Whistling Past The REO Graveyard

To those of us paying attention, it's well-known that banks are simply *not-foreclosing* on deadbeats (like my landlord).

Here's a typical anecdote, from a Zerohedge comment thread:

I'm in SoCal......ground zero for this mess. But my sister-in-law lives in Arizona. I saw her at Thanksgiving.

She's sitting in a home bought for $1.6 M in 2006. She has not made a payment in 15 months ( option ARM of course ) !! And she still lives in the home. Two short sale offers are in for $ 500k and $550k, which I doubt the bank will accept. Meanwhile, the County ( Pinal ) has raised her taxes from $ 2500 to $ 13,000 because the County's going broke. She doesn't plan to pay that either, along with other troubled prop owners who are boycotting the prop tax in an act of defiance. Letting the banks and the county fight over the carcass, so to speak.

Banks are moving the lower-end stuff and hunkering down with the big stuff. I see it in Cali, too. If the bankstas are going to be whacked with a big number, they get quiet.

From Bloomberg:

Reed said she completed four short sales in the past four months and the banks agreed to as much as $400,000 in losses.

Lenders have been reluctant to do such sales because they didn’t have procedures for employees to approve a financial loss for the company, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.

"A short sale requires somebody to stick their neck out and make a decision," said White, an expert in consumer law and bankruptcy. "There are not good structures in place to incentivize losses."

THERE ARE NOT GOOD STRUCTURES IN PLACE TO INCENTIVIZE LOSSES???

Are they kidding me?

But I do understand what that whackademic is saying. And I pre-empted him with my - Marginalizing Revenue - post.

It's just ridiculous that he can frame the issue like that, as if handling *losses* is some brand spanking new aspect of the business world.

Obviously, to me anyway, one of the problems with the ginormous banks is that they have *over-specialized*; they never should have divorced the revenue and cost departments. They are NOT freakin' different ballgames; they are two halves of the only game that matters, or at least should matter - PROFIT.

Read Mr. Mortgage's recent post - YEARS of Mid-to-High End Shadow Supply.

Titanic Can't Find Willing Skipper

On the wire today:

Nov. 22 (Bloomberg) -- Bank of America Corp.’s board may extend its search for a new, permanent chief executive officer into 2010 if directors can’t settle on a candidate in the next four days, according to people familiar with the matter.

Some candidates are reluctant to wade into disagreement between board members and the government over the bank’s future strategy, said Rochdale Securities LLC analyst Richard Bove, citing large shareholders briefed on the matter.

“The government and perhaps some of the new directors want the bank cut back in size, while the old core Bank of America people don’t want to do that,” Bove said.

Dropping Out

O’Neill, a former chief financial officer of predecessor BankAmerica Corp., withdrew from consideration after talking with search-committee members because he felt they didn’t fully grasp how serious regulators are in their demands for change, the people said.

O’Neill told the committee members that the company needed to increase the size of its banking operations and shrink its trading business, one person briefed on the talks said. The committee members responded that such a shift would be unproductive because it would abandon the strategy set when Lewis bought Merrill Lynch & Co., the person said.

Compensation is another obstacle, because Bank of America’s $45 billion bailout puts the CEO under the purview of paymaster Kenneth Feinberg. Lewis agreed in October to forgo any pay for 2009 after being advised to do so by Feinberg.

At least four of those on the Finger list subsequently said they weren’t interested. They are O’Neill; former JPMorgan Chase & Co. investment-banking co-head William Winters; U.S. Bancorp CEO Richard Davis; and Eugene McQuade, a former Freddie Mac president who now oversees Citigroup’s largest banking subsidiary, according to people familiar with the matter.

Two executives not on the list, Bank of New York Mellon CEO Robert Kelly and BlackRock Inc. CEO Laurence Fink, have told colleagues and friends they’re not interested.

Aside from Moynihan, 50, other internal candidates include Chief Risk Officer Gregory Curl, 61. Lewis, 62, favors Curl, one person familiar with the matter said earlier this month.

Outside Candidates

Federal Reserve officials, who questioned Lewis’s judgment when he considered backing out of the bank’s $29 billion purchase of Merrill Lynch, are pressing for an outsider because they want more drastic change, a different person said.

Lewis has indicated to associates that he would remain as CEO on an interim basis if asked by the board, according to a person familiar with his thinking. Rochdale’s Bove wrote in a Nov. 20 note that several large investors support the idea.

Hah!

I find it hard to believe that NO ONE wants to eat the $hitpile that Ken Lewis has prepared.

It's unbelievable that Greg Curl's name is in the mix. He's nominally the *chief risk officer* for Bankrupt of America. But more than that, he was supposedly the *brains* behind all of BoA's mergers. How'd they work out again? Furthermore, topping out his uncredentials....as the article states - LEWIS FAVORS HIM!

I say go with Moynihan. I met the guy socially several years ago. He had the perfectly firm handshake!

ANYONE but extending Ken Lewis.

Although admittedly, Lewis hanging on because no one wants to inherit his job would have plenty of deeply ironic, entertainment value. A captain, by all rights, should go down with the ship, no?

Meredith Whitney On The Banks

Marginalizing Revenue

Recently a friend of mine, a proprietor of a small but highly lucrative consulting firm, told me:

"Business is good. My revenues are much higher this year but my profits are down."

My eyes rolled. Who gives a bleep about *revenues*?

His *revenues* are higher simply because he hired more consultants and billed more hours. His profits are down because he got lazy and did less of the work himself. Knowing his still lofty income and the toil of weekly travel I don't blame him for disengaging a bit.

As a trader, my *revenues*, my proceeds from broker and barter exchange transactions, were in the multi-million dollar range last year - as they always are. It's too bad I have those annoying multi-million dollar *cost bases* to account for!

But the misplaced obsession with revenue these days is rampant - especially in corporate America.

In the current witch-hunt against million dollar bonus recipients Wall Street has in unison defended its right to compensate - not profit producers - but *revenue producers*. Here's one exec:

I think there's a lot of emotion around bonuses, and legitimately so," said Robert P. Kelly, chairman and chief executive of Bank of New York Mellon Corp. "If you think about the average American, their house price is down, and they don't have the same level of job security that they had in the past, so people are angry."

But Kelly said increased scrutiny should be directed at top executives and policy makers at companies, not "revenue producers" like traders, who are effectively following the orders of higher-level managers.

Likewise, Citigroup only wants y'all to look at its revenue:

In a letter sent to employees Monday, Citi Chief Executive Vikram Pandit said the first-quarter performance so far has been the bank's best since the third quarter of 2007 -- the last time it recorded net income for a full period. Based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.

Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.

If only *credit losses* PARTIALLY offset profits!

And what does he mean by *one-time items*? Does he mean those that take a bite out of profits ONE TIME PER QUARTER - EVERY QUARTER?



Ken Lewis weighed in on *revenue producers*:

I don't feel good about the $500,000 cap. And it's not about me—I'll take $500,000. However, you will have talented individuals, particularly revenue producers, going to foreign banks and other asset management firms. That's a problem.

And he's weighed in on *revenue* for his entire bank:

Looking forward to this year, Bank of America should generate....close to $50 billion in pre-tax, pre-provision earnings( 2009).

There they are again with those nettlesome loan provisions.

So why the misplaced obsession with *revenue* from employees all the way up to upper management?

Because *net profits* are not their concern. That's the annoying, disjoint business of stake-holders. It's a problem for equity and debt holders.

We can also indict the revenue fetish this way - consider that Big Business has descended to the mindset Big Government with its single emphasis on top-line confiscation:



Also, there's this perverse obsession with mere revenue because that number, and that number alone, sets the parameters for SKIMMING.

For more on *skimming* visit:

Marginalizing Analysts

The Skim Biz Takes A Hit

Skim Biz Update - Fidelity Investments

Fidelity - A Mess

FAZ Decay

Above find historical prices for RIFIN - which is the underlying index for FAZ - that *triple-short* financials ETF I've been trading. It's also the underlying for FAS - the *triple-long*.

I've discussed, at length, the concept of ETF decay. Here I will try to quantify precisely how badly FAZ decayed during this recent bear market rally. [The S&P 500 has rallied from 666.80 to 803.00 in the past two weeks.]

The first whammy was on March 10th where the underlying (RIFIN) rose 13.75%

Then on March 12th it rose 10.62%.

On March 17th it rose 5.05%

And the final dagger (hopefully) was March 18th when it rose 9.79%.

Let's call up that formula I derived:

Lemma - Given an underlying A and its daily compounding triple inverse Z, a drop of R-percent in A which retraces fully the following day will DECAY Z by:

12*R² / (1 - R)

when .25 > R > 0

Plugging in .1376 for R tells us that on that first upward move, March 10th's rise, the FAZ decayed by a whopping 26.34%.

Allow me to clarify.

Using March 9th and March 10th closing prices, the FAZ dropped from 99.17 to 61.50.

Now, IF on March 11th, the RIFIN did a complete *retrace* the FAZ would only have risen back up to 73.05 - a far cry from the penultimate close of 99.17.

Now note that these numbers are only theoretical and approximate. The initial 13.76% rise in RIFIN should have sent the FAZ to 58.26 - on paper. But it closed officially at 61.50. And my math projecting a *retrace* to 73.05 by necessity presumes it went to 58.26.

In other words, none of you would-be Captious nerds out there need waste your time trying to poke holes in my Kevlar analysis.

By extension, the three other large *up* moves in RIFIN also induced substantial decay into FAZ.

March 12th's 8.98% up-move shaved 10.62% off FAZ.

March 17th's 6.28% up-move shaved 5.05% off FAZ.

And March 18th's 8.63% up-move shaved 9.79% off FAZ.

So what exactly should I do with these numbers? How should I aggregate their collective decay?

I don't well know.

A straight up compounding via multiplication yields:

98.50 * (1-.2634) * (1-.1062) * (1-.0505) * (1-.0979) = 55.92

That means that roughly and theoretically speaking, a complete retrace of the squeezing FAZ underlying would only get that ETF back to about 56.00 - a far cry from it's value of 98.50 with the underlying at the same exact level.

Let's test my hypothesis more directly.

On March 18th, the RIFIN closed at 510.24. In order for it to drop all the way back to March 9th's nadir of 357....

It would have to decline by 30.00%.

In that case, the FAZ should rise by three times that magnitude - it should rise by 90%.

Since the March 18th close of FAZ was 26.35, let's multiply that by 1.90 to see where a one day 90% rise would theoretically take it:

26.35 * 1.90 = 50.06

So by utilizing both methods, we can safely presume that the new backward-looking high for FAZ is somewhere between 50.00 and 56.00 - a sufficient guestimate for our purposes.

What does this mean?

It certainly doesn't mean that FAZ will never rise above 60.00 or eclipse its recent acme of 115.50.

That is still 100% possible. We'll just need much lower lows in Goldman Sachs, JP Morgan, Wells Fargo, and a sufficient number of other financials for it to occur.

It also means that those simpletons on xTrends comment threads drawing all sorts of lines on FAZ charts are complete Morons.

And, lastly, it means anyone sitting on a recently acquired high-cost-basis FAZ position ought to at least reduce their expectations accordingly.



Related posts:

ETF Daily Compounding

More On ETF Decay

Measuring ETF Decay

Leveraged ETF Risk

ETF Leverage - Test Case

Give The Morons Some Credit

Many antsy stock market bears have their hopes on *the next shoe to drop*.

So what could it be?

For a couple years now I've mistakenly thought it would be a pop of the US Treasury bubble. [I still have TBT and time will tell.]

Luckily, other poop has manifested, and manifested, and manifested.

Next up might be a municipal meltdown - how about the State of California?

It could be the final nail in General Motors - though this might already be priced in. The political will to write Detroit checks just HAS TO BE waning, right?

And it could always be another high-profile bank implosion.



Meredith Whitney, that noted blond bear recently asserted that *credit cards* are indeed the next dropping shoe for the equity market.

Between un-recoverable defaults and credit retraction, those plastic cards which have been conflated with hard currency will be cut in half, both literally and numerically.

Credit cards may seem small compared to the aggregate mortgage market, BUT....

With nothing to foreclose on, bank losses on them are 100%, at least.

And, the retraction of credit is destroying all the junk-sellers (Circuit City, Big Auto, Linens N'Things, malls, etc.) and fueling a spiral of pain. Retailers are going bust and slashing jobs....which in turn hurts these lazy 'new coot' Morons who are trying to pay down their credit card bills. This whacks commercial real estate; which in turn whacks investors and pension funds, private equity shysters, insurance companies....and investment banks, and commercial banks. And so on and so on. If only credit card losses were *contained* to a narrow industry! [like subprime, couch, cough]

Look at two of the pure-play credit card biggies, American Express and Capital One:





I sure wish I kept that COF short from the 50s last year!

Note that while AXP and COF allegedly represent opposite ends of the creditworthiness scale, that the two charts are near mirror images.

Now just Friday, Capital One announced rising card delinquencies for the month of February:

NEW YORK, March 16 (Reuters) - Capital One Financial Corp , one of the largest issuers of MasterCard and Visa credit cards, said on Monday that credit card defaults rose in February in the United States as job losses accelerated and unemployment soared to a 25-year peak.

In a regulatory filing, the company said the annualized net charge-off rate -- a measure of credit default -- for U.S. credit cards rose to 8.06 percent in February from 7.82 percent in January, while the rate for loans at least 30 days delinquent increased to 5.10 percent from 5.02 percent.

8-freakin' percent?!?!?!

How exactly are they going to absorb those massive losses?

I suspect that credit cards are like mortgages in that a few bad apples are responsible for the bulk of losses. In other words, it's not like the card companies are *writing off* 8% of everyone's balances. It's more like one of every 12 people is revving up their balance to the max and simply walking away.

I remember years ago when I first learned about *credit card debt*. I had a friend in Philly who was dating an older broad from Kensington. Of course she would never tell anyone that specifically....no, she was from *The Northeast*. One day my buddy informed me that she owed 60k on her credit cards and I instantly fell awestruck and dumbfounded. Her house wasn't even worth that much. Why the bleep did the card companies ever extend her that much credit to begin with?

Of course back then, I was innocent of the concept of *securitization* and also of *greater fool* financial schemata.



To wrap this post up I want to make a tangent to HELOCs - so-called home equity loans.

Back in 2006, Ken Lewis at the Bank of Morons, decided to write about $110 billion in HELOCs. This vintage is proving, and will continue to prove utterly disastrous for two simple reasons:

1) These loans are essentially unsecured by any actual *home equity* AND also by their secondary lien status.

2) These loans are trading at 5 cents on the dollar because of the demographic who purchased them.

You see, a great proportion of 2006 HELOC borrowers took the money out to PAY THEIR 2005-vintage mortgages!

This was the case for my landlord who added at least four secondaries (perhaps more) to his four properties as the bubble was bursting. In the past 1.66 years that I've been here, he has in fact been using that secondary lien money to pay down primary debt. [And drive $80,000 cars, etc.]

Other people I know in my circle of family, friends, and enemies (biggest sub-population) have done likewise. Invariably, those in fiscal straits also have *two mortgages*.

The first step is to bite off more house than one can chew.

Next, blunt that mortgage with a HELOC.

Then, or concurrently, let those credit card balances skyrocket.

Followed by, a loan against your retirement account. [25% of the public has done this!]

Then, at the end of the rope, only the lucky can tap mom and dad for a lifeline.

But getting back to credit cards - while my argument may be overly anecdotal, don't ignore the trenchant logic of it all. The people who have run up their credit cards are already surrounded by debt and all but exhausted of means. Meredith Whitney is correct, the losses will be staggering for the banks.

By the way, that last graphic above of Countrywide advertising *bilingual*, *quick and easy*, *low rate* HELOCs is not from the bubble years; it's not even from last year.

That's on their site right now!

John Thain Sodomizes Ken Lewis - In The Public Square!

The wires today are abuzz with reports of Ken Lewis ousting Merrill head honcho John Thain. (Remember the firms merged this month.)

Here's what I said two months ago:

But it's time now for Ken Lewis to walk away from this deal. He's been duped by the more sophisticated Wall Streeters on this one. John Thain appealed to Ken's gargantuan ego and it worked like a charm. Lewis may as well have been a fanny-pack wearing tourist at a professional poker table - he was bent over that easily.

Here's the post-bend-over kiss-and-tell from today's Charlotte Observer:

Lewis' loss of confidence in Thain was due to a combination of factors, according to a source familiar with the matter. Merrill had been losing executives, and the bank heard concerns about his leadership from employees and investors. In addition, Lewis learned of Merrill's rising losses from the Merrill transition team, not Thain himself. When Lewis later talked to Thain, he didn't seem to have a good explanation, the source said.

Thain also went to Vail, Colo., on vacation in December at a time when Merrill's problems were emerging. Although Thain was working on the trip, the move was not perceived well at Bank of America, the source said. Thain also had planned to fly this week to the World Economic Forum in Davos, Switzerland, even though some Bank of America officials had signaled he shouldn't go.

Thain's payment of bonuses to Merrill employees before the deal closed also has emerged as a new black-eye for the bank.

Bank of America spokesman Scott Silvestri said today that Thain made the decision to pay the bonuses in December instead of the normal time of January. Merrill was an independent company at the time but informed the Charlotte bank of the decision, Silvestri said. He declined to say when the bank learned of Thain's decision.

December was a critical month for the merger. The bank has said it learned of rising losses at Merrill in the middle of the month, after shareholder approval on Dec. 5 but before the acquisition closed Jan. 1. Bank of America CEO Lewis last week said he considered backing out of the deal, but proceeded under the urging of regulators.

Last week, Bank of America said Merrill posted a fourth-quarter loss of more than $15 billion, largely because of writedowns related to the fallen value of securities. That loss, though, wasn't counted as part of Bank of America's own $2.4 billion fourth-quarter loss.

The bank wouldn't say how much Merrill paid in bonuses. Merrill disclosed compensation and benefits expenses of $15 billion for 2008, down 6 percent from 2007.

So, let's see....

Thain *hid* losses from Ken Lewis.

He went on vacation in December to Vail when the losses were coming to light AND just before the close of the merger.

AND, worst of all, he engineered a looting of the company by its employees at the midnight hour.

HOW THE 'EFF CAN MERRILL'S TOTAL COMPENSATION ONLY BE DOWN 6 PERCENT FROM 2007?!?!?!?!

Now almost as bad as what Thain and Merrill Lynch did to shareholders and taxpayers is the shameless scapegoating from Ken Lewis.

He's trying to get the blame-fingers pointed at Merrill, Thain, and the *regulators* who ALLEGEDLY made him do the deal. Ken Lewis, with all this smoke and his BAC stock purchase is doing his very best to keep the focus off him and the fact that BAC is trading at $5.71 today - an 18 year low.



For sure, John Thain screwed Ken Lewis. But Kenny Boy showed up commando in a pink mini-skirt, wore a blonde wig, and toted a bottle of lube.

Sorry for the graphic imagery, but if you want a whitewash of this heinous crime you're going to have to look elsewhere.

Trading Update - Knocking The Ball Coverless!

So I'm cleaned up on my bank shorts now. I dumped my sizable SKF position late today at an average price of 195.11. My cost basis, as far as I can tell, was 132.20.

I also let out my remaining short positions on my least favorite bank - Wells Fargo.

I covered my since-exercised Jan 30 puts and my April 30 puts. The Jan flip was from 3.18 to 15.74. And the April put profit was the difference between my 4.80 purchase price and today's sale at approximately 16.32. Both trades were initiated 4 months ago.



Now if I were a partisan Moron....I might suggest that the stock market WAS NOT enthused by today's Presidential inauguration coronation.

Of course it matters not which stooge is the impotent figurehead - this stock market would be tanking even if I were taking the throne. [Possibly, anyway.] Asset prices (stocks, bonds, and real estate) are still too far divorced from economic reality.

It feels really satisfying to take these positions off. With the profits, my first goal is to coax a Naples extension out of Mrs. C-Nut - who had the misfortune of flying home this morning....to 2 feet of snow in our driveway!

She asked if she could call a plow....I soberly reminded her how bad the economy was and informed her that the shovels were on the back deck.

Next, I'm going to figure out how best to parlay these profits into some long-commodities and short-Treasuries positions. I could also very easily buy a ton more oil (DXO) here but just don't have the appetite at the moment.

Being Right Doesn't Guarantee A Paycheck

William Tanona was Goldman's banking/investment banking analyst. He burst onto the scene about a year ago with a very bearish report on Citigroup. The market sold off December 27, 2007 a couple hundred points. Many bubbleheads blamed Mr. Tanona. His over-the-top bearish report proved to be 100% accurate shortly thereafter. Instantly, William Tanona vaulted to the top as a *credible analyst*.

I didn't blame Tanona for that little sell-off - I praised him. I was short that day and made a bundle.

So why did Goldman Sachs layoff a star analyst? All we can muster for a reason is conjecture. He could have just been caught up in the firm-wide layoffs. He could have been *overpaid*. Who knows what really happened?

One possibility, could be the firm's perception Tanona got lucky with his short calls on the investment banks. He did wax bullish on Morgan Stanley around May(?). Or he could have just not been *in* with the higher-ups. It wouldn't be the first time Billy got screwed. Despite being 6'8 he got cut from our high school basketball team I believe sophomore and junior years. The coach felt compelled to put him on the team senior year but that's it; he got no run. Billy then walked on the team at Villanova. How many guys can walk on a Big East basketball team but couldn't play in high school?

Another possible reason Billy got the axe is that with the demise of Lehman and Bear Stearns, THERE ARE NO INVESTMENT BANKS LEFT TO ANALYZE.

Yes, you read that right, Billy went to my high school. Haven't seen him in a few years but when I do, I'll buy him a beer - a premium beer - for all the dough he made me last December.

I wouldn't worry for a minute about him finding another lucrative position. Goldman guys land on their feet, every time.



Goldman Sachs traded down to 47.41 this week - a nadir below its 1999 IPO price of $53 a share.

Yee Haw!!! - Riding the Wall Street Bull

For a day anyway.

Got beat yesterday. With the Dow dropping 440 points to near 7,500, my *spread* went against me.

I am essentially long oil and oil stocks which got hammered. I am also short long term Treasuries through TBT. Both of those positions killed me.

Against that I have my massive short position in Wells Fargo. With Citigroup dropping like a stone, Bank of America threatening single digits, and JP Morgan falling off a cliff, Wells Fargo dropped a mere 1.87 yesterday. If it traded in line with the other banks, down 3-4 points, I'd have fared okay.

Instead, I lost a good chunk of money Wednesday and Thursday.

Luckily, today I made it back.

The Dow rallied 500 points in the final 90 minutes to close at 8,046.



Here's what I've been doing since Tuesday:

With the market tanking, I went *bargain* hunting.

I bought Simon Property Group, yeah the mall REIT I've been short most of the year, at 41.86. Sold it yesterday at 43.65. Today it traded as low as 33.79. That stock was $100 two months ago!

I added to TBT, my long term Treasury short ETF. Was a horrible purchase. Bought at 57.74. This thing dropped below 50 the next day! Remember, this is a long term disinvestment. Who's going to keep buying 30 year Treasuries yielding 3.7% going forward? Can't wait to see the international reaction to our *Federal tax receipts* come the new year.

I got long the XAU synthetically at 77.00. In this *baby with the bathwater* selloff it fell to 67.48 yesterday. This morning it opened up 6 or 7 points. I dumped my position at the equivalent of 76.70 in the index. And, what do ya know, it ran up another 10 points. The index closed up 18.72 today to finish at 88.80. [Gold, the physical commodity, rallied 54 bucks today to close at $799 an ounce.]

I bought a smidge of FSLR at 104.57. Was trying to buy a little *alpha*. It didn't work.

On Thursday, just about the only good thing I did was sell my NASDAQ-100 position, the QQQQ at 27.22. It closed yesterday, at the multi-year low of 25.56.

Then today, I bought it back at 25.46 and sold it at 3:51pm - after the big rally, at 26.42.

Now as for Wells Fargo....did I pick the wrong bank to short or what?

It was down 4.5 points the past two days. Meanwhile, JPM dropped 9 points between Wed and Thur, AND was down another 3.5 points today.

Furthermore, Bank of America fell 25% over Wed and Thur. AND Citigroup positively imploded falling from 8.66 on Tuesday afternoon to close at 3.77 today - a loss of 57%!!!

For kicks, I bought 1,000 shares of Citigroup at 6.28 on Wednesday. I figured, what's the worst that could happen? I could lose $2,000-$3,000.

So here I am, two days later down $2,500!!!

It's a real test of fortitude not to buy a *chunk* more and try to scalp it. So far I have resisted.

Make no mistake...this is scary. If depositors start lining up to take their money out of Citi who knows what that will do to our fiat ponzi scheme. This keeps me up at night - AND I don't even own anything; no home; no mutual funds. Ignorance is bliss!



Another from the *alpha seeking* file was STP - Suntech Power Holdings - a Chinese Solar Company (who cares what it is really?). I bought some at 5.80 on Thursday. I was actually reading an *old* Forbes magazine and I read Jim Oberweis' recommendation to buy it. In the October 27th issue, he said to buy it AT $35 PER SHARE!!!!

In his defense, he wrote the column on October 2nd. So that 83% he lost his readers actually occurred over 1.5 months. So he's vindicated, right?

Oh yeah. In that same issue Ken Fisher said to buy Bank of America at $34. What a total bleepin' idiot!!! BAC flirted with single digits today (down to 10.01) before closing at 11.47. The sheeple have given this man, what, something like $46 billion to *manage*?

Also, Ken Fisher said to buy Citigroup at $25 in March. Listening to this guy would have absolutely killed you!!!

I covered my tiny BAC short at 13.84 the other day. It was tiny because it was hard to implement with all the *rule changing* (i.e. short banning) in September. I was short from 30.50.

I added to my erstwhile, flailing oil long, DXO. My average price is now 4.18. Funny Circus Bears was absolutely right when he claimed, 11 days ago, that I was a "little early".

However, I left myself plenty of room to average down. Still have more bullets if needed.

As for being early....I was early on SKF too. Early getting in, and waaaay too early getting out. That thing traded above $300 today. Of all the bunker-digging, end-of-the-worlders that I read, NO ONE, I mean NO ONE had a $300 target on the SKF. $200 or $250 are the high numbers I recall.



I almost forgot. I covered two-thirds of my Wells Fargo short today. I sold my January 22.5 puts for an average price of 4.91. Bought em at 1.55 in July.

And I covered my short stock position in WFC at $21.75. My cost bases I'd have to dig up - though the profits on this were far from spectacular. If memory serves me, I started putting some of this short on at 23.95 back in July and then some more around $27.00. Recall this stock spiked to the insane level of $44 in September. Of all my trading losses over the years, that *paper loss* was the most brutal. So it was a victory just get the money back.



This stock is definitely heading lower. I just needed to lighten up on it given my presumption that the overall market is due for a bounce. Of course I could buy the *market* against it - as I've been leaning that way on a short term basis, BUT I'd rather just clean up my account. I still own Jan 30 and April 30 puts on Wells.

The stuff I have now - oil and short Treasuries - are *investments* as much as they are trades. I'm comfortable holding them 6 months to a year.

One last *alpha seeker*....today I bought Google at $253.95. Dumping my long term holding near $450 has proven prescient, to put it mildly.

More Market Carnage

Wowsers! Look at the blood today. Also, not listed above, was Ken Lewis' Bank of America which closed at $17.00 - an almost 13 year low! I am still short that thing from 30.50 or so.

Google dropped below $300 for the first time in 3 years. Remember I sold my long term position in Google at $447 on September 19th.

Today, I started buying it back. Bought a little at 290.39.

I dumped my January 15 First Federal puts at an average of $10.00 apiece. Bought them back in May for 2.90. I don't have the patience or the luck to hope for bankruptcy before January expiration. ESPECIALLY since I got screwed in this stock back on September expiry as the stock spiked to $20.

I also bought a little (50%) more of DXO - the double long oil ETF - at 4.21.

Remember those 76 extra shares of SKF I got stuck with? I didn't make "75 points" on these stragglers, more like 48 points. I wanted them *off my sheets* as we used to say on the trading floor. They were dumped today at 172.26.

It's almost time for the market to really crash since my shorts are just about exhausted.

I am still short a little JP Morgan Chase, a little Bank of America, and a lot of Wells Fargo - but that's about it.

Wanted - Insurance Against Thugs

Flashback to my September golf trip in Florida.

On a ride back from Larry Bird's Hideout Golf Club I was talking to one of my golf buddies, a very wealthy guy, and he informed me that he owned a bunch of bank stocks (e.g. Bank of America) for the dividends.

Of course I recommended that he dump them - telling him that the dividends would surely be cut. Cold to this idea, I suggested he buy the Ultrashort Financials ETF - SKF as a hedge against his banks. THAT, he was amenable to. He said he'd been watching it but was waiting for a better entry point. Misinformed, he thought SKF was trading around $130. I said, "Try more like $103?". Excited, he called his broker right then and there to put a bid in.

That was September 19th, 2008 - the very day the SEC banned the SKF. They didn't really ban it, they just froze the issuance of *new shares*. When my buddy's broker told him the SKF wasn't purchasable, my stomach sank. Did it have a counterparty default or something? Was it now a *zero*? I owned quite a bit of it and was already banged up from the massive short squeeze in financials. A disaster with this position might very well have knocked me out of the game completely.

SKF didn't go to zero, in fact it continued to trade at a premium to its NAV (like a closed-end fund) until the ban was lifted. C-Nut eventually made his money back.

But the point of this post is to demonstrate how the federal government aggravated this year's stock market pain. My buddy wanted to legitimately hedge his portfolio by shorting the basket of financials and the thugs in Washington wouldn't let him.

On September 19th, Bank of America closed at 37.48 and SKF closed at 100.00.

Yesterday, Bank of America, with its dividend since halved and its equity diluted by a $10 billion offering, closed at 19.48.

And yesterday, SKF closed at 148.42. So a dollar-for-dollar hedge in this ETF would have offset a rough 50% loss with a 50% gain!



Short selling, ETFs, and put options are *financial insurance*. You take them away and you lower the value of financial assets.

Look at it this way, what would happen to the value of your house if you couldn't buy insurance on it? Who would spend $200,000, $500,000, or $5,000,000 on a house that if burnt down or ravaged by a natural disaster would prove irretrievable?

Heck there'd be no mortgage market. If you couldn't buy insurance on the market value of your home, then no bank would ever lend you a substantial mortgage. Without mortgages, homes would crash over 50% in price - perhaps much more.

So, did the stock market eventually fall more or less because of this short-banning and rule-changing than it otherwise might have?

That's unprovable.

What is a proven fact, however, is that my buddy was unable to hedge his bank portfolio and instead had to bear a massive loss.

And also, the short ban had the effect of making all long term investors pay higher prices than they should have during this period. Bank of America spiked above $37, Wells Fargo spiked to $44, Citigroup approached $20, and JP Morgan Chase popped to near $50 per share. I've already blogged about that boob at Fidelity's Magellan fund piling into these overpriced financials in September. See Skim Biz Update - Fidelity Investments.

Yesterday Wells closed at 28.62, Citigroup at 11.21, JP Morgan at 36.41, and Bank of America closed at 19.48.

That's what market distortions do, they hurt everyone - buyers and sellers alike.

Don't even try to tell me that Goldman Sachs - who's really running the *bailout* - wasn't aware of the consequences of all this game-changing BS.

An audit of their books will no doubt show them *long banks* for the squeeze. I'd bet considerable money on it.

The Hilarious Jim Cramer

"My record of being right from 1980 to 2007 is, I think, unparalleled." - Jim Cramer, 11/07/08.

Hah! Very funny, Jim.

You really have to watch people with their *track records*. In 2006-2007, all you saw advertised by mutual funds and money managers was their *5 year returns*. Not a one was touting their *10 year returns* because those included the 2000 NASDAQ crash.

Similar to Jim Cramer, other bulls like Rich Karlgaard and Ken Fisher have also based their bullish bias upon the slender reed of their own 25 years of market experience.

What they failed to understand or account for, was the fact that interest rates have been declining over that time period. They overlooked the importance of multi-year bull market in bonds on their equity returns.

We're all biased by personal experience and we're all prone to get swept up by the momentum of short-term success....

So we must read history for intellectual ballast.

Note that Jim's buying Wachovia - which is the same as buying Wells Fargo - my biggest short position.

Wells just floated a secondary last week at $27.

Short term history tells us that not a single bank this year has *raised capital* and not fallen substantially lower.



The most recent example is Goldman Sachs who, in late September, sold a preferred stake to Warren Buffett, gave him warrants at $115, and then after the public waxed euphoric about the *genius's* blessing, Goldman peddled $2.5 billion in stock to the sheeple at $123.

Right now Goldman is trading 71.82 - only a month and a half later.

Wells Fargo and that turd Wachovia are going down, hard.

My record in the past 6 weeks is UNPARALLELED - if I do say so myself.

Post-Election Trading

My three short trades from yesterday paid off handsomely, today.

I bought some SKF at 118.21, as you can see from the graphic above it closed at 128.43 today, after *spread the wealth around* Obama was elected President.

I bought EEV yesterday at 80.60 intraday AND doubled it up after the close at the cheaper price of 74.75. I let out half of it this morning at 82.58. This UltraShort Emerging Market ETF closed even higher at today at 91.40. Cha-Ching!

And lastly, yesterday I got short the S&P 500 via it's double-short ETF, SDS. I bought at 78.50 and dumped it today at the near high (market low) of 85.85.

I joked on the Rich Karlgaard's blog that the Dow Jones Industrial Average rose 300 points yesterday in celebration of John McCain's impending loss.

And it dumped 486 points today because Barack Hussein Obama won!

Credit Derivatives Primer

About seven or eight years ago I was talking to a Wall Street guy, ten years my senior, poolside in Bridgehampton, NY. Real slowly he said to me:

"...I trade something called a credit derivative."

Something called a *credit derivative*? They were relatively new, hence the educational tone. Of course I had an general idea what they were - but that's about it.

Credit derivatives are all the rage, or, the cause of all the rage these days on Wall Street. The bankrupt triumvirate of Lehman Brothers, Bear Stearns, AIG were all were neck-deep in this toxic poop.

Actually, it was JP Morgan that invented them about 10 years ago. Supposedly they are still the king of credit derivatives - a fact that JPM shorts keep broadcasting to all who'll listen.

Here's a great article on credit derivatives:

The $58 Trillion Elephant in the Room.

Read the whole thing. The excerpt below somewhat explains why I am leaning short JPM myself:

J.P. Morgan continues to dominate the world of derivatives. It has derivatives contracts tied to $90 trillion of underlying securities. Of that, $10.2 trillion are credit-derivatives contracts. Those mind-boggling totals are somewhat misleading. They reflect what is called the “notional” amount in the world of derivatives, based on the underlying amount of the contract, not its current value. When offsetting contracts are taken into account, that figure is whittled down to a much smaller—though still enormous—$109 billion of derivatives, of which $26 billion are credit derivatives. That’s the amount the bank could lose if all its trading partners went out of business, an extremely remote event. But the exposure is climbing, up 17.4 percent from the end of 2007. That’s equal to 20 percent of the bank’s net worth.



And I also highly recommend reading Ron Chernow's masterpiece The House of Morgan.

Forget Amazon.com. In this economy, borrow it from your library.

More On The Secret Goldman Sachs Bailout

In The Red, White, and GOLDman Sachs I wrote:

Remember that $85 $120 billion dollar government *bailout* that AIG got in September? Well the rumor mill had it that it was really a bailout of Goldman Sachs; that Goldman Sachs had $40 billion in AIG counterparty risk.

And then I went on to catalog all the Goldman cronies now shepherding the *bailout* funds.

Think my conspiracy theory is crazy?

There's more from the Washington Post last week:

Effectiveness of AIG's $143 Billion Rescue Questioned

A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.

The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.

Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations.

In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.

The company may be forced to borrow additional federal funds for rising payouts to counterparties. Neither the government nor AIG is releasing information about the specific amounts paid to individual firms, but numerous credit experts say that the value of those mortgage assets is probably declining every week. That means AIG has to pay a higher price as part of its guarantees.

In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG's chief financial officer warned of "Goldman's acknowledged desire to obtain as much cash as possible." But AIG's external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.

Rutledge warns that because there has been no public disclosure of AIG's payments to counterparties, it is impossible to know whether the pricing it is using now is proper.



Let it be noted that the lack of full disclosure is actually standard practice for this *bailout*. A month ago, in The Broad Daylight Rape Of Joe Taxpayer, I promulgated:

That means that the government knows which banks are in trouble, is giving them taxpayer dollars, AND is concealing their identities from the public!!!

The original $85 billion dollar *advertised* AIG bailout has taken two jumps. First it was bumped to a $120 billion *investment* then just last Thursday it borrowed another $40 billion from the Treasury. Remember what hotshot John Maudlin said initially, "My bet is that the taxpayer is going to make a real profit on this deal."

Idiot!

Yeah, Goldman's stock has been hammered, they are laying off a few thousand, and their bonuses have to be down (I'd assume).

BUT, by rights, they should be bankrupt. Their partners should probably have been wiped out if it weren't for such outright political thievery.

For the first three quarters of 2008, Goldman has reported profits of $4.4bn, down by almost half from last year's sum. According to SEC filings, it has set aside $11.4bn for pay and benefits, a decline of 32 per cent over 2007. Barring a big change in the firm's performance, the current partners can expect bonuses, on the average, of $1m or less, according to people familiar with the matter. (link)



On Saturday, some buffoon was telling me that things were so bad at Goldman that they were "de-partnering" people. According to that link just above, they boot partners out biannually - at the same time they bring in new ones as well. Nobody has permanent tenure there - which is wise from a business standpoint.

Of all the epithets apt for Goldman crooks, no one can ever call them stupid.

Note also their smart political contributions - the largest of any Wall Street firm.

So go on ahead, ignore the conspiracy theories facts if you wish.

Skim Biz Update - Fidelity Investments

Boy is THAT a misleading headline.

Fidelity Investments' flagship Magellan fund sharply raised its holdings of Bank of America Corp and JPMorgan Chase & Co in September, as it moved into bigger U.S. banks amid the worsening credit crisis.

The $28.3 billion fund, managed by Harry Lange, also sold out of positions in Merrill Lynch & Co, Morgan Stanley, and Wachovia Corp. in September, and slashed holdings of Goldman Sachs Group Inc., according to data posted on Fidelity's website on Thursday.

Magellan also slashed its holdings of insurer American International Group Inc. at the end of September from the prior month. AIG's shares sank in September as the U.S. government took it over to prevent its failure.

Lange raised his stake in Bank of America to $834 million from just $18,809 a month earlier, making the U.S. bank his sixth-biggest holding.

His stake in JPMorgan increased ninefold to $523 million, and made the largest U.S. bank by market value Magellan's ninth-largest holding. Magellan also reported a new $225 million stake in Wells Fargo & Co

Bank of America, JPMorgan and Wells Fargo have fared better than some rivals in handling the credit crisis, and are making large acquisitions to consolidate their positions.



Now the boneheads in Boston reading this far right now don't have the slightest clue how misleading, or irrelevant that positive headline was. But anyone who knows where Goldman Sachs, AIG, Merrill Lynch, and Morgan Stanley were trading in September when Mr. Lange *slashed his holdings* knows that he and his investors took a bath, a blood bath.









He didn't *slash* his holdings - THE MARKET DID!!!

And now this genius is piling into the biggies: Bank of America, Wells Fargo, and JP Morgan Chase.

Think he's going to be right this time? I don't and I have my money where my boca is - short all three of them.

Here's the real story - even if whitewashed - from that article:

Magellan's performance has floundered, partly because of the financial sector bets. The fund is down 49.2 percent so far this year compared with a 35.5 percent negative return of the S&P 500 index, according to Lipper data.

Down 49%?!?!?! Just this year?!?!?!

OUCH.

More aptly, this Globe article should have been titled:

"Fidelity's Magellan Takes It In The Keister!"

Just as I told y'all last week in The Skim Biz Takes A Hit, rumors are already swirling about layoffs from asset managers.

Supposedly Fidelity is going to pink slip 4,000.

I'll take the *over* on that one.

When Experts Malfunction

What's amazing in this world is that there are Morons who invest BILLIONS of dollars - meanwhile I am sitting at home, in my pajamas, a mere multi-thousandaire.

Flashback to but one year ago. In this Bloomberg article from October 29th, 2007 a couple of *Davids* Dreman and Chalupnik predicted a major bounce in banking shares. Boy were they wrong!



Oct. 29 (Bloomberg) -- Bank shares are so cheap and their dividends so high that some of the world's biggest investors now say the combination is unbeatable.

"The big banks are pretty cheap," said David Dreman, who oversees $22 billion at Dreman Value Management LLC in Jersey City, New Jersey. "We are definitely looking at some of these high-yielding stocks." Dreman, ABN Amro Asset Management, First American Funds and Portfolio Management Consultants, who combined manage $433 billion, predict the shares are set to rebound.

"In a semi-panic, and that may be what we have in the financial markets right now, every firm gets tarred with the same brush," said Dreman, whose flagship $8.98 billion fund has beaten the S&P 500 for seven straight years.

Dreman bought bank shares in the past month and owned 1.4 percent of Seattle-based Washington Mutual Inc. at the end of June. The largest U.S. savings and loan has a 7.84 percent indicated yield, the highest since at least 1986. It also trades at 1.06 times book value, the lowest since Bloomberg began tracking the data in 1997.

"We don't think the turning point is that far away," said David Chalupnik, a Minneapolis-based senior managing director at First American, which oversees about $68 billion. "The big dividend yield and the low valuation and the Fed cutting interest rates all tell us we're going to win."

Chalupnik added to the firm's Wachovia stockholdings in August. He may buy more because prices have fallen and there's little risk the worst U.S. housing slump in 16 years will force the largest banks to reduce cash payments.

Citigroup may earn $4.80 a share in 2008, the average of 10 analysts' estimates compiled by Bloomberg showed. That's more than double the $2.16-a-share dividend the bank will pay this year. Citigroup has paid a higher dividend each year since 1987.

'With a Vengeance'

Bank of America has increased its dividend every year since 1977, data compiled by Bloomberg show. The bank on Dec. 28 will pay 64 cents to shareholders on record as of Dec. 7, double the quarterly payout in 2002.

That makes banks a safer bet than homebuilders and mortgage companies, the biggest casualties of this year's housing collapse and increase in home-loan delinquencies, according to Chalupnik. The groups have fallen 42 percent and 36 percent, respectively, the largest declines among 137 sub-industries in the S&P 1500 Composite Index.

"You've got a high dividend yield -- current income --plus very attractive valuations and an interest-rate environment that's only going to benefit the financial stocks," said Brandon Thomas, who oversees $43 billion as chief investment officer of Portfolio Management Consultants in Chicago. "When they do turn, they're going to turn with a vengeance."



Yeah butthead, they TURNED DOWN with a vengeance. The Bank Index (above) is down a whopping 40% in the 12 months since that article.

Dreman loaded up on Washington Mutual. In the past year it has gone from $25 to zero.

Dreman, a Forbes columnist, has also been recommending Fannie Mae throughout its slide to ZERO.



First American's David Chalupnik loaded up on Wachovia. In the past year it has gone from $45 to $6. Bravo!

Citigroup has dropped from $41 to $14 over that same time period. It did not earn anywhere near the *consensus analyst estimate* of $4.80 per share this year. Try more like a LOSS of $2.15. Rosy EPS estimates for 2009 today only stand at $1.08.

Bank of America has raised its dividend every year since 1977? Hah! It just halved its quarterly dividend to 32 cents per share and is slopping away at the taxpayer bailout trough. BAC stock had dropped from $48 to $24 per share. Note that purported genius Warren Buffett also dumped $425 million in Ken Lewis' company when the stock was near $50 in the second quarter of 2007. Well done, Buff!

So Dreman manages managed $22 billion and Chalupnik manages managed $68 billion at the time of last year's article.

Meanwhile I manage two small children, an Italian wife, a psychopathic cat, and some loose change.

Go back and read everything I've recommended and written in the past four years. The only bad predictions you'll find are *shorting long term Treasuries* and one really terrible stock pick in CDE - which I hardly pounded the table on.

I'll settle for a mere $1 billion to manage!