO. Bankrate.Com notes offers diverse opinions on what a good FICO score is.)
While 705 is not sterling, it's not exactly swiss cheese either. Yet in a mere six months (since July), in spite of reasonable FICO scores, foreclosures have gone from 0% to a whopping 13.17% of the entire pool. Has the FICO model gone haywire or is something else happening (such as walking away). Most likely it is a combination of both.
This is a relatively new pool. The issue date was May, 2007. Common wisdom suggests that it is mortgage vintages from 2004-2006 from those buying near the real estate peak that are most in trouble. This pool is blowing sky high in 8 months flat.
Inquiring minds may be asking about lines 7 and 8 as well as the GEO lines at the bottom of the screen shot.
* Line 7 is the sum of lines 3 through 6 (anything
60 days late or greater plus all previous foreclosures
and REOs)
* Line 8 is the sum of lines 4 through 6 (anything
90 days late or greater plus all previous foreclosures
and REOs).
* The GEO lines (geographic distribution) show
this pool is 48% California and 14% Florida.
WMALT 2007-OC1 A1 is a securitized mortgage-backed security issued in May, 2007. Following are the breakdowns and ratings from the prospectus.
* The total pool size is $513,969,100.
* $476,069,000 was rated AAA.
* 92.6% of this cesspool was rated AAA.
* Yet 15% of the whole pool is in foreclosure or
REO after a mere 8 months!
In addition, the data suggests that people are not even bothering to wait for delinquencies to hit 90 days. Instead they are handing over the keys right now.
Washington Mutual was the underwriter. If you
bought a slice of this cesspool from WaMu, are you
going to buy their next offering? One final question:
Does anyone have any reason to trust any rating from
Moody's, Fitch, and the S&P?
If I'm not making myself clear, let me say it, you're going to see.... worse recession -- worse inflation, the dollar's going to go down even more than it did in the '70s. In the '70s, America was a creditor nation still, now we're the largest debtor nation in the history of the world. So you're going to see worse inflation and, ultimately, a worse recession because the dollar is going to be under serious attack. - Jim Rogers
The operative thesis for investors at this time is that the primary trend has turned down. A bear market is in progress.... I don't know how far this bear market is fated to carry. Nor do I know how long it will last. My advice - be prepared for the worst and hope for the best. To hope costs you nothing, but to be unprepared can cost you much, maybe more than you can imagine at what probably is this early phase of the bear market. Through over half a century of experience, I've learned to respect bear markets. I don't trade them, I don't fade them, I don't short them - I stay out of them. I've learned to stay on the sidelines. - Richard Russell
The notion that rich valuations on record profit margins can be overlooked, and will not be followed by sub-par long-term returns, is a speculative idea that runs counter to all historical evidence. It is an iron law of finance that valuations drive long-term returns. As testament to that fact, the S&P 500 is now behind Treasury bills on a total return basis for the 9.5 years since August 1998, and the present cycle has not even experienced a bear market. - John Hussman
If you have a whole bunch of Baby Boomers about to retire and selling off stock to fund their retirement dreams, it stands to reason that there must be at least an equal number of buyers ready to wade in to equities. The simple math says if there are fewer buyers than sellers, prices will go down - a nice way of saying your retirement dream may be hosed. Whenever I talk to the kids, I ask "What are you buying?" The eldest is saving for her first house. The others are content to rent - and invest money in stocks? "Dad, are you crazy? We have student loans to pay off..." Oh yeah, those. Well, that's the whole economic problem in a nutshell. Where is the replacement buyer? Not that it's just stocks, either.... we also ran out of replacement 43-year old second home buyers in 2003 or so. Maybe the Housing Bubble was extended a bit through easy credit, but that's clearly yesterday's news and now housing prices are coming down. Whether all this will feel like inflation or deflation depends on your personal balance sheet. If you own a home, your net worth is likely to decline. If you don't, you'll be griping about inflation at the grocery store. - George Ure
Here is how I think the next few quarters are going to play out. Each new downgrade triggers more losses at financial institutions. You don't write down a bond insured by MBIA as AAA until there is actually a write down. And then you do, and announce it at the end of the quarter. Along with the rest of the losses caused by new downgrades. We are going to see massive write-offs every quarter by the same financial institutions that have already written off $100 billion. We are only in the beginning innings. There are very serious suggestions that several extremely large banks (and not just in the US), of the "too big to be allowed to fail" size, technically have negative equity. With each announcement of a new massive write-off, we will see yet another large capital investment announced as well. And every time it happens, the market is going to be disappointed. And continuing disappointment is what keeps a bear market intact. - John Mauldin
In a last ditch attempt to prevent a broader financial collapse, eight major banks in six different countries - Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner - are coming to the rescue of one U.S. bond insurance company this week: Ambac. These are the banks that have the most exposure to structured securities and other derivatives guaranteed by Ambac ... and the most to lose if Ambac goes down. But.... the entire premise of bond insurance is riddled with conflicts of interest: The three top rating agencies - Fitch, Moody's and Standard & Poor's - collect large fees from the bond insurers for their ratings. They are the same rating agencies that rate the hundreds of thousands of bonds covered by the bond insurers, also collecting large fees for each rating. And they are the same companies that collect still more in consulting fees to help structure many of the bonds that the insurers cover. No wonder they've waited so long to downgrade the sinking bond insurers! One single downgrade sets off an automatic chain reaction of downgrades, which could virtually destroy the business of hundreds of thousands of their best-paying customers. My view: It's a house of cards built on a foundation of deceptions that no amount of capital can cover up. - Martin Weiss
Today [February 25] the S&P affirmed the AAA rating of insurers MBIA and Ambac.... Citing ability to raise $3 billion in capital (a deal that is not even finalized), and in the face of monolines holding $70-$150 billion of worthless CDOs, the S&P held its nose and confirmed horse hockey smells like a rose.... Six months from now, the problem with the monolines is not going away. If anything it will be worse. In addition, banks are going to need to raise more capital as "walk aways" continue to add unwanted houses to balance sheets, credit card defaults rise, and commercial real estate plunges. In the long run, the S&P did not do anyone any favors by their actions today. However, the S&P did manage to further damage their own reputation, presuming of course that was even possible, or they even care. - Mike "Mish" Shedlock
So, what would happen if the monolines spun off their bad assets.... Well, in the first instance banks would have to absorb even more gigantic writedowns because, presumably, they would have to swallow the "bad monoline" assets in order to avoid counterparty failure. There is no doubt that the 'bad bank' portion of the monolines would fail - they wouldn't be able to raise the requisite capital in the markets. Secondly, we could then watch the "good" assets deteriorate swiftly as the economy plunges further into recession. Remember all those smart guys - Greenspan, Bernanke, Milken et al - talking about how well contained this whole problem was to sub-prime USA? That must now be considered one of the sickest jokes of all time. - Jim Walker [ex-chief economist, CLSA]
The Fed and the Administration have drawn their line in the water, seeing more liquidity as the solution - not the problem. The US citizenry is being treated like mushrooms; kept in the dark and fed PR (public relations). Correction: make that another two alphabetical letter acronym. - Fred Cederholm
The mortgage financing market's complete inability to differentiate and appropriately value superior AAA /AA-rated mortgage securities from all other mortgage assets is as unprecedented as it is frustrating. Our portfolio of mortgage-backed securities has exhibited exceptional credit performance and comprises loans that are among the most solid in the industry. Quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality. - Larry Goldstone [president, Thornburg Mortgage, Inc. Nick's comment: Mr. Goldstone has apparently forgotten Keynes' dictum that markets can remain irrational longer than you can remain solvent.]
The thing that's keeping commercial real estate afloat is that owners enjoyed a good economy for the last five years. Tenants are still paying rent, and until recently, expanding. But once the economy turns negative -- I think we're probably in the beginning stages of a recession -- then that fig leaf of "I've got income fundamentals working for me" goes away. By year end, it's a different world for commercial owners. After six years of writing mortgages at super peak values, in which commercial mortgage debt doubled nationwide, commercial mortgage lenders are suddenly realizing that they're highly exposed and are starting to tighten up. Once mortgage volumes start falling, lenders will tighten mortgage underwriting, triggering a feedback loop that produces a crescendo of falling values. Our proprietary liquidity index predicts a downtrend that reflects the past few years' logarithmic upturn, but in reverse. Most commercial lenders and property owners don't agree, but commercial real estate is likely headed for a worse downturn than housing. After all, a subprime borrower living a house will typically do whatever she can to keep the house. The scoundrels I know in commercial real estate will send the keys back in a heartbeat. So once the downturn starts, commercial real estate will be "marked to market" brutally and efficiently. The only winner in will be the foreclosure and bankruptcy attorneys. - Marcel Arsenault
Even the casual observer can have no doubt that FOMC decisions move asset prices, including equity prices.... The statistical evidence is strong for a stock price multiplier of monetary policy of something between 3 and 6, the higher values corresponding to policy changes that investors perceive to be relatively more permanent. That is, according to our findings, a surprise easing by the Fed of 25 basis points will typically lead broad stock indexes to rise from between 3/4 percentage point and one-and-a-half percentage points. - Ben Bernanke [October 2003. Nick's note: So far, not much evidence of this effect.]
Bernanke clearly has some new innovations, but the name of the game itself has not changed much: Banks are so capital impaired they cannot lend. They refuse to write down assets to reasonable levels because to do so would bankrupt them. Thus with each passing day, the more asset values plunge, the more zombified our banking system becomes. Zombification of banks is exactly what happened in Japan. Bernanke could cut interest rates to zero tomorrow and it would not change matters much if at all. Academia is meeting a real world test, and Bernanke has met his match. - Mike "Mish" Shedlock
As the slow-motion train wreck in our financial system continues to unfold, there are going to be plenty of ill-conceived rescue attempts and dubious turnaround plans, as well as propagandizing, dissembling and scheming by banks, regulators and politicians, all done in an effort to try and buy time or to figure out how the losses can be dumped onto the lap of some patsy (e.g., the taxpayer). Given that, it makes sense to avoid acting like an equity investor and swallowing -- hook, line and sinker -- the alleged good news that will be constantly reported in the press or streaming across news tickers on CNBC and elsewhere. While it is nice to think that this crisis could be resolved by those individuals and institutions that played a major role in creating the problem in the first place, it is not going to happen. Only time, trillions of dollars of losses, a substantial economic downturn, and a broad acceptance of today's harsh, new realities will accomplish that. - Michael Panzner
And here's the thing: I don't think it's just me, the [Fed's] actions sound trivial compared with the problem.... credit markets are worsening faster than the Fed can cut rates, so that money is effectively getting more expensive, not cheaper; the other measures.... sound minor. Rearranging deck chairs - that may be too strong, but it's pretty unreassuring. So what should be done? I'm not sure (and I'm thinking about it, hard.) For now, I'd just say that this is really, really scary. - Paul Krugman
Let me tell a personal story to illustrate the problem. In 1976 I was a young entrepreneur, working as a print broker. There was a severe paper shortage at the time. I borrowed $10,000 from my friendly personal banker and used it to buy traincar loads of paper. Things went well. I got a lot of business just because I had access to paper in my warehouse. But my bank ran into trouble and the regulators forced them to reduce their loan book. They cancelled any loan they could. I politely suggested that they stick to the terms of our agreement (otherwise known as telling them to go pound sand). When they realized that I did not intend to destroy my business to help their balance sheet, they called my mother (I swear this is true - I was 26 at the time) and told her they would ruin my credit if she did not pay the loan for me. They so worried her that she actually did so, and then told me afterwards. Maddening. The point is that a bank or broker in a capital crisis will do what it feels it has to do to get back into balance. Relationships that you thought you had are gone with the wind. - John Mauldin
What we have to realize is that about 60% of.... the "shadow banking system" has vaporized into thin air and is never coming back. The SIVS, CLO, CDOs, and the rest of their alphabet friends which bought the debt are now in the process of selling anything they can as they close up their funds. Pension funds and insurance companies which bought the debt are understandably on strike. The world economy is going to have to find new structures and buyers for all sorts of debt. This is not going to happen overnight. It will take at least a year, maybe more. - John Mauldin
It's like the old joke, If you owe a thousand pounds, it's your problem. If you owe a million pounds, it's your bank's problem. But if you owe a trillion pounds, now it's your government's problem. - "Alex"
According to Bear Stearns CEO, Alan Schwartz, his company went from being a stable and liquid enterprise to nearly insolvent in the span of 24 hours. What unexpected event arrived to shipwreck poor Bear? Market chatter of course.... Obviously Mr. Schwartz is being disingenuous. After all, financially stable companies do not suddenly blow-up because a handful of investors are spreading erroneous rumors. Rather, by definition financially stable enterprises are those that are not slaves to their creditors and/or those that do not carry a market risk profile that can turn the company into road kill inside of 24 hours. - Brady Willett
No, No, No, Don't move your money from Bear, that is being silly, don't be silly, Bear Stearns is fine, Bear Stearns is not in trouble. - Jim Cramer [Nick's comment: Oops.]
I had long thought that the great bear market in stocks might be swift, because over the past 300 years the bigger the investment mania, the faster has been the ensuing collapse. The peaks of 1968 and 1835 led to deep bear markets of six and seven years, respectively. The wilder Roaring 'Twenties, capping an 87-year rise, led to a deeper bear market, yet it was faster, lasting less than three years. The even more dramatic South Sea Bubble, which peaked in 1720, led to a still deeper bear market, yet it was even faster, lasting only two years. So given that the past 10 years of topping has produced the craziest overvaluation, the largest number of bubbles and the most persistent period of market-related optimism ever, by a huge margin, I am more than ever expecting a swift resolution. It would also make sense from a political perspective: The coming deflation needs to be swift enough to out-run the actions of the Fed and Congress. If it happens fast, they won't be able to act quickly enough to turn the credit deflation into a currency inflation before the former trend has run its course. - Bob Prechter
This is the most radical change and expansions of Fed powers and functions since the Great Depression: Essentially the Fed now can lend unlimited amounts to non-bank highly leveraged institutions that it does not regulate.... it is treating this crisis - the most severe financial crisis in the US since the Great Depression - as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate.... the Fed is taking serious financial risks and seriously exacerbating moral hazard distortions.... now the Fed is providing them with a blank check for unlimited amounts.... this is not just a liquidity crisis; it is rather a credit and insolvency crisis. - Nouriel Roubini
Wall Street in reality is the only place whereby a man can glide into town in his new Rolls Royce, to take financial advice from somebody who each night goes home on the subway. - Ceri Shepherd
These psychotic, 400-point rallies in the Dow do not augur renewed confidence. They are being driven almost entirely by short-covering, and even the otherwise clueless news anchors are starting to dismiss them as meaningless. One of these days, moments after the last surviving bear's short position has been liquidated, stocks are going to fall so steeply that even the Plunge Protection Team will call for back-up. Then, the financial collapse that so many have been expecting will unfold in just a few days, with enough power to leave the global economy in ruins for a generation. - Rick Ackerman [Nick's comment: Probably not.]
The Fed's rate cuts are not affecting the lending between banks which is actually deteriorating quite rapidly. And, when banks don't lend to each other (because they are worried about getting their money back) the wheels of capitalism grind to a halt. The banks are the essential conduit for providing credit to the broader economy, so there must be traffic between the major lending institutions. The banks are hoarding cash to cover losses on their steadily downgraded mortgage-backed assets and to shore up their skimpy capital reserves. As a result, consumer spending will slow, housing will continue to falter, business will contract and GDP will shrink. - Mike Whitney
I get a real laugh ("Hahaha!") out of the emergency stimulus program of just giving away $150 billion dollars in $800 increments to various citizens, who total, I assume, 18,750,000 people at 800 clams apiece. Hahaha! Free money! We have now reached the point where the economy is so screwed up from the Federal Reserve's neo-Keynesian econometric stupidities that they are reduced to urging the Congress to give money away to keep the economy from imploding because they can't find people to loan money to at interest rates that are less than the rate of inflation? Hahaha! We're doomed! - Richard Daughty
To revive flaccid financial markets, American politicians are now groping obscenely for their "stimulus packages." It's an ugly image. It's also worse than useless. They might as well be gesturing lewdly like crotch-grabbing rappers, because that's as likely as their economic package is to get the country out of economic straits. The first stage on the road to recovery is to pinpoint the problem and take responsibility for it. You've spent more than you've produced and have switched to living on credit. Having exhausted your creditor's good will, but not your insatiable appetites, you turn to counterfeiting cash in the basement - that's where the U.S. finds itself today. - Ilana Mercer
To be totally honest, things are bad. Things are beyond bad. Things must be near epidemic proportions. Consider that it generally takes Congress at least a few months to find a new way to tax us, but yet it can take them less than a week to come up with a way to give it back. Think about that for a minute. - Andy Sutton
One of the ways that analysts talk about the just-enacted "fiscal stimulus" is by asking the question "How
much of the stimulus will be saved?" To some extent, this is the wrong question, because if you think about it
from the standpoint of equilibrium, the answer is obvious: exactly all of it. The reason is simple. In equilibrium, every security issued must be held. If the government issues $150 billion of new debt to finance its
outlays, then by pure accounting identity, exactly $150 billion of savings must be absorbed from someone to
purchase that debt.... The simple fact is that $150 billion is far beyond the capacity of the Fed to monetize
without provoking a currency crisis. Government itself is a zero sum game. The proposed "fiscal stimulus"
amounts to the government issuing additional debt to some individuals in the economy, and allocating the
proceeds to others. The only relevant issue is whether adding to the Federal debt in order to redistribute
purchasing power will bring resources into use that otherwise would lay idle; whether the redistribution of
purchasing power will relieve some constraint that would be binding in the absence of the program, in a way
that ultimately increases economic activity. The hope is that moving money from one pocket to another will
make us wealthier. - John P. Hussman
I think Bernanke is in a very difficult situation. Too many bubbles have been going on for too long... The Fed is not really in control of the situation. - Paul Volcker
I don't have a high regard for any government (except, possibly, that of Singapore), but the most destructive course a society can embark upon is to appoint academics to positions of responsibility. - Marc Faber
Sooner or later, credit expansion, through the creation of additional fiduciary, must come to a standstill. Even if the banks wanted to, they could not carry on this policy indefinitely, not even if they were being forced to do so by the strongest pressure from outside. The continuing increase in the quantity of fiduciary media leads to continual price increases. Inflation can continue only so long as the opinion persists that it will stop in the foreseeable future. However, once the conviction gains a foothold that the inflation will not come to a halt, then a panic breaks out. In evaluating money and commodities, the public takes anticipated price increases into account in advance. As a consequence, prices race erratically upward out of all bounds. People turn away from using money which is comprised by the increase in fiduciary media. They 'flee' to foreign money, metal bars, 'real values,' barter. In short, the currency breaks down. - Ludwig von Mises
It is interesting to watch the Fed trying to meet the present crisis in the same way as it was in 1930: by administering liberal doses of cheap money. In 1930 the Fed made the crisis worse and it prepared the ground for the Great Depression. Cheap money in 1930 certainly did not stop the decline in the stock market. Ruefully, one can say of the Fed the same what was once famously said of the Bourbons after the restoration of the monarchy in France: "They've learned nothing and forgotten nothing." - Antal E. Fekete
The Fed's extraordinary steps thus far to reinflate the economy have been directed almost entirely at institutional lenders rather than individuals. (We ignore the $160 billion tax rebate, since it is just a drop in the bucket relative to total debt.) The result is that there has been little discernible economic stimulus, only a buildup of reserves on lenders' books with no corresponding demand for loans. (Actually, loan demand has been shrinking, and fast.) So, what Helicopter Ben appears to have achieved using measures that even we would concede are hyperinflationary is: nothing. The banks might be able to pass themselves off as solvent, provided the auditors are in on the con. But merely making the lenders appear not to be bankrupt has done absolutely nothing to achieve what the Fed had set out to do - i.e., re-kindle the housing boom. In fact, even though mortgage rates have trended lower, the lenders have been under great pressure to tighten their standards. The result is that, on balance, demand from home buyers has continued to fall. - Rick Ackerman
Bernanke wants banks to lend more, but all that will do is increase losses. The man clearly does not understand what the basic problem is. Yes, banks should be raising capital, but not to increase lending. Banks need to raise capital in advance of the approaching tsunamis in commercial real estate and credit card writeoffs, and the continuing tsunami in residential housing, all of which are going to further impair bank balance sheets.... We do not need more Steak n Shakes, Pizza Huts, McDonald's, Panera Breads, Starbucks or any other restaurants for that matter. We do not need more Wal-Mart, Target, Lowes, Home Depot, Best Buy, or Bed Bath and Beyond stores. We do not need more Toyota dealers, GM dealers, or Ford dealers. We do not need more nail salons, dry cleaners, movie rental places, storage facilities, etc. We do not need more houses from Toll Brothers, Beazer, Hovnanian, Lennar, Pulte, Centex or Ryland. Inventory of houses is at an all time high. Bernanke wants banks to raise more capital so they can do more lending. He never bothered to ask this simple question: For What? - Mike Shedlock
This is a battle of the Titans - inflation vs. deflation...free markets vs. government manipulators...boom vs. correction. And guess what? We can tell you how it will end - at least in broad outline: The Titans are going to get together and destroy the U.S. economy. Inflation will reduce Americans' purchasing power. Deflation will collapse the value of their assets. Between the anvil of falling prices...and the hammer of rising ones - the American middle class is going to get smashed. - Bill Bonner
I was shocked.... in November, the revolving debt of Americans (meaning credit cards and such) was going up at (preliminary) annual rate of 11.3%.... My jaw was on the floor...and I know what it means to the future of the country. It means people can't pull any more equity out of their homes, and so they are 'living on plastic' which sets the stage perfectly for what.... will be mass repudiation of credit card debt by average American families later this year. - George Ure
The deflation in home prices is not only unsettling to homeowners; it has in effect removed a crucial part of the consumer's piggy bank. Home equity is no longer a source to finance consumer spending. This development is unsettling in its own right, but it is only a reminder to homeowners that their major asset is in deep trouble and is not likely to improve any time in the foreseeable future. If we are correct in placing primary emphasis on the problem faced by households, the economic malaise will not be brief, even though its depth is uncertain. The process is going to be like water torture - drip by drip over an extended period of time until all these excesses are squeezed out of the system and new and happier horizons can open up. - Peter Bernstein
Changing social attitudes about debt have clearly moved to the forefront of the housing crisis. Even those who can afford to pay are walking away with no regrets.... This is what happens when you give people free money. Unfortunately, Bernanke, Congress, and Paulson are intent on giving away more free money to fix the problem. On the surface this might appear inflationary. However, credit destruction and bank impairments are happening far faster than Bernanke and Congress are acting. Welcome to Deflation American Style. At the current rate of progression, Deflation American Style figures to be far worse than anything Japan ever saw. - Mike Shedlock
My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June. Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments. I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money. I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions. I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal. - Internet reader of the L.A. Times [Nick's comment: The moral argument seems to be, if the big boys can do it, I should be able to do it, too. I view this as a moral lapse by all parties, but this is the ethical corruption one can expect when government bails out the big boys and screws ordinary folks.]
There is now a consensus - certainly at the AEA panel - that home price will have to fall 20% to 30% before they bottom out, most likely 30%. This is a whopping loss of home values of about $6 trillion that will have significant macro effects and financial effects. With losses this large the wealth effects on consumption - and the related collapse in home equity withdrawal - will be serious; and with losses this large over 10 million households will end up in negative home equity territory and would thus have a strong incentive to default on their mortgages as most US states treat mortgages as non-recourse loans (i.e. once you default and get foreclosed you are not liable for the difference between the amount of your mortgage and the lower value of your home). The macro and financial consequences of losses and defaults of this size are massive. The part of these $6 trillion losses that will be incurred by households having their home equity wiped out will show up in lower private consumption; while the part of these $6 trillion losses borne by banks, other financial institutions and investors in the US and across the world will lead to a severe credit crunch. - Nouriel Roubini
There are a number of economic theories that economists espouse. One that most of Wall Street and the Fed shares is their Monetary World View. Regardless of what you call it, it is the belief that interest rates control all things economic. Raise rates and the economy slows. Lower rates and the economy revives.... And because of this, banks are comfortable putting trillions of dollars into interest rate strategies and derivatives that rely on this theory. It is vitally important that the Fed continues to play the game as laid out by the Monetary World View. If they were to deviate, say raising rates to protect the Dollar at a time when the economy was slowing, it could be disastrous, since the banks would have been betting trillions on lower rates to rev up the economy. This then could put certain banks in jeopardy of failure as some have a little as 3% of their assets backing up the mountain of derivatives. And forget about surprise moves. The Fed signals well in advance any expected turn in policy. A sudden shift could cause a bank to be left out on the wrong side of a $100 billion derivative. Big oops. - John Riley
When did recession become an abhorrent, avoid-at-all-costs phenomenon? ....Recession has become dreadful because of the amount of debt, dubious investments, derivatives and crappy paper that infests the U.S. financial system. Fear is high that any debt and consumer retrenchment, which are both natural and NECESSARY (for long-term health), will quickly chain react into the dreaded debt deflation and system implosion. - Bill King
Given the worsening housing and credit market situation, look for the Fed to print and pump M-3 at this economy as if every dollar was worth a thousand votes. The world economy will be cheering this effort, because if they cannot export their goods to a dollar-rich U.S. consumer, their economies will tank. Period. World Central Banks should fully support the Fed's printing presses. And they have, failing to cut their rates, and participating in the recent liquidity flood. Kiss the dollar goodbye. It is being sacrificed. - Robert D. McHugh
I had too much to drink with someone who is terribly plugged in (security clearances AND knows tons of people in academia and the officialdom personally, both here and overseas). Unfortunately, I can't use many of the specifics he conveyed, but he is a very upbeat sort by temperament but also has been studying the banking/credit mess. He sees us going down the Japan path. Banks will not be technically bankrupt, but will have so many bad assets on their balance sheets, and will have taken hits to their equity bases, that 18 months from now they will be unable to make new loans. They will be quasi nationalized. BTW he said this in a completely evenhanded fashion, as if he was giving a weather report. This, mind you, comes from someone who has written frequently for the American Enterprise Institute and tells me the Treasury and the Feds are working on this scenario now. This is far more dire than any forecast either yours truly, a constitutional skeptic, or even uberbears like Nouriel Roubini, have been putting forward. - Yves Smith
After cutting rates down to "effectively zero," the Japanese embarked on the biggest program of unnecessary government spending in history. With no military to waste money, it had to turn to public works. New highways to nowhere...new bridges... new rail lines, by the late '90s, the little island of Japan was pouring more concrete than all the fifty states. It was very stimulating to cement sellers. But as to the economy...it did nothing. Here we are, 18 years later...and the Nikkei index is still down by two thirds. - Bill Bonner
The only lesson the U.S. has learned from Japan is how to clean up the post-bubble mess. America has failed
to learn the much more important lesson -- how to avoid dangerously destabilizing bubbles in the first place.
The Greenspan/Bernanke ideology still places disproportionate emphasis on the former while ignoring the
latter at great peril. - Stephen Roach
The G7 financial and banking industry around the world is TOAST. Burnt toast! Their balance sheets and
reserves are in tatters. As money center and investment banks have slowly but surely become hedge funds in
disguise, we are seeing managerial incompetence on plain display. I generally dislike laws that were passed
decades or generations ago which have never been revised or repealed, but the tumbling of the Glass-Steagall
laws (separating banking, insurance and investment companies) that were repealed when Citigroup merged
with Travelers Insurance in the late '90s have really shown the wisdom in those lessons from the great
depression. The financial industry today threatens the banking industry as it did then. - Ty Andros
The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars. - George Soros
The dollar.... is governed by trust on a global scale. That is what gives it its true worth. As it stands right now, that confidence in the dollar is on the wane. What happens if that confidence is lost? Globally, we will feel the rush for the exits much the way Mexico (twice), Brazil, and Argentina (twice) did. Where the risk offers no reward, investors flee. On the home front, the moment could bring about the sudden realization that the strongest economy is now a banana republic. That could see a plunge in jobs and a spike in inflation. A tandem hit such as that would make the upcoming recession seem like a vacation. - Paul Petillo
The biggest fear is that long-term bond rates won't come down in line with short-term rates. We'll have the reverse of what we've seen in recent years, and that is what is frightening the markets. The mechanism of monetary policy is ineffective in these circumstances. I'm not saying it won't work at all; it will help the banking system, but the credit squeeze is going to go on because nobody trusts anybody else. The Fed is pushing on a string. - Joseph Stiglitz
Our view is that the current financial imbroglio is so massive that "too big to fail" will become "too big to bail". There is no conceivable way to bail out entities that might entail trillions of dollars. - Bill King [The King Report]
The mortgage bond insurers have their hands out for $200 billion. Hell, it's only money - print whatever they need... Is everyone on crack and I missed the dealer? Not only are we guaranteeing that inefficient excesses are rewarded, but now we're about to guarantee the ratings of the guys who over-extended? Where my bottle of Jack? - George Ure
Counterparty risk in the credit default swap market will be a huge story in 2008. Losses are going to mount far higher than estimates from just a few months ago. I believe that many financial institutions will be taking large losses every quarter for the next few quarters. At the end of each quarter, investors will hope that this is finally the end. "Surely this time they have gotten it all out in the open." It won't be, because banks can't write down loans until the counterparty risk problem is solved.... Between more massive subprime-related losses, being forced to bring SIVs back onto their balance sheets, and deteriorating credit quality in other bank lines (like credit cards and auto loans, as well as commercial real estate), banks are going to be forced to raise capital and tighten lending standards. This is not something that is going to happen in one quarter. It may take the better part of the year for all of this to flush out of the system. - John Mauldin
Why Would Bank of America Buy Countrywide? Inquiring minds are questioning the deal. Many people have emailed me all day wondering "Why now?" After all, "Why not wait until bankruptcy when previous deals give Bank of America first lien on assets?" I am wondering if those are the right questions. I asked a widely respected friend of mine this question: Could there have been encouragement, cajoling, dare say it begging by the Fed and/or Treasury for Bank of America to bail out CFC to prevent a cascade of defaults? Here was the reply: The smart money says yes. - Mike Shedlock
Focus Capital had $1 billion under management and made 33% in 2007. Let's do the math. $1 billion in assets; 33% return in 2007; 20% of the gains go to fund management; 6.6% net goes to managers; 2.0% management fee is on top of that; 8.6% total. $1,000,000,000 * .086 = $86,000,000. $86 million is not a bad sum of money to make for turning $1 billion into $200 million. Clearly this is the advantage of leverage (at least for those running the fund). All you need is one big year. Who cares after that? I think I could almost retire on $86 million. - Mike Shedlock
We still have to deal with dysfunctional credit markets. The Fed must persist in their work of creating liquidity. Only time and transparency will relieve the problem of insolvency. That process is working, too. It takes time and it does and will succeed. Remember, there are no examples of Depression in economic history where stimulus was applied and where the inflation-adjusted interest rate was brought to zero by the central bank. That is the condition in the US today. In sum, stimulus works. - David R. Kotok [chairman, Cumberland Advisors. Nick's comment: Stimulus might succeed (as it has in the past), but I don't see any guarantees.]
The Canutes at central banks in all time zones are determined to put the market out of business. If they put enough new money and credit in circulation, they believe, the mistakes of the past will disappear and the markets will behave themselves. They seem not to notice that the mistakes were caused by too much money and credit in the first place! - Bill Bonner
Given that there is a massive international banking financial structure, to assume that this financial structure is going to allow a gaggle of in-hock, cell-phone-babbling, credit-card maxers, who get up at four A.M. before Black Friday to buy plastic junk, to have any influence in electing a head of state, is outrageously ludicrous.... Fed-babblers frustratingly moan and groan about what the Fed and other central banks are doing. They operate on a false assumption that the various central banks are loyal to their respective countries. Any central bank is only loyal to its self-survival to keep collecting vigorish from the stupid debt slaves and to maintain control over those slaves on a national or international basis. Any attempt to counter this force is an exercise in windmill waving. - Thomas Henning
It may be that a global recession takes the air out of the gold market. Maybe the price stops going up. Maybe it falls back some. But when it comes to the feds' efforts to sink the dollar, in order to avoid a Japan-like slump, you ain't seen nothin' yet. Tax rebates. Rate cuts. Federal spending. Perhaps even direct intervention in the credit and equity markets. (What's a Plunge Protection Team for, anyway?) Crank up the presses. Put the choppers on full alert. It will be interesting to see what happens. We don't know. But our guess is that, at some point, gold is going to soar as investors seek safety from a disappearing greenback. - Bill Bonner
In the past week, I have been in the car coming home late from work, with the presidential debates on the radio. It is very discouraging to listen to what passes for economic literacy among the candidates. In reality, many candidates are espousing policies that are quite dangerous at worst, or simply misleading at best. Far too many in both parties tell a frustrated America what it wants to hear, rather than the economic reality. - John Mauldin
We happen to know this for a fact - though a very well-guarded state secret: when autopsies were done on a
random selection of dead congressmen, they opened up the crania and found there was nothing there. "How
did these men function with no brains," asked the astonished doctors. But for those of us who have been
following politics, the answer was obvious. - Bill Bonner
A man whose family was German aristocracy prior to World War ll owned a number of large industries and
estates. When asked how many German people were true Nazis, the answer he gave can guide our attitude
toward fanaticism."Very few people were true Nazis" he said, "but many enjoyed the return of German
pride, and many more were too busy to care. I was one of those who just thought the Nazis were a bunch of
fools. So, the majority just sat back and let it all happen. Then, before we knew it, they owned us, and we had
lost control, and the end of the world had come. My family lost everything. I ended up in a concentration
camp and the Allies destroyed my factories". We are told again and again by 'experts' and 'talking heads'
that Islam is the religion of peace, and that the vast majority of Muslims just want to live in peace. Although
this unqualified assertion may be true, it is entirely irrelevant. It is meaningless fluff, meant to make us feel
better, and meant to somehow diminish the spectra of fanatics rampaging across the globe in the name of
Islam. The fact is that the fanatics rule Islam at this moment in history. It is the fanatics who march. It is the
fanatics who wage any one of 50 shooting wars worldwide. It is the fanatics who systematically slaughter
Christian or tribal groups throughout Africa and are gradually taking over the entire continent in an Islamic
wave. It is the fanatics who bomb, behead, murder, or honor kill. It is the fanatics who take over mosque
after mosque. It is the fanatics who zealously spread the stoning and hanging of rape victims and homosexuals. The hard quantifiable fact is that the 'peaceful majority', the 'silent majority', is cowed and extraneous. -
Emanuel Tanay.
Is it reasonable to expect a killer bear just ahead, similar to 1970 or 1973-74, as the economy clearly crashes to a hard landing? Yes, but I am leaning to the view that we're more likely to see a "double-dipper", like 1980-1982.
First, one should never underestimate the ability of incumbent politicians to buy their way back into office by goosing the economy in an election year.... witness the $600/$1200 per person/couple being showered from Bernanke's helicopters onto you in May or June. Second, the Fed is clearly taking in dodgy assets (though of higher quality) in exchange for short-term loans to banks,.... and now, even non banks.... in effect partially nationalizing them.
Third, a bottom (at least for the intermediate term) is usually close at hand when the problems that we pessimists were predicting at bull-market highs are generally recognized to be true. For example, the early estimates of about a half-trillion dollars worth of writedowns needing to be taken are now generally recognized to be correct.... maybe even conservative, it could be a trillion dollars. Anecdotally, we can see that the economy fell off a cliff in January 2008, amidst denials by the pundits. Now it is generally recognized that the economy (as officially measured using the bogus CPI) is in recession, although our elected servants have not yet publicly come around to that point of view. I suppose you could wait for the "Recession Has Arrived" headline on the covers of Time and Newsweek to make it official, but by that time stocks will probably already be rallying.
Fourth, the market in election years usually does not follow the "Sell in May and go away" script that works in most non-election years. Typically, stocks will be at a peak (of some sort) within a month before or after the November elections.
Thus, I expect a sustainable rally anytime now, with a recovery in stock prices to about election time, followed by a new downleg in 2009 when the politicians decide to take their lumps and get the economic bad stuff over with as quickly as possible. Maybe I'm a little early here, but I think it's time to start nibbling at good values in the stock market. What was is it that was said about buying when blood runs in the streets? Well, there's plenty of financial bleeding going on right now; the old dictum will probably prove to be correct yet again as long as there is no systemic collapse (see later). In that case you can say, well, you did the best you could under the circumstances.
The caveat is that the current problem is not due to a lack of liquidity.... there's plenty of money sloshing about.... it's an issue of solvency, like the old fashioned "money panics" (credit panics, actually) of the early 20th century. The deleveraging could spiral out of control; but so far, it appears to me we are tracing the trajectory of Japan, with a winding down of leverage interspersed with bouts of false hopes, while the powers that be strive mightily to maintain the zombie debt on the books of institutions instead of marking it to market.
Let's see, why do we have the Federal Reserve? Oh yes, to maintain the value of the dollar and to stabilize the economy. One Great Depression, one killer inflationary recession (1970s) and one credit crunch (the current one) later, with the purchasing power of the dollar shrunk by 96% since 1913, it should be clear to even the brain-dead that the Fed is a colossal failure. Time to kill it off and replace it with something that really works to our benefit..... but I'm getting off-topic, that's a subject for another time.
In past issues I've given odds for another major
systemic failure. Hell, we have a new failure every
week as yet another alphabet derivative market or
"shadow-banking" institution bites the dust; time to
scrap those estimates, odds are 100%. From now on,
I will give odds for a systemic collapse, by which I
mean a near-total freezup of bank lending, a global
stock-market collapse (30+ percent) and the onset of
a true depression. Currently I assess the odds of this
happening at about 15% (which may seem low,
except the Fed has now made it clear it is willing to
bail out most anybody, at any time). By corollary, the
odds that we will continue to progress along the path
of a Japan-style slump are about 85%. (The odds that
we will miraculously recover into a glorious new
economic age within the next year or two are 0%).
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $123,393.01 (see below)
Increase: $23,393.01 [+23.39%]
COMMENT on "Inheritance": You will see that I've done a lot of buying and selling since this portfolio was last printed in January 2008. Most of it revolves around the various ProShares Ultrashort funds which I had bought in October and December. During January and February I bought and sold frequently to keep my hedge against the bear market "balanced", buying small amounts of Ultrashorts when the market rallied and selling them when it panicked. I don't think I made more than $40 or $50 on any of the smaller trades, but I feel I did keep my risks balanced against the possiblity of a systemic collapse.
In the first week of March, as the debt deleveraging threatened to spin out of control, I felt the bearish hedges had served their purpose, and sold them all. My original objective was to protect against a selloff in my oil/gas stocks as the recession impacted energy demand. What actually happened is that the Fed has so severely trashed the value of the dollar that the oil stocks have declined hardly at all, as oil and other key commodities are being driven to new highs. Meanwhile, good values in stocks outside the oil/gas arena were appearing, and it made sense to put the cash to work in the interests of diversification and in expectation of a "relief rally" which was probably not too far away.
My paper profits came about largely because oil/gas (commodities) did well while the market generally, and financials and real estate in particular, did poorly. I can see oil/gas correcting as the recession begins to bite, but these are long-term holdings for me, and I didn't want to be squeezed at both ends.... paper losses in oil/gas while the relief from high energy prices gives a boost to the market; better to be squeezed from only one side. Finally, if you actually look at the Ultrashort portfolios, you will see they are all swap agreements. Should we have a systemic collapse, I didn't want to see about $13K (normalized) of paper profits in these vaporize because of counterparty failure.
My first purchase was to add another Canadian trust, Advantage Energy Income Fund, to the portfolio when its price was severely depressed in the January mini-panic. Next, seeing that rural telecoms were again out of favor, I added to each.... Citizens Communications, Iowa Telecom and Windstream, to bring them up to 100 shares. Integrys was also depressed during the period, so I also brought that position up to 100 shares. (All figures normalized, of course.)
Also added in the telecom area was Fairpoint Communications, which I'd looked at more than a year ago and didn't buy at the time because I didn't feel it was as good a value as the others I did buy then. But Fairpoint has decided to quadruple its size by swallowing the northern New England landlines of Verizon.... a merger which is almost complete (might be a done deal by the time you read this). To accomplish this, it had to agree (to regulators) to slash its generous dividend. Normally I wouldn't touch a company which treats its shareholders so badly, but in this case it may be a justified tradeoff for future growth. Usually I perk up when I see a change in management.... in this case, it's a change in direction as Fairpoint transmogrifies from a rural cash cow to a more traditional telecom. In the process, it has ticked off everybody, even its former investment friends, who have now said, "sell". Everybody hates this stock.... it had dropped to the point where the yield with the new dividend was the same as it was with the old, higher dividend. So I bought some.
As a result of the Money Show (as previously mentioned) I took on good-sized positions in the three Gladstone companies (GLAD, GOOD and GAIN) though, for the most part, I waited awhile before purchasing them, as stocks will frequently get a little-short-term boost from Money Show exposure, and there's no need to pay for that if you don't have to. Also added, just for fun, was Manas Petroleum.
As the credit crunch picked up steam in early March, some utility and other stocks I'd been keeping an eye on started sporting good dividend yields, so I did a little cherry-picking here. First added were Nicor, an Illinois gas-distribution utility which is on the mend following turbulence earlier in this decade, and NGP Capital Resources, which invests in small and midsize energy companies. Later came PNM Resources (formerly Public Service of New Mexico), a primarily electric utility which struggles in a very unfriendly regulatory environment and which had just received a parsimonious rate increase, only a third of what it had applied for. PNM is not permitted to have a fuel adjustment clause with its customers, so the stock gets crushed as energy prices soar. Conversely, should energy prices flatten out or decline in the recession/deflation, PNM should do well. It can take years for regulators to come around and correct for their previous stinginess, so this is a really-long-term holding (as long as the regulators don't completely destroy it). Finally, I added some Progress Energy, a Florida electric/gas utility (in a friendly regulatory environment) which has sold off as the area's housing bubble has popped. Its territory extends from central Florida (including the Orlando area) into the panhandle. It will definitely do well again when the housing glut is absorbed and the area resumes its growth.... you can't survive in Florida without central air.
A non-utility addition is Macquarie Infrastructure, an Australian mini-conglomerate with diversified interests worldwide, but primarily in supporting the operation of bridges, tunnels, airports and the like. About a third of its revenues comes from operating airport parking lots in the U.S. Definitely not a recession-resistant business.... travel always falls off during a recession. So I'm looking to the other side of the canyon here.
I also thought it might finally be time to start adding "paper" - that is, companies which deal in lending or other financial transactions, in preparation for the rally I expect, as well as "things" - companies owning hard assets such as mines, oil/gas wells, power pants, parking lots, etc. The first was a bank. "No, Nick!", I hear you exclaiming, "you bought a bank, while there's a credit crunch going on which could collapse the world's financial structure?" Yes, I did. You may remember than one of the stocks I inherited from my stepmother was Wells Fargo, actually a very sound pick by her money managers. I sold enough to cover her original cost and let the "profit" ride for awhile. Eventually I felt uncomfortable owning any bank stock with a possible systemic crisis looming, so I sold the remaining Wells Fargo.
But Wells Fargo is a pretty well-run bank, and it didn't indulge in a lot of the high-leverage foolishness that the other big boys (Citicorp, Bank of America and Wachovia come to mind) did; or, if it did, it got into the game late and got out early. Warren Buffett is a director and continues to buy its stock. When the credit panic subsides, while the banks weakened by their excessive leverage thrash about, the strong banks such as Wells Fargo should be able to expand their franchises.
Also in the "paper" area, later in the month of March I bought shares of First Marblehead, a student-loan processing outfit. At one time First Marblehead packaged student loans for securitization, but that business died in January. For the time being it must struggle along with the other parts of its business - helping students secure loans, and managing student loan programs for colleges. I can see growth for sure in this, as banks are dumping their student-loan programs without notice and the whole student-loan situation is in a state of rapid flux. Regardless, look at this as a turnaround situation, should the credit markets permit a turnaround.
When the first week of March saw the collapse of Carlyle (32:1 leverage) and this failure started to propagate into other leveraged financial companies, in the line of fire was Thornburg Mortgage - like Bear Stearns, which came a week later, solvent one day and insolvent 24 hours later. I took a quick look at Thornburg and it seemed to me that it was leveraged about 17:1 on what in non-panic times would be a pretty high-quality mortgage portfolio of jumbo loans. It was likely that Thornburg was roadkill, certainly if the deleveraging progressed until its capital was wiped out. But there was a chance that if the panic burned itself out sooner, there might be some salvage value left in the company.
So, just for fun, over a period of three days I bought about $260 worth of Thornburg. By Monday afternoon, March 10, it looked like I might just as well taken the $260 and flushed it down the toilet. But on Tuesday March 11 the Fed announced yet another lending plan, in my opinion to bail out Bear Stearns (ultimately unsuccessful; a forced merger with JP Morgan came in the following week) and Lehman. This caused all of the financials under duress, including Thornburg, to rocket higher. So I decided that discretion was the better part of valor, and reduced my position to 100 shares at a cost of about $1.20 per share.
Looking back, it still seems to me that Thornburg is roadkill. But I will concede that there is a slim chance it will survive in a much-shrunken form. At any rate, this is much more fun than going to Foxwoods (an Indian casino in Connecticut) and the odds of coming out ahead are much higher than at the casino.
At the end of the third week of March the deleveraging reached hedge funds speculating in commodities, so a sudden dump on the market of some of their holdings as they reliquefied themselves caused a sudden, around-10% drop in the prices of gold, oil and base commodities. So I took the opportunity to add a few more shares of Newmont Mining to the portfolio, and doubled my position in US Gold.
My, what a busy period. Things seem to have quieted down, and I'm not planning any more moves for the immediate future. But you never know.... there's no telling where the deleveraging will strike next.
The portfolio cost (normalized) is $119,072.07 with $14,150.91 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $22,538.23
Increase: $11,839.23 [+110.66%]
COMMENT on "PIG": There is no change from the last issue.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $30,466.19
Present value: $38,679.14
Increase: $ 8,212.95 [+26.98%]
COMMENT on Roth IRAs: I have used the surplus cash to buy more shares of Tortoise Capital Resources.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity non-individual-stocks retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 78.71%; money-markets, 13.57%; inflation indexed bonds, 0%; TIAA real estate, 2.80%; MLPs, 4.68%; TIAA-CREF High-Yield II, 0.24%.
TIAA-CREF values, 24Mar2008: stock, 237.77; equity-index, 91.78; MM, 25.11; bond, 85.22; inflation-indexed bond, 53.60; real estate, 314.20; TIAA current yield in SRA, about 4.8%. COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of February 29, 2008.
____________________________ NYSE TIMER'S TREND _______________________________
Mon 5 Nov 07 # . I . |13543.40 | - *
Tue 6 Nov 07 . I #. |13660.94 | - *
Wed 7 Nov 07 # . I . |13300.02 | . - *
Thu 8 Nov 07 #. I . |13266.29 | . - *
Fri 9 Nov 07 # . I . |13042.74 |*-~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 12 Nov 07 # . I . |12987.55 | . - *
Tue 13 Nov 07 . I# . |13307.09 | . - *
Wed 14 Nov 07 #. I . |13231.01 | . - *
Thu 15 Nov 07 # . I . |13110.05 | . - *
Fri 16 Nov 07 #. I . |13176.79 | . - *
Mon 19 Nov 07 # . I . |12958.44 | . - *
Tue 20 Nov 07 # . I . |13010.14 @| . - *
Wed 21 Nov 07 # . I . |12799.04 @| . -*
Fri 23 Nov 07 . I# . |12980.88 | . - *
Mon 26 Nov 07 # . I . |12743.44 @| . *
Tue 27 Nov 07 .# I . |12958.44 | . - *
Wed 28 Nov 07 . I # |13289.45 | .- *
Thu 29 Nov 07 .# I . |13311.73 | - *
Fri 30 Nov 07 . I # |13371.72 |-. *
Mon 3 Dec 07 # I . |13314.57 |-. *
Tue 4 Dec 07 # . I . |13248.73 |-. *
Wed 5 Dec 07 . I # |13444.96 |-. *
Thu 6 Dec 07 . | . # |13619.89 + . *
Fri 7 Dec 07 . | .# |13625.58 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 10 Dec 07 . | . # |13727.03 | + *
Tue 11 Dec 07 # I . |13432.77 | .+ *
Wed 12 Dec 07 . & . |13473.90 | + *
Thu 13 Dec 07 # . I . |13517.96 + . *
Fri 14 Dec 07 # . I . |13339.85 | - *
Mon 17 Dec 07 # . I . |13167.20 |~.~*-~~~~~~~~~~~~~~~~~~~~~~~
Tue 18 Dec 07 # I . |13232.47 | . - *
Wed 19 Dec 07 # . I . |13207.27 @| . - *
Thu 20 Dec 07 # I . |13245.64 | . - *
Fri 21 Dec 07 . I #. |13450.65 | . - *
Mon 24 Dec 07 . | .# |13549.33 |-. *
Wed 26 Dec 07 . |# . |13551.69 |-. *
Thu 27 Dec 07 # . I . |13359.61 |-. *
Fri 28 Dec 07 #. I . |13365.87 |-. *
Mon 31 Dec 07 # . I . |13264.82 | - *
Wed 2 Jan 08 # . I . |13043.96 | . - *
Thu 3 Jan 08 #. I . |13056.72 | . - *
Fri 4 Jan 08 # . I . |12800.18 @|~.~*-~~~~~~~~~~~~~~~~~~~~~~~
Mon 7 Jan 08 #. I . |12827.49 @| . - *
Tue 8 Jan 08 # . I . |12589.07 @| . - *
Wed 9 Jan 08 # I . |12735.31 @| . - *
Thu 10 Jan 08 . & . |12853.09 | . - *
Fri 11 Jan 08 # . I . |12606.30 | . - *
Mon 14 Jan 08 . I# . |12778.15 | .- *
Tue 15 Jan 08 # . I . |12501.11 | .- *
Wed 16 Jan 08 #. I . |12466.16 |~.~-*~~~~~~~~~~~~~~~~~~~~~~~
Thu 17 Jan 08 # . I . |12159.21 | . -*
Fri 18 Jan 08 # . I . |12099.30 @|~.~*-~~~~~~~~~~~~~~~~~~~~~~~
Tue 22 Jan 08 # . I . |11971.19 @| . - *
Wed 23 Jan 08 .# I . |12270.17 @| . - *
Thu 24 Jan 08 . #I . |12378.61 | . - *
Fri 25 Jan 08 #. I . |12207.17 | . - *
Mon 28 Jan 08 . | #. |12383.89 | - *
Tue 29 Jan 08 . | # |12480.30 |-. *
Wed 30 Jan 08 . #| . |12442.83 |-. *
Thu 31 Jan 08 . | #. }|12650.36 + . *
Fri 1 Feb 08 . | . # |12743.19 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 4 Feb 08 . |# . |12635.16 | + *
Tue 5 Feb 08 # . | . [|12265.13 +~.*~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 6 Feb 08 # . I . {|12200.10 |-. *
Thu 7 Feb 08 .# | . |12247.00 | - *
Fri 8 Feb 08 # | . |12182.13 | .- *
Mon 11 Feb 08 . #| . |12240.01 | . - *
Tue 12 Feb 08 . | #. |12373.41 | - *
Wed 13 Feb 08 . | #. }|12552.24 |-. *
Thu 14 Feb 08 #. I . {|12376.98 |-. *
Fri 15 Feb 08 #. I . |12348.21 |-. *
Tue 19 Feb 08 . I# . |12337.22 |-. *
Wed 20 Feb 08 . | #. |12427.26 |-. *
Thu 21 Feb 08 # I . |12284.30 | - *
Fri 22 Feb 08 . #I . |12381.02 |-. *
Mon 25 Feb 08 . | . # }|12570.22 + . *
Tue 26 Feb 08 . | . # |12684.92 |+. *
Wed 27 Feb 08 . | #. |12694.28 |+. *
Thu 28 Feb 08 .# | . |12582.18 |+. *
Fri 29 Feb 08 # . I . {|12266.39 + . *
Mon 3 Mar 08 #. I . |12258.90 | - *
Tue 4 Mar 08 # . I . |12213.80 | . - *
Wed 5 Mar 08 . #I . |12254.99 | . - *
Thu 6 Mar 08 # . I . |12040.39 @| . - *
Fri 7 Mar 08 # . I . |11893.69 @|~.~*-~~~~~~~~~~~~~~~~~~~~~~~
Mon 10 Mar 08 # . I . |11740.15 @| . - *
Tue 11 Mar 08 . & . |12156.81 | . - *
Wed 12 Mar 08 #. I . |12360.58 @| . - *
Thu 13 Mar 08 .# I . |12145.74 | . - *
Fri 14 Mar 08 # . I . |11951.09 | . - *
Mon 17 Mar 08 # . I . |11972.25 | . - *
Tue 18 Mar 08 . I# . |12392.66 | . - *
Wed 19 Mar 08 # . I . |12099.66 | . - *
Thu 20 Mar 08 . #I . |12361.32 | . - *
--------------------------------------------------------------------------------
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal of October 15, 2007.
____________________________ NASDAQ TIMER'S TREND _____________________________ Mon 5 Nov 07 # . I . | 2795.18 | .- * Tue 6 Nov 07 .# I . | 2825.18 | .- * Wed 7 Nov 07 # . I . | 2748.76 | . - * Thu 8 Nov 07 # . I . | 2696.00 | . - * Fri 9 Nov 07 # . I . | 2627.94 @| . - * Mon 12 Nov 07 # . I . | 2584.13 @| . - * Tue 13 Nov 07 . I# . | 2673.65 @| . - * Wed 14 Nov 07 #. I . | 2644.32 | . - * Thu 15 Nov 07 # . I . | 2618.51 | . - * Fri 16 Nov 07 # I . | 2637.24 | . - * Mon 19 Nov 07 # . I . | 2593.38 | . - * Tue 20 Nov 07 # . I . | 2596.81 @| . - * Wed 21 Nov 07 # . I . | 2562.15 @| . - * Fri 23 Nov 07 . #I . | 2596.60 | . - * Mon 26 Nov 07 # . I . | 2540.99 @| . - * Tue 27 Nov 07 . #I . | 2580.80 | . - * Wed 28 Nov 07 .# I . | 2662.91 | . - * Thu 29 Nov 07 .# I . | 2668.13 | .- * Fri 30 Nov 07 .# I . | 2660.96 | .- * Mon 3 Dec 07 #. I . | 2637.13 | .- * Tue 4 Dec 07 # . I . | 2619.83 | . - * Wed 5 Dec 07 . #I . | 2666.36 | .- * Thu 6 Dec 07 . I #. | 2709.03 | .- * Fri 7 Dec 07 . #I . | 2706.16 | - * Mon 10 Dec 07 . |# . | 2718.95 |-. * Tue 11 Dec 07 # . I . | 2652.35 |-. * Wed 12 Dec 07 .# I . | 2671.14 |-. * Thu 13 Dec 07 #. I . | 2668.49 | .- * Fri 14 Dec 07 # . I . | 2635.74 | . - * Mon 17 Dec 07 # . I . | 2574.46 @| . - * Tue 18 Dec 07 # I . | 2596.03 | . - * Wed 19 Dec 07 # I . | 2601.01 | . - * Thu 20 Dec 07 . #I . | 2640.86 | . - * Fri 21 Dec 07 . I #. | 2691.99 | .- * Mon 24 Dec 07 . | # | 2713.50 |-. * Wed 26 Dec 07 . | # | 2724.41 + . * Thu 27 Dec 07 # . I . | 2676.79 + . * Fri 28 Dec 07 #. I . | 2674.46 |-. * Mon 31 Dec 07 # . I . | 2652.28 | - * Wed 2 Jan 08 # . I . | 2609.63 | . - * Thu 3 Jan 08 #. I . | 2602.68 @| . - * Fri 4 Jan 08 # . I . | 2504.65 @| . - * Mon 7 Jan 08 # . I . | 2499.46 @| . - * Tue 8 Jan 08 # . I . | 2440.51 @| . - * Wed 9 Jan 08 #. I . | 2474.55 @| . - * Thu 10 Jan 08 .# I . | 2488.52 @| . - * Fri 11 Jan 08 # . I . | 2439.94 @| . - * Mon 14 Jan 08 .# I . | 2478.30 | . - * Tue 15 Jan 08 # . I . | 2417.59 | . - * Wed 16 Jan 08 # . I . | 2394.59 | . - * Thu 17 Jan 08 # . I . | 2346.90 @| . - * Fri 18 Jan 08 # . I . | 2340.02 @| . - * Tue 22 Jan 08 # . I . | 2292.27 @| . - * Wed 23 Jan 08 #. I . | 2316.41 @| . - * Thu 24 Jan 08 . #I . | 2360.92 @| . - * Fri 25 Jan 08 # . I . | 2326.20 | . - * Mon 28 Jan 08 . #I . | 2349.91 | . - * Tue 29 Jan 08 .# I . | 2358.06 | .- * Wed 30 Jan 08 # . I . | 2349.00 | .- * Thu 31 Jan 08 . #I . | 2389.86 | .- * Fri 1 Feb 08 . |# . | 2413.36 | - * Mon 4 Feb 08 # I . | 2382.85 | - * Tue 5 Feb 08 # . I . | 2309.57 | . - * Wed 6 Feb 08 # . I . | 2278.75 | . - * Thu 7 Feb 08 # I . | 2293.03 | . - * Fri 8 Feb 08 .# I . | 2304.85 | . - * Mon 11 Feb 08 .# I . | 2320.06 | . - * Tue 12 Feb 08 # I . | 2320.04 | . - * Wed 13 Feb 08 . |# . | 2373.93 | - * Thu 14 Feb 08 # . I . | 2332.54 | .- * Fri 15 Feb 08 # . I . | 2321.80 | . - * Tue 19 Feb 08 # . I . | 2306.20 | . - * Wed 20 Feb 08 # I . | 2327.10 | . - * Thu 21 Feb 08 . #I . | 2299.78 | . - * Fri 22 Feb 08 #. I . | 2305.35 | . - * Mon 25 Feb 08 . & . | 2327.48 | .- * Tue 26 Feb 08 . & . | 2344.99 | - * Wed 27 Feb 08 . #I . | 2353.78 | - * Thu 28 Feb 08 # . I . | 2331.57 | .- * Fri 29 Feb 08 # . I . | 2271.48 | . - * Mon 3 Mar 08 # . I . | 2258.60 | . - * Tue 4 Mar 08 # . I . | 2260.28 @| . - * Wed 5 Mar 08 .# I . | 2272.81 @| . - * Thu 6 Mar 08 # . I . | 2220.50 @| . - * Fri 7 Mar 08 # . I . | 2212.49 @| . - * Mon 10 Mar 08 # . I . | 2169.34 @| . -* Tue 11 Mar 08 . #I . | 2255.76 | . - * Wed 12 Mar 08 # . I . | 2243.87 @| . - * Thu 13 Mar 08 # I . | 2263.61 | . - * Fri 14 Mar 08 # . I . | 2212.49 @| . - * Mon 17 Mar 08 # . I . | 2177.01 @| . - * Tue 18 Mar 08 . & . | 2268.26 | . - * Wed 19 Mar 08 # . I . | 2209.96 @| . - * Thu 20 Mar 08 . #I . | 2258.11 | . - * --------------------------------------------------------------------------------"Timer's Trend" is based on 4% and 10% exponential moving averages of the New York Stock Exchange or NASDAQ advance/decline lines (that is, the ratio of advancing to declining stocks). There are many symbols shown above, but the ones that count are the braces:
NEXT ISSUE - should appear in April 2008.