September 2008
47 posts
Welcome to the World of Deflation →
— another excellent read
More on Risk Management
Here’s a simple reason why the bailout can’t work: if a business truly needs a loan to stay in business (as opposed to making a strategic investment), no bank is going to lend that business money. It doesn’t matter what a bank’s balance sheet looks like.
We are going through a period of deflation. Asset prices are falling (stocks, homes), and debt destruction is underway...
Borrowing on Our Future →
— Somebody smarter than me writes a letter to future taxpayers.
WatchI just got a kick out of the pointed symbolism. Time to invest in soup lines?
The Irish Option: Suspend FDIC Limits
Updated
Ireland is unhappy with the effect that runs on banks have been having. Their solution? Temporarily guarantee all deposits. The Irish Independent reports, Ireland’s bank guarantee could be model for other countries:
”Certainly this will be looked at by governments elsewhere as a model,” said Paul Niven, head of asset allocation at F&C Investments in London,...
Was that it?
Calls for the bottom are in. I’ll get to why I disagree with that in a moment (and why I might be wrong). I took some money off the table yesterday (sold some puts). I did not reverse position. I am extremely well hedged right now. That’s another way of saying that I made no money on today’s up open. I only have one bet on right now, as of a half hour ago, and that is a strangle....
How to Avoid Armageddon
This is basic, though forgotten, accounting: Cash is king. Having a line of credit reduces risks in a business, but relying on that credit increases risk. Credit itself is a measure of risk. The fact is that risk has been mispriced for so long, businesses decided it was acceptable to rely on credit. Risk is being repriced, and people who bet on risk are finding out that you can’t win that...
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Keeping Rates Down is Hard Work
LIBOR and the Fed Funds rate are two measures of how much banks charge to lend each other money. Bloomberg reports Libor Rises Most on Record After U.S. Congress Rejects Bailout:
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro...
Excellent Perspective →
— Brilliant
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Fallout
Mark Thoma at Economist’s View has an extensive selection of links and snippets of the fallout in House Votes against Bailout Package.
[…] it’s not the stock market I care about, it’s employment and growth. Even if this is not a catastrophe, you don’t take this kind of risk with the economy. Even without a major crash, it’s likely a lot of people just lost...
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Machinations
The Fed announced about $630 billion in additional liquidity today. Bloomberg Reports:
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and...
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So Long Wachovia
Citigroup is buying Wachovia in an FDIC-assisted transaction. There will be some value to Wachovia shareholders, though it is dependent on Citigroup stock performance (but roughly $1 per share). The FDIC will absorb all losses greater than $42 billion.
Story here.
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Contrasting Viewpoint
Paul Krugman has had an evolving viewpoint on the bailout package as details have emerged. His position, however, has been very firm: “No equity, no deal.”
In Tricky bailout politics he writes:
So is it better to have no plan than a deeply flawed plan? If it was the original Paulson plan, no plan is better. Dodd-Frank-Paulson may just cross the line — let’s see what details we...
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Reality vs Political Rhetoric
The bailout package is likely a done deal now. I oppose this package for a number of reasons, which I will outline below. From a financial perspective, the current deal is significantly better than the original proposal by Paulson. Still, there are too many flaws to list all of them.
The Premise
The premise of this bailout is: If the government does nothing, financial Armageddon will occur,...
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Who's Next
The failure of WaMu was the single largest bank failure in the United States. In fact, it was larger, in nominal terms, than the previous ten largest bank failures combined.
People are wondering, who’s next? The last time I heard that question, I ridiculed it, saying that it was obvious WaMu was next. Fortunately (for everyone), the answer isn’t as obvious this time. However, if I...
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Under the Radar: Auto Industry Bailout
The LA Times is reporting House passes $25 billion loan package for auto industry. While we were worrying about the $700 Billion bailout of banks, the auto industry snuck in under the radar.
Supporters portrayed the bill as small change compared with the $700-billion Wall Street bailout proposed by the Bush administration, and Michigan lawmakers said they were preparing to seek another $25...
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So Long WaMu
Details will be announced in a couple hours, but it appears as if JP Morgan is buying the good parts of WaMu and letting the crap wither on the vine.
Update:
Here’s the link from NYT
Pondering Politics and Economics
Many polls show that Americans think that the economy is the most important issue in the Presidential election. In fact, it’s a dividing view. Republicans think that McCain will be better for the economy, while Democrats think that Obama will be better. Here’s my thought: Rationally, every American should know that it doesn’t matter who they vote for. After all, both parties are...
Peter Boockvar on CNBC: Bailout Won't Work
Peter Boockvar had an interesting analysis of the banking industry. He pointed out that the lending capacity of the banks already exists, and that there is evidence that is in plain sight. He pointed out that the top 20 banks are paying a dividend total of $40 Billion. He then said that was $400 Billion in lending capacity. The CNBC commentator said it was only $40 Billion because no bank is going...
Oh Balls
Read this:
naked capitalism: Democrats Say “Breakthrough” Enables Them to Pass Bailout Bill Tomorrow
And now, take a moment to weep for the complete loss of sanity in Congress. The debate centered around executive compensation. That accounts for what? $700 Million, tops. We’re talking about $700 Billion. Total costs for this package are estimated at...
A sneaking suspicion - Paul Krugman - Op-Ed... →
I disagree with a lot of Krugman’s policy recommendations. I can’t deny that the man is smart, though. He also writes well, and this article is worth reading. The essential point: Paulson and Bernanke are still making this shit up as they go along. I’ve got such confidence in those two.
WatchPresident Bush talks about a different plan than the one we’ve been hearing about. This one apparently involves buying the troubled assets “at the current low price.” That plan would be reasonable, except that no bank would participate. Banks already can sell at market prices, but they’d have to admit to losses if they did. The bailout only works if the government pays a...
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Back to Basics: Trading vs Investing
I invest and I trade. It’s worth discussing these as two different things.
Investing
Investing is about making money in the long haul. Investing isn’t about figuring out what’s hot right now. It’s not about changing market conditions. It’s about growing a nest egg over a period of decades.
Investing is easy: Buy a diversified mix of ETFs and rebalance every year....
Stupid Fake News Stories
I was reading the headlines of CNBC and Bloomberg (and Yahoo, Calculated Risk, Mish, etc.). The market headed up with a headline that the White House would consent to the executive pay limits pushed by Congress. I bought some SPY calls in response, expecting at least a rally for the day. The headline ended up being bogus. Stupid AP, and stupid me.
Don’t forget: There is risk in the...
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Calling a Crash
The recent actions of Paulson, Bernanke, and Cox have made a market crash almost certain. That’s my thesis. Disclaimer: Only a crazy nut job thinks he can predict a market crash. However, the market is going down, and I think it will continue. Now I’ll give the why (intervention backfires), how bad (S&P 1000), when (October), and what to do (cash, covered calls, puts).
Why
...
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Sane Company Update: JMP
JMP Group, Inc. has also opted for sanity, voluntarily removing themselves from the SEC short ban. Kudos!
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Ron Paul Commentary on CNN
Ron Paul has a commentary on CNN. I encourage you to read it, if only so that it stays on the front page (popular stories stay longer).
Commentary: Bailouts will lead to rough economic ride - CNN.com
At the end of the commentary is a standard disclaimer:
The opinions expressed in this commentary are solely those of the writer.
In the case of congress, that disclaimer seems sadly...
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Sane Company in Crazy Times
Calculated Risk reports the first company opts out of short selling ban. The company is Diamond Hill Investment Group, Inc.. Honestly, this move is good for a number of reasons:
This is going to give them a lot of good press… Well, at least from bloggers.
Their own shares are lightly traded. They need the shorts to provide liquidity.
Their philosophy page indicates they are willing to...
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Congress Solves Crisis: Turn Trash Into Art
I got this link from Mish. It led me to realize the genius behind the bailout package now estimated at 1.8 trillion dollars: Congress is opening a scrap art business.
Scrap art is a great occupation. You buy garbage, which is essentially free, and turn it into art. If you have any talent welding and sculpting, then you may attract customers and make a living doing what you love. The only...
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Opportunity Cost and Moral Hazard
There have been a lot of bad economic policies being enacted recently. In fact, there have been a lot of bad economic policies enacted throughout this country’s history. Most of these policies can be revealed to be bad by understanding two economic terms: Opportunity Cost and Moral Hazard. These terms are not in and of themselves complicated. In fact, they are quite simple. But, correctly...
Three Panel Soul :: On Sober Analysis →
A little humor from a comic strip artist that apparently is not normally political.
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Ethics of National Debt
There is no moral justification for the National Debt. This only gets more obvious with the duration of the issued debt. National Debt requires future taxes to be payed off. National Debt can be summed up as “We cannot budget, and we demand that our children bail us out.” Note that on 30 year debt, many people who will be paying the taxes to cover that debt haven’t even been born...
New Stimulus Package
The US Government is pushing forward with a new stimulus package aimed at helping the average American. Instead of a mere $600 with income restrictions, this new package is $2000 for every man, woman, and child in the US. Don’t go out and buy your new iPod yet. In fact, you won’t even be able to pay off your credit card bill or make a housing payment. Instead, there are some...
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Crisis of Confidence
Once again, I heard the talking heads on CNBC say that the current bear market is a “Crisis of Confidence.” That’s an interesting way to spin it. If I watch someone take a step off a cliff, is the problem gravity or my lack of confidence that he will defy it? As a whole, our system is over-leveraged. Banks and other financial businesses did not hold enough in reserves. We...
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Bailout Not Enough
Even if we assume AIG only needs 85B, it’s still not enough. 8.5% above LIBOR is not an economical borrowing rate. I’d like to stress two numbers: AIG claims a book value of 29.04 per share with 2.69B shares outstanding. Borrowing that amount at that rate cannot be sustained. Now that assets are going to be systematically sold off, nobody is going to be paying book value. All the...
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Fed Bails Out AIG →
And with one headline, the US Government just became the world’s largest insurer. Welcome to the USSA. The thing is, these guys just turned down a private buyout. So how’d the US Government get on the hook? And what ever happened to letting Lehman fail as a message against moral hazard?
This is moral hazard.
Plays on Sept 16
I sold the SPY puts I bought yesterday for a profit. I am afraid to count out the Fed as an AIG savior. Capital vs. Opportunity, I guess. If the market collapses after the announcement, I’ll still have my small profit. If the market rallies, I’ll probably buy more puts at the end of the day.
Brother, can you spare 6.13 trillion dimes? →
Honestly, I used that joke earlier today and found it funny. I amuse myself.
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WatchNouriel Roubini is my hero
Already Priced in?
In a word, no.
The market is only down about 3% right now. That’s not a terrible day, given how volatile things have been this year. That’s a very slow unwind. I don’t believe that things are that good. To put my money where my mouth is, I bought some SPY puts today.
I think that you should see some significant consequences to the Lehman collapse. Lehman was supposed to be...
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Merill Lynch a Deal at Half the Price
With everything heading down the toilet, it makes you wonder why Bank of America felt a huge premium was warranted in the purchase price of Merrill Lynch. I mean, if your industry had two huge collapses in a year, I wouldn’t be making you a big purchase price offer like that. And that goes double when there are rumors circulating that you are next.
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Predictions for September 15-19
So there’s a good chance that Lehman is going to declare bankruptcy tonight. The futures markets are predicting a slide in the DOW of about 2%. AIG needs to raise some serious cash soon. And WaMu is actually a zombie, looking for brains to eat. What does that mean?
Expect an announcement from Christopher Cox over at the SEC. Further expect that it will be limiting shorts in some way.
...
Bailout fans are my favorite nutjobs
The recent taxpayer bailout of China and PIMCO has been sold to the public as an attempt to keep the mortgage market working. The mortgage market is working. Houses are too expensive, and they are coming down in price. People who blame foreclosures for falling property values have it backwards. People are getting foreclosed on because they bought more house than they could afford, and now that...
Paulson And Others Translated →
Mish did an excellent job at pointing out the hypocracy and double-talk recently handed to us by the financial elite.
Bill Gross, PIMCO →
Bill Gross wants to be bailed out. If this wasn’t a good portion of America’s retirement plan, it would be humor.