Has anyone noticed that many recent economic news items include a phrase something like,"highest/lowest level in history"?
The evidence is that history is being made right now. And as much as some of us like to think we know where that leads, the reality is that it is uncharted territory.
If you got some spare time and need a laugh, Countrywide filed it's 10-K today.
I loved this gem under risk factors:
We depend on the accuracy and completeness of information about customers and counterparties
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to borrowers under certain loan programs, we assume that the information provided by a customer is accurate and complete and we do not independently verify that information. Our financial condition and results of operations could be negatively impacted to the extent we rely on customer information that is not complete or accurate.
This is so off the scale that I can't get me head around it. If munis have to pay a rate higher than treasuries for tax exempt debt, than treasury yields must be going to jump up dramatically. Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
I posted the previous at this ungodly hour because I woke up in the middle of the night sensing impending doom and looked at CR for confirmation. My vibes were correct.
I wonder if all the economists will bother to look away from their computer simulations long enough to notice that their inputs are simply incorrect? The event that couldn't happen has happened.
Investors high-tailed it to the exit, nonetheless. Shares of MF Global closed down 27% in Thursday trading on the New York exchange, touching their 52-week low at one point.
The losses were easy to come by. "Grain prices have experienced unprecedented volatility recently with price swings as much as 25% this year to date," said analyst Niamh Alexander of Keefe Bruyette Woods. On the Minneapolis Grain Exchange, wheat was trading at $22.60 this week, up from $5 a year ago.
The economic recession is going to hurt the municipalities abilty to pay back their debt. Real estate and income taxes will go down and drive up the default rate on munis. The market is forecasting unusual risk.
isn't there a tax advantage to holding 5.5% muni over a treasury as well? or do you have to be in some kind of muni fund for that..
anyway, I still prefer 24 month term CDs in AUD - 6.6% and currency appreciation. Since there are only 4 or 5 big aussie banks they (CDs) are effectively treasuries, it would be unthinkable for one to be allowed to fail.
Worried writes:
i dont get it. Excuse my ignorance
...
How is 5.5 high???
I think what is at issue is the ratio of AVERAGE AAA RATED 30yr muni to 30yr treasury...5.14/4.42 = 1.163. So, 16.3% premium over treasuries.
So, if you want to research, this (the ratio as defined above) is the number you should look at.
I see only one way out of this crisis of confidence as spoken about previously, the monolines, clearly lack no credibility, the ratings agencies continue to be under extreme pressure due to current/past mistakes, either Buffet/a like credit reinsures this debt or the government does.
This is the only way to begin to stem the systemic spreading of credit problems in the system. A market solution was provided an opportunity and it is clearly not working and deteriorating further.
You have to ask yourself when reality will set in? When the common trades to low single digits, come on, the markets have spoken and will continue to price these companies accordingly until a solution that provides the confidence that the credit markets need.
What id unfortunate is that our regulators fail to grasp the severity of the current crisis.
" ``Management believes this decline in value is other than temporary,'' according to the filing. "
" Of those CDOs, $6.9 billion, or 92 percent, are experiencing so-called events of default, Tavakoli said. Such events signal the most-senior classes may not be paid in full. "
"Employees at some firms that received the most fees during the year were also large contributors to Moore's campaign for governor. Overall, employees at firms that manage pension dollars gave at least $128,000 last year to his war chest, about 5 percent of all contributions."
""It doesn't pass the smell test to us," said Cope, whose group has close ties to the Perdue campaign."
"Employees at some firms that received the most fees during the year were also large contributors to Moore's campaign for governor. Overall, employees at firms that manage pension dollars gave at least $128,000 last year to his war chest, about 5 percent of all contributions."
""It doesn't pass the smell test to us," said Cope, whose group has close ties to the Perdue campaign."
5.5% is like 8+% taxable and new issues for shorter term stuff were near 2% even a month ago.
My plan is to take money off the table from my eurobond and roll some of it over into spanish paper, the ARS auction next weeks and 10 year munis. If it works out I should make over 8% with a currency hedge to boot.
"Several of the Companys other financial guarantee reinsurers, including RAM Reinsurance Company, Ltd. (RAM), Ambac Assurance Corporation, XL Financial Assurance Ltd. and XL Capital Assurance Inc., have had their credit ratings either downgraded or put on negative watch by one or more of the major rating agencies between December 2007 and February 2008. RAM has deposited $104 million of assets in a trust for the benefit of MBIA as of December 31, 2007. Although there was no material impact on the Company for any of the rating agency actions through February 2008 relating to its reinsurers, a further downgrade of one or more of the Companys reinsurers could increase the amount of capital required to maintain MBIA Corp.s triple-A ratings and may require the establishment of reserves against any receivables due from the such reinsurers. "
Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
Fear, plain and simple. The US govt seems to be a less likely candidate to default as opposed to Orange County.
What's becoming clear to me is that this market is becoming an extremely efficient distributor of flaming bags of doo-doo. Last Friday all the shorts were suicidal after Gasparino's 3:30PM rumor ramped up the tape. Now all of Friday-Wednesdays gains are toast. Markets like this are good for nothing except generating brokerage commissions.
Time to hide all the sharp objects and take away the shoelaces from anyone who went long.
I'm just an ignorant ole hillbilly, but it would seem to me that in order to stop the bleeding, you need to apply a bandage. All I've been reading on these blogs is homeowners are dumping their houses because they are overpriced, they don't have equity, or can't afford the payments. Along with that, their confidence in the monetary system is totally shot. You are dealing with a monetary virus here, and the global system needs to start applying an immunization instead of a quarantine.
I think the first thing I would do is look at these defaulting loans and work out a deal. I know, the banks don't want to do that cause they lose money. But aren't they losing anyway? Aren't we all?
Take a mortgage, run through the numbers, CREDIT all interest paid to date to that homeowners principal for the purpose of renewing the loan. Take the new principal figure and run it against a new fixed rate 30 year loan. If the numbers are good, issue the loan. If they don't add up, put it in the non-performing pile. What that idea does is PUT SKIN IN THE GAME for the homeowner. Money he has already paid. And it removes one more POS mortgage from the books.
Others advocate an across the board chop of 20 to 30 percent of the mortgage. Problem is, that isn't going to get the cash flow going again. Actually it will freeze it up even more. But mortgages based on time and payment would be easier to swallow, especially when the garbage is replaced with a new loan with fixed interest.
Shorter CFC 10-K "We're very trusting people. So we believed all the borrowers were telling us the absolute, unvarnished truth when we made our loans. Our bucketful of woes is the fault of all those nasty, lying, no-good, low-down borrowers."
revro, a casual perusal of Google suggests that "woocoodanode" may have originated right here at CR.
Took a look this morning at some of the muni CEFs, just happened to choose Blackrock and Pimco since they're among the bigger players.
National muni CEFs generally yielding 6.0 - 6.5%. I recall reading a year or more ago that these used 25% leverage, so that sounds about right.
They are all still about 5% from their bottoms in late December. No clear idea what happened the last week in December except the belated Santa Claus rally in equities.
Yes, spreads are rising in Europe but neither party is gonna look to default on sovereign debt and is running a surplus, as opposed to Italy or Greece. My position in euros averages at 117 (but is rising as paper matures)so I'm not too worried. Besides, the euro's got a better chance of hitting 160 before 140.
My concern is with another ARS failure likely, how long can I hold on to the high yield before the note gets called.
In a wealth preservation enviornment, getting yields like this without going too far out the limb is manna.
Long side and short side alike have to be willing to accept mucho pain in order to be positioned correctly.
After the SocGen lows, what you really needed to buy was the deep cyclicals - you'd have 20 sticks in a TEX, CAT, BUCY - when there was no logical premise for doing so, or for suspecting they'd make a V-bottom.
On the short side, if you held your nose into the CNBC tape-painting last week and bought the double-short emerging market ETFs - with absolutely no technical justification - you made 20% this week.
I personally took a butt-kicking for the last half of February until this week.
This is one of the harder markets to trade that I can remember. July, 2007 through January, 2008 was pretty easy by comparison - sell or go short when the MACD and stochastic were way overbought, buy or go long when they were oversold.
Last week, we were pretty much at midline on all those measures.
It's been said that the great collapses always occur from very oversold conditions.
I made the unfortunate mistake of listening to IBD and going long WDC (Western Digital.) It looked like a clean breakout, but then it got swamped by Friday's tank-fest.
Thank God I had the sense to hedge by buying out-of-the money puts on the same stock as cheap insurance. I'm positioned neutral now; except for some DBA ETF up about 10% and protected with trailing stops.
If those get hit on Monday, I just might short into the hole. RIMM looks tempting again; it's close to filling a gap between 97 and 103.
Bob Morris,
It is forced selling on the part of hedgefunds. They were borrowing short via auction rate securities to lend long (buying long dated muni bonds on margin).
Lots of the demand for muni's is at the short end of the yield curve but most of the supply is longer dated stuff.
By doing what they did (buy long dated paper on margin and create short dated paper out of it via the auction rate securities mechanism) they flattened the yield curve for muni's and made money in the process.
What's happening now is as long dated munis yield goes up (price drops) the funds are receiving margin calls. They either have cash to meet the margin calls or they don't. If they don't they must sell further depressing long muni bond prices jacking yields higher.
Further up thread someone asked why munis yielding more than Treasuries was significant. Well munis at a minimum are exempt from Federal income tax and could be exempt from State and Local income tax as well.
As an example, a muni yielding 5.5% for someone in the 28% tax bracket and 10% state income taxes has a taxable equivalent yield of almost 8.5%!! In other words, the yield on Treasuries would have to rise from @ 4.5% on the 30yr to 8.5% for the Treasury and Muni to pay the same after taxes...
Hedge Funds' Fire Sales Send Muni-Bond Yields To Historic High Levels
Talk about confusing cause and effect. Muni bonds are repricing to reflect true yield and perceived risk. Dare I say the "calculated risk?" That is what is causing hedge funds and others to sell not the other way round. Hedge funds are just a convenient whipping boy because some people cannot say out loud the word inflation.
I did like this quote: "As a result of the bond insurers' recent problems, Mr. Dresslar noted, the general-obligation bonds will be sold without insurance. 'Insurance has no value. It would be a waste of taxpayer money.' "
As my teenage daughter might say, "DUH". And then I'd add, "gosh, I wonder why he didn't wonder harder about that possibility back over the past few decades when they were buying ALL THAT stuff in the first place???"
preserve, that is part of it but what Mike just posted is the reason for the dump...hedge funds are being forced to unwind positions to raise capital for margin calls. Read the wsj article and the bloomberg one too and the picture is clear.
The thing to keep in mind is the other side of the coin...this is a buying opportunity too because some things are being sold at clearly bargain prices. The likelyhood of default of the most attractive bonds approaches zero. And because of the tax-exempt status the yield is north of 8%.
The Bill Gross' of the world will sop a lot of these up with a blotter. Some hedge fund investor's loss is going to be someone else's gain. But hey, it's more fun to pontificate about "the rapture" coming.
Rising inflation is finally being noticed and as a result long dated muni bond prices are falling.
But there is more to it. The market is also recognizing that municipalities and states have huge unfunded pension liabilities. As markets decline and home values deteriorate, these unfunded liabilities become unmanageable.
In my state of NJ, the state employee pension fund is 78 billion and currently has a 28 billion short fall. This is after a bull market and state sales taxes were raised from 6% to 7%. State income tax was also raised significantly on high income earners.
The State pension fund assumes an 8.25% annual return which they keep failing to meet. To improve returns, NJ is considering alternative investments (aka riskier assets).
I see no way sub par growth of 4 to 6% can possibly generate 8.25% returns over time. In short, we've borrowed and spent our future and are screwed.
For anyone jonesin' for some Saturday cliff-diving, the following 5-day chart of Fremont General from CBS marketwatch should scratch your itch:
<a href="http://www.marketwatch.com/tools/quotes/intchart.asp?symb=FMT&time=3&freq=7&comp=&compidx=aaaaa%7E0&compind=&uf=0&ma=&maval=&lf=1&lf2=&lf3=&type=2&size=1&txtstyle=&style=&submitted=true&intflavor=basic&origurl=%2Ftools%2Fquotes%2Fintchart.asp>Look out below!
"Talk about a liquidity crisis!" HUH? CR, this has NEVER been about "liquidity", it's always been about risk.
bailey, i think what CR is talking about is the fact that these sales are due to the margin calls faced by the hedgies. That's about liquidity since they can't cough up the money to meet them. The rest of what happens is about supply and demand of these with a risk chaser.
At least NJ isn't talking about eliminating the home mortgage interest deduction.
That will never happen as it would depress prices further. Let me re-phrase, happen now. It may happen when things calm down and under a new administration. But I would imagine that the extent of the change would be for second residences and not primary ones.
Thanks for your input on foreign deposits. In the last 2 years I put 45% of my portfolio in precious metals (gold and silver bullion with a heavier weight to silver). I have been very happy with that thus far. I like the idea of some liquid cash and have been looking at several offshore havens . (Swiss, Caymans, etc.)
Although my precious metals are stateside, I am contemplating moving in to bullion in Swiss accounts.
ipodius,
This is California we are talking about. We charge sales tax on the Federal excise tax on gasoline. Yup, a tax on taxes. We are facing a $16 billion shortfall next FY. The State is going to be going through sock drawers looking for loose change. A lot of the die-hard conservatives in the legislature are termed out this year. No one is guarding us chickens. We came within a hairsbreath of enacting universal healthcare that would have cost an additional $14b in government spending with almost no new revenue. I repeat, this is California we are talking about.
There she stood in the doorway;
I heard the Dow Jones bell
And I was thinking to myself,
this could be Vallejo or this could be hell
Then she gave me an SIV, and she showed me the way
There were voices down the corridor,
I thought I heard them say...
Rob, lol, you have a point. But with the state being ground zero along with FL now, perhaps some cooler heads will think about that.
I live in MA and while we have that "Taxachusetts" reputation, there is NO deduction on state taxes for any home-related anything except for rent believe it or not. So buying a house actually increases your taxes here. Maybe that's where you are heading too
Smoke and mirrors in the budget,
red ink on the books
And she said we are all just prisoners here, of the lies we cook
And in the legislative chambers,
They gathered for the feast
The stab us with their steely knives,
And this time they might just kill the beast
wow... that's 8.5x leverage. Every time I think "well maybe it's not going to be that bad" then I read something like this:
From the bloomberg article referenced above:
"On Dec. 31, Jersey City, New Jersey-based Blue River Asset Management had $15.2 billion of bonds under management, with only $1.8 billion of investor equity, according to a January 2008 sales document provided to prospective investors."
From Bloomberg Friday newsdump: Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe
Goldman Sachs Group Inc. and Bear Stearns Cos. bankers are under investigation in the U.S. Justice Department's criminal probe of the municipal derivatives business, regulatory documents show....Lawyers in the municipal bond industry have said the criminal probe is the biggest in the history of the almost 200- year-old market, where states, cities and towns have $2.6 trillion of debt outstanding. The Federal Bureau of Investigation also raided three brokers that advise local governments and ran the bidding as part of the probe, which may involve transactions as far back as 1992 Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe - Bloomberg.com
Is our goldman sach's Secretary of Treasury Paulson borrowing Cheney's defibulator? I must send New York Governor Eliot Spitzer a thank you note.
Unirealist - I've been following what's on sale in the muni markets for a week or two. And yesterday I started to buy. Yesterday was a little like August - forced hedge fund selling - and they were throwing out the baby with the bathwater. I picked up some fairly new Florida state GO's - 5.25 of '37 - with almost 10 years of call protection - at a discount - 99.5 - for a yield to worst of 5.28%. There were also some good deals on Washington - California - and Texas GOs. But I thought the Floridas were the most bang for the buck.
Note that I - like most individual retail investors - plan to hold these issues forever. They are not a trading vehicle. They are purely for income. And if you look at Investing in Bonds - you can see that the prices people paid to various brokers for these bonds yesterday varied a lot. I used Zionsdirect - which offered me the best price I could find - plus a $10.95 commission for the trade.
In August - these "bargains" - the munis puked up by hedge funds - disappeared in about a week as retail demand soaked up the inventory. I am not sure what will happen now. I am not smart enough to time things exactly - so I have kept some money on the sidelines and will wait and see what happens in the next couple of weeks.
Note that buying on a day like yesterday makes me want to throw up. Because I am normal. Who wants to buy when blood is running in the streets? Maybe the sellers are right and I am wrong?
Note also that this is a cautionary tale for all of us smaller investors and traders. Hedge funds are usually all on the same side of a trade - and when the trade goes against them (which this one - short treasuries - long munis - did with a vengeance) - a lot get margin calls at the same time - which can lead to extreme market moves. It actually isn't so bad with munis - because there are lots of average guys like me who will absorb most of the better stuff out there on the street eventually. But with things like commodities - whether you're talking about wheat or gold - I'm not sure average buyers are waiting in the wings to soak up what hedge funds will junk when the current hyberbolic moves come to an end. So CYA. Roby
A lot of our States' deficit problems are related to "asset inflation" economics. Any short falls or deficits are simply offset with increased future investment returns.
This has been a boon for wall street. Mo-better promises are met with mo-better fees. Hedge funds and private equity are the latest incantations.
This fallacy is unwinding. Where will the money now come from? The prudent savers I fear.
When my mom was a "higher up" in the Dept of Ed she used to get a rebate check for state gas taxes for miles while driving on the Pike.
Don't dis my Big Dig. You just don't know what it is like to pull out of the car rental at logan and have just one traffic light and 65mph conditions all the way to Braintree.
We escaped from California last year to Connecticut, which while still solvent, sure has steep property taxes.
Hawaii is looking good.
If Greenwich CT is the hedge fund capital of the world and hedge funds are imploding as we speak, what does that say for the future health of the state?
YOY a .7% decline for the entire year is forecast- stunning considering the 4% background inflation rate. My personal forecast is 3% drop YOY.
The party is truly over. Tax increases are definitely necessary, but still politically difficult. Of course AZ has a constitutional prohibition on general debt too...
I foresee a great big splat, with a big drag from state and local gov't as they raise fees galore to keep up the budget.
Viewing with alarm writes:
This is so off the scale that I can't get me head around it. If munis have to pay a rate higher than treasuries for tax exempt debt, than treasury yields must be going to jump up dramatically. Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
It is a "hang on next week" event coming. What we're seeing is a total lack of liquidity. We see all of these proposed government loan programs (FHA, VA, Fannie, Freddie) and yet no one talks about one thing: They must sell bonds too.
Do note that much of what is going on in the muni market is margin calls on Hedge funds. That should scare everyone here. Why? They have to sell whatever they can for whatever price they can get upon a margin call.
So the question is... can the DJIA stay above 10K? I think so... But... how sure am I?
An event is coming. We might avoid it next week, but we'll see the ugly of who was swimming naked financially long before bikini season.
lol...Rob dawg there is no diss here (except they keep raising the tolls). I live on the north shore and just took a position in a place at the 95/pike interchange. Through the Ted and zip all the way out. Takes about 40 minutes in the worst traffic. Which, btw, is exactly how long it took me to use the T to get to downtown.
On the plus side of the big dig, I'd have to drive about 35 miles more if I were to use 95. So there's a lot of gas savings in there. Even with all the mess, i can tell you that, living here, it is one of the best things that ever happened.
Broker- "I thought liquidity crisis is when you run out of beer!"
You are absolutely correct, but that's another form of liquidity crisis.
Thankfully, Conjure and I laid in a massive stock of "Reinheitsgebot" late last year. We're covered, unless Russia invades Western Europe, which seems unlikely at this juncture.
Looks like Montgomery County MD and Howard County MD bonds are selling -right now- at about a 10% discount-- they were at about a 5% premium a week ago. Note that MD is a high-tax state, and Montgomery & Howard are two of the wealthiest counties in the country. Just sayin'.
We escaped from California last year to Connecticut, which while still solvent, sure has steep property taxes.
Yeah but you got good schools and roads out of the deal. For our money we get Spanish language translators. No, not Spanish to English.
Mixtec (var. Otomanguean) to Spanish. There's a huge population in the county who speak neither English nor Spanish and can read absolutely nothing. The translators help these people avail of free public services which are predominately provided in Spanish. This came about when the 14 yo girl seven months pregnant was discovered too afraid to get any medical care.
Merely third world status may start looking pretty good soon enough.
BTW - One reason treasuries are trading more expensive than munis is liquidity (as I have mentioned - munis aren't particularly liquid). And on-the-run treasuries are trading more expensive than off-the-run treasuries. On-the-run treasuries are among the most liquid holdings in the world. It is pure and simple a liquidity driven market at this point. Otherwise - who would want a 2 year note yielding 1.64%? Roby
An event is coming. We might avoid it next week, but we'll see the ugly of who was swimming naked financially long before bikini season.
It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system. I'm in the camp that says the Fed is shrinking the monetary base. It's doing it to shake out the hedgies and the hugely-levered. Then it will change policy quietly. Right now the fed is concerned with the banking system, and to hell with everything else.
This contraction is causing market disruptions and pain everywhere in the financial system. But it has to happen. In my opinion, the dow will fall below 11500 before this is over with. The bottom line is no one knows what any of these financial instruments are actually worth. In my opinion we're seeing close to the most pessimistic evaluations. So that represents a great buying opportunity.
A lot of people are going to end up less weathly. But, then again, those in hedge funds can afford it. The only problem is pension funds, but we know what will happen with those. That's where the bailout will occur, not in RE.
And don't forget that most of these financial write-offs are because of the mark-to-market accounting rules. What happens, in the future, when these instruments have found their value and if this market is too pessimistic? Some of the latest write-downs need to be evaluated against the backdrop of exactly what instruments lie behind the write-down and if they are held. So, again, the turmoil is that no one really knows and we're still just guessing.
But I can confidently tell you one thing: the next POP you hear is going to be in PM and commodities.
Methinks Roubini is accurate when he says the J6Ps (us) are going to take a $1 Trillion dollar hit.
With CR, Tanta, and all the brainpower here, can we formulate a reasonable path out of this mess that does not involve driving the feds (us, again) any further in debt?
Also, where's/what's a safe place to put money that won't evaporate between inflation and even lower interest rates.
Or, is the whole thing fixed against us, like wrasslin'?
Ziggurat writes:
Impressive.....the discount/yields in closed end funds should be interesting also.
AVOID the closed-end Muni funds for now. They are ALL leveraged and they leverage by floating short-term auction rate debt, that same market that's been seizing up. They could be among the forced sellers of the long-term debt.
At some point, going into these funds might be a good idea, maybe after they've fallen and have to de-leverage, but make sure you investigate carefully. It may be the auction rate market they relied on to leverage never really recovers. It was one of many borrow-short, buy long markets that may going to the dustbin of history.
BTW - One reason treasuries are trading more expensive than munis is liquidity (as I have mentioned - munis aren't particularly liquid). And on-the-run treasuries are trading more expensive than off-the-run treasuries. On-the-run treasuries are among the most liquid holdings in the world. It is pure and simple a liquidity driven market at this point. Otherwise - who would want a 2 year note yielding 1.64%? Robyn
Well there's also the fact that treasuries are the only form of USD debt with no default risk (since the federal government is the only entity that can create money to pay off its debt).
It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system.
Money market funds are part of the shadow banking system. "Hey, invest in our fund and we double, cross-our-hear, promise that you'll get above average returns and zero risk."
Money market funds have grown to ~2T in assets in the last decade or so and have never been stress tested in a market like this. What's a cross-our-heart promis worth when people are questioning the "Full Faith and Credit of the US Government" FDIC insurance system.
The banks aren't well capitalized enough to absorb ~2T in new deposits on their balance sheets. And, Money Market Funds can't go to the Fed directly.
I know I'm sounding tin-foil hat, but we have a run on the ARS/VRDO market in progress. These investments were sold as "municipal money market funds".
Who's going to be in a position to buy if even 10% heads to the door?
NSA, just ask yourself "is the port authority of new york and new jersey going to default on its bonds anytime in the near future?" Then what is the yield all about? Ask yourself "no matter what happens to the housing market, are these securities worth ZERO?"
The issue is actual price and not modeled price. The other issue is leverage. Everything is worth something, and we're still modeling...some people on the stupid side. The smart side is going to let the stupid side scream melt-down and quietly buy things.
What's the quote? You don't make money buying AT the bottom and selling AT the top. You make it buying AROUND the bottom and selling AROUND the top, as few people can accurately time events with precision.
Broker- "I thought liquidity crisis is when you run out of beer!"
I thought it was when the line for the bathroom was 10 deep and you haven't broken the seal after a 12 pack.
*Astute buying, Robyn, next week may indeed be even better . Waiting to hear back from my broker to see what he picked up. Sent the order in 5am EST from Spain, haven't had e-mail access since.
Ipodius- "...the next POP you hear is going to be in PM and commodities."
In terms of PM, Conjure and I agree with you. Commodities are more problematic but, yes, we agree there's a bubble there as well. Unfortunately, people like Jim Rogers are starting to believe their own rhetoric, so the party there isn't over yet.
Generally, asset prices are starting to come down. I'm seeing this on the ground with machine tools and transportation equipment.
Frankly, we think you're optimistic on the Dow, but we're in the same ballpark, strategically speaking. There's going to be a reckoning before the snow melts.
The so-called bubble states are going to be blasted, particularly California.
Kicker, while there are risks to some of these funds, and some will stuggle to not break the buck, most have the financial wherewithall to support the funds for a short-term event. Or some funds will break the buck for a period, and then come back. There are no guarantees in the prospecti.
But the savvy fund managers are now looking for what i just described. While everyone is screaming fire, they have already found the exits and are reading the insurance policies and contacting the contractors to rebuild. The rest will perish in the smoke.
Rule of thumb: you panic and you die. If you can keep your head you may get hurt but you'll recover. Dead is dead.
And remember that those feeding the panic may have their own agenda. Just like when some fed the optimism. People can fleece you just as well on the way down as on the way up. That's my problem with the PM and commodities people. It's in their best interests to feed the speculation so they can get the price higher. The real estate people of the new bubble.
Frankly, we think you're optimistic on the Dow, but we're in the same ballpark, strategically speaking. There's going to be a reckoning before the snow melts.
Frankly I think I'm optimistic on the Dow too, but i'm trying not to join the ranks of the nihilists. But yes, i think we're in the same place. Smart people are picking through the trash now to find the value, and there is value to be found.
I'll give you another point of view on what you're seeing on the ground...global wage arbitrage is becoming less attractive and at the same time transportation costs will not get any cheaper. It's going to make sense for companies to think about the cost and benefit of production closer to the point of sale. The sourcing will continue from outside, but the assembly and shipping costs are beginning to tilt back.
I'm seeing the same thing in tech. It used to make sense to send stuff to india or china. Now, not so much if you factor in other costs. The actual reason this is happening is that you can't hire enough people here. I'll repeat that - the reason i choose to do that is that i can't find enough people here.
So instead of trying to send your kids to the H bomb, you should be sending them to solid engineering schools.
"Well there's also the fact that treasuries are the only form of USD debt with no default risk (since the federal government is the only entity that can create money to pay off its debt).
ac-
No default risk?
The exorbitant amounts in the creation of debt is the default risk.
This does not even take into consideration a continued run on the dollar, a Volker-type interest rate environment(which cannot be allowed to happen) or a possible revaluation.
In six months from now we might not be talking about how severe the recession is going to be, we may be talking about if the System is going to survive at all.
LA and most major cities are about to become very, very violent. I expect to see a riot or civil event some time in the next twelve months.
Quincy- "In six months from now we might not be talking about how severe the recession is going to be, we may be talking about if the System is going to survive at all."
You are absolutely correct, but you can't play it in a binary, yes or no, way. Think of a general on a battlefield, where there's a lot of "fog." You maneuver and respond only when the situation favors you.
The key is AWARENESS, and the fact that you're here puts you ahead of the game.
Sorry, that was a philosophical mp moment on the art of financial warfare.
"a further downgrade of one or more of the Companys reinsurers could increase the amount of capital required to maintain MBIA Corp.s triple-A ratings and may require the establishment of reserves against any receivables due from the such reinsurers. "
I've been saying for a long time now, watch the RE's.
NSA, just ask yourself "is the port authority of new york and new jersey going to default on its bonds anytime in the near future?" Then what is the yield all about? Ask yourself "no matter what happens to the housing market, are these securities worth ZERO?"
They could be, depends on future inflation rates.
All we can say right now is that the market is irrational. Either investors in Treasuries are under-estimating inflation or that the corporate bond/equities market is under-estimating risk relative to munis. They can't all be right.
My prediction is that, yields on long dated corporate, housing, and Treasuries will increase as the long-dated issuers compete for (limited) investors money. Spreads on corporate debt are going to widen (because the riskiest GO muni is probably safer than most corporate debt). Higher spreads on corporate bonds changes discounted cash flow calculations so equities should drop.
A sudden shift in demand for short term securities to long term securities could halt the slide. But, I don't see either with the market uncertain about credit risk or inflation.
The sell-off will result in a flood of new cash trying to get into the banking system. This is going to have to be balanced the investors like Robyn who are willing to convert short term cash into long term investments or increases in the banks balance sheets.
Since investors like Robyn and over-capitalized banks are in short supply there is going to put further pressure on the FFR rate. The Fed is going to also find itself having to again drain money out of the system to defend the 3% FFR.
OPODIUS: "It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system. "
I share most of your thoughts... but I don't think the FedRes is the cause of the unwinding of leveraged hedge funds. If anything, the rate cuts should help everyone across the board. The FedRes has very little control because capital can flow anywhere. Instead, I think what is happening is simply due to re-pricing of risk. Risk premiums for risky assets were very low for many years and things are simply getting back to more sensible levels. Anyone who underpriced risk is facing the brunt of the problems right now.
OPODIUS: "In my opinion, the dow will fall below 11500 before this is over with. The bottom line is no one knows what any of these financial instruments are actually worth. "
I think around 11500 would be reasonable. That is around a 20% correction (depending on where you count from) and big corrections are generally around that number.
However, the risk for both longs and shorts is that there is nothing to stop the market from going sideways for a long time. It is quite possible for hte market to go up and down within a 15% to 20% range for a long period of time. A lot of people, especially momentum investors or young investors, who look at the last 20 years seem to think that markets trend in one direction (up or down) but in the 40's and 60's/70's, it was largely flat.
OPODIUS: "In my opinion we're seeing close to the most pessimistic evaluations. So that represents a great buying opportunity."
I think one has to look at specifics. There is massive euphoria over commodities and gold; and there is still a strong bullish bias towards emerging markets. However, there is extreme pessimism when it comes to US financials and US consumer discretionary. If you buy the whole market, it is not cheap (even superinvestors like Warren Buffett say the market as a whole is neither cheap nor expensive). But if you buy certain sectors, it may be cheap--but cheap can also imply value traps.
(Having said all that, I'm just a newbie and am trying to be a stock picker and don't really bet on sectors)
OPODIUS: "A lot of people are going to end up less weathly. But, then again, those in hedge funds can afford it. The only problem is pension funds, but we know what will happen with those. That's where the bailout will occur, not in RE. "
There isn't going to be any sizeable bailout of anyone. The problem is so big that no one can bail anyone out. You will see some help for certain areas but it will only have a minor effect. The biggest bailout that can happen is if the US economy avoids a recession or enters a mild recession. As far as I'm concerned, the government is always late to the game and isn't big enough.
OPODIUS: "And don't forget that most of these financial write-offs are because of the mark-to-market accounting rules. What happens, in the future, when these instruments have found their value and if this market is too pessimistic? "
Yep. Completely agree. It wouldn't surprise me if the marks reverse in the future and some financials actually show a profit simply from these reversals. For example, a lot of banks are writing down their bridge loans (to LBO buyouts) that they couldn't sell. But many of these companies are solid and I would find it unlikely for them to default (what's the chance of Harrah's, a big casino, defaulting?).
The problem, of course, is that no one knows what is an impaired asset and what is not.
OPODIUS: "But I can confidently tell you one thing: the next POP you hear is going to be in PM and commodities."
I concur but I have been wrong for over an year--and paying a price. Most value-oriented investors have been wrong with the commodity calls. We missed the rally up and I suspect we'll miss the correction down as well...
Having said that, a bigger bubble in my eyes is emerging markets. The next BIG correction is going to be emerging market stocks and emerging market bonds. A lot of EM are priced as if they were developed countries, with stable political environment, rule of law, transparent central banks, good corporate governance, etc. The spread between EM debt and US Treasuries is some of the lowest ever. From what I understand, in the history of the world, there hasn't been a so-called emerging market that has not defaulted on its bonds. Will this time be different? I'm not betting on it...
To: Ipodius re: your 11:54 am- My F-I-L is a metals engineer and upon his retirement the company took two years to find a replacement body. Overseas grad - no US grads were available (and they paid well, too). Data point.
I think one of reasons that poeople are reluctant to spend $200K on an IT degree is the fear of outsourcing.
I dunno what happens on the indices next week specifically, but swami predicts a literally miraculous stick-save at around Dow 11.6/S&P 1270, driven by inexplicable late-day futures-buying.
Probably the indices will be allowed to go just far enough below support to engender a fine bear-fry. They are not going to let you sit short.
On a commodities pullback, I am with you on that. Been working on a position in SMN for a couple of weeks, almost got stopped out mid-week. We'll see...
To: Ipodius re: your 11:54 am- My F-I-L is a metals engineer and upon his retirement the company took two years to find a replacement body. Overseas grad - no US grads were available (and they paid well, too). Data point.
A huge number of the GenX "engineer types" were sucked into the .com boom. I was one of them.
The .com boom happen to coincide with a melt-down in cold war tech. Lots of boomer engineers were getting laid off left and right. There was no chance of somebody like me getting into a hard engineering field at that time.
Case in point, my a position for a Physics Prof opened up a local school in the early 90s. They had four PHD level applicants. Two years later, they had three hundred.
Plus, management in corporate America has no idea how to manage techs. In a short term result driven environment, they also have no desire. Techs have become disposable and most of us know that. I have dozens of stories of complete teams that were driven to death and then laid off the day the product shipped.
mp writes: "Well, it seems to me that Sivaram, Ipodius, and I can agree that asset prices are headed lower. Or, have I missed something?"
Can we agree that the monolines are the saviour of the world and that all of you should buy shares in them?
On a serious note, I do see a looming correction but everything comes down to the nature of any declines. The next 5 years will probably seperate the good investors from the rest...
If you have data to support your call on PM pop, I'd like to see it.
As you know, I'm sure, most gold, outside of antiquities is in circulation. The reported IMF sale did little to dampen the price. Silver gets consumed daily, and the burn rate is much higher than the replenishment rate.
Further PM's trade more as financial assets, rather than commodities.
So, again, I ask, what data do you have that PM will pop?
It may be another way of stating the obvious, but I think one of the reasons for the misconception that the general market "looks cheap" on a P/E, P/S basis is that the last several years have been a bubble in cyclicals.
Take a look at the best performing industries of the last 5 years, which would've marked just about the end of the Nascrash:
Steel, coal, nonferrous metals, a couple of flavors of oil services, transport stuff including trucks and tires. And the lonely internet group, which I suspect is mostly about the GOOG.
Deep, dirty cyclicals. The way those things play is that you buy them at earnings troughs, when the PE is 255 and sell them at earnings peaks, when the PE is 4.
On this thesis, the real reason some high-profile value guys look like idiots here is that the value bubble may have already popped. Same thing happened to the tech rock stars in 2001. They never seem to understand when the paradigm has shifted.
maybe someone else noticed Cal's contribution from the Countrywide 10-k statement but this part caught my eye.
Our financial condition and results of operations could be negatively impacted to the extent we rely on customer information that is not complete or accurate.
Apparently Countrywide never heard of two forms of ID and manager approval before cashing the check.
I believe the U.S. stock market will gradually descend over the next 2-3 years and not reach bottom until maybe 2010, at which time the S&P 500 could be 30-40% below where it is now.
There is $2.5 to $3.0 trillion of defined benefit pension money in the stock market, maybe 80% of it U.S. stocks. That portion will come way down due to risk, loss and the Pension Protection Act mandate of full DB plan funding phased in by 2011 and amortized over 7 years. So, at least a trillion of DB plan money will be leaving the U.S. stock market. I think individuals and endowments also will be re-allocating retirement plan money away from the U.S. market, but very gradually. I can't see U.S. earnings making any kind of sustained comeback until late 2009 or 2010.
The next really big roller coaster drop, IMHO, is in emerging stock markets, not U.S. They have soared on the back of leverage and speculation and now there's nothing to hold them up. EEV or bust!
If you have to invest in stocks, look to Japan starting sometime in 2009 and Europe a little later.
"Can we agree that the monolines are the saviour of the world and that all of you should buy shares in them?"
Do you not track the RE's. Seriously, you seem incapable of time sequencing things. I don't care about your long term plans. If you buy something that's dated 10 years and intend to hold it for 10 years, but run into major problems 2 years later, your intentions at purchase are friggin' worthless.
That sounds exactly like the historic model for engineers and geoscientists in the oil & gas industry, which managed itself into a corner that they are now desperately trying to dig themselves out of due to the demographics of the current population of skilled petrotechnical labor. They appear to have waken up to that fact, but that commitment has yet to be tested in a price cycle turn.
Which will occur, though it will be quite different than past price cycles as I suspect the new 'low' price that will be hit once the speculative frenzy cooks off and some demand destruction occurs will be in the range of what would have been considered a high price environment just a year or two ago.
Globally we are not close to running out of energy, but we are getting damn short of the low hanging fruit. The short version is "The era of cheap energy is over," which is a view that is now emanating from within the oil and gas industry and can be found in detail in the National Petroleum Council's recent report Facing the Hard Truths About Energy.
To close the loop on the engineering discussion, engineering sciences related to all elements of the energy industry (oil & gas, coal, nuclear, electric generation & distribution, energy efficient buildings and communities, wind, solar and next generation biofuels)will be in high demand.
Since people are posting stock recos and disses, I'd like to point out the negative action in the fertilizers. The tech indicators on POT, CF, MOS and AGU look like they're rolling over. Go short or at least sell some calls as the premiums are pretty juicy. AG is just too obvious here and I expect a bloodbath.
Agree completely on commodities correcting soon. Don't agree at all with lumping gold (and to a lesser extent silver) into the commodities bucket. I'm guessing that the PMs will soon be seen as real money again, and gain value in a deflationary spiral. It will be interesting to see who's right.
I did like this quote: "As a result of the bond insurers' recent problems, Mr. Dresslar noted, the general-obligation bonds will be sold without insurance. 'Insurance has no value. It would be a waste of taxpayer money.' "
As my teenage daughter might say, "DUH". And then I'd add, "gosh, I wonder why he didn't wonder harder about that possibility back over the past few decades when they were buying ALL THAT stuff in the first place???"
Actually the insurance worked out fine for the issuing cities/counties etc. right up until the point that it went away. The cities bought the insurance for a few extra basis points, and got more than that back in reduced interest (based on the insurer's AAA rating) when they issued the bonds. At that point the city is ahead of the game, with the money from the bond issue in hand to build that new sewer plant or whatever. If the bond insurer goes belly up at that point, it's the bond buyer's problem--but not really a problem as long as the folks back in the issuing city keep paying their utility bills, generating the revenue to pay off the bonds at the interest rate the bond buyers were expecting in the first place. Lack of insurance will affect the resale value of the bond, but those who hold to maturity won't notice a problem.
Now, with bond insurers having no REAL AAA rating to sell (as opposed to the fictional rating they still possess, which the market no longer values) there is no interest rate payoff motivating a city to buy that insurance. So the city pays a bond interest rate based on its underlying financial strength. Obviously the financial strength of public entities varies just as widely as the strength of corporations. With no insurance to rely on, muni bond investors will have to look at the muni behind the bond. And yes, as economic conditions deteriorate, so will the creditworthiness of many municipalities. They likely will have trouble borrowing at any kind of rate they can afford, meaning they may find it hard or impossible to finance things like schools, libraries that don't generate their own revenue. A sewer plant, on the other hand, can be paid back with the fairly reliable stream of rev from utility bills, which can be raised to cover the cost of the plant over time. But I would be reluctant to touch bonds that get issued to finance growth/development projects, to be paid back via the tax revenue from the growth.
But kids coming up even in tech are fairly scatter brained. I've had several former techs constantly tell me how they felt about a project. This, after I asked them to give me specific data (bandwidth usage, security implications, equipment needs etc).
I had one who wanted to do SOHO routers that didn't do IPSEC the way I had the servers set up demand that I purchase them so he could see. He demanded that he FELT they would work.
College graduate too.
Retooling educational engineering departments is gonna be a bitch. That most HS grads, at least in CA, have trouble with algebra isn't gonna help.
This is a widespread problem, and the numbers seem to indicate no feasible way of closing the multi-billion dollar gaps that have built up over time.
Can states and cities repudiate some portion of their pension liabilities at some point, without going into bankruptcy, just as some corporations have reneged on non-binding promises to their retirees involving medical care and so forth? Just asking.
Many of the best engineers I knew are now doctors and lawyers. I'm from the generation that witnessed engineering go from value adding productive efforts to financial bean counting cost centers. This went along with engineers going from valued professional staff members to fungible employees.
MISEAN: "Do you not track the RE's. Seriously, you seem incapable of time sequencing things. I don't care about your long term plans. If you buy something that's dated 10 years and intend to hold it for 10 years, but run into major problems 2 years later, your intentions at purchase are friggin' worthless."
That was a joke by me because I know none of you will touch the monolines (I wouldn't want any of you to anyway-it's too risky for most of you)... but to seriously answer your question...
When you invest in a distressed asset, what matters is not necessarily what happened along the way or what mistakes were made. Instead, the main thing is price.
I have actually been bearish on real estate for several years now. It was obvious that real estate was in a bubble because real estate prices were out of whack compared to rents and average incomes. However, the reason I decided to invest in Ambac is based on the price.
When I invested early this year, I felt most of the negative news was priced into the stock. The stock was trading between 50% to 70% of book value (book value is a good indicator of the worth of an insurer).
When you invest in distress situations, the question is not whether mistakes were made (there clearly were--otherwise the stock wouldn't be down 80% in the first place). The question is what the value of the company and what is the expected loss that will damage the current value. Needless to say, I felt the losses were manageable. The verdict is out on whether my original call is correct or not, but so far very little has changed (other than the fact that the AAA rating is under threat (mostly due to management incompetence; they should have raised capital a few months ago, instead of diluting shareholders like crazy now)).
To go back to your analogy, let's say you were looking at a 10 year bond. Originally it would be priced at par but let's say it drops 30% after two years due to some mistakes of the issuing company and a looming crisis. If you were contemplating that bond, your key decision is whether the price that you will pay now will ensure a reasonable return. The fact that the bond dropped 30% after two years or that there is a looming crisis doesn't mean that it should be avoided per se.
Maybe I'm being mistakenly stubborn but it's still not clear that the monolines are toast. There are a lot of successful investors, like Warburg Pincus, Martin Whitman, and Chris Davis that have decided to invest in some of these companies. This doesn't mean that I'm right but it does mean that my thinking isn't as dumb as it seems... of course, you have William Ackman, Tilson, and a few other hedge funds, who are taking the opposite position...
RobDawg- "...this is California we are talking about."
Have you contemplated escaping before they close the borders?
Up here in Washington state, we have a contingency plan to blow the bridges on the Columbia River if a worst-case California invasion materializes.
Ventura County will blow up the empty Countrywide buildings across the 101 and 118 freeways leading to Los Angeles. We watch Los Angeles rot from within. We only worry about being sucked in when the (social) ground opens up to swallow the whole mess. So far all we plan on doing is blowing up the Metrolink tunnel and posting guards on the 101 in Calabasas. We figure the mobs will be too busy looting Malibu and Pac Pal to ever get up the coast.
Unfortunately we suspect San Luis Obispo thinks the same of us.
"
Retooling educational engineering departments is gonna be a bitch. That most HS grads, at least in CA, have trouble with algebra isn't gonna help."
I can top that. According to my wife, who works in the registrar's office of one of the UC campus, stats taken from application forms indicate that 1/3 of the incoming freshmen this year will be on Prozac. Not just for our campus, but the whole system.
And that only counts the ones who bothered to say so.
Can states and cities repudiate some portion of their pension liabilities at some point, without going into bankruptcy, just as some corporations have reneged on non-binding promises to their retirees involving medical care and so forth? Just asking.
I've spent some time looking into this question lately, and also assessing the health of PBGC.
The answer is that every state has different protections for public pensions. They literally range from A to Z. Go here to see an analysis state by state:
As for PBGC, it is a disaster waiting to happen. There is almost no way PBGC can continue to meet all its obligations going forward. The collapse of the U.S. automobile industry over the next few years will put PBGC under. Participants in any plan that falls into PBGC hands probably should not count on more than about 50-60 cents on the promised dollar in retirement benefits.
I doubt that when PBGC fails the U.S. Govt. will be able to bail it out.
SV, thanks for the thoughtful responses to my post. I'm thinking about them.
mp, it does seem that we're on the same page...and the same philosophical one. As far as the PM issues goes there is no proof for anything in investing, just gut, trending, past models and rumor. Although when I can take an argument and substitute the words "tech (a la .com) or Real Estate for Gold, I take that as a sign we've hit froth.
About tech and education. Since I happen to teach computer science, math and finance I do have an informed opinion. It's hard to be an engineering major. It's a lot of work. Therefore, most students shy away from it, especially after the .com bust and the outsourcing scare talk. But you have to have the chops or no matter how hard you try, you're going to be mediocre. And when I was an undergrad I heard all the bullshite about our "generation" not being as good as the ones that came before. All crap. Each one is the same, just different problems. I've taught for 20 years now and nothing fundamentally has changed. Except we all abbreviate more and care less about spelling since the advent of the spellchecker
MW,
Could you elaborate on foreign (swiss, cayman, etc.) pm and other holdings? I am a beginning saver stunned by the combination of possible us bank failures and usd devaluation. How do you go about offshoring financial holdings? What a time to graduate.
Stop that you're TERRIFYING me. Are you serious? 1/3? How can people be that irresponsible to put there kids on psycotropic drugs.
We're doomed."
It's a quick fix these days for behavioral problems. The doctors recommend them. The industry pushes mood alterers hard to both doctors and laypeople. Hell, they're even marketing Prozac for dogs these days.
All we've got time for in society in these days in quick fixes. Parents gotta work, therapy isn't covered, kid's stressing out about getting into college or just messed up in some way -- pills are easier to get than real solutions.
As for PBGC, it is a disaster waiting to happen. There is almost no way PBGC can continue to meet all its obligations going forward.
Reading the reports from the head honcho of the PBGC it sounds like he pretty much resigned to it. Raise rates on existing pension plans to cover the short-fall will just increase the number of failures.
Problem is that the bankruptcy courts allow companies to bankrupt out of pension obligations. That puts pressure on the survivors to do the same. We've reached a tipping point.
As for municipalities shedding pension obligations, it ain't going to happen outside a bankruptcy court. The courts have consistently held that munis can't change benefits once they were granted.
San Diego was going through some gyrations a couple of years ago trying to wriggle out of some benefits arguing they were granted illegally. I'm don't think much came of it.
BTW - I forgot to mention that CR's original piece which stated that Schwab had 30 year AAA munis at a 5.5 might be somewhat misleading - since a shorthand brokerage firm rating on an insured bond is usually based on the rating of the insurer - or the issuer - whichever is higher.
Today - it is absolutely essential to look at the underlying issuer's rating and rating history - and to figure out where the money is coming from to pay you back. Luckily - it is very easy to do this on line these days. For example - I have almost a full page of info about the bond I bought yesterday (whose rating is AA1/AAA/AA+).
BTW - just a quick remark about equity valuations. YOY earnings on the SP500 are down 13%. That isn't very encouraging. Roby
SV, I've thought a bit (and I'm ipodius...a sly nod to an old BBC series, a tech device, and to the fact that before the world went to hell in a handbasket, i was forced to study latin for 4 years).
The fed is not expanding the money supply, it is shrinking it. All these auctions are not pumping new money into the system at all. I believe that bb and the boys are doing that in a determined way to impair the shadow banking system. What you are seeing is the results of that - and the FORCED repricing of risk that the models got wrong on the previous expansionary data inputs. After all, credit, like RE prices, were not supposed to contract.
The denouement to this is coming faster than you think (as mp and conjure allude to). So you have to know where to be when it happens. You'll know when the fed actually DOES increase the money supply, which they will do as soon as they are sure it will flow to where they want it to - the banks themselves.
They are also going to stop lowing the FFR sooner than you think. And unexpectedly. That will cause the final shake-out.
Today - it is absolutely essential to look at the underlying issuer's rating and rating history - and to figure out where the money is coming from to pay you back. Luckily - it is very easy to do this on line these days. For example - I have almost a full page of info about the bond I bought yesterday (whose rating is AA1/AAA/AA+).
Short post to educate the novices on how to track down the financials given a CUSIP? Google only seems to turn up bits and pieces.
Btw, when this reverse occurs, money is going to flow in a different direction and the speculation in PM and commodities will cease. That's when you'll hear the POP. I do agree with mp...commodities are more complex and the drop will not be as forthcoming or as quick. But the speculative money will flee.
The brilliant thing about investing is that I don't have to be right all the time. I just have to be right in dollar terms more times than I am wrong. And lord knows I've been wrong. But I've also been, very, very right.
As a goldbug, silverbug, and dollar uber-bear, I have to tell you that one of the best pieces of rational which shows that PM's are not overdone is the fact that, for the most part, it has not entered into the general population's conversations. Those who read blogs like CR and Mish are NOT normal (myself included). When my neighbors stop talking about sports, tech stocks, the kids private lesson's, etc. and start talking foreign currencies, monoline insolvency, and where to get gold coins, THEN AND ONLY THEN, I will sell.
I disagree with mp and Ipodius on PM's but do agree regarding commodities in the short to medium term. I remain a commodity bull for the longer term as I believe that most commodities are simply in short supply for a world that has expanded its consumer base so vastly in the past 20 years. The generally low commodity inventories really hadnt manifested themselves in the marketplace before now and this fact had to result in a major repricing (not a bubble).
I believe that most people on this board have too much of a U.S. biased view of the world. This doesn't mean that I agree fully with the decoupling theory but some shades of gray of decoupling will occur. Let us not forget that this time it is the U.S. that is the creditor nation and the savings are sitting on the other side. These savings will be put to work in their domestic economies when exports shrink and most of that will be infrastructure related, i.e. commodity consuming.
The obvious consequence is that U.S. vendor financing will grind significantly down putting even further pressure on the dollar and therefore put upward pressure on dollar denominated commodity prices.
Didn't FFDIC post that placebo's were just as effective as pyscho=therapeutics? Not that I believe it.
BTW- it was only after the Opodius that I caught the I, podius connection. Altho with Latin, shouldn't it be iPedius? Or is that being pedantic?
Lurker here......re GOLD! Yes, gold will CORRECT near term, it usually does between March and August (view 40yr chart at 321gold.com). Since Gold has an inverse relationship to USD, its long term trend remains positive.
"
BTW - just a quick remark about equity valuations. YOY earnings on the SP500 are down 13%. That isn't very encouraging. Robyn"
Yes, but the losses are almost entirely concentrated in financials. Ex. finance the last number I saw was +14%yoy.
That leaves a lot of places to invest that are doing rather well and where stocks prices have collapsed along with the citibanks of the world.
I guess I wasn't factoring in the gas mileage changes over the decades its been since I fled L.A. But I think I can still rely on the day the 9.0 quake hits. Then all the overpasses will be down and very few will get through over land.
I can top that. According to my wife, who works in the registrar's office of one of the UC campus, stats taken from application forms indicate that 1/3 of the incoming freshmen this year will be on Prozac. Not just for our campus, but the whole system.
And that only counts the ones who bothered to say so.
I'm not going to deny that a lot of people are on anti-depressants, but I do question why this information would be on college admissions paperwork, in a day when the right to privacy of medical info is rather broad. Just asking.
My bias has been pro PMs since before Nixon closed the window, but even I've been wondering whether a bubble is forming.
My refuge at the moment is that PMs remain the anti-dollar and it does look like the Fed will continue to trash the USD.
The problem is the PM mining stocks which are, first of all, stocks that still tend to react along with the overall stock market, as they did on Friday. IMO some caution is indicated there and margin is definitely to be avoided.
I don't think the money supply is growing rapidly as some inflationists think. But at the same time, I don't see any big contraction. I haven't looked at those numbers in a while (and don't really follow it much) but it just seems to be similar to the past.
SPORTSFAN: "The problem is the PM mining stocks which are, first of all, stocks that still tend to react along with the overall stock market, as they did on Friday. IMO some caution is indicated there and margin is definitely to be avoided."
Also... Although goldbugs don't care about it but if you were a value-oriented investor gold stocks make no sense. Their valuations are insane (P/Es around 30; companies like Goldcorp at 40) and you are simply betting on the price going up. If gold stops going up...
Yes, but the losses are almost entirely concentrated in financials. Ex. finance the last number I saw was +14%yoy.
That leaves a lot of places to invest that are doing rather well and where stocks prices have collapsed along with the citibanks of the world.
Thnx VERY MUCH to Dave in Ct., here is a prime example of equity bulls' ignorance.
So, Dave, how the fuck would I have known to have avoided the financials when executing a broad-based S&P invenstment plan? PLEASE tell me, Dave, how could I have avoided that little portion of S&P losses? Inquiring minds want to know.
Similarly, if I invested 50 years ago in equities, how much time & energy & LUCK would I have had to expend in order to have achieved the "average" return of X.Z% (or whatever the fuck folks like you claim) that would make me a multi-multi-millionaire by now?
Seriously, now, here is an epiphany for you: most folks reading this blog are WAY more enlightned than you, despite your self-perceived (USD-based) value. In fact, you are quite the relative newcomer to those of us who have read the CR wisdom for ~3yrs now.
david_in_ct - I happen to invest in equities solely through Fidelity sector funds - all 41 of them. And I keep a pretty detailed Excel spreadsheet on them. So I know pretty much what is working - and not working. As of today - the only funds in the black this year are Gold (up 16+%) and Natural Gas (up 2%). The third best is Chemicals at -1%+.
Contrary to popular opinion - the worst performers since the first of the year haven't been financials or construction stocks (which have been moving up slowly but surely in terms of relative strength) - they've been tech stocks (all 5 of my bottom 5 are techs - with Networking at the bottom of the heap - at a loss of over 20%).
OTOH - old saying - you can' eat relative strength - and 39 of the 41 sector funds show losses YTD - only 4 show a profit in the last six months - only 9 show a profit in the last nine months - and only 11 show a profit in the last 11 months (I use 11 months instead of 12 for reasons related to how my spreadsheet is put together - not any esoteric reason).
Note that the unweighted average of these 41 sector funds is beating the unweighted average of the major indices (QQQQ, SPY, DIA, MDY, RUT 2000) over all of these time frames. Overall - not a swell time for US equities. Roby
P.S. Regarding not being able to eat relative strength - I am down 5.04% for the year in equities - versus 9%+ for the indices and the funds. This is the kind of performance that earned those Harvard money managers 8 figure bonuses (they lost less than the other guys in a down market). As someone who is not paid a big bonus when I lose less than the other guys - I am not a particularly happy camper. Roby
Finally - I forget the exact numbers - but about 50% of an individual stock's performance is based on overall market performance - another 30% or so on sector performance - and only 20% or less on the nature of a particular stock. So when the broad market and most of the sectors are moving against you - you have to be an extremely good stock picker to do ok (it's a heck of a lot easier to have the wind at your back than in your face). Perhaps you are a great stock picker - I am not. Roby
PS Robyn, you need to read less blog, and make more family.
Youre infinite-columned spreadsheet is obviously taking its toll on you. You really do sound like the classic entity that will make the million just before kickin' the bucket.
Just sayin'.
Why would anyone lend a muni $10k for 30 years on such a poor return.
Strip out the true rate of inflation from the 5.5% yield and you are getting 0% real rate of return, let alone the risk that you might not get all your money back.
In the UK we have a government savings product called Premium Bonds. Its rather like playing the lottery but you never lose your stake. You can invest up to £30k/$60k and each month the bond numbers go in the draw.
The government pays out prizes to the value of 3.8% of the invested pool and the top monthly prize is 2 x £1million/$2m down to lots of $100 prizes, all TAX FREE.
Each £1 bond has an equal chance of winning and statistically you should win 15 times per 12 months if you hold the maximum 30k bonds.
ANON IN CA: "Similarly, if I invested 50 years ago in equities, how much time & energy & LUCK would I have had to expend in order to have achieved the "average" return of X.Z% (or whatever the fuck folks like you claim) that would make me a multi-multi-millionaire by now?"
I'm seeing the same thing in tech. It used to make sense to send stuff to india or china. Now, not so much if you factor in other costs. The actual reason this is happening is that you can't hire enough people here. I'll repeat that - the reason i choose to do that is that i can't find enough people here.
ipodius | 03.01.08 - 11:54 am | #
Ah, the old saw. Repeat after me. There is no shortage of good tech workers in this country. There is, however, a shortage of good tech workers willing to work for the wages most employers seem comfortable giving to workers....as they line their pockets with millions in profits. Been there done that...twice. No more.
Haven't read any of the comments, so apologies if this point has already been made, but while it may be an historic spread, it seems entirely merited. Local governments don't have the same huge tax-raising power as the U.S. government, nor the power of the printing press.
Maybe, just maybe, the markets are being really efficient and signaling us that we are on the cusp of a major decline in the credit quality of municipalities and their various funding entities. We already know two things: (1) the bond "insurance" covering much of this debt is likely worthle in teh face of any sustained downturn; and (2) the rating agencies opinions are pretty much worthless and, at best, are subject to "review." Add to that a an actual or feared inplosion in property values which serve as the backbone of many municipalties tax base, the tumult in MARS (Municipal Auction Rate Securities) markets, and a general lack of flexibility in our financial system. The sum of those parts could easily cause one to come to the conclusion that the markets and investos are acting perfectly rational by pulling in their horns. Sometimes, you sow what you reap and we are sowing the seeds of financial chicanery of Wall Street blessed by a complacent and foolish SEC (Securities and Exchange Commission).
Impressive.....the discount/yields in closed end funds should be interesting also.
The conjure clock is ticking louder every day!
Has anyone noticed that many recent economic news items include a phrase something like,"highest/lowest level in history"?
The evidence is that history is being made right now. And as much as some of us like to think we know where that leads, the reality is that it is uncharted territory.
Maybe we will sail off the edge of the earth.
What's Robyn's take on this?
OT, but some good(?) news... latest H.3 shows NBR rose from -18006M to -17259M.
If you got some spare time and need a laugh, Countrywide filed it's 10-K today.
I loved this gem under risk factors:
We depend on the accuracy and completeness of information about customers and counterparties
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to borrowers under certain loan programs, we assume that the information provided by a customer is accurate and complete and we do not independently verify that information. Our financial condition and results of operations could be negatively impacted to the extent we rely on customer information that is not complete or accurate.
i dont get it. Excuse my ignorance
When auction rate securities related to the port authority of NY went to 20% that seemed high
How is 5.5 high???
Seems low to me and yet is the highest in history? What even in the 1970' when rates were around 18%
I am totally ignorant here by the way on the nature of these bonds
But why buy bonds if they have such low yields??? what else to you get other than your money back in 30 years?
This is so off the scale that I can't get me head around it. If munis have to pay a rate higher than treasuries for tax exempt debt, than treasury yields must be going to jump up dramatically. Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
I posted the previous at this ungodly hour because I woke up in the middle of the night sensing impending doom and looked at CR for confirmation. My vibes were correct.
S*it, where do I buy gold over the weekend?
I wonder if all the economists will bother to look away from their computer simulations long enough to notice that their inputs are simply incorrect? The event that couldn't happen has happened.
Investors high-tailed it to the exit, nonetheless. Shares of MF Global closed down 27% in Thursday trading on the New York exchange, touching their 52-week low at one point.
The losses were easy to come by. "Grain prices have experienced unprecedented volatility recently with price swings as much as 25% this year to date," said analyst Niamh Alexander of Keefe Bruyette Woods. On the Minneapolis Grain Exchange, wheat was trading at $22.60 this week, up from $5 a year ago.
why are mgex prices so much higher than kcbt?
Bummer for those of us without a subscription to the WSJ... any way you could reproduce the graph?
The economic recession is going to hurt the municipalities abilty to pay back their debt. Real estate and income taxes will go down and drive up the default rate on munis. The market is forecasting unusual risk.
I also don't have a subscription and can't see the graph but there are some cool pictures over at Mish's site that should give you an idea.
Mish's Global Economic Trend Analysis: Free Fall In Munis, Worst Month Since 2003
isn't there a tax advantage to holding 5.5% muni over a treasury as well? or do you have to be in some kind of muni fund for that..
anyway, I still prefer 24 month term CDs in AUD - 6.6% and currency appreciation. Since there are only 4 or 5 big aussie banks they (CDs) are effectively treasuries, it would be unthinkable for one to be allowed to fail.
Justin:
Where are you buying your AUD 24 month CD's?
Worried writes:
i dont get it. Excuse my ignorance
...
How is 5.5 high???
I think what is at issue is the ratio of AVERAGE AAA RATED 30yr muni to 30yr treasury...5.14/4.42 = 1.163. So, 16.3% premium over treasuries.
So, if you want to research, this (the ratio as defined above) is the number you should look at.
CR-
I see only one way out of this crisis of confidence as spoken about previously, the monolines, clearly lack no credibility, the ratings agencies continue to be under extreme pressure due to current/past mistakes, either Buffet/a like credit reinsures this debt or the government does.
This is the only way to begin to stem the systemic spreading of credit problems in the system. A market solution was provided an opportunity and it is clearly not working and deteriorating further.
You have to ask yourself when reality will set in? When the common trades to low single digits, come on, the markets have spoken and will continue to price these companies accordingly until a solution that provides the confidence that the credit markets need.
What id unfortunate is that our regulators fail to grasp the severity of the current crisis.
" ``Management believes this decline in value is other than temporary,'' according to the filing. "
Security Capital Lost $1.5 Billion on Derivatives (Update1) - Bloomberg.com
" Of those CDOs, $6.9 billion, or 92 percent, are experiencing so-called events of default, Tavakoli said. Such events signal the most-senior classes may not be paid in full. "
Citigroup Underwrote $6.9 Billion of Ambac's Most Troubled CDOs - Bloomberg.com
Eye Opening-
"Employees at some firms that received the most fees during the year were also large contributors to Moore's campaign for governor. Overall, employees at firms that manage pension dollars gave at least $128,000 last year to his war chest, about 5 percent of all contributions."
""It doesn't pass the smell test to us," said Cope, whose group has close ties to the Perdue campaign."
Charlotte.com
Eye Opening-
"Employees at some firms that received the most fees during the year were also large contributors to Moore's campaign for governor. Overall, employees at firms that manage pension dollars gave at least $128,000 last year to his war chest, about 5 percent of all contributions."
""It doesn't pass the smell test to us," said Cope, whose group has close ties to the Perdue campaign."
Charlotte.com
The NAV's of closed end muni funds have dropped 1-2% every day for the last week or so...it is a bloodbath
"Where are you buying your AUD 24 month CD's?"
HSBC offshore, but take a look at any aussie bank.
Eg ANZ:
http://www.anz.com/common/selector/TermDeposit/default.asp#result
just $50k on term deposit for 24 months ... 7.62%
5.5% is like 8+% taxable and new issues for shorter term stuff were near 2% even a month ago.
My plan is to take money off the table from my eurobond and roll some of it over into spanish paper, the ARS auction next weeks and 10 year munis. If it works out I should make over 8% with a currency hedge to boot.
the currency hedge only works if you know which way the price is gonna move
when the tsunami hits the rest of the world, watch out.
MBIA 10K-
"Several of the Companys other financial guarantee reinsurers, including RAM Reinsurance Company, Ltd. (RAM), Ambac Assurance Corporation, XL Financial Assurance Ltd. and XL Capital Assurance Inc., have had their credit ratings either downgraded or put on negative watch by one or more of the major rating agencies between December 2007 and February 2008. RAM has deposited $104 million of assets in a trust for the benefit of MBIA as of December 31, 2007. Although there was no material impact on the Company for any of the rating agency actions through February 2008 relating to its reinsurers, a further downgrade of one or more of the Companys reinsurers could increase the amount of capital required to maintain MBIA Corp.s triple-A ratings and may require the establishment of reserves against any receivables due from the such reinsurers. "
http://investor.mbia.com/phoenix.zhtml?c=88095&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9NTUwMTA4MyZhdHRhY2g9T04%3d
Spanish Alec? are not even spanish people with money moving out of spanish paper?
one question, where does the "Hoocoodanode" originates from?
anoninCA - Thank you for answering the other poster's question.
Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
Fear, plain and simple. The US govt seems to be a less likely candidate to default as opposed to Orange County.
What's becoming clear to me is that this market is becoming an extremely efficient distributor of flaming bags of doo-doo. Last Friday all the shorts were suicidal after Gasparino's 3:30PM rumor ramped up the tape. Now all of Friday-Wednesdays gains are toast. Markets like this are good for nothing except generating brokerage commissions.
Time to hide all the sharp objects and take away the shoelaces from anyone who went long.
I'm just an ignorant ole hillbilly, but it would seem to me that in order to stop the bleeding, you need to apply a bandage. All I've been reading on these blogs is homeowners are dumping their houses because they are overpriced, they don't have equity, or can't afford the payments. Along with that, their confidence in the monetary system is totally shot. You are dealing with a monetary virus here, and the global system needs to start applying an immunization instead of a quarantine.
I think the first thing I would do is look at these defaulting loans and work out a deal. I know, the banks don't want to do that cause they lose money. But aren't they losing anyway? Aren't we all?
Take a mortgage, run through the numbers, CREDIT all interest paid to date to that homeowners principal for the purpose of renewing the loan. Take the new principal figure and run it against a new fixed rate 30 year loan. If the numbers are good, issue the loan. If they don't add up, put it in the non-performing pile. What that idea does is PUT SKIN IN THE GAME for the homeowner. Money he has already paid. And it removes one more POS mortgage from the books.
Others advocate an across the board chop of 20 to 30 percent of the mortgage. Problem is, that isn't going to get the cash flow going again. Actually it will freeze it up even more. But mortgages based on time and payment would be easier to swallow, especially when the garbage is replaced with a new loan with fixed interest.
Shorter CFC 10-K "We're very trusting people. So we believed all the borrowers were telling us the absolute, unvarnished truth when we made our loans. Our bucketful of woes is the fault of all those nasty, lying, no-good, low-down borrowers."
revro, a casual perusal of Google suggests that "woocoodanode" may have originated right here at CR.
Took a look this morning at some of the muni CEFs, just happened to choose Blackrock and Pimco since they're among the bigger players.
National muni CEFs generally yielding 6.0 - 6.5%. I recall reading a year or more ago that these used 25% leverage, so that sounds about right.
They are all still about 5% from their bottoms in late December. No clear idea what happened the last week in December except the belated Santa Claus rally in equities.
Tickers include: BBK, BFK, BKN, BSD, PMF.
Yes, spreads are rising in Europe but neither party is gonna look to default on sovereign debt and is running a surplus, as opposed to Italy or Greece. My position in euros averages at 117 (but is rising as paper matures)so I'm not too worried. Besides, the euro's got a better chance of hitting 160 before 140.
My concern is with another ARS failure likely, how long can I hold on to the high yield before the note gets called.
In a wealth preservation enviornment, getting yields like this without going too far out the limb is manna.
Don't have a WSJ sub, maybe they explain it.
What is causing the forced selling? Margin calls? Something else?
Boy, scrutinizer, you have that exactly right.
Long side and short side alike have to be willing to accept mucho pain in order to be positioned correctly.
After the SocGen lows, what you really needed to buy was the deep cyclicals - you'd have 20 sticks in a TEX, CAT, BUCY - when there was no logical premise for doing so, or for suspecting they'd make a V-bottom.
On the short side, if you held your nose into the CNBC tape-painting last week and bought the double-short emerging market ETFs - with absolutely no technical justification - you made 20% this week.
I personally took a butt-kicking for the last half of February until this week.
This is one of the harder markets to trade that I can remember. July, 2007 through January, 2008 was pretty easy by comparison - sell or go short when the MACD and stochastic were way overbought, buy or go long when they were oversold.
Last week, we were pretty much at midline on all those measures.
It's been said that the great collapses always occur from very oversold conditions.
J6P has the right ideer.
I made the unfortunate mistake of listening to IBD and going long WDC (Western Digital.) It looked like a clean breakout, but then it got swamped by Friday's tank-fest.
Thank God I had the sense to hedge by buying out-of-the money puts on the same stock as cheap insurance. I'm positioned neutral now; except for some DBA ETF up about 10% and protected with trailing stops.
If those get hit on Monday, I just might short into the hole. RIMM looks tempting again; it's close to filling a gap between 97 and 103.
Bob Morris,
It is forced selling on the part of hedgefunds. They were borrowing short via auction rate securities to lend long (buying long dated muni bonds on margin).
Lots of the demand for muni's is at the short end of the yield curve but most of the supply is longer dated stuff.
By doing what they did (buy long dated paper on margin and create short dated paper out of it via the auction rate securities mechanism) they flattened the yield curve for muni's and made money in the process.
What's happening now is as long dated munis yield goes up (price drops) the funds are receiving margin calls. They either have cash to meet the margin calls or they don't. If they don't they must sell further depressing long muni bond prices jacking yields higher.
Further up thread someone asked why munis yielding more than Treasuries was significant. Well munis at a minimum are exempt from Federal income tax and could be exempt from State and Local income tax as well.
As an example, a muni yielding 5.5% for someone in the 28% tax bracket and 10% state income taxes has a taxable equivalent yield of almost 8.5%!! In other words, the yield on Treasuries would have to rise from @ 4.5% on the 30yr to 8.5% for the Treasury and Muni to pay the same after taxes...
Ahh never mind just read this Bloomberg article Bloomberg On Muni Bond Activity
We sure live in some interesting times...
Hedge Funds' Fire Sales Send Muni-Bond Yields To Historic High Levels
Talk about confusing cause and effect. Muni bonds are repricing to reflect true yield and perceived risk. Dare I say the "calculated risk?" That is what is causing hedge funds and others to sell not the other way round. Hedge funds are just a convenient whipping boy because some people cannot say out loud the word inflation.
The title of the WSJ article is a totally misleading.
The jump in municipal yields on Friday was simply a result of fact that cash infusion deal for the insurance companies fell apart.
Ie. It is becoming questionable whether these insurers who insured the municipal bonds will be solvent.
I did like this quote: "As a result of the bond insurers' recent problems, Mr. Dresslar noted, the general-obligation bonds will be sold without insurance. 'Insurance has no value. It would be a waste of taxpayer money.' "
As my teenage daughter might say, "DUH". And then I'd add, "gosh, I wonder why he didn't wonder harder about that possibility back over the past few decades when they were buying ALL THAT stuff in the first place???"
ozzy dollar is priced to perfection.
it may give up 20-30% of its rise easily in a jiffy..
watch out there, watson.
I also don't have a subscription and can't see the graph but there are some cool pictures over at Mish's site that should give you an idea.
Wow. If I'm reading the graphs right, some of those funds look like they're down almost 20% in the past month.
I bet there a lot of people really suprised thier muni fund is behaving like a bad stock.
preserve, that is part of it but what Mike just posted is the reason for the dump...hedge funds are being forced to unwind positions to raise capital for margin calls. Read the wsj article and the bloomberg one too and the picture is clear.
The thing to keep in mind is the other side of the coin...this is a buying opportunity too because some things are being sold at clearly bargain prices. The likelyhood of default of the most attractive bonds approaches zero. And because of the tax-exempt status the yield is north of 8%.
The Bill Gross' of the world will sop a lot of these up with a blotter. Some hedge fund investor's loss is going to be someone else's gain. But hey, it's more fun to pontificate about "the rapture" coming.
Rob Dawg,
Rising inflation is finally being noticed and as a result long dated muni bond prices are falling.
But there is more to it. The market is also recognizing that municipalities and states have huge unfunded pension liabilities. As markets decline and home values deteriorate, these unfunded liabilities become unmanageable.
In my state of NJ, the state employee pension fund is 78 billion and currently has a 28 billion short fall. This is after a bull market and state sales taxes were raised from 6% to 7%. State income tax was also raised significantly on high income earners.
The State pension fund assumes an 8.25% annual return which they keep failing to meet. To improve returns, NJ is considering alternative investments (aka riskier assets).
I see no way sub par growth of 4 to 6% can possibly generate 8.25% returns over time. In short, we've borrowed and spent our future and are screwed.
NJ is not in this boat alone.
"Talk about a liquidity crisis!" HUH? CR, this has NEVER been about "liquidity", it's always been about risk.
CREDIT RISK!
For anyone jonesin' for some Saturday cliff-diving, the following 5-day chart of Fremont General from CBS marketwatch should scratch your itch:
<a href="http://www.marketwatch.com/tools/quotes/intchart.asp?symb=FMT&time=3&freq=7&comp=&compidx=aaaaa%7E0&compind=&uf=0&ma=&maval=&lf=1&lf2=&lf3=&type=2&size=1&txtstyle=&style=&submitted=true&intflavor=basic&origurl=%2Ftools%2Fquotes%2Fintchart.asp>Look out below!
Tag it, bag it, and page the undertaker boys ...
NJ is not in this boat alone. - Angry Saver
Welcome to the Hotel California
such a lovely place
you can check out any time you like
but you can never leave...
At least NJ isn't talking about eliminating the home mortgage interest deduction.
"Talk about a liquidity crisis!" HUH? CR, this has NEVER been about "liquidity", it's always been about risk.
bailey, i think what CR is talking about is the fact that these sales are due to the margin calls faced by the hedgies. That's about liquidity since they can't cough up the money to meet them. The rest of what happens is about supply and demand of these with a risk chaser.
At least NJ isn't talking about eliminating the home mortgage interest deduction.
That will never happen as it would depress prices further. Let me re-phrase, happen now. It may happen when things calm down and under a new administration. But I would imagine that the extent of the change would be for second residences and not primary ones.
let's riff on that a bit, what the heck:
On a dark desert highway
Cool winds through my hair
Warm smell of foreclosures
Risin' up through the air
Up ahead in the distance
I saw a shimmering light
My head grew heavy and my wallet thin
From the capital flight ...
Justin and Alex:
Thanks for your input on foreign deposits. In the last 2 years I put 45% of my portfolio in precious metals (gold and silver bullion with a heavier weight to silver). I have been very happy with that thus far. I like the idea of some liquid cash and have been looking at several offshore havens . (Swiss, Caymans, etc.)
Although my precious metals are stateside, I am contemplating moving in to bullion in Swiss accounts.
ipodius,
This is California we are talking about. We charge sales tax on the Federal excise tax on gasoline. Yup, a tax on taxes. We are facing a $16 billion shortfall next FY. The State is going to be going through sock drawers looking for loose change. A lot of the die-hard conservatives in the legislature are termed out this year. No one is guarding us chickens. We came within a hairsbreath of enacting universal healthcare that would have cost an additional $14b in government spending with almost no new revenue. I repeat, this is California we are talking about.
Inflation has nothing to do with it. Treasuries are doing well, despite the inflation risk.
Rob Dawg,
I just compared State tax rates for NJ & CA. I had no idea how bad CA taxes were.
Top NJ rate is 8.97%
Top CA rate is 9.30%
Worse still, the top CA rate kicks in WAY sooner. My condolences. CA is mo-better screwed.
W
There she stood in the doorway;
I heard the Dow Jones bell
And I was thinking to myself,
this could be Vallejo or this could be hell
Then she gave me an SIV, and she showed me the way
There were voices down the corridor,
I thought I heard them say...
RobDawg- "...this is California we are talking about."
Have you contemplated escaping before they close the borders?
Oops, the 10:42 anon was me.
Rob, lol, you have a point. But with the state being ground zero along with FL now, perhaps some cooler heads will think about that.
I live in MA and while we have that "Taxachusetts" reputation, there is NO deduction on state taxes for any home-related anything except for rent believe it or not. So buying a house actually increases your taxes here. Maybe that's where you are heading too
But we can deduct big dig tolls. lol
Smoke and mirrors in the budget,
red ink on the books
And she said we are all just prisoners here, of the lies we cook
And in the legislative chambers,
They gathered for the feast
The stab us with their steely knives,
And this time they might just kill the beast
mp,
Conjure would go hungry around here. The State already took all my dawg balls.
California's 9.3% "upper income" level for the "rich" kicks in at a whopping $43k or so.
At least my property tax mil rate is about 0.2% (two tenths of one percent). Prop 13, the tie that binds.
wow... that's 8.5x leverage. Every time I think "well maybe it's not going to be that bad" then I read something like this:
From the bloomberg article referenced above:
"On Dec. 31, Jersey City, New Jersey-based Blue River Asset Management had $15.2 billion of bonds under management, with only $1.8 billion of investor equity, according to a January 2008 sales document provided to prospective investors."
From Bloomberg Friday newsdump: Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe
Goldman Sachs Group Inc. and Bear Stearns Cos. bankers are under investigation in the U.S. Justice Department's criminal probe of the municipal derivatives business, regulatory documents show....Lawyers in the municipal bond industry have said the criminal probe is the biggest in the history of the almost 200- year-old market, where states, cities and towns have $2.6 trillion of debt outstanding. The Federal Bureau of Investigation also raided three brokers that advise local governments and ran the bidding as part of the probe, which may involve transactions as far back as 1992
Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe - Bloomberg.com
Is our goldman sach's Secretary of Treasury Paulson borrowing Cheney's defibulator? I must send New York Governor Eliot Spitzer a thank you note.
Welcome to the third-world, California
T'was a lovely place (such a lovely place)
Now a sad disgrace
There's plenty of room in the third-world, California
What a nice surpise (what a nice surprise)
Goin' chapter 9 ...
"NSA writes:
J6P has the right ideer."
Well it's like most of the other ideers I come up with. No one bothers to listen, cause their mouth is always open.
Unirealist - I've been following what's on sale in the muni markets for a week or two. And yesterday I started to buy. Yesterday was a little like August - forced hedge fund selling - and they were throwing out the baby with the bathwater. I picked up some fairly new Florida state GO's - 5.25 of '37 - with almost 10 years of call protection - at a discount - 99.5 - for a yield to worst of 5.28%. There were also some good deals on Washington - California - and Texas GOs. But I thought the Floridas were the most bang for the buck.
Note that I - like most individual retail investors - plan to hold these issues forever. They are not a trading vehicle. They are purely for income. And if you look at Investing in Bonds - you can see that the prices people paid to various brokers for these bonds yesterday varied a lot. I used Zionsdirect - which offered me the best price I could find - plus a $10.95 commission for the trade.
In August - these "bargains" - the munis puked up by hedge funds - disappeared in about a week as retail demand soaked up the inventory. I am not sure what will happen now. I am not smart enough to time things exactly - so I have kept some money on the sidelines and will wait and see what happens in the next couple of weeks.
Note that buying on a day like yesterday makes me want to throw up. Because I am normal. Who wants to buy when blood is running in the streets? Maybe the sellers are right and I am wrong?
Note also that this is a cautionary tale for all of us smaller investors and traders. Hedge funds are usually all on the same side of a trade - and when the trade goes against them (which this one - short treasuries - long munis - did with a vengeance) - a lot get margin calls at the same time - which can lead to extreme market moves. It actually isn't so bad with munis - because there are lots of average guys like me who will absorb most of the better stuff out there on the street eventually. But with things like commodities - whether you're talking about wheat or gold - I'm not sure average buyers are waiting in the wings to soak up what hedge funds will junk when the current hyberbolic moves come to an end. So CYA. Roby
A lot of our States' deficit problems are related to "asset inflation" economics. Any short falls or deficits are simply offset with increased future investment returns.
This has been a boon for wall street. Mo-better promises are met with mo-better fees. Hedge funds and private equity are the latest incantations.
This fallacy is unwinding. Where will the money now come from? The prudent savers I fear.
But we can deduct big dig tolls. lol
When my mom was a "higher up" in the Dept of Ed she used to get a rebate check for state gas taxes for miles while driving on the Pike.
Don't dis my Big Dig. You just don't know what it is like to pull out of the car rental at logan and have just one traffic light and 65mph conditions all the way to Braintree.
I've borrowed CR's concept of the Rock Blog:
Stock Geometry: Saturday Rock Blogging: Diamonds on The Soles of Her Shoes
Why would Paulson need defib?
He'll be pardoned before the investigation's even finished.
We escaped from California last year to Connecticut, which while still solvent, sure has steep property taxes.
Hawaii is looking good.
If Greenwich CT is the hedge fund capital of the world and hedge funds are imploding as we speak, what does that say for the future health of the state?
Now for proof of recession in Arizona:
http://www.azleg.gov/jlbc/mfh-feb-08.pdf
16% DROP YOY
Nothing more to say than- WOW!!
YOY a .7% decline for the entire year is forecast- stunning considering the 4% background inflation rate. My personal forecast is 3% drop YOY.
The party is truly over. Tax increases are definitely necessary, but still politically difficult. Of course AZ has a constitutional prohibition on general debt too...
I foresee a great big splat, with a big drag from state and local gov't as they raise fees galore to keep up the budget.
Capital spending? Surely you jest!
Someday this war's gonna end...
Viewing with alarm writes:
This is so off the scale that I can't get me head around it. If munis have to pay a rate higher than treasuries for tax exempt debt, than treasury yields must be going to jump up dramatically. Why would anyone buy treasuries if they can get a higher yield on tax exempt debt. Hang on next week!
It is a "hang on next week" event coming. What we're seeing is a total lack of liquidity. We see all of these proposed government loan programs (FHA, VA, Fannie, Freddie) and yet no one talks about one thing: They must sell bonds too.
Do note that much of what is going on in the muni market is margin calls on Hedge funds. That should scare everyone here. Why? They have to sell whatever they can for whatever price they can get upon a margin call.
So the question is... can the DJIA stay above 10K? I think so... But... how sure am I?
An event is coming. We might avoid it next week, but we'll see the ugly of who was swimming naked financially long before bikini season.
Got Popcorn?
Neil
Don't dis my Big Dig.
lol...Rob dawg there is no diss here (except they keep raising the tolls). I live on the north shore and just took a position in a place at the 95/pike interchange. Through the Ted and zip all the way out. Takes about 40 minutes in the worst traffic. Which, btw, is exactly how long it took me to use the T to get to downtown.
On the plus side of the big dig, I'd have to drive about 35 miles more if I were to use 95. So there's a lot of gas savings in there. Even with all the mess, i can tell you that, living here, it is one of the best things that ever happened.
Neil- "An event is coming."
Yup.
"long before bikini season"
LOL
I thought liquidity crisis is when you run out of beer!
Broker- "I thought liquidity crisis is when you run out of beer!"
You are absolutely correct, but that's another form of liquidity crisis.
Thankfully, Conjure and I laid in a massive stock of "Reinheitsgebot" late last year. We're covered, unless Russia invades Western Europe, which seems unlikely at this juncture.
Looks like Montgomery County MD and Howard County MD bonds are selling -right now- at about a 10% discount-- they were at about a 5% premium a week ago. Note that MD is a high-tax state, and Montgomery & Howard are two of the wealthiest counties in the country. Just sayin'.
We escaped from California last year to Connecticut, which while still solvent, sure has steep property taxes.
Yeah but you got good schools and roads out of the deal. For our money we get Spanish language translators. No, not Spanish to English.
Mixtec (var. Otomanguean) to Spanish. There's a huge population in the county who speak neither English nor Spanish and can read absolutely nothing. The translators help these people avail of free public services which are predominately provided in Spanish. This came about when the 14 yo girl seven months pregnant was discovered too afraid to get any medical care.
Merely third world status may start looking pretty good soon enough.
BTW - One reason treasuries are trading more expensive than munis is liquidity (as I have mentioned - munis aren't particularly liquid). And on-the-run treasuries are trading more expensive than off-the-run treasuries. On-the-run treasuries are among the most liquid holdings in the world. It is pure and simple a liquidity driven market at this point. Otherwise - who would want a 2 year note yielding 1.64%? Roby
An event is coming. We might avoid it next week, but we'll see the ugly of who was swimming naked financially long before bikini season.
It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system. I'm in the camp that says the Fed is shrinking the monetary base. It's doing it to shake out the hedgies and the hugely-levered. Then it will change policy quietly. Right now the fed is concerned with the banking system, and to hell with everything else.
This contraction is causing market disruptions and pain everywhere in the financial system. But it has to happen. In my opinion, the dow will fall below 11500 before this is over with. The bottom line is no one knows what any of these financial instruments are actually worth. In my opinion we're seeing close to the most pessimistic evaluations. So that represents a great buying opportunity.
A lot of people are going to end up less weathly. But, then again, those in hedge funds can afford it. The only problem is pension funds, but we know what will happen with those. That's where the bailout will occur, not in RE.
And don't forget that most of these financial write-offs are because of the mark-to-market accounting rules. What happens, in the future, when these instruments have found their value and if this market is too pessimistic? Some of the latest write-downs need to be evaluated against the backdrop of exactly what instruments lie behind the write-down and if they are held. So, again, the turmoil is that no one really knows and we're still just guessing.
But I can confidently tell you one thing: the next POP you hear is going to be in PM and commodities.
Methinks Roubini is accurate when he says the J6Ps (us) are going to take a $1 Trillion dollar hit.
With CR, Tanta, and all the brainpower here, can we formulate a reasonable path out of this mess that does not involve driving the feds (us, again) any further in debt?
Also, where's/what's a safe place to put money that won't evaporate between inflation and even lower interest rates.
Or, is the whole thing fixed against us, like wrasslin'?
Ziggurat writes:
Impressive.....the discount/yields in closed end funds should be interesting also.
AVOID the closed-end Muni funds for now. They are ALL leveraged and they leverage by floating short-term auction rate debt, that same market that's been seizing up. They could be among the forced sellers of the long-term debt.
At some point, going into these funds might be a good idea, maybe after they've fallen and have to de-leverage, but make sure you investigate carefully. It may be the auction rate market they relied on to leverage never really recovers. It was one of many borrow-short, buy long markets that may going to the dustbin of history.
Thanks ipodius. That's the stuff we're after.
BTW - One reason treasuries are trading more expensive than munis is liquidity (as I have mentioned - munis aren't particularly liquid). And on-the-run treasuries are trading more expensive than off-the-run treasuries. On-the-run treasuries are among the most liquid holdings in the world. It is pure and simple a liquidity driven market at this point. Otherwise - who would want a 2 year note yielding 1.64%? Robyn
Well there's also the fact that treasuries are the only form of USD debt with no default risk (since the federal government is the only entity that can create money to pay off its debt).
It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system.
Money market funds are part of the shadow banking system. "Hey, invest in our fund and we double, cross-our-hear, promise that you'll get above average returns and zero risk."
Money market funds have grown to ~2T in assets in the last decade or so and have never been stress tested in a market like this. What's a cross-our-heart promis worth when people are questioning the "Full Faith and Credit of the US Government" FDIC insurance system.
The banks aren't well capitalized enough to absorb ~2T in new deposits on their balance sheets. And, Money Market Funds can't go to the Fed directly.
I know I'm sounding tin-foil hat, but we have a run on the ARS/VRDO market in progress. These investments were sold as "municipal money market funds".
Who's going to be in a position to buy if even 10% heads to the door?
NSA, just ask yourself "is the port authority of new york and new jersey going to default on its bonds anytime in the near future?" Then what is the yield all about? Ask yourself "no matter what happens to the housing market, are these securities worth ZERO?"
The issue is actual price and not modeled price. The other issue is leverage. Everything is worth something, and we're still modeling...some people on the stupid side. The smart side is going to let the stupid side scream melt-down and quietly buy things.
What's the quote? You don't make money buying AT the bottom and selling AT the top. You make it buying AROUND the bottom and selling AROUND the top, as few people can accurately time events with precision.
So I ask you, how AROUND price discovery are we?
Anyone who drops their bikini (or speedo) and shows their "uglies" in here is getting shorted.
Broker- "I thought liquidity crisis is when you run out of beer!"
I thought it was when the line for the bathroom was 10 deep and you haven't broken the seal after a 12 pack.
*Astute buying, Robyn, next week may indeed be even better . Waiting to hear back from my broker to see what he picked up. Sent the order in 5am EST from Spain, haven't had e-mail access since.
Ipodius- "...the next POP you hear is going to be in PM and commodities."
In terms of PM, Conjure and I agree with you. Commodities are more problematic but, yes, we agree there's a bubble there as well. Unfortunately, people like Jim Rogers are starting to believe their own rhetoric, so the party there isn't over yet.
Generally, asset prices are starting to come down. I'm seeing this on the ground with machine tools and transportation equipment.
Frankly, we think you're optimistic on the Dow, but we're in the same ballpark, strategically speaking. There's going to be a reckoning before the snow melts.
The so-called bubble states are going to be blasted, particularly California.
Kicker, while there are risks to some of these funds, and some will stuggle to not break the buck, most have the financial wherewithall to support the funds for a short-term event. Or some funds will break the buck for a period, and then come back. There are no guarantees in the prospecti.
But the savvy fund managers are now looking for what i just described. While everyone is screaming fire, they have already found the exits and are reading the insurance policies and contacting the contractors to rebuild. The rest will perish in the smoke.
Rule of thumb: you panic and you die. If you can keep your head you may get hurt but you'll recover. Dead is dead.
And remember that those feeding the panic may have their own agenda. Just like when some fed the optimism. People can fleece you just as well on the way down as on the way up. That's my problem with the PM and commodities people. It's in their best interests to feed the speculation so they can get the price higher. The real estate people of the new bubble.
Frankly, we think you're optimistic on the Dow, but we're in the same ballpark, strategically speaking. There's going to be a reckoning before the snow melts.
Frankly I think I'm optimistic on the Dow too, but i'm trying not to join the ranks of the nihilists. But yes, i think we're in the same place. Smart people are picking through the trash now to find the value, and there is value to be found.
I'll give you another point of view on what you're seeing on the ground...global wage arbitrage is becoming less attractive and at the same time transportation costs will not get any cheaper. It's going to make sense for companies to think about the cost and benefit of production closer to the point of sale. The sourcing will continue from outside, but the assembly and shipping costs are beginning to tilt back.
I'm seeing the same thing in tech. It used to make sense to send stuff to india or china. Now, not so much if you factor in other costs. The actual reason this is happening is that you can't hire enough people here. I'll repeat that - the reason i choose to do that is that i can't find enough people here.
So instead of trying to send your kids to the H bomb, you should be sending them to solid engineering schools.
If oil drops by a third, gold could follow.
"Well there's also the fact that treasuries are the only form of USD debt with no default risk (since the federal government is the only entity that can create money to pay off its debt).
ac-
No default risk?
The exorbitant amounts in the creation of debt is the default risk.
This does not even take into consideration a continued run on the dollar, a Volker-type interest rate environment(which cannot be allowed to happen) or a possible revaluation.
In six months from now we might not be talking about how severe the recession is going to be, we may be talking about if the System is going to survive at all.
LA and most major cities are about to become very, very violent. I expect to see a riot or civil event some time in the next twelve months.
No risk in treasuries? Oh my.
We are all Enron now.
Quincy- "In six months from now we might not be talking about how severe the recession is going to be, we may be talking about if the System is going to survive at all."
You are absolutely correct, but you can't play it in a binary, yes or no, way. Think of a general on a battlefield, where there's a lot of "fog." You maneuver and respond only when the situation favors you.
The key is AWARENESS, and the fact that you're here puts you ahead of the game.
Sorry, that was a philosophical mp moment on the art of financial warfare.
r_c,
"a further downgrade of one or more of the Companys reinsurers could increase the amount of capital required to maintain MBIA Corp.s triple-A ratings and may require the establishment of reserves against any receivables due from the such reinsurers. "
I've been saying for a long time now, watch the RE's.
Great pull.
Cheers,
NSA, just ask yourself "is the port authority of new york and new jersey going to default on its bonds anytime in the near future?" Then what is the yield all about? Ask yourself "no matter what happens to the housing market, are these securities worth ZERO?"
They could be, depends on future inflation rates.
All we can say right now is that the market is irrational. Either investors in Treasuries are under-estimating inflation or that the corporate bond/equities market is under-estimating risk relative to munis. They can't all be right.
My prediction is that, yields on long dated corporate, housing, and Treasuries will increase as the long-dated issuers compete for (limited) investors money. Spreads on corporate debt are going to widen (because the riskiest GO muni is probably safer than most corporate debt). Higher spreads on corporate bonds changes discounted cash flow calculations so equities should drop.
A sudden shift in demand for short term securities to long term securities could halt the slide. But, I don't see either with the market uncertain about credit risk or inflation.
The sell-off will result in a flood of new cash trying to get into the banking system. This is going to have to be balanced the investors like Robyn who are willing to convert short term cash into long term investments or increases in the banks balance sheets.
Since investors like Robyn and over-capitalized banks are in short supply there is going to put further pressure on the FFR rate. The Fed is going to also find itself having to again drain money out of the system to defend the 3% FFR.
More cuts comming.
OPODIUS: "It is my belief, looking at what the Fed is doing coupled with policy decisions, that the great unwinding is the removal of most of the shadow banking system. "
I share most of your thoughts... but I don't think the FedRes is the cause of the unwinding of leveraged hedge funds. If anything, the rate cuts should help everyone across the board. The FedRes has very little control because capital can flow anywhere. Instead, I think what is happening is simply due to re-pricing of risk. Risk premiums for risky assets were very low for many years and things are simply getting back to more sensible levels. Anyone who underpriced risk is facing the brunt of the problems right now.
OPODIUS: "In my opinion, the dow will fall below 11500 before this is over with. The bottom line is no one knows what any of these financial instruments are actually worth. "
I think around 11500 would be reasonable. That is around a 20% correction (depending on where you count from) and big corrections are generally around that number.
However, the risk for both longs and shorts is that there is nothing to stop the market from going sideways for a long time. It is quite possible for hte market to go up and down within a 15% to 20% range for a long period of time. A lot of people, especially momentum investors or young investors, who look at the last 20 years seem to think that markets trend in one direction (up or down) but in the 40's and 60's/70's, it was largely flat.
OPODIUS: "In my opinion we're seeing close to the most pessimistic evaluations. So that represents a great buying opportunity."
I think one has to look at specifics. There is massive euphoria over commodities and gold; and there is still a strong bullish bias towards emerging markets. However, there is extreme pessimism when it comes to US financials and US consumer discretionary. If you buy the whole market, it is not cheap (even superinvestors like Warren Buffett say the market as a whole is neither cheap nor expensive). But if you buy certain sectors, it may be cheap--but cheap can also imply value traps.
(Having said all that, I'm just a newbie and am trying to be a stock picker and don't really bet on sectors)
OPODIUS: "A lot of people are going to end up less weathly. But, then again, those in hedge funds can afford it. The only problem is pension funds, but we know what will happen with those. That's where the bailout will occur, not in RE. "
There isn't going to be any sizeable bailout of anyone. The problem is so big that no one can bail anyone out. You will see some help for certain areas but it will only have a minor effect. The biggest bailout that can happen is if the US economy avoids a recession or enters a mild recession. As far as I'm concerned, the government is always late to the game and isn't big enough.
OPODIUS: "And don't forget that most of these financial write-offs are because of the mark-to-market accounting rules. What happens, in the future, when these instruments have found their value and if this market is too pessimistic? "
Yep. Completely agree. It wouldn't surprise me if the marks reverse in the future and some financials actually show a profit simply from these reversals. For example, a lot of banks are writing down their bridge loans (to LBO buyouts) that they couldn't sell. But many of these companies are solid and I would find it unlikely for them to default (what's the chance of Harrah's, a big casino, defaulting?).
The problem, of course, is that no one knows what is an impaired asset and what is not.
OPODIUS: "But I can confidently tell you one thing: the next POP you hear is going to be in PM and commodities."
I concur but I have been wrong for over an year--and paying a price. Most value-oriented investors have been wrong with the commodity calls. We missed the rally up and I suspect we'll miss the correction down as well...
Having said that, a bigger bubble in my eyes is emerging markets. The next BIG correction is going to be emerging market stocks and emerging market bonds. A lot of EM are priced as if they were developed countries, with stable political environment, rule of law, transparent central banks, good corporate governance, etc. The spread between EM debt and US Treasuries is some of the lowest ever. From what I understand, in the history of the world, there hasn't been a so-called emerging market that has not defaulted on its bonds. Will this time be different? I'm not betting on it...
To: Ipodius re: your 11:54 am- My F-I-L is a metals engineer and upon his retirement the company took two years to find a replacement body. Overseas grad - no US grads were available (and they paid well, too). Data point.
I think one of reasons that poeople are reluctant to spend $200K on an IT degree is the fear of outsourcing.
InlandEmpire
No default risk?
The exorbitant amounts in the creation of debt is the default risk.
Well, there's the risk of being paid back in worthless dollars, but technically that's not default (I think people call it implicit default).
But if somebody has the ability to print all the dollars they want, I don't see how they can default on a promise to pay back debt in dollars.
Well, it seems to me that Sivaram, Ipodius, and I can agree that asset prices are headed lower.
Or, have I missed something?
I dunno what happens on the indices next week specifically, but swami predicts a literally miraculous stick-save at around Dow 11.6/S&P 1270, driven by inexplicable late-day futures-buying.
Probably the indices will be allowed to go just far enough below support to engender a fine bear-fry. They are not going to let you sit short.
On a commodities pullback, I am with you on that. Been working on a position in SMN for a couple of weeks, almost got stopped out mid-week. We'll see...
To: Ipodius re: your 11:54 am- My F-I-L is a metals engineer and upon his retirement the company took two years to find a replacement body. Overseas grad - no US grads were available (and they paid well, too). Data point.
A huge number of the GenX "engineer types" were sucked into the .com boom. I was one of them.
The .com boom happen to coincide with a melt-down in cold war tech. Lots of boomer engineers were getting laid off left and right. There was no chance of somebody like me getting into a hard engineering field at that time.
Case in point, my a position for a Physics Prof opened up a local school in the early 90s. They had four PHD level applicants. Two years later, they had three hundred.
Plus, management in corporate America has no idea how to manage techs. In a short term result driven environment, they also have no desire. Techs have become disposable and most of us know that. I have dozens of stories of complete teams that were driven to death and then laid off the day the product shipped.
Of course, they keep the sales guys.
mp writes: "Well, it seems to me that Sivaram, Ipodius, and I can agree that asset prices are headed lower. Or, have I missed something?"
Can we agree that the monolines are the saviour of the world and that all of you should buy shares in them?
On a serious note, I do see a looming correction but everything comes down to the nature of any declines. The next 5 years will probably seperate the good investors from the rest...
mp,
If you have data to support your call on PM pop, I'd like to see it.
As you know, I'm sure, most gold, outside of antiquities is in circulation. The reported IMF sale did little to dampen the price. Silver gets consumed daily, and the burn rate is much higher than the replenishment rate.
Further PM's trade more as financial assets, rather than commodities.
So, again, I ask, what data do you have that PM will pop?
Cheers,
It may be another way of stating the obvious, but I think one of the reasons for the misconception that the general market "looks cheap" on a P/E, P/S basis is that the last several years have been a bubble in cyclicals.
Take a look at the best performing industries of the last 5 years, which would've marked just about the end of the Nascrash:
BigCharts - Charting a World of Investment Information
Steel, coal, nonferrous metals, a couple of flavors of oil services, transport stuff including trucks and tires. And the lonely internet group, which I suspect is mostly about the GOOG.
Deep, dirty cyclicals. The way those things play is that you buy them at earnings troughs, when the PE is 255 and sell them at earnings peaks, when the PE is 4.
On this thesis, the real reason some high-profile value guys look like idiots here is that the value bubble may have already popped. Same thing happened to the tech rock stars in 2001. They never seem to understand when the paradigm has shifted.
maybe someone else noticed Cal's contribution from the Countrywide 10-k statement but this part caught my eye.
Our financial condition and results of operations could be negatively impacted to the extent we rely on customer information that is not complete or accurate.
Apparently Countrywide never heard of two forms of ID and manager approval before cashing the check.
"Of course that check is good! Trust me!"
" ``Management believes this decline in value is other than temporary,'' according to the filing. "
"Other than temporary." That is a classic. What's another way to say "other than temporary?" Could that mean "permanent" perhaps?
I believe the U.S. stock market will gradually descend over the next 2-3 years and not reach bottom until maybe 2010, at which time the S&P 500 could be 30-40% below where it is now.
There is $2.5 to $3.0 trillion of defined benefit pension money in the stock market, maybe 80% of it U.S. stocks. That portion will come way down due to risk, loss and the Pension Protection Act mandate of full DB plan funding phased in by 2011 and amortized over 7 years. So, at least a trillion of DB plan money will be leaving the U.S. stock market. I think individuals and endowments also will be re-allocating retirement plan money away from the U.S. market, but very gradually. I can't see U.S. earnings making any kind of sustained comeback until late 2009 or 2010.
The next really big roller coaster drop, IMHO, is in emerging stock markets, not U.S. They have soared on the back of leverage and speculation and now there's nothing to hold them up. EEV or bust!
If you have to invest in stocks, look to Japan starting sometime in 2009 and Europe a little later.
SV,
"Can we agree that the monolines are the saviour of the world and that all of you should buy shares in them?"
Do you not track the RE's. Seriously, you seem incapable of time sequencing things. I don't care about your long term plans. If you buy something that's dated 10 years and intend to hold it for 10 years, but run into major problems 2 years later, your intentions at purchase are friggin' worthless.
Cheers,
Misean, I have no "data" that PM "will" pop, and neither does anyone else. You KNOW that, which is why you asked the question.
I have an opinion, based on experience and prior data, just like you have an opinion. You're entitled to yours, just as I am to mine.
Kicker,
That sounds exactly like the historic model for engineers and geoscientists in the oil & gas industry, which managed itself into a corner that they are now desperately trying to dig themselves out of due to the demographics of the current population of skilled petrotechnical labor. They appear to have waken up to that fact, but that commitment has yet to be tested in a price cycle turn.
Which will occur, though it will be quite different than past price cycles as I suspect the new 'low' price that will be hit once the speculative frenzy cooks off and some demand destruction occurs will be in the range of what would have been considered a high price environment just a year or two ago.
Globally we are not close to running out of energy, but we are getting damn short of the low hanging fruit. The short version is "The era of cheap energy is over," which is a view that is now emanating from within the oil and gas industry and can be found in detail in the National Petroleum Council's recent report Facing the Hard Truths About Energy.
To close the loop on the engineering discussion, engineering sciences related to all elements of the energy industry (oil & gas, coal, nuclear, electric generation & distribution, energy efficient buildings and communities, wind, solar and next generation biofuels)will be in high demand.
Since people are posting stock recos and disses, I'd like to point out the negative action in the fertilizers. The tech indicators on POT, CF, MOS and AGU look like they're rolling over. Go short or at least sell some calls as the premiums are pretty juicy. AG is just too obvious here and I expect a bloodbath.
Agree completely on commodities correcting soon. Don't agree at all with lumping gold (and to a lesser extent silver) into the commodities bucket. I'm guessing that the PMs will soon be seen as real money again, and gain value in a deflationary spiral. It will be interesting to see who's right.
Everbank has a bunch of single currency CDs. I like Iceland. Good rate and if I take a bath will be in a hotspring.
I did like this quote: "As a result of the bond insurers' recent problems, Mr. Dresslar noted, the general-obligation bonds will be sold without insurance. 'Insurance has no value. It would be a waste of taxpayer money.' "
As my teenage daughter might say, "DUH". And then I'd add, "gosh, I wonder why he didn't wonder harder about that possibility back over the past few decades when they were buying ALL THAT stuff in the first place???"
Actually the insurance worked out fine for the issuing cities/counties etc. right up until the point that it went away. The cities bought the insurance for a few extra basis points, and got more than that back in reduced interest (based on the insurer's AAA rating) when they issued the bonds. At that point the city is ahead of the game, with the money from the bond issue in hand to build that new sewer plant or whatever. If the bond insurer goes belly up at that point, it's the bond buyer's problem--but not really a problem as long as the folks back in the issuing city keep paying their utility bills, generating the revenue to pay off the bonds at the interest rate the bond buyers were expecting in the first place. Lack of insurance will affect the resale value of the bond, but those who hold to maturity won't notice a problem.
Now, with bond insurers having no REAL AAA rating to sell (as opposed to the fictional rating they still possess, which the market no longer values) there is no interest rate payoff motivating a city to buy that insurance. So the city pays a bond interest rate based on its underlying financial strength. Obviously the financial strength of public entities varies just as widely as the strength of corporations. With no insurance to rely on, muni bond investors will have to look at the muni behind the bond. And yes, as economic conditions deteriorate, so will the creditworthiness of many municipalities. They likely will have trouble borrowing at any kind of rate they can afford, meaning they may find it hard or impossible to finance things like schools, libraries that don't generate their own revenue. A sewer plant, on the other hand, can be paid back with the fairly reliable stream of rev from utility bills, which can be raised to cover the cost of the plant over time. But I would be reluctant to touch bonds that get issued to finance growth/development projects, to be paid back via the tax revenue from the growth.
energyecon,
You're right about engineering problems.
But kids coming up even in tech are fairly scatter brained. I've had several former techs constantly tell me how they felt about a project. This, after I asked them to give me specific data (bandwidth usage, security implications, equipment needs etc).
I had one who wanted to do SOHO routers that didn't do IPSEC the way I had the servers set up demand that I purchase them so he could see. He demanded that he FELT they would work.
College graduate too.
Retooling educational engineering departments is gonna be a bitch. That most HS grads, at least in CA, have trouble with algebra isn't gonna help.
Cheers,
RobDawg- "...this is California we are talking about."
Have you contemplated escaping before they close the borders?
Up here in Washington state, we have a contingency plan to blow the bridges on the Columbia River if a worst-case California invasion materializes.
Misean,
Yep it ALL comes back to the math education...though there are still some excellent schools out there. Sorry to hear that about the CA system.
RE: public pension liabilities.
This is a widespread problem, and the numbers seem to indicate no feasible way of closing the multi-billion dollar gaps that have built up over time.
Can states and cities repudiate some portion of their pension liabilities at some point, without going into bankruptcy, just as some corporations have reneged on non-binding promises to their retirees involving medical care and so forth? Just asking.
Many of the best engineers I knew are now doctors and lawyers. I'm from the generation that witnessed engineering go from value adding productive efforts to financial bean counting cost centers. This went along with engineers going from valued professional staff members to fungible employees.
John Stark,
I think PBGC would take them up. Not sure. Not that PBGC is in good shape.
Cheers,
Rob Dawg,
Re: engineers,
Check!
Cheers,
MISEAN: "Do you not track the RE's. Seriously, you seem incapable of time sequencing things. I don't care about your long term plans. If you buy something that's dated 10 years and intend to hold it for 10 years, but run into major problems 2 years later, your intentions at purchase are friggin' worthless."
That was a joke by me because I know none of you will touch the monolines (I wouldn't want any of you to anyway-it's too risky for most of you)... but to seriously answer your question...
When you invest in a distressed asset, what matters is not necessarily what happened along the way or what mistakes were made. Instead, the main thing is price.
I have actually been bearish on real estate for several years now. It was obvious that real estate was in a bubble because real estate prices were out of whack compared to rents and average incomes. However, the reason I decided to invest in Ambac is based on the price.
When I invested early this year, I felt most of the negative news was priced into the stock. The stock was trading between 50% to 70% of book value (book value is a good indicator of the worth of an insurer).
When you invest in distress situations, the question is not whether mistakes were made (there clearly were--otherwise the stock wouldn't be down 80% in the first place). The question is what the value of the company and what is the expected loss that will damage the current value. Needless to say, I felt the losses were manageable. The verdict is out on whether my original call is correct or not, but so far very little has changed (other than the fact that the AAA rating is under threat (mostly due to management incompetence; they should have raised capital a few months ago, instead of diluting shareholders like crazy now)).
To go back to your analogy, let's say you were looking at a 10 year bond. Originally it would be priced at par but let's say it drops 30% after two years due to some mistakes of the issuing company and a looming crisis. If you were contemplating that bond, your key decision is whether the price that you will pay now will ensure a reasonable return. The fact that the bond dropped 30% after two years or that there is a looming crisis doesn't mean that it should be avoided per se.
Maybe I'm being mistakenly stubborn but it's still not clear that the monolines are toast. There are a lot of successful investors, like Warburg Pincus, Martin Whitman, and Chris Davis that have decided to invest in some of these companies. This doesn't mean that I'm right but it does mean that my thinking isn't as dumb as it seems... of course, you have William Ackman, Tilson, and a few other hedge funds, who are taking the opposite position...
RobDawg- "...this is California we are talking about."
Have you contemplated escaping before they close the borders?
Up here in Washington state, we have a contingency plan to blow the bridges on the Columbia River if a worst-case California invasion materializes.
Ventura County will blow up the empty Countrywide buildings across the 101 and 118 freeways leading to Los Angeles. We watch Los Angeles rot from within. We only worry about being sucked in when the (social) ground opens up to swallow the whole mess. So far all we plan on doing is blowing up the Metrolink tunnel and posting guards on the 101 in Calabasas. We figure the mobs will be too busy looting Malibu and Pac Pal to ever get up the coast.
Unfortunately we suspect San Luis Obispo thinks the same of us.
And most alarming of all is the first exclamation point ever to have appeared in Mister Deadpan CR's text.
"
Retooling educational engineering departments is gonna be a bitch. That most HS grads, at least in CA, have trouble with algebra isn't gonna help."
I can top that. According to my wife, who works in the registrar's office of one of the UC campus, stats taken from application forms indicate that 1/3 of the incoming freshmen this year will be on Prozac. Not just for our campus, but the whole system.
And that only counts the ones who bothered to say so.
They've got more than math skills to worry about.
Two words for you Rob Dawg: La Conchita
It happened before, we can make it happen again.
Rob Dawg,
"So far all we plan on doing is blowing up the Metrolink tunnel and posting guards on the 101 in Calabasas."
Not gonna stop me flying up PCH to Lindero canyon.
Muaahahahahahha.
Cheers,
Bob Dobbs,
Stop that you're TERRIFYING me. Are you serious? 1/3? How can people be that irresponsible to put there kids on psycotropic drugs.
We're doomed.
Cheers,
I've spent some time looking into this question lately, and also assessing the health of PBGC.
The answer is that every state has different protections for public pensions. They literally range from A to Z. Go here to see an analysis state by state:
http://www.ncpers.org/Files/News/03152007RetireBenefitProtections.pdf
As for PBGC, it is a disaster waiting to happen. There is almost no way PBGC can continue to meet all its obligations going forward. The collapse of the U.S. automobile industry over the next few years will put PBGC under. Participants in any plan that falls into PBGC hands probably should not count on more than about 50-60 cents on the promised dollar in retirement benefits.
I doubt that when PBGC fails the U.S. Govt. will be able to bail it out.
We figure the mobs will be too busy looting Malibu and Pac Pal to ever get up the coast.
Unfortunately we suspect San Luis Obispo thinks the same of us.
SLO has one other advantage over Ventura. It's called "being more than one tankful of gas away from LA."
Elementary survival planning.
sportsfan,
I can get there with a 1/4 tank to spare.
Cheers,
rich,
The monolines, their RE's, DB pensions and PBGC is a caldera waiting to erupt.
The ground keeps quaking, new vents keep opening, yet people keep whistling past the grave yard.
Cheers,
SV, thanks for the thoughtful responses to my post. I'm thinking about them.
mp, it does seem that we're on the same page...and the same philosophical one. As far as the PM issues goes there is no proof for anything in investing, just gut, trending, past models and rumor. Although when I can take an argument and substitute the words "tech (a la .com) or Real Estate for Gold, I take that as a sign we've hit froth.
About tech and education. Since I happen to teach computer science, math and finance I do have an informed opinion. It's hard to be an engineering major. It's a lot of work. Therefore, most students shy away from it, especially after the .com bust and the outsourcing scare talk. But you have to have the chops or no matter how hard you try, you're going to be mediocre. And when I was an undergrad I heard all the bullshite about our "generation" not being as good as the ones that came before. All crap. Each one is the same, just different problems. I've taught for 20 years now and nothing fundamentally has changed. Except we all abbreviate more and care less about spelling since the advent of the spellchecker
MW,
Could you elaborate on foreign (swiss, cayman, etc.) pm and other holdings? I am a beginning saver stunned by the combination of possible us bank failures and usd devaluation. How do you go about offshoring financial holdings? What a time to graduate.
"Bob Dobbs,
Stop that you're TERRIFYING me. Are you serious? 1/3? How can people be that irresponsible to put there kids on psycotropic drugs.
We're doomed."
It's a quick fix these days for behavioral problems. The doctors recommend them. The industry pushes mood alterers hard to both doctors and laypeople. Hell, they're even marketing Prozac for dogs these days.
All we've got time for in society in these days in quick fixes. Parents gotta work, therapy isn't covered, kid's stressing out about getting into college or just messed up in some way -- pills are easier to get than real solutions.
As for PBGC, it is a disaster waiting to happen. There is almost no way PBGC can continue to meet all its obligations going forward.
Reading the reports from the head honcho of the PBGC it sounds like he pretty much resigned to it. Raise rates on existing pension plans to cover the short-fall will just increase the number of failures.
Problem is that the bankruptcy courts allow companies to bankrupt out of pension obligations. That puts pressure on the survivors to do the same. We've reached a tipping point.
As for municipalities shedding pension obligations, it ain't going to happen outside a bankruptcy court. The courts have consistently held that munis can't change benefits once they were granted.
San Diego was going through some gyrations a couple of years ago trying to wriggle out of some benefits arguing they were granted illegally. I'm don't think much came of it.
BTW - I forgot to mention that CR's original piece which stated that Schwab had 30 year AAA munis at a 5.5 might be somewhat misleading - since a shorthand brokerage firm rating on an insured bond is usually based on the rating of the insurer - or the issuer - whichever is higher.
Today - it is absolutely essential to look at the underlying issuer's rating and rating history - and to figure out where the money is coming from to pay you back. Luckily - it is very easy to do this on line these days. For example - I have almost a full page of info about the bond I bought yesterday (whose rating is AA1/AAA/AA+).
BTW - just a quick remark about equity valuations. YOY earnings on the SP500 are down 13%. That isn't very encouraging. Roby
SV, I've thought a bit (and I'm ipodius...a sly nod to an old BBC series, a tech device, and to the fact that before the world went to hell in a handbasket, i was forced to study latin for 4 years).
The fed is not expanding the money supply, it is shrinking it. All these auctions are not pumping new money into the system at all. I believe that bb and the boys are doing that in a determined way to impair the shadow banking system. What you are seeing is the results of that - and the FORCED repricing of risk that the models got wrong on the previous expansionary data inputs. After all, credit, like RE prices, were not supposed to contract.
The denouement to this is coming faster than you think (as mp and conjure allude to). So you have to know where to be when it happens. You'll know when the fed actually DOES increase the money supply, which they will do as soon as they are sure it will flow to where they want it to - the banks themselves.
They are also going to stop lowing the FFR sooner than you think. And unexpectedly. That will cause the final shake-out.
Bob Dobbs,
"it's a quick fix these days for behavioral problems."
Well hell, givem' a joint. I'm just shocked at your statement. I'm not challenging the point. Just shocked by it.
Cheers,
Today - it is absolutely essential to look at the underlying issuer's rating and rating history - and to figure out where the money is coming from to pay you back. Luckily - it is very easy to do this on line these days. For example - I have almost a full page of info about the bond I bought yesterday (whose rating is AA1/AAA/AA+).
Short post to educate the novices on how to track down the financials given a CUSIP? Google only seems to turn up bits and pieces.
Btw, when this reverse occurs, money is going to flow in a different direction and the speculation in PM and commodities will cease. That's when you'll hear the POP. I do agree with mp...commodities are more complex and the drop will not be as forthcoming or as quick. But the speculative money will flee.
The brilliant thing about investing is that I don't have to be right all the time. I just have to be right in dollar terms more times than I am wrong. And lord knows I've been wrong. But I've also been, very, very right.
ipodius and mp,
As a goldbug, silverbug, and dollar uber-bear, I have to tell you that one of the best pieces of rational which shows that PM's are not overdone is the fact that, for the most part, it has not entered into the general population's conversations. Those who read blogs like CR and Mish are NOT normal (myself included). When my neighbors stop talking about sports, tech stocks, the kids private lesson's, etc. and start talking foreign currencies, monoline insolvency, and where to get gold coins, THEN AND ONLY THEN, I will sell.
I disagree with mp and Ipodius on PM's but do agree regarding commodities in the short to medium term. I remain a commodity bull for the longer term as I believe that most commodities are simply in short supply for a world that has expanded its consumer base so vastly in the past 20 years. The generally low commodity inventories really hadnt manifested themselves in the marketplace before now and this fact had to result in a major repricing (not a bubble).
I believe that most people on this board have too much of a U.S. biased view of the world. This doesn't mean that I agree fully with the decoupling theory but some shades of gray of decoupling will occur. Let us not forget that this time it is the U.S. that is the creditor nation and the savings are sitting on the other side. These savings will be put to work in their domestic economies when exports shrink and most of that will be infrastructure related, i.e. commodity consuming.
The obvious consequence is that U.S. vendor financing will grind significantly down putting even further pressure on the dollar and therefore put upward pressure on dollar denominated commodity prices.
Didn't FFDIC post that placebo's were just as effective as pyscho=therapeutics? Not that I believe it.
BTW- it was only after the Opodius that I caught the I, podius connection. Altho with Latin, shouldn't it be iPedius? Or is that being pedantic?
Lurker here......re GOLD! Yes, gold will CORRECT near term, it usually does between March and August (view 40yr chart at 321gold.com). Since Gold has an inverse relationship to USD, its long term trend remains positive.
Misean, tj, congrats! now, and in the future.
"
BTW - just a quick remark about equity valuations. YOY earnings on the SP500 are down 13%. That isn't very encouraging. Robyn"
Yes, but the losses are almost entirely concentrated in financials. Ex. finance the last number I saw was +14%yoy.
That leaves a lot of places to invest that are doing rather well and where stocks prices have collapsed along with the citibanks of the world.
I can get there with a 1/4 tank to spare.
Misean,
I guess I wasn't factoring in the gas mileage changes over the decades its been since I fled L.A. But I think I can still rely on the day the 9.0 quake hits. Then all the overpasses will be down and very few will get through over land.
I can top that. According to my wife, who works in the registrar's office of one of the UC campus, stats taken from application forms indicate that 1/3 of the incoming freshmen this year will be on Prozac. Not just for our campus, but the whole system.
And that only counts the ones who bothered to say so.
I'm not going to deny that a lot of people are on anti-depressants, but I do question why this information would be on college admissions paperwork, in a day when the right to privacy of medical info is rather broad. Just asking.
On the PMs commenters, pro and con:
My bias has been pro PMs since before Nixon closed the window, but even I've been wondering whether a bubble is forming.
My refuge at the moment is that PMs remain the anti-dollar and it does look like the Fed will continue to trash the USD.
The problem is the PM mining stocks which are, first of all, stocks that still tend to react along with the overall stock market, as they did on Friday. IMO some caution is indicated there and margin is definitely to be avoided.
IPODIUS,
If your thesis is correct, why are commodities rallying sharply? Commodities have been literally on a parabolic ascent lately (especially since the credit crisis back in Aug).
I don't think the money supply is growing rapidly as some inflationists think. But at the same time, I don't see any big contraction. I haven't looked at those numbers in a while (and don't really follow it much) but it just seems to be similar to the past.
SPORTSFAN: "The problem is the PM mining stocks which are, first of all, stocks that still tend to react along with the overall stock market, as they did on Friday. IMO some caution is indicated there and margin is definitely to be avoided."
Also... Although goldbugs don't care about it but if you were a value-oriented investor gold stocks make no sense. Their valuations are insane (P/Es around 30; companies like Goldcorp at 40) and you are simply betting on the price going up. If gold stops going up...
david_in_ct writes:
Yes, but the losses are almost entirely concentrated in financials. Ex. finance the last number I saw was +14%yoy.
That leaves a lot of places to invest that are doing rather well and where stocks prices have collapsed along with the citibanks of the world.
Thnx VERY MUCH to Dave in Ct., here is a prime example of equity bulls' ignorance.
So, Dave, how the fuck would I have known to have avoided the financials when executing a broad-based S&P invenstment plan? PLEASE tell me, Dave, how could I have avoided that little portion of S&P losses? Inquiring minds want to know.
Similarly, if I invested 50 years ago in equities, how much time & energy & LUCK would I have had to expend in order to have achieved the "average" return of X.Z% (or whatever the fuck folks like you claim) that would make me a multi-multi-millionaire by now?
Seriously, now, here is an epiphany for you: most folks reading this blog are WAY more enlightned than you, despite your self-perceived (USD-based) value. In fact, you are quite the relative newcomer to those of us who have read the CR wisdom for ~3yrs now.
Run along now, foolish chump.
david_in_ct - I happen to invest in equities solely through Fidelity sector funds - all 41 of them. And I keep a pretty detailed Excel spreadsheet on them. So I know pretty much what is working - and not working. As of today - the only funds in the black this year are Gold (up 16+%) and Natural Gas (up 2%). The third best is Chemicals at -1%+.
Contrary to popular opinion - the worst performers since the first of the year haven't been financials or construction stocks (which have been moving up slowly but surely in terms of relative strength) - they've been tech stocks (all 5 of my bottom 5 are techs - with Networking at the bottom of the heap - at a loss of over 20%).
OTOH - old saying - you can' eat relative strength - and 39 of the 41 sector funds show losses YTD - only 4 show a profit in the last six months - only 9 show a profit in the last nine months - and only 11 show a profit in the last 11 months (I use 11 months instead of 12 for reasons related to how my spreadsheet is put together - not any esoteric reason).
Note that the unweighted average of these 41 sector funds is beating the unweighted average of the major indices (QQQQ, SPY, DIA, MDY, RUT 2000) over all of these time frames. Overall - not a swell time for US equities. Roby
P.S. Regarding not being able to eat relative strength - I am down 5.04% for the year in equities - versus 9%+ for the indices and the funds. This is the kind of performance that earned those Harvard money managers 8 figure bonuses (they lost less than the other guys in a down market). As someone who is not paid a big bonus when I lose less than the other guys - I am not a particularly happy camper. Roby
Finally - I forget the exact numbers - but about 50% of an individual stock's performance is based on overall market performance - another 30% or so on sector performance - and only 20% or less on the nature of a particular stock. So when the broad market and most of the sectors are moving against you - you have to be an extremely good stock picker to do ok (it's a heck of a lot easier to have the wind at your back than in your face). Perhaps you are a great stock picker - I am not. Roby
PS Robyn, you need to read less blog, and make more family.
Youre infinite-columned spreadsheet is obviously taking its toll on you. You really do sound like the classic entity that will make the million just before kickin' the bucket.
Just sayin'.
Why would anyone lend a muni $10k for 30 years on such a poor return.
Strip out the true rate of inflation from the 5.5% yield and you are getting 0% real rate of return, let alone the risk that you might not get all your money back.
In the UK we have a government savings product called Premium Bonds. Its rather like playing the lottery but you never lose your stake. You can invest up to £30k/$60k and each month the bond numbers go in the draw.
The government pays out prizes to the value of 3.8% of the invested pool and the top monthly prize is 2 x £1million/$2m down to lots of $100 prizes, all TAX FREE.
Each £1 bond has an equal chance of winning and statistically you should win 15 times per 12 months if you hold the maximum 30k bonds.
ANON IN CA: "Similarly, if I invested 50 years ago in equities, how much time & energy & LUCK would I have had to expend in order to have achieved the "average" return of X.Z% (or whatever the fuck folks like you claim) that would make me a multi-multi-millionaire by now?"
LOL Another disgruntled short?
I'm seeing the same thing in tech. It used to make sense to send stuff to india or china. Now, not so much if you factor in other costs. The actual reason this is happening is that you can't hire enough people here. I'll repeat that - the reason i choose to do that is that i can't find enough people here.
ipodius | 03.01.08 - 11:54 am | #
Ah, the old saw. Repeat after me. There is no shortage of good tech workers in this country. There is, however, a shortage of good tech workers willing to work for the wages most employers seem comfortable giving to workers....as they line their pockets with millions in profits. Been there done that...twice. No more.
Haven't read any of the comments, so apologies if this point has already been made, but while it may be an historic spread, it seems entirely merited. Local governments don't have the same huge tax-raising power as the U.S. government, nor the power of the printing press.
Maybe, just maybe, the markets are being really efficient and signaling us that we are on the cusp of a major decline in the credit quality of municipalities and their various funding entities. We already know two things: (1) the bond "insurance" covering much of this debt is likely worthle in teh face of any sustained downturn; and (2) the rating agencies opinions are pretty much worthless and, at best, are subject to "review." Add to that a an actual or feared inplosion in property values which serve as the backbone of many municipalties tax base, the tumult in MARS (Municipal Auction Rate Securities) markets, and a general lack of flexibility in our financial system. The sum of those parts could easily cause one to come to the conclusion that the markets and investos are acting perfectly rational by pulling in their horns. Sometimes, you sow what you reap and we are sowing the seeds of financial chicanery of Wall Street blessed by a complacent and foolish SEC (Securities and Exchange Commission).