Mr. Mortgage's Patent Eye Medicine

Well, this table's not exactly eye candy. But it sure is something, especially if one is interested in California real estate.

Please note: this is not a same-house comparison, so the numbers are at the mercy of a change in mix of houses sold. But still...

Since Everyone's Talkin' Ponzi

First off, sorry if this constitutes rubbing people's noses in it, but figured it a worthwhile exercise. So, what exactly is a Ponzi scheme? I'm gonna give it a go. Roughly, it can be construed as any financial operation in which there is no steady-state, stable condition. It's grow, or die.

How's it all work? Well, if I promise 100% annual returns, and do nothing productive, but instead redistribute my inflow, it goes something like this. I take $1 from A, and in order to remain liquid when A wishes to redeem the $2 in a year, within that year I have to recruit a similar $1 from B, so's I have $2 to give A at end of year. Done with A, unless she reups. But neglecting that, now I owe B $2, but have no funds, which means I need two new $1 suckers investors, C and D, in order to remain solvent. Therefore, as a pure redistribution unit, whatever return I promise, I have to grow by that same rate. 100% annual returns? Gotta grow suckers subscriptions 100% annually.

How stupid! Who'd ever fall for a scheme like that, right? Well, what if I promised a mere 12% annual return, rain or shine? Or even a safe-as-houses 6%? Or even just 3%? Just don't ask me how, and I'll do it. By the way, if everyone and their mother's brother decided to go get their alleged money out of the alleged bank at the same time it might not look so rosy. It's called a run on the bank, and we actually can't afford it in this glorious day and age. Hence my painfully sincere Modest Proposal a short while back. Will bank for kibble.

Better yet: what if I promised you mere return of your money--or maybe a little less, yet--in a month or three? And in the meantime I went out and printed more money, so that at end of term you got your money back, and it had to go out there and compete with more of the same? Yeah, right: that would never fly.

Ok, ok; how about this scenario. Everyone's income goes up by an average of 5% a year, nobody saves any money, but everyone scrambles to lever up and "buy" widgets which cost several multiples of annual income, simply because their prices recently have been, and hence always will be, appreciating at clips of 10-30%, or more, a year? That's gotta be sustainable, and Charles Ponzi had nothing on that in scope. Totally unrelated to this, Calculated Risk made a crucial point today that just can't be belabored enough:

That is a key point - the chain is broken - there is no move-up buyer.

Basically, to paraphrase Keynes, in the long run, everything's a Ponzi (or pyramid) scheme.

Might as well put a plug in for my favorite psychosociofinancial book, Charles Kindleberger's Manias, Panics, and Crashes. It can kinda be summed up as a history-always-repeats-only-sheeple-don't-see-it-until-after-the-fact sorta tome, but it can also be tied up in one pithy line: "Nothing so undermines your financial judgment as the sight of your neighbor getting rich." But before you thinks of investing any other moneys, you mights as well reads it.

But c'mon; why would anyone want to monetize envy? So much more rewarding to comestiblize it.

Et Tu, Scania?

Apparently some people (but no pedants) took issue with our mindless glory-seeking repetition of Volvo's announced European truck orders slowdown of a couple months ago. So maybe orders didn't just completely disappear like we cynics parroted, but instead Volvo was trying to recognize cancellations. So numbers not so bad after all. Whew: kibble not subject to spontaneous wholesale transporterizationalness to twilight zone after all. Close one.

Well, somehow, truck orders (African or European?) are so bright that Scania has decided to suspend truck production in five factories across Europe for one month spanning the customary winter holidays. Will refrain from comment now, but not without giving away punchline:

Danielsson said falling order intake, which has dropped about 50 percent in the past nine months, was the main reason for the stoppage.

"We don't want to build up stock," he said.

Jumbo Prime: The New Subprime

Mr. Mortgage is calling The Jumbo Implosion. Nothing major:

Analysts are not taking into consideration how much trouble the American economy will be in across the nation when those middle to upper class home owners all over the nation see their prices fall as much as the lower end has. This will happen - it has to. Unless folks start paying cash and see extra value in million dollar homes, home prices will gravitate to the most readily available financing, which is still $417k.

He tosses California a special bone:

BUYING A $650K HOME WITH $85K PER YEAR INCOME - MOST POPULAR IN CA

A 5/1 interest only at 5%, qualifying at interest only payments, means that a $520k loan carried a payment of only $2166 per month. Add in $650 per month for taxes and insurance, and the total is roughly $2825. With a 15% second of $97,500 at Prime carrying payments of $325 per month and reasonable ‘other debt’ at the time of $400 per month, the total payment out the door would be $3541 approx. This means a household income of $7082 per month could buy a $650k home with 5% down. This is not out of the realm of hourly workers or moderate income single worker families .

Now the same home is worth $450k, the borrowers added debt after the loan was funded and all of their after tax income is going out to debt each month. They can’t save a penny and are going broke just to live in this underwater house. They can rent the same house for $2500 per month. The best decision is to walk.

$650k Purchase in 2006 - 95% first/second combo

$2166 per month on a $520k 5/1 interest only Jumbo Prime
$650 taxes and insurance
$325 per month on a $112,500 heloc
$400 other debt
——————————————————–
$3500 per month total payments
$7000 per month ($84k per year) needed to qualify

(numbers above are approximate)

Now days, the same income buys a $275k to $300k mortgage with 10% down. This shows why housing prices keep falling.

The average note discount at Trustee Sale in CA last month among the big banks was 45%. If these loans were mostly 80% loans at the beginning, this means the homes are being discounted over 55% and still less than 5% sell at auction. They rest go back to the bank as REO.

Home values going parabolic in Jumbo regions like CA had much to do with the nation’s past six year’s wealth effect. When a home goes from $300k to $1 million, that equity is extracted and spent. The home in Nebraska going from $100k to $200k was insignificant. This is why when it comes down to housings impact on the broader economy, ‘as goes CA so goes the rest of the nation’.

Oh; is that all? Actually, there is more in the original post.

In case anyone's wondering who this Mr. Mortgage is or what he looks like, when I first heard of him back in April, he was foaming at the mouth about Lehman mortgage lending standards. This when Lehman was a $44 stock, and not a pink sheet special. Yet.

Bullish or Bearish?

Fascinating pair of charts by Doug Short today.

In the first, the real S&P index since 1871 is plotted with its trendline. That's "real" with CPI-based inflation according to the BLS.

The second chart is nominally the same, only this time "real" means with CPI according to Shadowstats, as alluded to in "Stupid CPI Games."

The first chart is pretty bearish-looking, but the second is really rather bullish. Ack; my head's spinning--and no, I'm not dizzy from chasing my tail; thanks for asking. Like I would ever indulge in such a pointless, unintelligent-seeming activity.

Goldman Says...

Buy our stuff, but bet on it failing, too! I'm not making this up:

Goldman Sachs Group Inc., one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt.

Not sure how exactly they mean this. Are they just covering their, uh, bases, so they'll be right no matter what? Or is it like the subprime fiasco, where they sold MBSs, then shorted them, to make money twice, wherein the latter time was against their clients of the former? Or is it doublespeak like the warnings on cigarette packs that actually cause people to want to smoke?

Whatever it is, I'm guessing those munis don't taste so good anyways.

And please be sure that, whatever else you do, you don't excessively feed the hopelessly cute white dog with the sad face staring straight into your eyes...

Williams: Unemployment More Like 16%

According to Shadwstats' John Williams, real, all-inclusive unemployment is now more like 16%. More on his method here.

Sound far-fetched? Well, according to the official Bureau of Labor Services number, official unemployment measure U-6 is now 12.5%.

Taleb Calls Roubini Out

For being the optimist we all know "Dr. Doom" to be. Video from Charlie Rose on Calculated Risk here. Mr. Rose takes it all in stride, thumping the book on the table with coldly premeditated casual journalistic flair. Or not.

BTW, for those who haven't been keeping score, Dr. Nouriel Roubini's been proven right time and time again, but the time lag from initial pronouncement to eventual vindication has been shortening. Would that the interval from initial drool to eventual feeding would shorten similarly...

Uh, I'd Like a Do-Over, Please

In case any missed it, reader John kinda nailed the case for DryShips shut for me with his last comment on the previous post about the less than rosy case for said company. Here's the link. I believe there may be some character issues here, and, in general, would much rather be the fleecer than the fleecee.

DryShips: Caveat Emptor

Well, in case you missed it in the comments section of "Buying Dollars for Dimes", reader John quickly pointed out a couple of unsavory tidbits (oxymoron?).

First up is "Curious George," in which it is disclosed that CEO Economou owns his own private fleet of ships, which might tend to smell like a conflict of interest. That, and he doesn't seem to care so much about shareholders. Oh, and a previous company went bankrupt with Economou ending up with most the fleet while shorting creditors some, if you consider "37 cents on the dollar" less than adequate.

Also, in "Dry Bulk Shippers..." the planned sale/dilution of existing equity is discussed.

Perhaps cheap isn't as cheap looks, but still...

Buying Dollars for Dimes

There's this thing called the Baltic Dry Index, which is a broadish measure of the supply vs. demand, or price, to ship certain stuff (bulk dry raw materials, if you care) around the world. It's cratered lately, to the tune of roughly 95% off peak. I shudder to think of my feeding quantities, which have already been cut by some 40% due to austerity measures and alleged stifle weakness, falling another 55%.

There's this company that ships bulk dry goods--and does some drilling, too--called, of all things, DryShips. Thing is, its equity, which consists largely of dry bulk ships and drilling rigs net of debt, is, according to their latest quarterly report, some $2.1B. As contrasted to their market cap, which is a mere $170M, or less than last quarter's net income of $179M. So really, the title shoulda been buying dollars for pennies. But pennies shouldn't exist anyway, given their prohibitive materials cost and negative utility, so let's compromise and say nickels, which doesn't alliterate nearly as well with dollars as does dimes. So provided dry bulk armageddon doesn't truly occur, since otherwise we're all doomed anyhow, the stock at current valuation shouldn't get much worse. But could it?

Well, as the sometimes-wise Keynes once said, "The market can stay irrational longer than you can stay solvent."

Update: Though having seemingly caught a presumably local bottom for this stock, prudence dictates I direct you to this and especially this, in which I conclude the company probably isn't worth the risk. Unlike most, I'd rather be good than lucky, though wouldn't mind the luck if it were more systematic. The good kind, natch...

Good Ninja Rant

The Financial Ninja provides a good rant addressing the failings of the fashionable theories among most present practitioners of the Dismal Science. He debunks the myth of the rational, utility-maximizing, independent, well-informed player in favor of a more chaotic, empirical/computational model. Which makes absolutely no sense to me, because the former is exactly what I am when I casually amble over and steal the cat food in exchange for some perfunctory curses and pitiful sanctions: e.g., getting locked up for a while, all the better to digest (burp) in peace. That's at worst; half the time I get away with it.

Cerberus Cries Foul

Poor, poor, three-headed doggy company. Apparently, they thought they were buying ribeye, but now claim they were sold scrapple. It's not that they overpaid; they were misled. Yep, that's what Cerberus is alleging was done to them by Daimler. Gee, given everyone and their brother was doing private equity deals until so very recently, why didn't every deal end up profitable? Could it be Daimler actually knows something about the car bidness, notwithstanding their purchase of Chrysler in the first place?

Berkshire Hathaway CDSs on the Up and Up

Yeah, and not in a good way, like when my bowl magically fills. Apparently one of the last truly(?) AAA-rated US corporations is seeing CDS rates on its debt rise dramatically. Geez, when last I dissed Warren, I wasn't thinking material damage would instantly appear... Hmm; they usually say credit precedes common; what's this mean?

Moody's Finally Gets It

Moody's might actually be getting into the forecasting business again, unlike in the Ambac/MBIA/etc. calls, where their barn door closing alerts came way after all the aminals had left already, and everyone else had not only pretty much agreed they were planning to, but had also helped them pack. What good's a bulldog with no bulls to taunt? So why'd you let them go, eh? Uh, sorry; obscure, and likely in bad taste.

Mr. Mortgage reports Moody's is actually warning about the Alt-A segment of the mortgage universe. Better late than never? They're also saying it's early days, and the fallout might could dwarf the subprime fiasco. Hoodathunk?!! I'm shocked, shocked...

Oops; ok, thought about it for another minute, and actually, they're prolly way late on this call also, in that the paper's already priced bad stuff in, arguably too much bad stuff, and the only utility their announcement serves is to tell people to put their heads between their legs since the plane isn't gonna land too terribly prettily.

SEMI Billings

Apparently SEMI's official billings, for what it's worth, has dropped to below one beeellion dollars (bwahahaha...). Ye olde B:B ratio not looking so hot either. Note to fellow SVers: Look out below...

Wonder What Treats I Coulda Gotten?

From our one confirmed follower "Browny" comes this bit about some less than morally uptight peeps (say it ain't so!) working in the mortgage industry. Not sure I wanna go any further on this topic; not supposed to know from salacious...

I May Need a Cave Now

Officially a little alarmed here. Perhaps between flippant comments about nosh I've tended toward the darker aspects of finance, but really, that's all there's been lately, for some time now, even though only recently has it been made painfully obvious to one and all--some of us popped the red pill a little earlier. Even so, a lot's been baked in the cake that I'd really rather not think about now, and will probably cause no end of taunting and/or ostracism (more than now!) if broached in polite company. But after this post on Naked Capitalism (thanks, Yves...maybe), mebbe the opti-pessimeter could use a little calibration. Here's one hook; you decide:

Everyone along the supply chain should worry about their children going hungry.

Mommy!

Officially in Vogue: Steel Skeletons

Pointed out in Calculated Risk last Friday, Sobrato Development is leaving a group of speculative Santa Clara office buildings in stylish steel structural skeleton as they wait for the market to turn around and a buyer/tenant (read: sucker) to materialize. And if I don't get fed more already, I'll be nearly as gaunt, if covered. Money quote:

This is a delay rather than a shut-down. We are going to finish this building.

Yeah. Uh huh. Any bets on whether grass grows on the roof beams? C'mon, I need the kibble.

Anecdotes from "Ask Fleck"

As you may have surmised, I'm a fan of Bill Fleckenstein of the eponymous Fleckenstein Capital. In addition to daily market-related commentary, he fields a bunch of daily reader questions and comments in his "Ask Fleck" section. Possibly best $120/yr value for investment insight around. And no, I'm not a shill, just a paid-up fan.

Anyway, today's "Ask Fleck" has a couple data points even I found slightly gulp-worthy (not as much so as raw egg, alas, and not nearly as tasty):

Checking in from the steel world. My company is a supplier of ferro alloys for steel mills. Arcelor Mittal, the world's largest steel producer, told us today that they will not take delivery of ANY raw materials through the end of the year....that is the extent of Arcelor's production slowdown. This is a global, not North American, shipment freeze.

Also:

a quick data point from GEMB [GE Money Bank] in Texas. a family friend of mine just had a water softener installed in his home, and the installer struck up a conversation with him. my friend is in banking and lending. the next day, the installer called my friend and told him that his business is in jeopardy because GEMB, who usually lends people the $3500 to install his product has said they will NO LONGER LEND to ANYONE. obviously, this has serious implications for these small businesses that rely on the financing. this is an incredibly profitable business, borrowers usually have very high credit scores and the lender usually charges 18-22%. i guess GEMB really may be insolvent.

Funny how Immelt has seen fit to remind shareholders several times recently how GE has a AAA rating, and yet they run to the FDIC to get $139B in debt backing, not to mention getting themselves on the do-not-short list back in September.

In case anyone cares, by the way, I actually somewhat prefer sous-vided eggs (148F, please) to raw, but I'm not picky.

The Buffett Bandwagon

I've fallen off, and not sure I'm climbing back on. Unless maybe it becomes a chuck wagon; then, naturally, I'm all over it.

In the beginning, there was only pure puppy admiration for Warren Buffett, as in his annual letters to shareholders he made crazily candid, value-ridden, anti-hype statements, declaring at least once Berkshire Hathaway stock too richly valued, and that he himself wouldn't be a buyer at the time. He was an early (mid- to late-80's) critic of the USA's trade deficit, a dependable critic of financial derivatives, famously calling them weapons of mass financial destruction, and he plain made sense. He also made fun of the hedge fund business model right before its implosion that we are now witnessing. His annual letters are investing must-reads.

My opinion suffered a hit earlier this year, though, when Moody's reported a "computer glitch" had caused them to rate some CPDO derivatives AAA when they otherwise would not have. Funnily enough, S&P had already rated them as such, and Fitch had refused, leaving Moody's the last of the big three ratings agencies available to rate them. And many creditors wouldn't touch an instrument without the explicit blessing of at least two of the three agencies. How lucky for the issuers that this computer glitch came through in just the right way. Warren, a major shareholder in Moody's, boldly stated, “I would doubt very much that any events of any one day will permanently change the franchise value of Moody's." While strictly true, it sounded disingenuous at best, given their potential implication in this still-unfolding financial crisis, and that there exists a far better alternative to their debtor-paid, conflict-of-interest-ridden ratings agency business model. One glaring example of such is Egan-Jones, who are paid by creditors, and hence have the right financial interests by design.

Then there was the purchase of Goldman Sachs equity during the big turmoil of September. There were some internal reversals in my head over that, but they settled out in fine form. Goldman, the granddaddy of the hedgies, once fined for illegal naked shortselling, was now whining about shortsellers affecting its own stock price. Yes, based on the going stock price of $125, Berkshire's $115 price was a deal. Now, at $70, not so much. But my main problem was his glowing characterization of the company:

Goldman Sachs is an exceptional institution. It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.

Kinda laying it on thick for my tastes, especially given his own previously-shared views about hedge funds and such. But wait; there's more: he also said he backed the $700B government bailout, and that the Goldman deal was an endorsement of such.

Slightly previously, Buffett had apparently made a similar offer to Lehman, which the inestimable Dick Fuld first solicited, then rejected. No doubt that woulda done even better than the Goldman deal has to date.

In October, Buffett swooped in to buy some GE stock at a then-bargain $22.25. That, for a financial black box that many suspect doesn't nearly deserve the AAA rating its CEO constantly has to remind the public it still has.

There's also the massive puts on the S&P500 index (from fuzzy recollection: need to verify) Berkshire wrote some years ago, which position is made financially tenable if the market manages to stay afloat somewhat. So one might say Buffett's talking the market up, and announcing he's a buyer, is actually a layered, derivative sort of book-talking. Not too terribly unlike one Bill "Bond King" Gross of PIMCO, also a supporter of gubmint as toxic waste buyer of last resort, ASAP.

Doug Kass, among others, has made a case for avoiding, or even shorting, Berkshire stock, going so far as to say, "Warren Buffett Has Lost His Groove."

Honestly, I dunno exactly what to think. Possibly Buffett deserves the benefit of the doubt, given his singular track record, and past straightforwardness, and history of being right, if early. But really, anyone else saying what he's said this year would be right up there by Ben Stein in my pantheon. Ugh; is it Nylabone time yet?

Liar's Poker: The Sequel Cometh?

Michael Lewis, of Liar's Poker and Moneyball fame--both great, great books--has written an astounding article, "The End of Wall Street's Boom." It's an absolute must-read, unlike the portion of the kibble bag label that tells you how much to feed according to an inconsequentiality like body weight. He starts out with a fairly innocent, self-deprecating statement:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me.

Follows up with understatement:

Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.

And sets up and asks a burning question:

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

And describes some profound (profane?) roadblocks:

There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product.

The quotes don't begin to describe the essay, which, like Liar's Poker, is a fascinating inside look at the characters (unflawed as well as very much otherwise) and shenanigans behind the financial headlines. Just read it. And not the kibble bag label. Please.

Yves Smith on Greenspin

If/when I grow up, I want to be Yves Smith. Earlier this year, Sir Alan, aka Mr. Serial Bubble Blower, joined Paulson & Co. and PIMCO in advisory positions. Those are two off the top of my preternaturally airy head; there must be more. Just like there must be some tasty treats stashed somewhere below the bottom of the trash can, if I could only dig that deep... Completely coincidentally, natch, these companies happened to profit in some small measure from Greenie's easy-money, no-ouchies policies. Point is, Yves waxes quite eloquent on the Paulson announcement here:

It's one thing for Greenspan to sell books and give speeches to try to salvage his reputation. Nixon did that too, with more success and less profit. It is quite another for him to benefit in a far more direct fashion from the devastation he created, by hooking up with the fund that scored the biggest kill from the worst aspects of the negative real interest rates that Greenspan put into effect.

Wow, Sir Alan compared unfavorably to Tricky Dick. Why didn't I think of that? Anyway, I highly suggest reading the whole rant for full effect. I will try to overlook this potential slight on her bio:

Although I believe ideas should stand on their own merit, rather than on their author's credentials, I also recognize that readers want some assurance that they are not quoting a 13 year old or a dog.

To make myself feel better, I'll imagine that Ms. Smith, if she had a tail, would have no more luck catching hers than I do mine.

But in the Nicer Neighborhoods...

Surely prices shall always remain levitated, submit many who previously contended that SV Real Estate Always Goes Up. And surely I'll get that slice of blue rare prime rib I've drooled over every night in my dreams. Let's see, shall we? First, we have the original reset schedule for the Adjusted Rate Mortgages that were so in vogue until so very recently:

Here we see, perhaps boringly, that subprime resets were due to peak in the middle of 2008. In 20/20 hindsight, some of those loans came a cropper rather earlier, hence the to-do in 2007 over the subprime crisis which is still being parroted. And that is where many choose to stop thinking about it. A stickler, however, might notice that the bars stack yet higher when 2011 comes rolling around. All is not lost, however.

Thanks to the wonders of stagnant-to-falling price and minimum payment and resultant zero to negative equity, at least the Option ARM parts of those peak bars (aka "nicer neighborhood" bid funds) should actually come even sooner, now:


Apparently things should start getting interesting, and sellers more motivated, mid to late 2009.

Now if only that prime rib would materialize already, properly aged or otherwise.

Silicon Valley Real Estate Always Goes Up

Yeah, in Bizzaro World, maybe. Where I'm a tiny chihuahua that will settle for one whole stomach-distending Chicken McNugget in lieu of the bucket I require. Yet not a couple years ago not a few otherwise sober people would foamingly recite this supposed tautology to my inconsistently nodding face. This movie never having played before--in any way, shape, or form--who could imagine any other ending?

Anyhoo, this week's Dataquick data via View from Silicon Valley shows that the median Santa Clara County (aka Silicon Valley) "home"* price dropped a bit, from $795k ($489/ft) for the week ending 10/16/07, to $538k ($348/ft) for the week ending 10/15/08, the latest for which data has been posted. 'Tis just a flesh wound, I'm sure. Certainly couldn't get any worse, say most who never saw this coming in the first place.

*Am I the only pedant that thinks the concept of home can be attached to any location--or a state of mind, even--and that what is generally traded is a structure more properly called a house? Subliminal marketing at its most capital, methinks.

Stupid Unemployment Games

So we covered the CPI shenanigans foisted by the gubmint via the BLS in Stupid CPI Games. Whereby you think you're making/worth more, but lowfat(!) rice & lamb meal costs more yet, and still you're told by slyly slinking agent kitties that said kibble really, honestly, costs less than the price shows quite unambiguously, if you'll just look at these models and adjustments right here...

Well, here's the unemployment counterpart to that numbers racket, as explained by The Big Picture's Barry Ritholtz. And here's Shadow Stats' John Williams's take on it. Funnily (or not)--charmingly, even (or not)--'merkuns are always deriding the socialist Euros for their double-digit unemployment, presumably due to their supposedly wrong-headed disincentivization of work, and well, here we is. And this while things remain relatively good, all things considered.

Hoocoodanode (thanks, CR/Tanta!) building excess houses and buildings and paper and levering and bidding them up and borrowing on the resultant "equity" wasn't the way to endless prosperity? You don't like this? Well, sucks to your Ponzi finance, Piggy!

Blackstone LP: From Private Equity to Arbitrage to Greater Fool Harvesting

To date, the title is kinda the apparent arc of Blackstone's evolving business model from this particular vantage point. Keep in mind they haven't been studied nearly as diligently as might an exceptionally well-roasted (or even raw, really) rib bone, but there've been some glimpses here and there between gnaws.

First, they started out simply enough as a private equity fund, which entity is supposed to buy undervalued or distressed assets, dress and/or fix up their deficiencies with a talented management team and newfound "synergies" (read: mass layoffs), thus unlocking their hidden value, all to resell them at some later date, however long it happens to take.

To speed things up, they got into pure arbitrage, as epitomized by their record $39B purchase and turnaround partial sales early last year of Sam Zell's Equity Office Partners. Gee, Mr. Commercial Real Estate Mogul is selling property for capital gain instead of leasing it out for cash flow? At a record-low 5.3% cap rate? Where do I line up to buy? Why? Why, so I can immediately sell it to people who would pay even more than I did, at nearly the top of the biggest baddest property/credit bubble in all of recorded history. Here's what one hatin' naysayer had to say:

If Sam sold, it must be a good time to sell...I would never want to be buying when Sam is selling.

And since that deal and others like it were so ridiculously and laughably lucrative, the great beneficent Masters of the Universe deigned to share with the great unwashed the fruits of their labor through an IPO, in which the Chinese sovereign wealth fund CIC first bought 9.9%, or $3B worth, at $30ish, then reupped recently to 12.5% at rather less lofty prices, after which the stock traipsed yet lower. How much lower? At today's $7.70, the market cap of the whole company is a scant $2B. The exact amounts of CIC's phenomenal gains and Blackstone principal Stephen A. Schwarzman's (the "Black" part of the company name) heart-wrenching losses--net of the reported $1M paid to Rod Stewart for a birthday performance--are left as an exercise for the enterprising reader.

Not that it's relevant, but there's an old joke about hedge funds: in the beginning, the general partners bring experience and the limited partners bring money, and in the end, the general partners have money and the limited partners have experience. Just sayin'...

On Moral Hazard, Pt. I (of ?)

Unclear just what the gubmint is after other than pandering and creating inflation and generally keeping the great landed middle(ish) class from revolting, but it smells like they're thinking about suspending mortgages, which is nowhere near as drool-worthy as frying bacon. Redefining yet again what exactly a prime mortgage--or mortgagor, yet--looks like. Holy un(?)intended consequences, Batman!

Sarah the Strict Constitutionalist

Sure I'm supposed to talk about econostuff, but every so often something comes up which is far more profound, nearly up there with comestibles.

Such is the case with one Sarah Palin, who thinks the media criticizing her criticism of someone constitutes an infringement of her First Amendment rights. I am hereby criticizing her criticism of others' criticism of her criticism.

Trust me, I know from bitch, and I wouldn't dignify her with the title. At least one 82-year-old blogging grandma is rather more charitable, and refers to her thusly here and here, for starters.

And by the way, if she becomes VP, and I'm still around, I will recant this blog entry. Maybe.

Wilde Quote of the Day

For any who might wonder--or not--that an unedumucated dog could have worthwhile thoughts, or who might think of education as the root of all knowledge, I humbly (I'm not worthy!) submit this Oscar Wildeism:

Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.

Financial Armageddon Insurance

Would you like to buy life or property insurance against a massive near-earth asteroid collision, like something that caused the non-avian-dinosaur-killing Cretaceous-Tertiary extinction of some 65.5M years ago? If so, I have some for sale. Well, I guess you might call it a swap, since I'd want payment in something yummy. But I'd make you whole again if/when such disaster struck. Yeah, uh-huh, fershur.

Seriously, I only ask because some people are buying Credit Default Swaps against US Treasury default, and, naturally, pricing them. While the two disasters are of course not exactly alike, neither are they completely nonanalogous (word?). Takes some cognitive dissonance to think about risk-reward and the likelihood of collection in event of event, in either case. But anyway, for what it's worth, the CDS spread is going up. Time to write some KDSs (kibble default swaps)?

With Apologies to Kanye

Now, I ain't saying she's a gold digger, given it's likely fake, but I laughed. Kinda funny, even if I can't at all empathize...

In Defense of Bears

In case anyone is yet not aware, it is my considered opinion that bears tend to be better informed, if furrier and possibly less palatable, than bulls. There's more of a barrier to entry in terms of a) the basic mechanics, 2) unlimited downside risk, iii) limited upside potential, and 5) danger of margin call. Not to mention the societal and Wall Street bias in favor of buy first, ask questions later, if at all. Anyway, today there's a decentish Bloomberg article debunking the myth of evil short-sellers featuring Bill "Hair" Fleckenstein.

Sometimes It Takes a Physicist

I'm usually one of the first to spout off about the Dow Jones Industrial Average being too small and imperfect of an index, but be that as it may, there's a new twist on reading it, which of course could be applied to the other stock indices with no loss of generality or somesuch. The all-too-obvious how-long-ago-were-we-first-here sorta rule, bar-charted. Why didn't I think of that? Oh, yeah: no treat was in the offing...

I Iz Smarter than Ben Stein?

Ok, so maybe I'm not actually more intelligent than the guy, but on the other paw, I don't misrepresent a simple concept like insolvency while pretending to know what it is, and that in general I know what I'm talking about--in fact, I'm pretty sure that in some sense I literally have no idea what I'm going on about. On the other other paw, he gets nationally published and I don't. Oh, and as recently as last December he was arguing that subprime wasn't a big problem, without any mention of Alt-A or prime, each the sum of which is a bigger crap sandwich (ambiguous?) than subprime, and of course not a peep (mmm...) about the larger credit derivative and institutional solvency problems, all of which those of us dutiful Grant's readers had pretty well quantified--as in, Really Really Big.

Addendum: sorry, but this stuff was just too good/bad--you decide which--not to add. From as recently as May 2008:

...it's now crystal clear that we're not in a recession...

The beautiful part is that because we're not meeting the definition of a recession -- two consecutive quarters of negative economic growth -- the pundits are trying to rewrite the definition, to make it just about anything they feel like making it. (Or, as I like to say, the new rules allow liberals to call a conservative administration's tenure a recession any time they have the urge.)*

I hope you've been buying while the market was down.

...the direction [of the market] sure looks like it'll be up for a while now.

*The partisan recession jab is especially rich, given that his "definition," while widely believed, certainly doesn't fit the official NBER's:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

I have to agree with Ben here, though:

I wouldn't say business journalism is all bunk.

With the corollary that, sadly, most of it is.

Analysts: Worth Their Weight in Water?

At first I thought Bill Fleckenstein called sell-side analysts "dead fish" as a term of endearment, since I figured, who doesn't like dead fish, right? Especially when they've been sitting around a while; mmm hmmm...

Well, now there's this gotta-see graphic by SocGen's James Montier posted on the FT Alphaville blog that shows how analyst forecasts have actually been very clearly lagging actual earnings for, oh, the last two decades or so.

I respect Fleck, and have always loved fish--in fact I was sorta kinda named after dried salted cod--though now know why I've never really cared for analysts. But, importantly, if analysts are dead fish, do they float? Because then they'd be witches...

Volvo Sees a Slowdown

So I'm back from having one of my knees cut open and stitched up and then spending a week locked up at the vet for a lucrative (not for me) TPLO procedure. Can't imagine going back in for the other one. Ouch, and ouch again. Anyway, doing pretty well other than that.

This, though, is one of the most staggering current economic statistics I've yet seen, courtesy The Financial Ninja:

Volvo said it received 115 order bookings for heavy trucks in Europe in the quarter, down from 41,970 trucks a year earlier.

I've looked at that for some time now, and somehow trying to think about some 42k bits of kibble shrinking to a mere 115 warps my fragile little mind way more than Eric Cartman's sometimes-amusing shtick ever could. I've seen cliff-diving before, and even imagined some steep ones, but never quite so steep.

Actually, the follow-on sentence just really clears everything right up:

Customers in Europe are taking a "wait and see" attitude amid turmoil in global financial markets, Volvo said.

Gee, you think?

The Perils of Paper Gold

If one were to watch CNBC (in spite of Financial Media: Worse than Useless), one might see one Jurg Kiener talking about the paper gold market possibly cracking. Which naturally raises the question in one's mind of whether one desirous of the shiny yellow stuff might actually want to take some delivery of some sort, custodial or otherwise. Of course one might also wonder why anyone would want anything to do with anything that utterly inedible. Yuck!

A Modest Proposal: The Food Standard

There's this nicely-done animated video of the fractional-reserve system which shows how basically what is thought of as money isn't actually value, but instead is intrinsically debt, and magically created out of thin air, at that.

So I have a modest proposal (no, not like J. Swift's--and no, I haven't tried it: kids are friends, not food!): why not go on the Food Standard? You can't just instantly print food from nothingness, and it has value, as everyone needs to eat, especially those of us who especially need to...

What's Maps Got to Do with It?

"Watch money. Money is the barometer of a society's virtue. When you see that trading is done not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal not in goods, but in favors--when you see that men get rich more easily by graft than by work, and your laws no longer protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed."
--Ayn Rand, "Atlas Shrugged"

I don't see what any of this has to do with maps, or food, or for that matter anything meaningful going on nowadays, but there it is.

Why Public Education Is Gonna Be Hurting Even More

From "Ask Fleck" today:

"One of the consequences of the failure of banking institutions is that many public entities such as cities, counties, school districts and mosquito abatement districts were invested in their debt. For example, Menlo Park City School District, which has a reputation for fiscal responsibility, is furious that they were hit with a $3.5 million loss when Lehman Brothers collapsed. By law school districts are required to keep their money with the county who acts as their banker. San Mateo County, who had invested 5.7% of its funds in Lehman Brothers debt, held funds for 1000 such entities including San Mateo Community College District which lost $25 million, Sequoia Union High School District which lost 5.5 million and Redwood City School district which lost 1.1 million. Public schools here in California have already been cut to the bone financially. It is extremely difficult for these organizations to raise money because any new tax requires a 2/3 majority vote."

Heh. "Mosquito abatement district" sounds so much like an insult of a podunk exurban aspirational SUV-commuting McMansion bedroom community now overrun by brown lawns and green pools. Not that there really exist such things, but if there were I guarantee you I would be first in line to contribute to said dead grass as a consequence of drinking from said pools. Mmmm... Greenwater...

Financial Media: Worse than Useless

If I didn't know any better--and I'm not claiming I do--I'd maybe think about possibly planning on beginning to suspect the financial media of shilling for the financial community. Not that there's anything wrong with that...

Mr. Mortgage must have gimlets (alas, not giblets--yum!) for eyes, because he found this in a CNBC transcript that didn't make it to air:

BARTIROMO: SO RIGHT NOW WE HAVE, WHAT, 9,000 BANKS? 9,000 BANKS IN THIS COUNTRY. WHAT WILL YOUR PREDICTION BE AS FAR AS HOW MANY THERE ARE IN THE NEXT FIVE YEARS?

LEWIS: GOSH, I HAVEN’T THOUGHT ABOUTTHAT. MAYBE HALF.“

Yeah, I guess the average viewer didn't want to hear that from the CEO of (People's) Bank of (People's Democratik Republik of) Amerika, but still, don'tcha think maybe she shoulda heard it anyway? Not 'cause I want a run on yer local bank, but still...

And Gawker corroborates the impossibly improbable press censorship:

The Wall Street Journal is also censoring itself on behalf of large banks. Its spokesman said the newspaper would "stay away from" the words "crash," "panic," "pandemonium" and "apocalypse."

And CNN is clamping down on words like "meltdown" and "free fall," according to its senior business correspondent Ali Velshi.

In the end, prolly not so wise to bite yer feeder, whatever that wacky Elvis Costello dude might say:

I wanna bite the hand that feeds me.
I wanna bite that hand so badly.

Backstory:

On December 17, 1977, Elvis Costello and the Attractions performed as a last-minute replacement for the Sex Pistols, who were unable to obtain passports. NBC and the show's producer Lorne Michaels didn't want the band to perform "Radio Radio", since the song protests the state of the media. The band defied them by beginning to play their song "Less Than Zero", stopping, with Costello telling the audience that there was no reason to do that song, and telling the band to play "Radio Radio" instead. It infuriated Michaels because it put the show off schedule, and the band were barred from performing again.

Just what does he see in that Diana Krall tart anyway?!!

Andrew Jackson for President?

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves." -Andrew Jackson, 7th US President

Milk Bone(R) to The Financial Ninja for the above quote; he goes further into the story, but I thought this was eerily similar to today. What a surprise; it's possible to actually repeat historical mistakes? Say it ain't so...I for one am not looking forward to getting cut open again for non-foodstuffs I gulped down. C'mon: who knew squeaky balls weren't food? Why could I swallow them, then, huh?

Stupid CPI Games

So the gubmint has this CPI thing all rigged up to steal, basically, from retirees and the clueless masses, yours truly naturally not exempt: they hire allegedly cute (not!) kitties to distract me while I get short-shrifted.

There's now an official FAQ debunking the myth of the evil Bureau of Labor Statistics by explaining "common misconceptions." That's funny, I thought a common misconception was that I'm already large, yet will do anything for food, when in fact I'm chronically systematically starved and merely trying to subsist. Or the vet's indelicately suggesting that I could stand to lose a couple pounds such that I'd put less stress on my stifles (knees). Puh-leeze!

On the other hand, there's this John Williams guy (no, not the Close Encounters/Star Wars/Superman/RotLA composer dude, and not the classical guitarist dude either) who really understands what they're doing, and calls them out on it.

Amazingly, when you put the two together, they're quite complementary. Like I tell you how I'm starving and need a good meal already, or at least a treat or five, and everyone else says--slanderously--that I'm a food whore. Not complimentary, though, as I doubt they have anything nice to say to each other.