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)?