Monday, February 23, 2009

AIG: Worse than Worthless/Ford & the UAW/Buy of 50 AEB at 4.8/sold CAT BOND/JPM Dividend Cut

The DJIA is now at a level-7114.78 that is below the mini-crash close for October 27, 1997.  The precise closing number on October 27th was at 7161.17 which itself was the result of a mini-crash on that day. October 27, 1997 mini-crash - Wikipedia We are now having a rolling series of crashes. We are actually back to May 1997 for a closing low on the DJIA, which was 7085 on May 7, 1997.

As bad as it has been since October 2007, today did not look to me like a bottom in the market. My current forecast is for the DJIA to fall to 6400, but my forecasts are irrelevant to me since I am neither a buyer or seller of common stocks. It may be sometime before my model even allows me to buy a common stock with cash flow from dividends and interest, let alone make a serious investment in this asset category.  

My only thought at the end of today is the recurring one that I have frequently had recently, a gnawing feeling that everything the government has done to date has only slowed down the inevitable. What is happening now is not a reaction to anything the government is doing or not doing , as certain partisans who are no longer in power are apt to claim, but to the events that transpired before 2008 that set this train wreck in motion. Idealogues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis

There is a reason those who fail to learn from history are doomed to repeat it. Those who refuse to learn anything in history class in the years and decades to come will be joined by the tens of millions who lived through the pertinent history and deliberately learned nothing from it.  Their ideology distorts everything in real time and prevents the assimilation of new information inconsistent with their worldview. 

Their minds operate as a close loop system, seeking only confirmation for existing views, and ignoring or dismissing all facts inconsistent with their ideology as unreliable by definition (i.e., the facts must be unreliable because they are inconsistent with the ideology in the form of cliches ). There is a name for such people.    

If there ever was a company that deserves to go to zero, it is American International Group. 

Reports surfaced late in the trading session that AIG was going back to the government trough asking for more money,  which is just amazing since the government's funding  had already swelled to 150 billion by November of last year. DealBook Blog - NYTimes.com  David Faber reported that the company is prepared to report a loss of close to 60 billion due to writedowns.  

Such a loss would likely cause additional debt downgrades which would require more collateral to support AIG's improvident contracts, continuing the vicious cycle started last year after the company lost its AAA rating.   

I am just curious why the investigation of its London based Financial Products unit is off to such a slow start.  I would expect brazen incompetence by the SEC as their norm, but I was hoping for more vigorous efforts by the Brits. NYTimes.com

Possibly Mary will restore some teeth to the SEC that was lost during the lost under Chris Cox  NYTimes.com The market swooned after Faber's report was released. You would think 150 billion could have kept just about any company afloat. 

The deal between Ford and the UAW on permitting Ford to pay half of its obligations for retiree health care in stock was a ray of sunshine for the future of the U.S. auto companies.  NYTimes.com

BOUGHT AEB AT $4.8: 

I continued selling some of my short term corporate bonds, disposing of a Caterpillar note today at near par value.  I may continue some selling of bonds at or near par value.  I bought in an IRA 50 of AEB, the floating rate preferred stock issue by Aegon, at $4.80. I am aggregating a large  sum from the sale of these short bonds and bond ETFs which I intend gradually to re-deploy in bonds and preferred stocks with higher yields. At most I will invest about $800 more in Aegon and/or ING preferred stocks. I view them as high risk in the current environment.

This is a link to the prospectus: http://www.sec.gov 

AEB has been discussed in several posts and my last buy prior to today was at $5.5:
  
The credit default insurance spread for GE debt widened to 630 basis points, or $630,000 to insure 10 million for 5 years. 

J P Morgan became the latest big bank to slash its common stock dividend, reducing the dividend to a mere 5 cents from 38 cents.   

It will be impossible for me to view any bank as a competently managed business in the future, nor will I look at them again as a reliable source of dividend income. I do not own JPM common stock but I do have a position in PYV, a TC containing a JPM junior bond maturing in 2014.  

The Dow is now about 50% below its high in October 2007 with no end in sight to the carnage. When it does end, the recovery period will most likely be a long.  I did go ahead and fund my IRA in the full amount for this year.  I understand that it may appear that I do not work but that is a faulty assumption.    I just do not work very hard anymore. I will soon do another Roth conversion, my second so far in 2009. I will go ahead and invest my 2009 contribution since I am a player who has not yet lost faith, though it is becoming more like Kierkegaard's Leap of Faith.   Søren Kierkegaard - Wikipedia, the free encyclopedia

DISCLAIMER:
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 
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ING Preferred Stocks/Professor Schiller/GM Bankruptcy/

ADDED 5/11/09: SEE LATER GATEWAY POST FOR ING PREFERRED ISSUES

Added October 27, 2009: The most recent discussions on ING's settlement with the European Commission, and how it will effect the hybrid owners (preferred stocks), are in two posts from October, with the first linked one below providing more details:
**********original post

At mid-afternoon the S & P 500 is teetering near its low on 11/20/08 of 752.44. I would suspect that a failure to hold above that level might lead to more selling later today or this week.

A complete listing of ING perpetual preferred stocks can be found at this link.  Debt securities ING Groep N.V. | ING (ING changes that link periodically). Links to the prospectuses can also be found at the QuantumOnline.com site (free site, registration required).  The Dutch government claimed on Friday that ING did not need anymore capital. Business Feed Article There was a concern last week that ING would defer its payments on its "hybrid perpetual bonds" (i.e. preferred stock IND,INZ, IGK). ReutersING recently issued 5 billion dollars in Dutch government guaranteed bonds maturing in 5 years and paying 3.375%. Tribune I did add to my position in INZ last Friday bringing my position in my main account up to 100 shares with 50 shares in a retirement account. I will trade 1/2 of the position in the main account, as before, in the event of a pop in price.
The price action last week in ING preferred issues show how the mere fear of a deferral in a cumulative preferred dividend can send the price spiraling downward. I would add that a deferral of a cumulative preferred dividend by one of these large financial institutions would only be consistent with a dire financial condition, in my opinion. The commons stock of ING is down over 10% so far today to below $5, a key level for many institutional owners. Aegon (AEG) is trading at below $4. It does not matter which side of the pond the financial institution has a headquarters, all of them are considered guilty until proven innocent and the lack of confidence in any of them is palpable. Since my exposure is still small to the ING and Aegon preferred issues, however, I am open to increasing my exposure by about $1,000 in total to both of them, given my current assessment of the risk/rewards balance in them. The reward is payment of a dividend approaching 25% and the downside is seizure by government and a zero share price. ( Some of the ING preferred issues with a lower coupon are already trading below 5 like ISG, so those are inching closer to zero already)

GE is trading below $9 which is very disconcerting to me. This concern is not due to the fact that I own shares but the loud and clear message the fall of GE says about the depths of our current problems. The current price is around the late 1994 level adjusted for splits. The swoon today may be connected to the negative comments about GE Capital made by Deutsche Bank analyst Nigel Coe. WSJ.com

The statement from the government that it will provide a "temporary capital buffer" for those banks failing the stress test is somewhat helpful. MarketWatch No "systemically important" financial institution will be allowed to fail, which is another helpful comment by the government. Yahoo! Finance The banks should seek private capital before receiving the "buffer". The stress tests begin this week. NYTimes.com

I now believe that bankruptcy is the only viable option for GM, and Chrysler needs to be allowed to fail without government support in Chapter 11. WSJ.com If the UAW and the bond holders really get serious about making concessions necessary to make GM viable, then the bankruptcy option can be avoided for now. Nothing has yet to happen, or come close to happening, that would make GM a viable company in my opinion. Barrons.com
But I do not see the Democrats allowing either one of them to fail, even though both deserve to fail. But there are a lot of companies being kept alive that deserve to fail in a moral and equitable sense, including many of the large financial institutions.


Professor Schiller, author of Irrational Exuberance, is not ready to invest in stocks yet. Yahoo! Finance He is waiting for the cyclically adjusted P/E ratio for the market to fall to below 10. Tech Ticker, Yahoo! Finance
This would require a substantial drop from current levels or a long period where earnings rise and the index remains about the same. The nobel winning economist Paul Krugman appears to be very concerned that the stimulus will not be enough to jump start the economy and that consequently the U.S. will end up in a deflationary cycle similar to what Japan has experienced. http://finance.yahoo.com/banking-budgeting/article/106624/Paul-Krugman-on-the-Malaise-of-Nations;_ylt=Aui1rlJ.zTCQx1hBaAeCyOi7YWsA
Some of the same points were made by Rober Albertson in a recent interview in Barron's, particularly on how an increase in the savings rate could impact growth in the years ahead. .Barrons.com
Some of what Krugman is saying is also consistent with Ray Dalio's predictions.
All of these arguments, if they prove to be accurate predictions of the future, would suggest staying out of the stock market for the indefinite future and to own treasuries. I view these dire forecasts to be plausible but not the most likely outcome. Nonetheless, my trading model is preventing me from buying any common stock now anyway and I do not want to own treasuries at the current yield levels.
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Sunday, February 22, 2009

Citigroup/Volcker/AIG Financial Products/Governor Pawlenty's Blather/

Citigroup is on the ropes.  The WSJ is reporting tonight that this bank is in talks with the government to convert its preference shares into common shares. WSJ.com

Why would the bank want to do that?  

The only reason that makes sense to me is to avoid paying a 5% dividend on some of the preferred shares and 8% on others. This indicates weakness to me.  It would also dilute existence shareholders. If that is necessary for survival of the bank, then the bank is in really bad shape which is already indicated by its less than $2 per share price.  

The Obama administration has apparently not indicated whether it will support such a conversion in what amounts to a non-income producing security, paying just 4 cents a share a year in dividends.

Paul Volcker, one of the few economists that I take seriously, noted that the rate of decline in industrial production around the world was more steep than at the onset of the Great Depression.  CNBC.com

I respect Volcker.  I do not view him as an ideologue which was my baseline opinion of Greenspan.   

At this point, however, I do not see any useful purpose for him to make statements with such dire observations since many people would take him far more seriously than any politician. It would be much better for Volcker to just keep his opinions to himself for the next year or so, and just share them with the beanpole.  It might be best also to put a gag on Senator Dodd too who was undermining the administration downplaying nationalization last Friday. Courant.com

The comments by George Soros were far more ominous than those of Volcker.  Soros stated that the world's financial system has disintegrated and the turbulence is more severe than the Great Depression. Reuters

The chief technician at S & P says that the market is showing few signs that have marked previous lows in the indexes. washingtonpost.com

The Washington Post has a new article about the AIG Financial Products Unit which destroyed the company and help to both facilitate and accelerate the world's current predicament. washingtonpost.com

The wizards who ran this unit pulled down hundreds of millions for themselves by betting the company, AIG, that took all of the risks.   Their actions of this limited group of individuals would probably rank among the top ten causes of the worst financial crisis since the Great Depression.  

The damage caused by them is more than just destroying the world's largest insurance company which is in itself a major achievement. 

Personally, and this is just me apparently, I do not think the destruction of a 200+ billion dollar company is worth a few hundred million to a select group of egomaniac wizards.  The credit default insurance products written by them, based just on the AAA credit rating of AIG initially, allowed other financial institutions to take risks that could not be economically justified, nor were the investments made by those institutions prudent, which in itself contributed to the severity of the current crisis by feeding the credit bubble. 


Sweden refused to bail out Saab, which filed for bankruptcy, finding its plan to restructure its money losing operations was not realistic. WSJ.com

Since GM invested it Saab in 1990, it has rarely turned a profit.  

GM's Opel subsidiary is requesting a bailout from the German government.  GM's Daewoo unit was turned down for aid by Korea.  

Perma bear Alen Abelson, who was bullish for a couple of months in the early 1980s and bearish for the other many, many months of his life, displays a helpful chart in his column this week, showing the median house price divided by median family income. Double Trouble – The Fall of the Market and the Economy - Barrons.com   

For most of periods between 1960 to 2000, the chart was meandering in a range between 2.4 and 2.8.  

If you could say that a chart had a comfort level, then this chart was content to float around 2.8. Starting in 2000, the chart displays an upward move from about 2.8 to 4 reached in 2006, which is just too high and has since corrected to around 3.26 by December 2008.  

I would suspect that it has fallen some more this year. Rather than drawing pessimistic conclusions from the chart, this would be an indicator that the price of homes is falling to an affordable level. I would add that these kind of charts also have a wide margin of error given that it tries to incorporate current information about tens of millions of families, their incomes and the value of homes nationwide.   I would also like to see a chart like this one that excludes Florida and California. 

In the heartland, prices of homes never went parabolic and the correction in prices relative to income may very well be complete or near completion. So, it may be helpful for the beanpole to start engaging in some happy talk, or at least more hopeful and inspirational than downbeat and gloomy, and maybe some of the "animal spirits" will return at least where it makes sense.   

Buying a closet condo in Miami for 2 million never made much sense. 

I would have to say in passing that Abelson's chart looks different than the one used by Pimco: PIMCO - US Credit Perspectives - May 2008

This is a link to another chart comparing the existing home price from the Case Schiller index divided by median family income as of October. US Existing House Price / Median Family Income | The Big Picture 

A google search brings up data for local areas and these links relate to Baltimore and San Diego.Baltimore

San Diego county has experienced a 45.9% drop in median home price from 11/2005 to 1/2009. Wow!

The Governor of Minnesota, Tim Pawlenty, is a lawyer in need of an education about the Impairment of Contracts clause in the Constitution.  I listened, for as long as I could stand it, the blather of  four governors, two from each tribe, none of whom were convincing on any matter to this independent.  I do draw a distinction, however, between an unpersuasive argument and an opinion that is based on a factually incorrect premise. When asked about his opposition to Obama's foreclosure plan, the good governor from Minnesota said that the state and federal constitutions had a clause, called impairment of contracts, that prevented the federal government from exercising a heavy hand to abrogate contracts. 

Pawlenty must either be unfamiliar with the meaning of  the "impairment of  contract" clause or woefully ignorant of the plan that he was criticizing. 

The Obama foreclosure plan does not abrogate or force a change in a private contract, but simply gives incentives to the parties to the contract to agree to modify the terms. 

NYT 

"Q. Is my lender required to comply?

A. No, but the government is offering lenders incentives if they do. The government expects that most major lenders will participate."

NYT 

This program would in no way raise an issue of impairment of contacts but this argument from the governor may hold some sway in certain circles and more will be misled by it provided the media is asleep in his state and elsewhere, which is never a surprise. Contract Clause

A different legal issue would be presented if the government tried to force a substantial change in a CDO mortgage pool against the will of the owners.  This could conceivably raise an impairment of contract issue but there have been instances where the government acting under its police power was able to temporarily halt foreclosures permitted in the private mortgage contract. FindLaw | Cases and Codes  

As Mr. Pawlenty probably knows since he is very confident of his opinions on the subject, Wall Street mucked up the resolution of the mortgage problem by creating large pools of mortgages and then sold interests to investors around the world. Those contracts frequently required consent of the owners before the servicer of the pool could modify the borrower's payment terms. 




(the issue of when the servicer would have the right to modify mortgages in a CDO pool under its contract with the owner is beyond the scope of this post). 

Some pools might allow for a change with the approval of a high percentage of owners but not requiring 100%.   This is not a subject of Obama's plan.  Instead, as the governor already knows, the plan reaches mortgages where there is one owner who may or may not agree to a modification of the contract with the borrower,  with the federal government providing incentives to both sides to modify the contract to make it more affordable.   

Neither party to the contract is required or forced to do anything. There is factually no basis for any argument based on the government impairing a private contract within the meaning of any state constitution or the U.S. Constitution.   

I would just place no reliance on an opinion that is based on clearly erroneous information, or an opinion that omits material factual information that would undermine the opinion being given.  Perhaps the Governor is confusing the bill that he vetoed in mid-2008 that was passed by the Minnesota legislature that would have delayed foreclosures for subprime borrowers in his state. That state law would force a change in private contractual rights Foreclosure relief: It's a wonderful life when government is kept in check (the author of the preceding linked article is apparently unfamiliar with Supreme Court precedent on the use of police power to temporarily halt foreclosures without violating the contract clauseFindLaw | Cases and Codes)  

But this has nothing to do with Obama's plan the good governor was criticizing so authoritatively  in the panel discussion with Chris Wallace.  I hope that the governor does not mean the authority of a bankruptcy judge to modify or cancel a contract. 

This article summarizes more proof about the flagrant incompetence of the SEC to conduct an adequate investigation in a manner consistent with protecting the public.     Yahoo! Finance
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Saturday, February 21, 2009

Idealogues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis

I am seeing more stories about the number of foreclosures connected with speculators. In one county in Florida, the court's foreclosure docket is up to 1,000 a day and is called the rocket docket.  Unlike Tennessee, Florida requires an order form a Court to finalize a foreclosure.  Most of the foreclosures are homes bought by speculators who were also largely responsible for the run up in homes prices in that Florida county. Subprime mortgage crisis - Wikipedia In 2006, 22% of the homes purchased nationwide were for investment purposes. In certain markets, like condominiums in Miami, the number of units purchased by speculators reached as high as 85% of the total.

The role of speculators is just one of the scores of facts overlooked by right wing editorial writers, like the ones at Investors Business Daily, IBD, when engaged in what can only be characterized as contemporary revisionist history.  The editorial in today's IBD contains a largely fictional account of the origins of the crisis and is nothing more than a form of right wing propaganda. Most facts are ignored by "conservative"  ideologues to deflect blame for the crisis from the very policies advocated by IBD and largely followed for eight years by Bush. In this alternate reality, the blame falls mostly on three factors:

1.  the decline in the stock market has to do with Obama taking a lead over McCain in 2008 and then winning the election, 2. Obama saying bad things about the economy, the happy face theory of economics (discussed in 2 prior postsJapan GDP/ Economists: Secular Theologians with a lot of Numbers The GOP's New Alternate Reality: Obama is to Blame for our Troubles/Put on a Happy Face Beanpole/ Japan-US Comparisons Continued/GM Wants more dough) and 3. the Democrats are to blame for everything since they encouraged Fannie and Freddie to lend money to subprime borrowers, primarily to minorities, that could not afford the loan.

This is their version of reality and it can only be referred to as absurdest, revisionist extremism.  I am sure that there are millions in America who believe that the President's comments about economic reality, apparent to anyone following events in the real world, and his election in 2008, are two of the primary causes of the current crisis, as opposed to a myriad of events that happened from 2002 to 2007.  

Those people are just hopeless- no amount of facts will ever have any influence on them.  They read editorials written by ideologues simply to confirm their pre-existing opinions. I read them to see how reality and events are distorted for ideological purposes.   

When addressing the origins of the crisis, I try to remove any ideological considerations when looking into the rearview mirror since that only distorts my view. I want to try to understand what actually happened and how to prevent it from happening again. One interesting fact about Fannie and Freddie that is always omitted by the ideologues is that their purchase of subprime securities was just a small fraction of the total outstanding. In 2006 for example, near the height of the madness, subprime mortgage securities bought by Fannie and Freddie totaled 90 billion out of a total origination of 450 billion.  washingtonpost.com 

The ideologues know that most of those mortgages were originated by and sold to the private investors, pursuant to what I would characterize as part of what IBD and other extremists advocate, a laissez-faire, anything goes, wild west, free market capitalism. In their preferred world, there is no meaningful regulation of mortgage originations which is left up to the free market. Most of the subprime originations occurred in this world, the ideal world for IBD, where there were no rules, and the money was funneled by Wall Street to mortgage companies between 2002 to 2007, mostly now defunct, and the resulting loans were then packaged and sold  by Wall Street to investors around the world after receiving favorable ratings from Moody's and/or S & P based on an unrealistic assumption about housing prices increasing 6% or so  compounded into infinity. 

Another factor that is always ignored by ideologues is the percentage of bad ALT-A loans held by Fannie and Freddie versus subprime, and even the number of prime loans that have gone bad particularly in areas where the rise in  home prices far exceeded the increases in income. 

Other factors that are invariably omitted from the revisionist history promulgated by ideologues who wish to distract attention from the failures of their own policies include the 2004 SEC Rule change which allowed investment banks to increase leverage to 40 to 1 from a limit of 12 to 1, part of their philosophy of allowing Wall Street to regulate itself. All of these factors, and how they contributed to the crisis, are discussed in more detail in prior posts.

See, e.g.:  

(this is a link to my comments on a NYT article about securitization of subprime mortgages rated AAA by a rating agency and then sold by Wall Street to investors around the world: Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM)

When I use the term ideologue,  I am not referring just to those who wish to be called conservative but rarely are, or to liberals,  socialists or any other political label used mostly to condemn or mislead, but solely to any person who is a partisan advocate of a particular ideology to such an extent that they ignore or dismiss any and all reliable information inconsistent with the tenets of their ideology. As a consequence, their view of the world and reality is invariably severely distorted by their ideology. I have focused on those who wish to call themselves "conservative" in these posts since I view them to be creating the most distorted views of the origins of the current crisis.  

There are regulations that could have been in force that would have put a halt to what actually caused the crisis, and that is what the conservatives want to avoid talking about when trying to recreate history with absurdist theories.

One set of regulations would have been to create tight underwriting criteria for loans that were not securitized and bought by Fannie or Freddie.  This would include, for example, all of those homes bought by speculators and most subprime loans.

The speculators would be subjected to much more stringent underwriting standards than what actually prevailed during the bubble years, requiring by law on a nationwide basis at least a 20% down payment for example. A similar rule could be applied to another problem area, vacation homes, where the underwriting was loose and the defaults are now high.  

Since these problem areas do not fit into subprime loans bought by Freddie and Fannie at the insistence of Barney Frank,  they will not be discussed by IBD.  In other words, you do not allow anyone to finance loans to speculators or for second homes with one of those funky mortgage products, but require those buyers to have a lot of skin in the game.   

I discussed a another sensible regulation that would tie the amount of down payment required to the borrowers before tax income. Obama's Foreclosure Plan

For example, if the mortgage payments exceed 31% of the borrower's pre-tax income, then the borrower would have to make a down payment on the house that would bring the payments below that 31% threshold. If someone wanted more house than they could afford, then they could still receive a loan for that house, provided the borrower uses non-borrowed cash to bring the payments down to 31% level. This would be a nationwide minimum standard and banks would be free to impose more stringent underwriting criteria. I came up with the 31% figure after reviewing the Obama foreclosure plan which used that number as the ideal amount on affordability.   

You could also develop a nationwide regulation that would require more money down whenever home prices started to rise more than five per cent a year. This would be hard to implement nationwide, but one of the causes of the current mortgage crisis is that home prices were financed with mortgages at levels that could not be supported by a rise in income. This  in turn distorted price further, creating a further increase in home prices, and so on until the bubble burst and millions were left with mortgages that exceeded the value of their homes.

The loose and easy extension of credit in effect distorted a true market price. Possibly this kind of criteria could be enforced by a rating agency downgrading a pool of debt coming from such a market that would make lenders more hesitant in extending credit in a real estate market experiencing bubble prices, meaning a significant acceleration in home prices far above rises in incomes. With credit marginally harder to get, this will in turn tamp down a rise in prices to coincide more with a rise in income rather than a speculative fervor.

I am just suggesting some preliminary thoughts on the subject. But, in the last analyst, this kind of problem can be effectively dealt with by regulating the origination of mortgages.

But a wild west free market is exactly what conservative ideologues want to keep, so they have to divert the blame elsewhere, because what they want is the primary source of the problem, a market that operates free of any meaningful regulation and where greed by Wall Street, private mortgage companies, private mortgage brokers,  and speculators can create the crisis and the participation of all those folks are always conveniently ignored by the ideologues on a mission. 

A reader of these posts know already that I assign some responsibility to Barney Frank and the Democrats, for using Fannie and Freddie to pursue their social policy objectives. TRUST CERTIFICATE AON BOND KTN FREE MONEY FOR THE TREASURY/Plan for Doling the Dough to the American People/JZJ & JZE NYTimes.com

Unlike those who pretend to be conservative because a more accurate label sounds less soothing, a True Conservative wants to learn what history teaches about the fallibility of individuals, unwilling as a matter of principle to distort information in furtherance of an ideological objective, and the facts simply do not justify assigning a central role to the GSEs exclusive of other factors.

When viewed in a non-partisan and non-ideological manner, the use of Fannie and Freddie to further home ownership by low income, subprime borrowers is one of about ten or so important factors that led to the current mortgage crisis, and not even in the top five in importance.

Many other factors other than home mortgages led to the current economic crisis. The role of speculators in driving up home prices and defaulting on their loans is a larger contributor to the current crisis. Speculators  skewed the fundamentals of many local real estate markets, an artificial force in creating demand that drove prices up for others interested in only buying a primary residence and now they are contributing to the problem by defaulting on the mortgages in droves which were used in their speculative activities. The role of private mortgage companies and brokers, and the SEC's rule change in 2004, are also more central, as is the Federal Reserve maintaining abnormally low interest rates for an extended period of time and the absence of regulations relating to mortgage originations.

Fraud and misrepresentation, particularly in ALT-A originations, was a huge problem as well as the development by the banks and mortgage companies of loans that facilitated an easy credit cycle that gave impetus to a rapid rise in prices that could not be sustained by increases in income levels, an extremely important consideration and one rarely mentioned by those who want to dwell on Fannie lending money, in the thoroughly repulsive Ann Coulter's words, based on having a missing child by the name of Caylee or how well the borrower can hit a jump shot. They Gave Your Mortgage to a Less Qualified Minority - HUMAN EVENTS Ideology and Facts: Coexistence Not Allowed/CIT/ F & FCZ/

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Friday, February 20, 2009

Hartford Bond Sold/ Modoff: No Evidence of Trading/bought 50 INZ at 6.52/

For a few tense moments this afternoon, I thought there was a realistic possibility of a meltdown below 7,000 in the DJIA.  The White House allayed fears -somewhat- about bank nationalization by saying that it preferred for banks to stay in private hands. WSJ.com  NYTimes.com


The administration's statement is not the same as saying nationalization of a Bank of America or Citigroup is off the table.  The low hit today in BAC common was last seen in 1984.     

I am curious why anyone would vote for the current board of directors and why does Lewis still have his job?  Do we give a reward to Ken and the boys for destroying all of BAC's value since the start of the great bull market in the early 1980s, which seems like the kind of result that receives a large reward these days? 

I was discussing the market with my dad's accountant today. I gave him a prediction on where the Dow would bottom and the number was 6400. I would change my estimate of how long it will take to recover back to the October 2007 levels from 5 years to 7 to 10. The DJIA declined 6.2% this past week. 

So Bernie was not even an investor let alone a sage and wise one. The Trustee reported that there is no evidence Bernie even made an attempt to make an investment in at least 13 years. WSJ.com  But it has taken the worst bear market since the big GD to shine some light on the rodents, vermin and assorted cockroaches that have infested the entire world. 

There is not an ounce of confidence left in most of the formerly large banking institutions. The market has legitimate concerns whether there is any equity left in the banks' businesses. I heard Doug Kass say yesterday that he thought Citigroup and Bank of America were insolvent. Karen Finerman had been buying Bank of America preferred issues. CNBC.com 'Fast Money' Recap: Fast Money Recap News |TheStreet.com  Karen's trade is a paired one apparently, shorting the common stock and going long the preferred. This is not an  outlandish recommendation since the government has tens of billions invested in the preferred stock of both of those institutions and it would not be politically advantageous for anyone to say that the emperor Lewis has no clothes.   

Would the government want to say that its huge investments, just made, are in fact worthless? It might just be better to close one's eyes and wish it will just go away,  ignoring the problems at BAC and C may be the government's best policy.  Some of the other large regionals are just going to have to be seized by the FDIC at some point within the next year or two.    

I did average down early Friday afternoon by buying 50 of INZ in my main account at 6.52.  If I get another pop in the shares as before, I will sell the 50 bought in the 7 and change range using FIFO accounting, and the first shares bought would be the higher cost shares. The yield is around 27.6% at that level.  I also made a low ball offers on AEF and IGK in a retirement account which were not filled.  Several other bond orders were not filled.  The Aegon preferred stocks were extremely volatile today with AEF trading down at one point to yield 25%.   My order was almost filled at 6.50 placed after it fell to an intra-day low of 6.48. 

For my piece of mind, I unloaded my Hartford bond for a small loss at the price of 91.84, getting most of my money back, and this loss nets with  gains that I already booked earlier in the year on sale the sales of JZV and a Cousins Preferred. While I suspect HIG will survive, I am starting to have some doubts about it which do not appear to me now to be irrational. In the final analysis, I just wanted to quit thinking about it since there is no need for me even to take a chance on it at 10% below par value. I was wrong about the maturity date.  The HIG bond matured in 2012 not 2011, another reason to sale it.    

The intra-day fall in GE was worrisome, with the shares hitting 8.98 during the day. 


DISCLAIMER:
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 
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Panic Stage of a Bear Market is Here/CBR, ARIA/ Wells Fargo Trust Preferred/

Today is a panic day.  One of two things is going to happen.  The world will slip into a worldwide depression and there is nothing to be done about it except to soften the impact or we are simply entering the final panic stage of a bear market which will ultimately lead to a bottom and a recovery in the market.  I am not prescient. It is too early to know where we headed and it is certainly out of the government's control.  The market will end up where it wants to go.  In case this is approaching the alternative where a bottom is near, I will probably place within an hour some orders below the market to try to catch the fall in a few bonds and preferred stocks which are tanking as bad or worse than commons stocks from the same issuer.  I already placed a limit order in a retirement account to buy an Aegon preferred issue.  


Ciber, a 50 share position, was apparently obliged to do a stock offering of 8 million shares at $2.75 due to tightening credit conditions. CIBER Announces Pricing of Common Stock Offering: Financial News - Yahoo! Finance


Ariad (ARIA) also announced a placement of shares at $1.69. ARIAD Announces $24.3 Million Registered Direct Financing: Financial News - Yahoo! Finance
This is not good since the placement also included warrants to buy shares at $2.15. 

I would not classify the recent price action in the common shares of Citigroup and Bank of America as irrational.  I do view the overall meltdown over the past few days of the common shares of Wells Fargo and U S Bank, along with their trust preferred issues, to be more symptomatic of  panic pricing.    

In fact, I am inclined to think that we are now in the panic stage of a bear market where fear trumps all rational thought processes.  But the fear is not divorced from reality.

The pervasive fear among individuals will often cause a precipitous drop in the prices of Trust Certificates that are owned primarily by individual investors.  In the past, this has presented opportunities to buy what is in effect a bond at a discount price.  While I am prohibited from buying common stocks now under my trading model, I am allowed to buy bonds and preferred stock.  I also raised recently a nice sum from selling bond ETFs and individual bonds to be reinvested into individual bonds as opportunities arise, which is starting to happen now. 
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FDIC Needs to Bite the Bullet: No More Shotgun Marriages/NYT, SCMP/ the 10th Amendment & the Commerce Clause

The Philly Fed index for manufacturing activity dropped to a negative 41.3, the lowest reading since October 1990.  MarketWatch

The GM bondholders are complaining about the debt for equity swap due to concerns that GM is not cutting costs enough to weather the current downturn.  Senator Corker made a good point that the capital structure of GM is not really changing under GM's plan.  It is more of a substitution of government loans for existing private debt, thereby keeping the total debt level close to the same or even increasing it some. WSJ.com    

Fifth Third Bank (FITB) is hovering just above a dollar a share which suggests a consensus opinion among investors about that bank's ability to survive.  Suntrust (STI) hit a new 52 week low yesterday, trading below 7 bucks down from a 52 week high of 64 and change.  Regions Financial is trading at around $2.5  One problem with all of the shotgun marriages last year is that they weakened several larger banking institutions, whose survival may easily have been jeopardized by their acquisitions of insolvent financial institutions during 2008. The FDIC is just going to have to bite the bullet from now on, which means taking responsibility for all of the bad assets of  failed banking institutions regardless of its size-eating those assets rather than passing them on to a more healthy institution.  

The DJIA closed  at 7465.95.  A prior low in the last bear market for this average was 7,286.27 on 10/0/2002.  But that 7300 is also a May 1997 level.  So when the news media says that we are at six years lows, the truth is that this is almost a 12 year low in the DJIA. As bad as our major stock indexes look, they look good in comparison  to the long term chart of the Japanese Nikkei 225 which is close to breaching its lowest low in close to 30 years. WSJ.com; ^N225: Summary for NIKKEI 225 - Yahoo! Finance

It was interesting to me that the VIX fell 1.38 to 47.08 even with the carnage in the financial stocks and the drop in the major averages, with the Dow falling 1.19% and the Nasdaq down 1.71%.

The New York Times suspended its dividend which is a nice word for elimination. The price of one share of this stock is significantly less than its Sunday edition.  If I was not in a suspended, hunkered down mode myself, I would give the NYT a show of  support by buying 25 shares at 3. 

Sucampo Pharmaceuticals (SCMP), a 50 share position, reported earnings after the close. Cash and cash equivalents totaled 121.5 million as of 12/31/08 with no debt. The company earned 59 cents per share for 2008.  On 2/19/09 it entered an agreement with Abbott to market its lead drug, Amitiza, in Japan and received an upfront payment of 10 million from Abbott.  For the 4th quarter revenues declined to 16.374 million and the company suffered a loss of seven cents per share.  The loss was primarily attributable to increased expenses related to development of two clinical stage compounds funded solely by Sucampo.

Analysts were expected a loss of 6 cents on 15.57 million in revenues.  SCMP: Analyst Estimates for Sucampo Pharmaceuticals, Inc. - Yahoo! Finance 

After the close yesterday, the company issued a press release on the agreement with Abbott, which I view as positive.

This is a link to the earnings call transcript. Seeking Alpha

The life insurance companies look almost as bad as the banks. MarketWatch A Fitch downgrade of Prudential's commercial paper makes Pru ineligible for the Fed's Commercial Paper Funding Facility.  Reuters HIG lost almost 25% yesterday, closing at $7.73 down from its 52 week high of $79.88.HIG: Summary for HARTFORD FIN SVC - Yahoo! Finance Genworth is hovering in the 1 to 2 dollar range.   Except for the 30 shares of LNC that I bought at 6 and change, I am limiting my exposure to  life insurance companies to securities higher up the priority ladder than common stock, primarily senior and short term debt of Hartford and Prudential, long term senior debt of Prudential (JZH) and a floating rate preferred issue of Met Life, METPRA.  

I have more comfort with more senior securities in this sector but I understand that moving to more senior securities than common is far from a full proof method to avoid an implosion in value. Of all of those securities,  I am most concerned with the HIG senior bond maturing in 2011 and I dismissed the recommendation of Barron's to buy HIG's common stock. The bond is hovering at around 90 cents on the dollar and pays interest monthly.  

Marshall & Illsley (MI), one of the larger regional banks, reduced its dividend to a penny from 32 cents.  Another smaller bank that I owned many moons ago, UCBH Holdings (UCBH), also reduced its dividend to a penny which is the new normal for the American banks. MI closed yesterday at $3.45, down from a 52 week high of  $29.97.  While it is a member of the S & P 500, its current market capitalization is consistent with what used to be a small cap stock in the S & P 600.  The market capitalization of Citigroup is just 13.68 billion, not even a pygmy any more.  There is just no confidence left in the banks.  

I doubt that most Americans have read the Constitution and many who have read a provision or two find whatever they want to discover based on their predispositions.  The Tenth Amendment (Tenth Amendment to the United States Constitution - Wikipedia) is frequently a source of misinterpretation by those who oppose most federal spending programs, laws and regulations.

Many have probably never read a Supreme Court case or how that provision relates to other constitutional provisions including the Commerce Clause (  Commerce Clause - Wikipedia, the free encyclopedia)  and the  Necessary and Proper Clause (Necessary and Proper Clause - Wikipedia, the free encyclopedia). The Necessary and Proper Clause is found in Article 1, Section 8, clause 18 and reads as follows:

"The Congress shall have Power - To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."

The Commerce Clause which is paired with the Necessary and Proper Clause as a source of federal power states that congress shall have the power to regulate commerce among the states.  The regulation of commerce among the states is an enumerated power within the meaning of the 10th Amendment reserved to the federal government.  So, it really comes down to what is meant by regulation of commerce among the states.  

 To understand this clause as interpreted by the Supreme Court, I would recommend reading Gonzales v. Raich, a 2005 Supreme Court decision. Gonzales v. Raich The entire decision can be found at  GONZALES, ATTORNEY GENERAL, et al. v. RAICH  

In that case, California had passed a law allowing marihuana to be grown for medicinal purposes. This violated a federal law.  The Feds seized the marijuana crop of a Ms. Morrison and burned it. The marijuana grown by Morrison was legal under California law and clearly illegal under federal law. Did the federal government have the power to regulate the growing of marijuana permitted under state law?  The Court found that the federal government's regulation of this purely intrastate activity was lawful under the Commerce Clause. Scalia concurred in the result.  Personally, I viewed this case as difficult to explain in light of the Lopez decision. United States v. Lopez


In Lopez the Court held that a federal law preventing the carrying of firearms into a school was beyond the scope of the Commerce Clause. FindLaw  So Congress can not regulate the movement of guns into a school but can regulate the growing of marijuana?

Some other cases worth a read for anyone interested in the subject as I am:



United States v. Darby FindLaw | Cases and Codes

Why is this important? There is a movement among reactionary forces in the U.S., including several sitting members of the Supreme Court, to role back an entire century or more of Supreme Court interpretations of the Commerce Clause to fulfill an ideological desire to invalidate most, if not all, federal regulations that they do not like.

Oddly, this is why you have the so called liberal justices upholding the right of the federal government to burn Ms. Morrison's marijuana crop whereas a Justice Thomas wanted to allow Ms. Morrison to grow that marijuana.

The desire to go back to the 19th Century would require the Constitutional repeal of regulations for the health and safety of Americans that most people take for granted now like food and drug laws, as well as environmental and civil rights laws.  

All of those laws were found to be within Congresses enumerated powers through the Commerce Clause. The more informed ones who advocate an expansion of the Tenth Amendment to usurp Congresses regulatory authority realize that the first step in that process has to be a dramatic  alteration of about a century of the Supreme Court's interpretation of the Commerce and Necessary and Proper Clauses.  This has nothing to do with the proper interpretation of those Clauses, but only the reactionaries' desire  to turn back the clock, to enable individuals to do as they please regardless of the consequences to others,  and  to eliminate every piece of progressive legislation adopted by the federal government for the past 100 years.  Those individuals will identify themselves as conservative and align themselves with the GOP. I believe that there are millions of them, and a few sit on the Supreme Court today picked by their fellow "conservatives" in the GOP.  I previously discussed the use of labels in connection with this philosophy in prior posts.  

Limbaugh, the Titular Head of the GOP, on How to Save the Economy/ Dems Go Wild in Stimulus Package/GOP and the Lochner Era


Lowe's had a dismal quarter and forecasted 2009 earnings below the consensus estimate.  

Pinnacle West, one of my electric utility holdings, reported a quarterly loss largely due to an impairment charge from its real estate subsidiary. 

Hawaiian Electric (HE), which is just on a monitor list, stated it would maintain its dividend after missing the analysts' earnings forecast.  

There really is nothing positive to say about any corporate development today. My lottery ticket in Sunopta came close however with it guidance for 2009, but I have to emphasize that expectations are already really, really low when I talk about 100 shares of a stock purchased for just over a buck.  

I am interested to see if gold can move above a $1,000 an ounce, stay above that level, and then accelerate its move up.  WSJ.com

I have always viewed gold as part of an asset allocation and it is starting to pay off now.  I am not yet a seller. Possibly, I may make some sales around $1500. My buying stopped when gold went over $300 several years ago, with my first buy being an American gold piece minted in the 1880s (what is called a coronet) bought when I was 13 with money saved from mowing lawns at $2 per, when gold was pegged at $35. 
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