Archive - Nov 2009 - Story

If multi-apartment REIT BRE Properties is any indication of the housing "recovery" that is currently occurring on the West Coast, then look for several more decades of "exceptional" interest rates (when the exception is the norm, will any future rate hike be announced as exceptional as well... some time in 2020?). BRE, which together with REIT Duke Realty, is one of the few REITs that seem to have pissed Goldman off at some point, likely refusing corporate finance advisory services to the hedge fund with just one trading day loss in Q3, and as such merit a Sell recommendation, announced earnings today which demonstrate ongoing pain in such key housing markets as Los Angeles and Seattle. As Goldman points out, "Los Angeles and Seattle remained the weakest markets with rental rate declines of -11.5% and -8.5%, respectively."

The Federal Reserves is doing what they always do, bailing out their pals on Wall Street. My findings have strengthened my bullish outlook on the stock market even more, and they offer undisputable proof that the Federal Reserve is involved in illiquid CMS excepting activities via TALF. I do not think commercial real estate will be a problem. Remember, the commercial mortgage bond market is only $700 billion. The
residential mortgage bond market is $8.95 trillion.

"Credit performance for CMBS worsened at an accelerated pace this month versus the recent trend. Thirty-plus day delinquencies across the fixed rate universe increased by 41bp, to 5.50%, partly owing to the deterioration of loans that were current but transferred to the special servicer last month. This compares with the trailing three month average of 34bp. The trend of accelerating delinquencies is expected to continue throughout 2009 and early 2010, given the long lag times associated with commercial real estate." - Barclays

Each quarter or so, we have to go through all the drama and anxiety surrounding the utterances out of the FOMC. Where thousands upon thousands of traders sit bug-eyed at the computer screens, watching the 1 min. charts of the EUR/USD, SPY, TLT, trying to get an "edge" over the other 428,584 daytrading jockeys on Wall St., all looking at the exact same thing. All with their fingers madly punching the F12 and F11 keys as if their puny keystrokes are going to make any difference 48 hours from now.

In a segment earlier on CNBC, the ever cheerful Bob Pisani, whose only recent specialty on CNBC has been to find new and improved concepts that equate with "victories for the bulls" (global thermonuclear warfare, mutated viral contamination of water supplies, mass extinction events?), broke one of TV's cardinal rules by providing tax advice in a market primetime broadcast. In the clip below Pisani describes the tax trap associated with a wash sale. While he did not screw that up, he subsequently went on to describe how one can find other ETFs that would allow the viewer to get around the was sale rule, in essence providing a tax (avoidance) service, and also how viewers can avoid paying taxes. Of course, intent is a part of any comparable transaction, and one wonderswhether CNBC cleared this segment in which Pisani comes dangerously close to describing a method to evade taxes, which is a felony offense.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

This must have been one of those "so simple it would never occur to any politician" epiphanies. Four great points by Dylan Ratigan that should immediately be taken up by pro-reform politicians. If Barney Frank deems these are unenforceable or not worthy of his attention, replace Barney Frank immediately.

Dylan's four (shockingly logical) proposals on how to fix the broken financial system:

• Inject transparency, primarily to bring almost $500 trillion in swaps to the forefront.
• Capital to back Wall Street's gambling. It is a guarantee that very few firms will have Goldman's trading pattern each and every quarter.
• Enact a tax-code to discourage short-term profits. "Fortunes should not be made in minutes but over years through the creation of value to society."
• Break up the Too Big To Fail banking institutions. Start with Goldman Sachs. Right Now. Christine Varney, we are still looking at you.

We believe that this transaction will decrease the liquidity and capital adequacy of the insurance operations. For the consolidated organization, financial leverage will increase and fixed-charge coverage may decline. The capital adequacy of the insurance operations has declined over the past year, reflecting the drop in the market value of BRK's extensive
portfolio of equity holdings, which the insurance subsidiaries hold. This was the primary reason for our decision to change the outlook on all BRK ratings to negative from stable on March 24, 2009 (see research update). Moreover, the insurance operations over the past 12 months have been the buyers of BRK's well-publicized investments in Goldman Sachs, General Electric Co., WM. Wrigley Jr. Co., and Swiss Re. These large investments have attractive coupons and are boosting investment income, but have also increased the exposure of the insurance companies' statutory capital to equities and speculative-grade
bonds. The investments have also reduced insurance company liquidity, as BRK paid for them primarily out of cash and short-term investments and not from the sale of longer-term investments. The insurance companies already own a substantial amount of BNSF stock, so any further share purchases will increase the concentration risk associated with having a substantial portion of invested assets in securities of one company.

There is a sense of panic (not to mention a shift to unfiltereds from filtereds) coming out of the East Setauket lair of gazillions of teraflops in computing power. It appears one of the world's largest supercomputers keeps getting pantsed by 19 year old quants. Even as the S&P dropped almost 2% in October, and even though RIEF outperformed this performance by about 140 bps, investors apparently have had enough. With the magical line in the AUM sand of about $4 billion is likely to be crossed (in the wrong direction) very soon, your questions about the reasons behind Mr. Simons EOY retirement should be all laid to rest.

Earlier today Jim Rogers took a stab at Roubini saying that the NYU professor is wrong "about the threat of bubbles in gold and emerging-market stocks." In addition to claiming that commodities are still down and the equity markets are firing on all cylinders, Rogers added that the price of gold will double to $2,000 an ounce in the next decade. As a reminder, lately Roubini has been warning about the threats of the biggest every carry trade being established: that of shorting the dollar. Rogers seems to disagree: “What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.” Never one to back down from a public confrontation Roubini retorted promptly at today's Inside Commodities Conference in New York. Roubini claimed Rogers' $2,000/ounce forecast is "utter nonsense."

New York Attorney General Andrew Cuomo filed antitrust charges against Intel, alleging the company threatened computer makers and paid huge kickbacks to stop them using competitors' chips. Full complaint attached.

When a firm's trading performance challenges not only all preconceptions of realistic trading, but also of statistical distributions, one can merely stand back and watch in awe. Attached is a graphic of what a rigged, backstopped and manipulated market is all about. The chart demonstrates Goldman's YTD trading track record: out of 194 trading days in 2009, the firm has made over $100 million on 116 occasions! This alone accounts for $11.6 billion in revenue (and is likely much more as Goldman could have easily had a $1 billion trading day in the rightmost bracket as it is open ended). Assuming midline averages for any given bucket and multiplying by the amount of days that the firm traded within these, Goldman Sachs has made $15 billion courtesy of the skewed and very highly improbable (but not impossible, thank you taxpayers and Ben Bernanke) chart.

The ISM Non-Manufacturing index was released today and reversed the presumably good data contained in the ISM manufacturing index from two days ago. How the economy can look good one day and worse two days later, only the administration knows. Of note was the actual NMI number which came in at 50.6, a decline of -0.3 from September, and lower than the 51.5 consensus estimate. More troubling is that the Fed members, which many had expected to focus on the positive news released previously, will now be back to their schizophrenic, QE and stimulus-happy selves.

When two months ago we discussed the IMF's selling of one eighth of its gold reserves of which as most know by know half was recently acquired by India, we came to the conclusion that the IMF's proposed naive and subjective purpose for this disposition which was framed as "safeguarding against disruption in the gold market" would instead end up with "rioting in goldbugland." Based on gold price action over the past 3 days, we have been so far correct. And the concern for the IMF (and all Central Banks as well) is that India's example will be promptly followed by China, Russia and other sovereigns who are seeking to flee from their dollar holdings courtesy of continued madman-like behaviour out of the 3rd sub-basement at the Federal Reserve where all the Heidelberger Druckmaschinen are kept.

The Goldman 10-Q is out, providing numerous interesting datapoints for those willing to scour through them. The key one: Goldman lost money on just one trading day in Q3, making money on all the other 64. As a reminder, even in Q2 Goldman lost money on two trading days. The statistical probability distribution of 1 out of 65 is something that not the SEC, but Richard Feynman should be looking into, as Goldman Sachs, after rewriting the lass of risk/return, is now set to redefine normal distributions and other Statistics 101 concepts.