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Four of a kind
Sokol’s Dirty
My bet is that Mary Schapiro over at the SEC started looking at Sokol as
of this morning. The optics on this one are terrible. So there has to
be some noise from the regulator. I’m also willing to bet that nothing
comes from it. Insider trading is a very tough case to make. Wiretaps
and witnesses are needed.
I was on both the buy and sell side. I pitched a thousand deals and
listened to the sale from the other side of the desk. The rules were
always the same. If you were talking a deal you didn’t trade the stock. Period.
It might be useful to have Citi chime in on this. What are their house
rules on this? They were pitching this deal to Sokol. If anyone on that
deal team were trading the stock they would be out in an hour. If
Berkshire has no hard rules on this, well, shame on them and shame on
Warren B.
One thing that rubs me is that Sokol has made it out that he was just
trying to make a few extra bucks so that he could give some more away.
Like he is a nice guy. Bullshit. He’s just another predator.
Mortgages Outstanding
The FRB 4th Q 2010 Mortgages Outstanding report is hardly worth looking at. Nothing is happening in mortgage land. The lines are basically flat.
The FRB info is stale, but Fannie just released its report for February.
Same thing. There is no growth in mortgages. There continues to be a
very small month to month declines.
I was looking at this data and trying to draw some conclusions on how
“healthy” these $10.5T of mortgages are. I have no reliable data on key
variables, so I set up a matrix. The question I want to answer is how
much real equity is behind all this paper today?
How much equity was there behind the housing stock in 2006? The answer
is, A) At least 5%, but B) less than 50%. So the variables would be 10,
20, 30 and 40%.
How much has residential real estate fallen in value since 2007? It’s
the same as above. At least 5% but less than 50%. So I considered what
it looks like using drops in values of 10, 20, 30 and 40%.
I think equity (fair value minus mortgage) was around 15% in 2006. There
was a lot of 100% cash out ReFi-ing going on back then. There was also a
lot of high LTV mortgages being handed out. 15% equity is a generous
assumption. I think the average loss of value is about 30% nationwide.
This too masks reality as the biggest concentrations of homes are in
areas that saw greater than 30% declines.
The conclusion is that there is still very substantial negative equity
in the broad mortgage pool. The number starts with $1T. You can make
your own dot on the chart. We ain’t out of these woods yet.
Price of ‘Talent’
Ed DeMarco,
the fellow running the FHFA, appeared before the Subcommittee on
Capital Markets, Insurance, and Government-Sponsored Enterprises today.
He had 16 pages of prepared remarks. All boring except for the last paragraph:
I am
concerned that legislation to overhaul the compensation levels and
programs in place today with the application of a federal pay system to
non-federal employees carries great risk for the conservatorships and hence the taxpayer. I understand and have sympathy for what might motivate such a proposal, but I must report to this Subcommittee my firm view that such an action would, on balance, increase costs to taxpayers and risk further disruptions in housing market.
If DeMarco was talking with some friends he might have said it differently:
I need finance people. Lots of them. I need people who
understand credit. MBS Traders. Back office types. People who understand
and can price derivatives. Market economists. I need managers.
But I can’t get them. Government pay doesn’t draw the talent we need.
I’m sitting on a time bomb. A 6 trillion book and the good people are
all leaving. The private sector is sucking them up.
I know it sounds crazy but we have to pay the head of a government agency 4Xs what the president makes. The geeks who evaluate our derivative book earn (on Wall Street) 3Xs what a congressman makes.
I see no way around this. I fear it will end badly.
De Marco is a smart fellow. Consider his words a warning. We really
don’t want the guys who finished last in the class running these beasts.
(Fan and Fred are not going away anytime soon). The flip side is
equally unacceptable. Big salaries for mid level management and geeks at
Fan and Fred? That would go over big…… We ain’t out of these woods yet.
Supply
Dian L. Chu
did a good summary of the supply side of crude. Bottom line; Cushing is
full (damn near). If supply and demand have anything to do with the
outcome the price is headed lower. Tough to argue with.
I wrote about the Cushing issue some time ago and got what I thought was an interesting comment from someone:
Today
is March 2. A 100 tank car train left Stanley North Dakota loaded with
Bakken oil headed to St. James Louisiana...delivered price was $104.60 a
barrel....burlington northern rail road is charging $6 a barrel for
freight...........bypassing cushing oklahoma because it is
full.........and with limited oil out of the offshore rigs it pays to
haul it all the way across the continent.........wow.
That was a month ago. Nothing has changed. High grade crude for Gulf
delivery is still at a very big premium to WTI. $14 bucks as of this
afternoon.
A few questions:
Are trains running with crude? If not, why not?
Is the $6/brl a good number for transportation? If so why the apparent arbitrage?
Are “we” paying gas prices based on Cushing or LLS?
It looks like there is a boatload to be made here. Is there? Who’s making it?
»
- advertisements -
Anybody want to do a big bank job? We'll slaughter the tellers and go in the vault and set up fire pits when the cops come.
Then we'll give 10 percent of the money to charity.
The ghost of Pretty Boy Floyd strikes again!!!
i'll come with you on the job but i want to hang in the vault and wait for the rapture.
it seems like the time has finally come...
So much info, so little Radio Zero...
True AS. Big ups for Marla--may she be well.
Bruce, thank you again for a thought inspiring piece.
Outstanding post, 3 bullet points with nice gemstones inside. Kept it concise but very informative. My hat is off to you on this post Bruce.
I actually think oil is a nice long-term hedge on inflation, but I don't get the short-term run-up of oil prices in a shitty economy. Anything above $95 is insanity in my estimation. Unless they purposely hold-back supply OPEC style, it's not logical. I know some will strongly disagree, but that's the way I see it.
"oil is a nice long-term hedge on inflation"
INDEED! And when the money begins to move home from abroad there will be infaltion a-plenty!
Buffet is scum. This Sokol episode reveals his contempt for the rest of us.
Sokol got a kiss and a BJ from the girls on CNBC this morning.
mmmpphhssslurp...pop...slurp...pop...mmmpphhssslurp
They don't call her "Quick" for nothing, it's the ancillary hand technique on top of the linguals...
Nice catch on Dian Chu's article, Bruce.
Took a short with a stop just over the previous 107 high.......so we all know how that worked out. Keeping it real and still like Dian's articles.
On a related note it looks a lot like the recent FED talks about getting off the QE is just that; talk. Hoping for more but bailing on hope and getting back to reality.
Show me the money seems like the right call.
Thanks for being so consistent.
I just looked at the W chart and there is an UT resistance line dating back to June 09 that more or less hits around 107.55.
That line also intersects with a horizontal line from Sept 20 2008 which was the pivotal week when Oil spiked back from 91 to a high of 129 and then completetly crashed to 32.
If it breaks this TL resistance higher then the next target higher looks like 115 to 115.50. The weekly RSI is just hitting the 70 mark so a spike up maybe in the cards. Slow stocs have not rolled over either, not that technicals mean much in this space although the fundamental interpretation of recent FED speeches clearly appears to be skewed to pretend and extend.
We're thinking about QE too.
I think the FED has said too much, and out of desperation.
If inflation kicks in bigtime the FED and its rationale for QEs are completely discredited there will be political blowback as a price for this misjudgment of the public IQ.
Who knows what form that may take at this point but best guess is the public response is something like this; I am not paying for this bullshit any longer. Fuck You too.
It is all being reduced to the simplest common denominator which is nothing to lose.
See where the NIKKI goes and if it breaks 9800. Also watching Spain's ESP35 which has been VERY tentative compared to the runnup by other equity indexes......looks tough for it to break > 10,700/50
May still walk another short on OIL, but with a target around 97........looks risky at this point.........the FED is playing a weak hand trotting out its hawks with the clipped wing feathers.
Your nuts must be huge - HUGE shorty!
Don't know about that, and play in traffic at times but still have them after 7 years of this trading stuff
Great commentary again, I enjoy your articles Bruce.
Your thoughts are always appreciated. Thanks Bruce.
Bruce, you are sincere and usually well informed. A rare combination indeed, but no one in New York has a clue about wages. I taught MBA types for many years. The wage problem you are describing is an artifact of monopoly power, and the ridiculous over-pricing of almost everything in Manhattan/DC.
Decentralize, break up the monopolies, and hiring great people at less than the president's salary will never again be a problem. If the folks with these fancy titles had any knowledge or integrity, we would know that by now.
Couldn't agree more with the rest of the post;)
Keep in mind that I was quoting DeMarco. Was not suggesting that this was reasonable. Just that it is so. I thought my sarcastic connection of the geeks to congressmen would give you a hint where I lie on this.
All you need do is follow the money. The very big tax $s that go to DC from NYC make it sure that the decentralizing is somewhere well off in the future.
Sorry I misread it Bruce. Don't know if it's radiation or senility. Nice work.
"How much has residential real estate fallen in value since 2007? It’s the same as above. At least 5% but less than 50%."
Generally true Bruce, but worse in the most overbuilt areas. I just got back from looking at condos Fannie Mae is trying to unload in Myrtle Beach, SC. There are plenty available, beachfront and beachview, for as little as $20k. I found one frowzy place listed for under $10k asking price. I looked up the "last sale" price in the records: $76,000.
Naples and Fort Myers were loaded with condos that sold for $250k five years ago, now being short-saled for under $100k.
Fannie and Freddie are dumpsters full of pain for taxpayers.
So your dot would be inside of my dot. 20-25%? ($2.5T) That could be. I don't think that is priced in....
Condos are not included in the national Case-Shiller averages. If Bruce includes them his numbers would be twice as troublesome. And stay away from those condos! Don't you know The Association Fees are a noose around the unit-owners' neck? The Total Costs to run the building are divided by the paying unit-owners. When residents default, or foreclose and the bank lets it sit empty because they don't want to book the loss? The shortfall gets assessed to the remaining paying unit-owners. With each passing month, with each new vacancy, the burden increases. Association fees could jump 15%-25% pushing more people into default- its a viscious cycle. Want to throw your money away? Want to get stuck not being able to ever sell? Buy a Condo. Come down to South Florida where windstorm insurance coverage goes up 25% a year while property values go DOWN by the same amount. Could somebody explain to me that scam? Oh, right, Citizen's Ins. Co. is owned by The State of Florida, Hmmmm.
Isn't this how a tick or flea operates?
Has a strange similarity to local, state, and federal governments and programs, no?
Right-O, SwingForce. I didn't bite because I determined that, despite the super-cheap prices, neither condo assoc. fees nor local property taxes had come down an iota.
So I could buy a condo for $20k but the monthly fees were still $400, and the annual prop. tax over $1000. I was considering buying to rent out, but fees and taxes would cost me at least $6000 up front every year. Then add in internal maintenance issues, income taxes....not worth it.
Bruce,
thanks for your thoughts - enjoy your pov and dirt digging.
regarding home equity - the question is also under what conditions did the homeowners have much higher equity in '06 and of those which have potential to be supportive now and vice versa.
No doc loans - gone
EZ credit - gone
Zero down, 3% down, 5% down - gone (10%???)
Ability to save 10% as down payment - dubious
Cash out purchases - right out
high # of buyers available to move from rent to homeowners (w/ solid credit and earning history) - gone
Family formation rate - down and questionable or slower than expected rebound
Immigrants #'s coming turning into homeowners - (up/ flat / down???)
Average income - flattish or down in actual purchasing power
Significant #'s w/ credit blemishes not credit worthy - yup, millions.
Massive overhang of empty, bank owned, non-current homeowners - yup
Interest rates at all time lows that can really only go up - yup
tax policies being reviewed to reduce mortgage interest deduction - yup
That is incomplete but under those circumstances, hard to see how we even have $1.5T of equity against those $10+T of mortgages outstanding. Against that backdrop paired w/ little job growth and massive debt (w/ up to $5T in annual T issuance) still don't see how there won't be a continuation of QE??? Even if they just take a little breather to shake the commodity and equity markets out...don't see how it wouldn't resume within 3 months???
Doctor Bubble had charts on the negative equity ratio not too long ago. As I recall, the number of negative/no equity was approx 1-in-3 mortgagees. I still remember Deutschbank predicting a 1-in-2 ratio by 2013, when all the gimmick mortgages run their course ( mostly affecting the top 5 bad boy states for those kinds of loans). Deutsh made that 1-in-2 call approx. 2 years ago. I remember it because I was sure it had to be a typo !! Me appears to be wrong again.
Nonetheless, the negative equity data is important since it is the #1 predictor of a potential default.
And everyone knows this crap is still absurdly overprice, except the sellers.
Define "everyone". I rent, and tell everyone I know that prices will continue to fall. They all think i'm an idiot for not buying.
Same here.
If Sokol is dirty what does that say of Berkshire, that kind of BS doesn't just happen and it's not like this guy was a rogue, he was on the inner circle. Moreover Uncle Warren saw nothing wrong in his actions. If Sokol is dirty then Warren is ???
filthy?
Michael Lewis on Warren B 20 yrs ago:
http://www.tnr.com/article/politics/the-temptation-st-warren
(thanks to another on another thread)
Amazing - 1992 and look at the net worth Warren was protecting...
"One cannot blame him for doing whatever is necessary to protect his $700 million."
If true, simply amazing the "progress" Warren has made during these years simply picking better stocks!!!
You from Scotland?
I says Warren is as dirty as Sokol. Why? Because he loaned Godman Shafts money and defended their shitty trading against the investments they sold others. Including Schools, Firemen, and investment houses. The squids live on. They all belong in Jail.
Thank you for calling a spade and spade. Bullshit doesn't get any blacker than this because it's being shoveled as generosity and philanthropy.
Yes, who is making money on the crude arbitrage?
Ron Paul / Rick Santelli 2012 ya gotta believe they'd care enough to get it done!
This one screws with me too. It's great to see these numbers. I remember hearing that there was rail at cushing, but that there was no "desire" to run the arb. I assume there must be a political side, since the WTI price is what they feed to TV land. If refiners are running the arb, why hasn't the spread closed?
Right you is. Not only that, but Chevron was asked to reverse their pipeline flow from Cushing to the tank farms around L.O.O.P. and they declined.
I think they said they would think about it, but either way it would take two years.
Convenient.
Refiners