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?