Friday, July 31, 2009

House Deems "Cash for Clunkers" an Emergency, Allocates Another $2B

In case you missed out on the first billion dollars - don't worry, the House of Representatives has just passed HR 3435 ( Making supplemental appropriations for fiscal year 2009 for the Consumer Assistance to Recycle and Save Program) a.k.a Cash for Clunkers. This bill (below) will add $2Billion to the car buying extravaganza/spree event that blew through $1Billion in it's first week of existence. Details can be found on the self explanatory website

As someone who finds humor in virtually every piece of legislation to come out of Congress, we'd like to direct you to lines 18 through 20 of the fresh legislation, which reads:

"That the amount under this heading is designated as an emergency requirement and necessary to meet emergency needs pursuant to sections 403 and 423(b) of S.Con.Res. 13 (111th Congress)"

It's good to know that the boys in Congress consider a $4500 car buying rebate to be an "emergency"

HR3435 Sphere: Related Content

US Steel Cites Improved Demand; But From Where?

If you are into scouring the economic landscape for signs of good news - and by good news we don't mean second derivative technicalities - then you may have noticed the limited yet positive news from US Steel (X), which stated in it's recent earnings announcement that it will be increasing production capacity to meet demand from new orders. This news was initially denounced as entirely "stimulus" related; an assertion that may have overlooked some relevant facts. Below is what we know for certainty regarding US Steel's latest move:
  1. The particular facility that has benefited from the capacity increase is Granite City Works, located in southern Illinois.
  2. Granite City produces hot rolled, cold rolled, and coated sheet steel product for the "construction, container, piping & tubing, service center, and automotive industries.
From here we can basically rule out several industries as the source of new demand. Statements made by the Company's Chairman and CEO John Surma during the Q2 conference call would indicate that Tubing was not a bright spot for the Company during the most recent quarter:
"This severe downturn was primarily driven by the combination of lower demand due to reduced drilling activity, and extremely high inventory levels in the tubular supply chain caused by unprecedented levels of unfairly traded and subsidized Tubular imports from China. The Tubular results also reflects idle facility carrying cost of approximately $25 million and lower cost to market adjustments."

Additionally, the Census Bureau's latest report on construction starts doesn't indicate much of any uptick in construction spending.

That leaves the automotive industry as the most likely candidate. A comparison between April and May of 2009 light vehicle sales numbers shows that GM, Ford and Chrysler logged month-to-month increases of 11%, 20%, and 3% respectively. Furthermore, we would suspect that the automakers anticipated a successful running of the "Cash for Clunkers" program, which in fact nearly exhausted it's $1Billion budget in one week alone.

With the source of US Steel's fresh demand likely identified, the question becomes whether this demand is of a sustainable nature. That depends. It's probable that the White House will rush to extend funding for what has turned out to be the most popular stimulus extravaganza as of yet. Unfortunately, this program could simply lead to a double-dip style decline in new car sales, as anyone who has remotely considered buying a new car will likely take advantage of the government's recent auto largess. The best hope for US Steel is that, by the time "Cash for Clunker" demand begins to fade, additional rounds of stimulus money will have found their way into the real economy. For now, that appears to be the best hope. Sphere: Related Content

Treasury Spends $90 Million to Create New Housing Inventory

The Treasury Department announced yesterday that it has allocated $90M from the American Recovery and Reinvestment Act towards affordable housing in several states. Based upon the details included in the press release, it appears that Treasury will be providing funding for stalled development projects located - in at least one instance - in a town of less than 5000 persons. This particular expenditure, directed towards a previously failed elderly housing development, will flow to the town of Osawatomie, Kansas.

To be clear, we do not have an issue with elderly persons being provided a place to live. Our contention arises from what appears to be the creation of new housing inventory by the federal government. For the housing market to recover, a very simple dynamic needs to emerge: housing starts must remain subdued for a period, and be accompanied by higher sales that are a function of depressed prices. We have already seen some positive data points emerge as of recent in terms of the rate of home sales; signaling that at least to some degree, prices have dropped sufficiently to spur new demand. This trend will be rendered useless by the creation of new inventory, which will serve to negate the positive inventory reductions associated with higher sales. Furthermore, Treasury's strategy is another example of inefficient government spending; it is directing funds towards projects that the free market has abandoned, for the purpose of achieving a political agenda. Although the roots of said agenda may be fastened to a moral purpose, the continuation of these policies will only serve to prolong the housing slump.

Research facilitated by InfoNgen Sphere: Related Content

GDP Falls Less Than Expected On Government Expenditures

The Commerce Department's Bureau of Economic Analysis released it's advanced estimate of gross domestic product (GDP) figures this morning which indicated that the economy contracted less than expected in the second quarter of 2009. The 1% annualized second quarter decline will likely be celebrated, as it is a departure from the ~6% annualized declines the economy experienced in both the fourth quarter of 2008, and the first quarter of the current year. The story behind the numbers is however, no cause for celebration.

The true health of the economy- broadly defined by us as the ability of the private sector to maintain capital expenditures, create jobs, and service it's debt related obligations- has seen virtually no improvement, and in fact has continued to deteriorate throughout the current quarter. What is evident though, is that Government expenditures-a dollar amount that contributes to GDP in the same manner as private investment - have been propping up our largely wilted economy. From the Commerce Department's press release:

"Real federal government consumption expenditures and gross investment increased 10.9 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 13.3 percent, in contrast to a decrease of 5.1 percent."

The trend towards increased Government spending is illustrated by the chart above, which takes a handful of the categories that contribute to GDP and compares the dollar value of those contributions from 2004-2008. It's obvious from the chart that Government spending is not only resistant to recessions, but that it somehow strengthens during a decline! Now, Government spending is not the same as economic activity generated by the private sector; for the most part because Uncle Sam's expenditures are not naturally allocated towards the most efficient available opportunity, as is the case with private investment. Rather, the federal government's dollars are doled out primarily via political considerations. One would expect this wastefulness to be magnified during a recession, where the number and magnitude of profitable investments is on a decline, while the Government's absolute dollar expenditures are rising. Such levels of spending will serve to create the illusion that the economy is bottoming, recovering etc., all the while the plight of the average individual continues to deteriorate. Sphere: Related Content

Tuesday, July 28, 2009

Parsing the Case-Shiller House Price Data

On the final Tuesday of every month, the nation is treated to the data point known as the S&P/Case-Shiller Home Price Index; offering us a snapshot of housing price performance across 20 major metropolitan areas. (As a side note, why is Houston not included in this list?) The chart above illustrates the performance of the 20 cities covered by the index as of May 2009 (unfortunate 2 month lag time). We'd recommend assessing the data from this perspective, as the headline number reported in the media belies the fact that all real estate is local; to a degree that is. Breaking the chart out into individual cities allows you to discern the differences in the health of each market; it also illuminates the fact that not all cities participated in what could be called a "boom" in real estate during the past decade - conversely, not all areas of the country have "busted". Relevant observations from today's release:
  • Home prices in every metropolitan area except Detroit are, as of May 2009, above their January 2000 level.
  • New York is still 70.5% above it's January 2000 level
  • Month-to-month, Cleveland (surprise) logged a 4.1% increase; the highest in the series. Las Vegas dropped 2.6%, earning that city the title of "laggard" of the group.
  • Every city logged a year over year price decline, however the range was 30.1 percentage points. Max: Dallas -4.1% , Min: Phoenix -34.2%
The fact that Case-Shiller ticked positive for the month shouldn't however be a cause for excitement. For housing to "recover", the plight of the average citizen must actually improve. Rising unemployment and falling wages have never been a recipe for a strong housing market; except in the NAR's world. Sphere: Related Content

Who is the Secret "Oxygen Payments" Lawmaker?

For the second time in just a handful of days, the Wall Street Journal has mentioned a specific Washington event - recalled by White House budget chief Peter Orszag - that detailed a certain lawmaker's reaction to his assertion that health care costs must be kept under control. Members of Congress play a special role insofar as health care costs are concerned, as they control Medicare's bidding processes (or lack thereof), as well as the level at which Medicare will reimburse doctors for certain procedures. Anyways, Mr. Orszag reportedly told Laura Meckler of the WSJ that, during a recent meeting with lawmakers, his message of "cost savings" was interrupted by a representative who stated that her highest priority was "winning higher payments for oxygen suppliers". It appears as if Mr. Orszag, intent on avoiding the uproar that would result from his stating the actual identity of "oxygen supplier" lawmaker, has chosen to take a high road of sorts - and let somebody else figure out who this mystery lawmaker really is.

Thanks to the internet, we believe that we have developed a list of suspects, based on the small number of facts afforded us. The first bit of evidence to turn up is that the American Association for Homecare - an association that "advocates" (lobbies) on behalf of the homecare community (to Congress) - has been an ardent supporter of H.R.1077, the Medicare Home Oxygen Therapy Act of 2009 the Medicare Respiratory Therapy Initiative Act of 2009. The AAH even provides you with talking points, conveniently located on their website (and below) The AAHomecare's main thrust seems to be preventing the process of competitive bidding in the Medicare arena. As you can see, the talking points are very Obama-like; a.k.a assertions of savings are made without providing any supporting evidence.

Now, we assume that any lawmaker bold enough to introduce her oxygen-tank-payment concerns into a Cost Savings Meeting would be very likely to have sponsored or co-sponsored H.R.1077. A little research shows that this bill was sponsored and introduced by Rep.Mike Ross (D-AK), and co-sponsored by 23 other members of Congress. But wait; Mr. Orszag's account of the mystery reimburser identifies the Congressperson as a female, of which there are only a handful who have signed onto this bill. We have taken the liberty of listing them below:
  • Rep. Tammy Baldwin (D-WI)
  • Rep. Lois Capps (D-CA)
  • Rep. Lucille Roybal-Allard (D-CA)
So there you have it; by the power of deduction, we have determined that this infamous, mysterious Congressional grabber of pork is, in all likelihood, one of the Congress persons listed above. We will continue, in unrelenting fashion, to find out who this individual is. Tips welcome of course.

edit @ 2:30pm*Note: As was pointed out by a reader below, HR 3220 is a bill that would seem to be more directly applicable to the issue of the actual "oxygen". The problem is that HR 3220 is light on co-sponsors (only 1); therefore offering zero worthwhile "evidence". Our opinion diverges from the lobbyist commented below when he/she states that HR 1077 and HR 3220 are about completely different issues. It seems obvious to us though that providing Medicare coverage of respiratory therapists(HR 1077) is Quite related to reforming the reimbursement for home oxygen therapy services(HR 3220). For all practical purposes, we fail to see how there is actually any difference between the two, aside from the fact that HR 1077 appears to be the more inclusive of the two. Thank you for the comment though; we did get a bit sloppy on the reporting of this. Next up: an investigation into Rep. Tom Price (R-GA)

AAHomecare Competitive Bidding Talking Points 4.30 Sphere: Related Content

Monday, July 27, 2009

New Home Sales Up 11 Percent; Don't Celebrate Too Long

The Commerce Department this morning announced that sales of new, single family homes for the month of June increased by 11 percent (month to month). Because analysts were expecting a bump of only 2.3%, the news fueled the view - shared by many misunderstood individuals - that the housing market has bottomed, and may even have begun it's first "leg" of recovery. In evaluating this claim, it would be prudent to highlight several facts pertaining to the residential housing market, notably:
  • Although the month-to-month comparison is positive 11%, the level of new home sales in June 2009 was 21.3% lower than in June 2008.
  • At the current level of new home sales and new home starts, the supply of housing will return to a level of around 6 months worth (considered healthy) of inventory in early 2010. This is good news, however, Housing Starts are the wild card; this data point is heralded as a sign of recovery, yet too many new starts will simply contribute to the backlog of inventory.
  • Those "sales" that were logged in June were facilitated by the record low mortgage rates of the April/May time period. There has been some volatility in the average mortgage rate since then - owing to volatile Treasury market conditions - but the overall trend has been towards slightly higher rates.
  • The first-time-home buyer-tax credit (a.k.a that 8 grand cash injection) has been cited as an explanation for the uptick in new home sales. Needless to say, the tax credit does not apply to homes purchased after December 1,2009, prompting speculation as to whether the recent uptick in new home sales is even sustainable.
Finally, we would note that new home sales only represent 15% of the US residential market; the other 85% is comprised of existing homes. When you apply a little bit of logic to the situation, it makes perfect sense that new sales would begin ticking back prior to existing sales. The reason: new homes are sold by businesses, and existing homes are sold by individuals. In an inefficient market such as real estate, the price of an individuals home is largely determined by:
  1. What he/she thinks the house is worth
  2. How bad he/she needs to sell the house
Homeowners are notoriously optimistic concerning the value they attribute to their own residence. Buyers, as it turns out, are not so optimistic. The result is a massive bid/ask spread that exists for any piece of real estate listed on an MLS; with the length of time it takes to sell the asset largely a function of the size of the spread.

New home sales in contrast, are for the most part transactions conducted between a builder and client/customer. The builder has more resources, and is likely more aware of the proper ask price than the individual seller. Additionally, the publicly traded builder can reap a tax benefit by offloading inventory at a price below his basis.

We aren't perma bears by any means; however, evidence of a more sustained and substantive nature is required before we will throw our hat into the "residential recovery" ring. Sphere: Related Content

Verizon's Net Falls; Revenue Defies Trend

Verizon Communications (VZ) reported a 21% quarterly decline in net income, although the wireless behemoth's sales increased by 11.3% compared to the same quarter a year ago. The Company's results are essentially inverse to what we have seen coming out of of corporate America for the current quarter, as Verizon's net was adversely affected by extraordinary/one time items, despite logging sustainable revenue growth. This contrasts with the new, popular way of doing business, which involves draconian costs cuts and the fire-sale of critical components of the business (Citigroup) in order to hand Wall Street the EPS numbers they are pining for. Needless to say, revenue growth is not customary in the current economic environment.

The fact that Verizon was able to add 1.1million new subscribers during the quarter, in addition to increasing the top-line, would seem to indicate that cell-phones have emerged as a highly recession resistant luxury item. The fact that anybody would argue with us concerning cell phones status as a "luxury item" only proves our point further. Communicaion in and of itself is obviously not a luxury, however, when a 15 year old girl has the latest Blackberry storm International Edition, something has gone clearly gone awry with the country's ability to prioritize it's spending.

From an investment standpoint, Verizon fits nicely within our parameters for an attractive company: It is generating massive amounts of cash - each second - and it's product has drifted into the realm of non-discretionary purchases. As always though, these are just our parameters, and aren't necessarily suitable for everyone.

Disclosure: no position in VZ Sphere: Related Content

Saturday, July 25, 2009

RealPoint Discloses CMBS Methodology

In a move that is simply too coincidental to be a coincidence, the ratings firm RealPoint on Thursday announced that it will make public the underlying methodology pertaining to three separate CMBS ratings actions. The decision comes on the heels of recent criticism towards Standard and Poor's for that firm's erratic ratings activity in the CMBS realm. Investors are - wisely we believe - questioning the credibility of S&P in light of the fact that CMBS downgrades harm the Government's ability to effectively conduct a number of rescue schemes, including the TALF. S&P's labeling of some securities as AAA - despite having downgraded those securities just a week earlier - cast doubt over whether the ratings firm is operating independently of the United States Government (and it's every wish).

RealPoint must see the current situation as an opportunity to supplant the (three) major ratings firm in the eyes of investors. The pdf below was released as part of the latest RealPoint initiative, and would appear to view commercial securities (at least this specific issue) from a more critical (realistic) perspective than it's more established (by the Government) competitors. We welcome actions such as RealPoint's because, as every good capitalist is aware, it's all about competition.

RealPoint CMBS methodology disclosure Sphere: Related Content

Guaranty Financial On the Precipice of Collapse

A new and distinct phase of the financial crisis is beginning to materialize, characterized in part by the fragile(please excuse the euphemism) state of Guaranty Financial Group Inc. (GFG) - a financial institution that declares itself to be the second largest publicly traded bank in the state of Texas. The speculation over Guaranty Financial's ability to avoid FDIC seizure has intensified in recent days, due in no small part to the startlingly grim language contained in the bank's most recent 8-K concerning "material impairments" to the business. From the SEC filing:

As previously disclosed in a Current Report on Form 8-K filed on June 29, 2009, Guaranty Financial Group Inc. (the “Company”) has been working on a plan to raise substantial capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”) through an open bank assistance transaction with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Thrift Supervision (“OTS”) and with private investors, including the Company’s current principal stockholders. On July 17, 2009, at the direction of OTS, the Bank filed an amended Thrift Financial Report (“TFR”) as of and for the three months ended March 31, 2009. This filing reflected substantial asset write downs as described below, which resulted in the Bank having negative capital reflected in the TFR as of that date.

The Company believes that these write downs foreclosed the possibility of applying for open bank assistance. Our primary stockholders have not affirmed their willingness to commit to a capital infusion in support of such an application. As a result, the Company no longer believes that it will be possible for the Company or the Bank to raise sufficient capital to comply with the Orders to Cease and Desist described in the Company’s Current Report on Form 8-K filed on April 8, 2009. In light of these developments, the Company believes that it is probable that it will not be able to continue as a going concern.

With nearly a billion dollars in annual sales, and over two thousand employees, the collapse of Guaranty Financial would be no small event; it wouldn't however, pose an immediate threat to the stability of the financial system as a whole. In the latter months of 2008, the size, reach, and breadth of the most at-risk financial institutions was such that the after-shocks of failure could have brought our financial system to it's knees. Round #2 - a round that is gaining clarity on a daily basis - is most accurately described by the old saying "death by a thousand cuts". Bank failures of a magnitude similar to Guaranty Financial will not produce the immediately recognizable reverberations seen post-Lehman. What these "small" failures will do though is slowly exacerbate the crippling forces that presently plague the economy, drain further the FDIC's already depleted "rescue fund", and contribute to the decidedly deflationary trajectory of the United State's economy.

*no position in GFG Sphere: Related Content

Friday, July 24, 2009

S&P Turns Bullish on REIT's; Justification for CRE Upgrades?

In what appears to be a thinly veiled justification for recent ratings vacillations on commercial mortgage debt, S&P has just released an uber-bullish opinion of REIT's - specifically those that have accumulated large shopping center portfolios. The Mcgraw-Hill (MHP) subsidiary cites, among other supposedly positive factors, the "diversification" of REIT's tenants and locales as a reason to plow your money into the stocks of these Trusts. S&P identifies this positive aspect as being contrary to the experience of developers who, according to S&P, tend to own/operate single tenant locations; the implication being one of having "all your eggs in one basket". The most bizarre comment though, was that "local opposition" to developers seeking approval for new retail centers would benefit these REIT's by preventing neighboring competition. Such a statement caused us to wonder who, exactly, is charging ahead with plans to build new shopping centers right now? And where would the funding come from, especially for these "small developers" that S&P is speaking of.

That this note lacks of any sound reasoning or logic is not surprising. Most likely, S&P is painfully aware of the criticism it has received for it's sudden about face on commercial mortgage debt; specifically the fact that they are choosing to upgrade these securities to AAA status - for no apparent reason, and actually in defiance of what every fundamental indicator is telling the world at present. We wouldn't be surprised to see S&P pepper the world with more bullish CRE opinions in the near future, as they struggle oh so desperately to justify the non-sensible - and likely politically strong-armed - re-labeling of struggling debt to AAA. Sphere: Related Content

The Fed: Bull-Dogged Into Regulation Z Reform

In what amounts to little more than a complete waste of time, Ben Bernanke and the Federal Reserve Board have been bull-dogged,rail-roaded, pressured etc. into suggesting several "reforms" to the Truth-In-Lending Act, known fondly as Regulation Z. Doctor Bernanke has spent the past two days in front of Congress, attempting to defend the Fed's mortgage oversight role, and apologizing for the Fed's lack of intervention into the mortgage industry's consumer-related practices. The Federal Reserve Board was politically adept enough to issue a press release on the subject, transcribed in part below:

"The Federal Reserve Board on Thursday proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs). These changes, offered for public comment, reflect the result of consumer testing conducted as part of the Board's comprehensive review of the rules for home-secured credit. The amendments would also provide new consumer protections for all home-secured credit."

"Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances," said Federal Reserve Chairman Ben S. Bernanke. "It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset."


"In developing the proposed amendments, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices. To prevent mortgage loan originators from "steering" consumers to more expensive loans, the Board's proposal would:

  • Prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms; and
  • Prohibit a mortgage broker or loan officer from "steering" consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation. "

The sad thing is, these hearings were never intended to be conducted for the benefit of the consumer. Rather, the hearings and subsequent regulatory "reforms" are nothing more than a cheap circus act; performed by Congress, and designed to give them some face time spent scapegoating anybody other than themselves for the financial crisis. Bernanke and company understand this, and are simply participating in the insanity so that Congress doesn't strip away any of the Fed's cherished independence. As for the consumer, we would note that in all likelihood, nothing will change except for the fact that he will be forced (to pretend) to read another set of worthless "disclosures". And in terms of trying to prohibit mortgage brokers from "steering" clients to higher commission products: good luck. If a mortgage broker was engaging in this sort of behavior prior to Congress noticing, it is likely that nothing short of excommunication from the country will prevent him from continuing.
Sphere: Related Content

Thursday, July 23, 2009

CIT's Last Hope May Be Government Rescue

In yet another twist to the story that will not end, Senator Chriss Dodd (D-CT) stated with regards to CIT Group Inc.(CIT) :

"I wouldn't rule out the possibility of a government intervention financially",
"Maybe there are some alternative ideas that would allow the company to survive in an altered state, but still allow it to provide the assistance and support they have to smaller business"

This statement comes on the heels of what appears to be an effort by the advisers to CIT's bondholders to push the company into Chapter 11 bankruptcy in August. This news was initially broken by Bloomberg(here), who purpotedly learned of the adviser's intentions through "people familiar with the matter".

We must remember that although Chris Dodd is the Chairman of the omniscient and omnipotent Senate Banking Committee, his voice does not necessarily represent that of the Administration's, or for that matter, the voice of fellow Democrats in Congress. If your recall, earlier this week Chris Dodd managed to get in the crossfire of the impotent Capitol Hill debate that centered around whether or not to buy more F-22 fighter jets this year. This was by the way, one of the more irrelevant and useless debates we have ever seen, as the entire escapade was about Obama trying to prove that he could save the country slightly more than a Billion dollars by curtailing a weapons program. For whatever reason, Dodd and a handful of others bucked up to Obama and positioned themselves as staunch defenders of the program. The most likely explanation being that the F-22's are scheduled to be manufactured in Dodd's district. This is beyond the point though, which is that the king's soldiers do not always fall in line with each other. Throw a little high-from-victory Republican opposition into CIT's bailout equation, and the outcome appears far from a given.
Sphere: Related Content

Charlie Gasparino; Visibly Agitated By Blogs

As a larger and larger share of the world's information is disseminated via the blogosphere, there are bound to be traditionalists caught in the crossfire - those who don't "get" it. The typical response from the mainstream media has been to sporadically lash out at blogs, usually by using specific - albeit isolated - examples of misinformation supposedly uncovered on these non-regulated sounding boards. The next step is to attack the author, ad hominem style, as a means of discrediting him. Step #2 is unfortunately impossible to do when the author produces his/her content under a pseudonym; a decision made by many for the sake of their privacy, to evade retaliatory action from an employer, or simply because it makes things a whole hell of a lot easier. Mr. Gasparino apparently feels empowered enough to attack an entire class of individual - those choosing to blog anonymously - for what he perceives to be personal attacks. This is quite an unfortunate reaction, as it reflects poorly upon Charlie Gasparino's maturity, not to mention the judgment of CNBC itself, who continues to provide Mr. Gasparino with a platform from which to launch his ad hominem, broad based attacks.

Sphere: Related Content

Bernanke and the Fed: Firing on All Cylinders

The Federal Reserve Bank of New York has just reported it's activities under the Agency Mortgage-Backed Securities Purchase Program, for the 7 day period ending on July 22nd. For the mathematically lazy, the purchases documented below amount to (net) $21.125Billion worth of new agency securities. The majority of the lever-pulling is happening in the 30 year, and at the 4.5-5 coupon. These MBS's will presumably be tucked away in the Fed's gargantuan balance sheet, where they will co-exist with the Maiden Lane trio as well as any number of putrid securities.

Purchases ($ million)
Settlement Month
30 YEAR 4
0 0 525
2,250 2,750 2,200
1,600 2,000 600
150 1,000 0
1,050 500 200
1,250 2,600 0
0 950 0
0 650 0
0 0 120
15 Year1 4 Sep 150 0 0
4.5 Sep 0 700 0
Total 6,450 11,150 3,645

1 Inclusive of 10 year product.
2 20 year, 40 year and other agency programs.

*InfoNgen facilitated this post
Sphere: Related Content

Buffett Sees the Writing on the Wall; Reduces Moody's Stake

Warren Buffett's business-owning conglomerate - Berkshire Hathaway (BRK/A) - reported that it has reduced it's stake in Moody's Corporation (MCO), public parent of the ratings agency extraordinaire Moody's Investor Services. Buffett reportedly reduced his MCO holdings by nearly 20%, from a 20.4% stake in the company to only 16.8%. From Reuters:

"NEW YORK, July 22 (Reuters) - Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) this week lowered its stake in credit ratings provider Moody's Corp (MCO.N) to 16.98 percent from 20.4 percent, the first reported reduction since 2000.

The sale of about 8 million shares was revealed three months after Moody's stripped Berkshire of its own "Aaa" rating, and a day after the Obama administration proposed new disclosure and conflict of interest rules for rating agencies.

Buffett has long defended investing in the New York-based parent of Moody's Investors Service, while saying he does not rely on credit ratings to make his own investment decisions."

The Reuters piece seems to imply - in an ever so subtle fashion - that Berkshire's actions were some form of retribution for Moody's own stripping of Berkshire's AAA rating. The more plausible explanation is that Buffett, like many other astute market observers, is in tune with the steadily increasing investor/regulatory antagonism being directed towards the ratings establishment. The major credit rating firms (Moody's,S&P,Fitch) are quickly losing credibility with investors; summarized in a most illuminating fashion by the ZeroHedge piece entitled "S&P Committs Professional Suicide With Ratings Round Trip, Underlying CRE Remains Toxic Garbage" Investor sentiment also appears to be coinciding with a push by Washington to punish another perceived scapegoat of the financial crisis, and the ratings firms have emerged as the most vulnerable target. Moody's et al are unfortunately guilty of wrongdoings that the public can grasp with ease, thanks to the ubiquity of the english alphabet. There is no telling what sort of havoc the Obama Administration will wreak upon these companies; angered as it will be for allowing health insurance reform to slip from it's steadily-less-popular grasp. This is a reality that we suspect Mr.Buffett is keenly aware of.

InfoNgen facilitated the researching of this post

Sphere: Related Content

Ford Reports a $2.3B Profit; Others Aren't So Sure

Here's a riddle: How do you report a profit, a loss, and a $1B cash burn - all in the same quarter? Well, if you're Ford(F) this isn't much of a riddle, as it appears to be exactly what happened during the automotive giant's fiscal second quarter. As the results came in this morning ~6:45-ish, the CNBC angle (disclaimer: we watch CNBC to pass the time on the treadmill, with the additional purpose of looking to ultimately make fun of the network) was that Ford had lost 21 cents last quarter, but still managed to beat analyst estimates, who were looking for a loss of roughly double what was reported. By the time we cranked the computer up, the WSJ had already blasted out the following story entitled "Ford Posts $2.3 Billion Profit". To the WSJ's credit, the billion dollar cash burn is mentioned just moments into the story, immediately before the reported profit is attributed to "debt-restructuring actions in April".

Accounting maneuvers aside, the real story here is that Ford North America logged a pre-tax loss of $851Million. In fact, Ford's only profitable (automotive) regions for the quarter were South America and Europe, which posted pre-tax profits of $86M and $138M respectively.

The only other bright spot for Ford was, strangely enough, Ford Motor Credit Company - proud owner of a $646M pre-tax profit.

We've actually come to admire Ford for it's determination to stay off the Government's till. Hopefully it can stay that way.

Sphere: Related Content

Wednesday, July 22, 2009

Wall Street Pro Returns - With a Vengeance

Among the topics covered in WallStreetPro's latest tirade are increasing income inequality, the recent furor over Morgan Stanley's bonus payouts, and of course, the relatively inferior nature of Chinese manufactured products (at least insofar as their ability to withstand repeated blows from a baseball bat)

Sphere: Related Content

Obama's Political Capital Evaporates Over Health Care Proposal

First of all, it needs to be pointed out that Katie Couric completely misspoke - not 5 seconds into CBS's coverage of the "Presidential News Conference" concerning the budgetary impact of Obama's health care proposal. She clearly stated that the CBO estimated the proposed bill would increase Uncle Sam's budget deficits by $237B over 10 years. Ms. Couric: you were over $800B short, and we can't be certain whether or not it was intentional. *7/23/09 Clarification: We've received questions about this point. Technically, $237B is the figure provided in the CBO director's report as the projected deficit impact - <$1Trillion is the total cost. Our point though is that if we can't pay for the programs currently in place, won't $1Trillion in spending over the next ten years be Entirely Deficit Spending?

Second of all, this health care proposal is done; it has been killed, stonewalled, stymied - or whatever your word of choice may be. We're not sure whether President Obama has personally admitted to this yet - in secret that is - but the bill took two direct blows that it ultimately will never be able to recover from. Dagger #1 was the CBO's revelation that the proposal will add >$1Trillion to the deficit over ten years. Dagger#2, and the finishing blow we might add, was the strategic Democrat blunder that was the proposed "surtax" on families at certain income levels to help pay for the reform. This was a politically inept move by the more liberally inclined members of the Party, who for some reason forgot that a large portion of their newly achieved majority in Congress was provided courtesy of traditionally Red districts. The Democrats who were recently sent to Congress by these wealthier districts did not possess a mandate to increase their constituents taxes; quite to the contrary, many center-leaning Republicans voted in favor of a Democrat last November based upon that Party's promise to restore fiscal discipline to the nation. That has not happened.

Ultimately, we are not sure why Obama has chosen to conduct tonight's "press conference". The President is literally putting all of his political capital on the line; all in pursuit of an agenda that, in all likelihood, will not succeed. This bill will be stalled, and will either never come to a vote, or will remain in limbo while Congress takes it's cherished "recess". While Congress is in recess, this proposal will be torn to shreds by special interest groups. There is little to no chance of success; we are quite sure of it. Sphere: Related Content

GE Is No Longer a Financial Company

General Electric (GE) has spent the past 18 months operating under the stigmatic label of "financial company". During the real estate boom such a label was entirely appropriate, as operating earnings from the Consumer/Commercial Finance segment routinely represented 40-50% of GE's consolidated net income. Now however, as evidenced by the revenue and profit breakdown charts, the Company has already begun to take the form of an Infrastructure conglomerate that happens to have a finance unit. Within the context of many investor's vision of the progression of the global economy, a Company described by the terms above would be exceedingly well positioned to capitalize on the future "building of the world". GE's capacity for future growth could be hindered by larger than expected losses at GE Capital. However, based upon our interpretation of the most recent detailed disclosures pertaining to that unit, there is reason to be optimistic.

On March 19,2009, GE released an 88 page presentation that detailed GE Capital's commercial real estate, mortgage and consumer exposure. The segment's $81B commercial real estate holdings - split fairly evenly amongst debt and equity - are well diversified across all property types. In the debt arena, GE holds a first position lien in the majority of instances. When the Company assumes an equity position in a property, it does so primarily as the owner/operator without the use of any 3rd party debt. This is an extremely advantageous position to be in, as GE has the flexibility to manage it's leases and cash flows without the burden of debt service. Yes, GE Capital will face further real estate related losses. However, the manner in which GE has typically financed it's holdings should give it an edge over other traditional financial institutions.

General Electric is perfectly positioned, we believe, to profit from two major trends that are unlikely to be derailed.

First, is the United State's movement towards the adoption of cleaner energy technologies. On this note, the Company has already developed an Integrated Gasification Combined Cycle (IGCC). This process converts coal into a fuel that when burned, emits 50% less sulfur and other particulates than if not treated. Additionally, GE already offers wind,solar and nuclear power products.

Second, is what we simply refer to as the "building of the world". Power grids, clean water, and the inexpensive transport of goods through rail systems are all components necessary for the support of growing middle classes in the developing world. GE happens to offer products and services in all of these areas.

Without a doubt, problems linger on at both GE Capital and in the financial system at large. This fact may though have blinded many to GE's unique positioning as a Company which provides essential services to a growing world. As the problems at GEC are worked away over time, the trend that has already begun will become increasingly apparent: GE is no longer a financial company.

*long GE

Ge Capital Mar19-09 Presentation Sphere: Related Content

Bloomberg: CIT Rejected "Superior" GE Offer

Bloomberg broke the following story today, reporting that CIT Group Inc.(CIT), while standing on the precipice of bankruptcy earlier this week, rejected a $2B rescue financing offer from GE Capital. If we are to believe the publicly stated motive behind the rejection of GE's offer - the GE offer promised a cash injection a full 8 days later than the time frame offered by existing bondholders - it becomes alarmingly clear just how perilous a situation CIT found itself in.

To stimulate reader's minds in their pursuit of an alternate justification for CIT's rejection of an offer that contained terms more favorable than was available from current bondholders, we will provide a set of figures below. Below we have a list of the top three aircraft Lessors in the world as determined by the number of aircraft owned by each entity. The number in parenthesis represents the size, in number of aircraft owned, of each company's fleet.
  1. General Electric (1500)
  2. American International Group (980)
  3. CIT Group Inc. (300)
It seems that if today's financial markets could be converted entirely to numerical representations and plugged into an Excel spreadsheet, the error phrase "circular reference" would flash repeatedly.

*long GE
Sphere: Related Content

Tuesday, July 21, 2009

BOE Reports Weak Mortgage Demand, Foreign Capital Outflows

In it's monthly report chronicling the wounded-calf-like state of the British lending establishment, the Bank of England indicated that flows of net mortgage lending, in May, reached the lowest level ever recorded in the modern era of data collection (that would be 1993 for the BOE). In a positive twist, the BOE did report that major UK lenders have been lowering their credit standards as of recent. In all seriousness though, the UK is basically the US - minus of course the cheap reserve currency. Therefore, it shouldn't come as a surprise that the BOE's report would contain some difficult (if you're British) to swallow data points.

The most dismal section of the report can be found on pg5 of the pdf below, specifically Chart 1.1 "Contributions to growth in lending to UK businesses". This chart contains nothing that could even remotely be spun as "green-shootish", as the flow of capital away from UK businesses appears to be accelerating. The trend is most pronounced as it relates to the direction of flows of foreign capital, a source of funds that is literally fleeing the island. This new trend is of an especially aggravating nature for UK businesses, as Chart 1.1 illustrates the fact that in the final stages of the debt bubble, businesses within the UK relied on foreign-owned Inflows for almost half of all new growth.

In short, if we could create a new word, designed to convey a stronger feeling of bearishness than the word "bearish" itself, we would use that word to describe our short,medium, and long term investment sentiment towards the UK economy.

*no position in the UK.

BOETrends in Lending July09 Sphere: Related Content

Government Stimulus;Supporting the Economy With Hot Air

The Washington Business Journal posted a piece today entitled "Survey: Landscape work increasing"; the purpose of which (by our account) was to spin the American Society of Landscape Architects recent survey in a positive light. The survey basically consists of asking participants - in this case 507 landscape architecture firms - to respond to a series of questions related to the most recent quarter's billable hours, new work inquiries and hiring tendencies. Additionally - and further evidence that the Government's rescue schemes have pervaded every just about every aspect of business - the past few ASLA surveys have included questions pertaining to the "stimulus funds", and whether those monies had managed to trickle their way into the participants line of work. As evidenced by the title of the Business Journal piece, the survey did show a reported increase in business activity; predictably non-emphasized by the story though, was the fact that all of the uptick can be attributed to stimulus funds. Based on the survey, the percentage of respondents that indicated billable hours for the quarter to be normal (generally defined by the survey as "right where they usually are") or better increased by 6.8%, compared to Q1. The survey also revealed that the percentage of firms that reported having benefited from "stimulus funds" increased by 6.5% in Q2 v Q1. Clearly, the only growth occurring right now is entirely stimulus related; it is also meager.

Some critics might respond that, well, "business is business", so who really cares where it comes from? Besides, the government is simply simulating demand until the private sector can "recover". We would retort that such an argument ignores the point altogether, and would seem to indicate a certain obliviousness to a certain reality: the United States has been operating beyond it's actual capacity for several years now; it's illusory growth being the product of massive debt agglomeration that grew industries beyond what any real fundamentals are capable of supporting.

The Government, through it's stimulus efforts, is merely blowing hot air into a balloon. The trouble is, that balloon has a leak in it. Once the air pressure abates, the balloon will continue to deflate; until such point that it reaches a size that can be independently supported.
Sphere: Related Content

H.R.1207, Federal Reserve Transparency Act Gains Tractions

Ron Paul's (R-TX) viral bill, introduced before the House as H.R.1207 in February 2009, today enjoys front page mention in this WSJ article. Having gained the support of a full two thirds (2/3) of the US House of Representatives, it is no longer feasible for major news outlets to ignore Rep.Paul's crusade to bring transparency (albeit limited) to what is perhaps the most powerful organization in the world. We expect Rep.Paul to be criticized further as this situation progresses; even the WSJ chose to reference his role in the movie "Bruno" as if it proved some point about the Texas Republican.

We're torn, in a way similar to many, between the prospect of a Fed allowed to proceed in secrecy, and a vote-yearning political class; eager to assert it's oversight power by "slaying" the Fed with hearings, investigations, studies, committees, and any other process-formalities favored by Congress. At present though, Rep. Paul's bill appears benign and measured enough - it orders that the Fed be audited, not placed under direct Congressional supervision - that support for it would seem the wise option.

Rep. Paul's official website can be found at
You can sign the petition to Congress in support of HR1207 by clicking here

H.R. 1207 - Audit the Fed Sphere: Related Content

Sunday, July 19, 2009

Senator Barbara Boxer v CEO Harry Alford

We promised to provide an assessment of the political circus; for now, readers will have to be content with a glimpse.

Sphere: Related Content

Saturday, July 18, 2009

A Closer Look at JP Morgan and Maiden Lane LLC

One of the shadier - for lack of a more appropriate adjective - aspects of the Federal Reserve's activities is the presence of three borderline translucent LLC's on it's balance sheet: Maiden Lane LLC (ML LLC), Maiden Lane II LLC(ML II LLC) and Maiden Lane III LLC(ML III LLC). For now we will focus on ML LLC, the entity created to "acquire certain assets of Bear Stearns and to manage those assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to financial markets" (from NY Fed website). The creation of ML LLC occurred as a means by which to assist JP Morgan(JPM) complete the purchase of the investment bank formerly known as Bear Stearns. Presumably, the assets that found their way into ML LLC were selected due to their sheer toxicity, and more importantly, JPM's desire that it not acquire said assets. In other words, ML LLC is the financial equivalent of a leper colony, comprised of those assets deemed unsuitable by JPM.

Unlike a traditional leper colony however, ML LLC makes regular interest payments to JPM; payments that have amounted to nearly $300M since the inception of the limited liability corporation. This is a fact that receives little acknowledgment by those charged with the assessment of bank earnings. As Bank of America (BAC) and Citigroup (C) have been derided by the financial press and analysts for reporting "weak" earnings that were "bolstered by one-time gains", JPM's secretive subsidy is largely ignored; allowing the large bank to wallow about in it's largely favorable press coverage. Perhaps this means that JPM has quietly acted shrewder than even Goldman Sachs (GS), as that (investment?) bank has been the subject of mounting excoriation from an angry populace.

Nevertheless, a brief look at ML LLC's assets would suggest that the Fed is choosing to value it's holdings in an exceedingly optimistic light. The Fed states that in March of 2008, ML LLC's assets totaled roughly $30B. As of March 31,2009, the value of these same assets is reported at $25.3B, a decline of 15.6%. In it's brief explanation of the valuation methods applied to these securities, the Fed states that they are held at a "fair value", based upon the price at which a buyer would be willing to pay under "orderly market conditions". No definition of orderly is provided. Based upon the limited information provided by the Fed, we can determine the following concerning the composition of ML LLC's assets:
  • 45% of the residential mortgage loans were secured in either California or Florida
  • 79% of the commercial mortgage loans are classified under the "hospitality" property type
  • 51% of the non-agency CMO's were secured in either California or Florida
  • No private investor would ever want to touch these securities
What price could ML LLC's assets fetch under today's market conditions? Absent any real data, it is impossible to know. However we did find an interesting REIT, Hospitality Properties Trust (HPT), whose stock trades publicly on the NYSE - in theory subjecting it's property portfolio to a market based valuation. According to HPT's website, the trust's strategy is to "maintain and grow an investment portfolio of geographically diverse hotel and travel center properties". At the end of Q1 '08, HPT's share price stood at $34.02; by the end of Q1 '09, a share of HPT could be had for $12 - a decline of 64.7%. Obviously, the share price of HPT is not the most accurate bellwether for estimating the true value of ML LLC. However, with a notable dearth of information of any kind concerning ML LLC's rotting assets, it stands to reason that our approach is as good as any. That being said, we would encourage all readers to contact your Congress person and express your support for HR 1207, introduced by Ron Paul in February. You can do this by clicking here - the process takes less than a minute.

And that's the way it is.

*no position in any securities mentioned, although arguably, our tax dollars helped facilitate the Maiden Lane transactions.

Maiden Lane LLC Financial Records 2008 Sphere: Related Content

Philadelphia Goes the Way of California

In the latest sign that the nation's municipalities are hurtling towards an uncomfortable sort of insolvency, the City of Philadelphia announced via press release(below) that it has been forced to halt all expenditures other than employee compensation, debt service, and emergencies. Officially, the city is blaming it's woes on Pennsylvania's inability to overcome a California-like budget impasse. States, despite being the beneficiary of a nearly 1/3 slug of the recent Obama stimulus, can not seem to get their fiscal houses in order - in part due to the fact that they are not permitted to monetize deficits like Washington regularly (always?) does. This reality begs the question: what will States do next year absent massive cash transfers from Uncle Sam?

Philadelphia Budget Crisis Press Release Sphere: Related Content