MBIA insures corporate bonds, gov. bonds etc. Right now MBIA and AMBAC, the two biggest players in the bond insurance field, are the worry on Wall Street (see previous post on counter party risk i.e. bond insurers are a counter party). Yesterday MBIA's market value was approx $1.8 Billion, today the same company is worth $3 Billion (link). WOW! you might say their stock price must have gone up, up, up (the market value of a company is the (stock price) * (# of floating shares) ). But no, the value of the shares declined. How does this compute? Well to raise cash to keep its all important AAA credit rating, MBIA needed more cash "in the bank", so it decided to sell more shares (link). A secondary type stock offering usually has a higher cost of capital so this points to a possible shortage of borrowing opportunities for MBIA. This shortage is something to remember if MBIA needs more cash in the future. The amount of new shares sold increases the float by approx. 67% (from 123M shares to 205M shares). This is a huge number to increase the float by for a mature company. According to age old supply/demand as the supply of an item increases the value/price of that item drops. When the market (efficient or not) values a company at one level and the next day that level has increased by $1.2 Billion with no known fundamental changes to the business, then the (price of the shares)*(float) must eventually come down near the previous company value. The only way for that to happen is for the stock price to decline.
So what does all this mean? It means that MBIA increased its value by increasing the dilution of existing shareholders. Increasing the number of shares should eventually push the stock price lower and thus the market value of the company.
So what does this mean part II? Well if you believe this hypothesis, then the stock price of MBIA will decline (right now the AAA credit rating means more to MBIA than the price of the stock). You can profit from this by shorting MBIA. Of course with all their latest problems MBIA already shows a short position of approx %25 of its shares, so this option may not be the best. You could short AMBAC, but again their short position already is large. You could also join the revolution and use derivatives (the same things that got MBIA in trouble in the first place in a round about way) , more specifically put options on MBIA or AMBAC stock. But with all the volatility in the market and the companies in particular, the option premiums will be high. There are other things you could do, but I'm trying to lead people into finding more about this on their own and keeping my posts shorter (selling call options !!!!dangerous!!!!).
Until next time.
Friday, February 8, 2008
Friday, February 1, 2008
What I'm Reading Now
| ||||
| |
by: Satyajit Das
Tuesday, January 29, 2008
I've been humbled
While I did poke fun at Bush a few posts ago, this quote from last nights SotU address proved that humor can poke through the darkness.
He also pushed Congress to extend his tax cuts, which are to expire in 2010, and said allowing them to lapse would mean higher tax bills for 116 million American taxpayers. For those who say they're willing to pay more, Bush said, "I welcome their enthusiasm, and I am pleased to report that the IRS accepts both checks and money orders." www.ksl.com
I for one am tired of others telling me that I need to pay for their pet government programs. If they want it, let them contribute extra with a specification to the program they want funded. I believe in basic government services and not "bridges to nowhere".
Well anyway with respect to my lack of motorcycle posts I will add this picture so that you can now see what I'm currently lusting after.
He also pushed Congress to extend his tax cuts, which are to expire in 2010, and said allowing them to lapse would mean higher tax bills for 116 million American taxpayers. For those who say they're willing to pay more, Bush said, "I welcome their enthusiasm, and I am pleased to report that the IRS accepts both checks and money orders." www.ksl.com
I for one am tired of others telling me that I need to pay for their pet government programs. If they want it, let them contribute extra with a specification to the program they want funded. I believe in basic government services and not "bridges to nowhere".
Well anyway with respect to my lack of motorcycle posts I will add this picture so that you can now see what I'm currently lusting after.
Tuesday, January 22, 2008
A Dark Day
FIRST A PUBLIC SERVICE ANNOUNCEMENT: COLBY WHERE ARE YOU???
I'm sure everyone will soon hear of how the Fed is saving the economy by reducing interest rates by 3/4%. The news will go on and on about how this is a good thing and the ship will soon right itself. To use one of my more recently blogged expressions "Um, no". When the Fed lowers SHORT TERM INTERBANK interest rates eight days before its next meeting, it's NOT good. This is a sign of a drastic action for a desperate situation.
The public rarely knows what is the new, in vogue fear of Wall Street until after its happened. From what I have read (you never know the new fear unless you shift through the latest public fear to find the next one. You do this by reading several articles and picking up on the two or three sentences which coincide with the other articles. Now if I was any good with this I would be blogging from my beach house on Maui/Bali/Perth/Newport Beach/my own island etc. so take this with the knowledge that I can only guess as I'm an interested student and spectator) the latest fear is counter-party risk.
This type of risk is associated with the different parties subscribing to a financial instrument. Take a vanilla swap for instance. Two "people" Mike and Fred agree to pay each other a cash flow based on the USA short term interest rate (there are many good and valid reasons for doing this, but I won't bore you with the details). Mike has lost A LOT of money betting (yes, gambling) on Ma and Pa Kettles mortgage and can not pay Fred his cash flow. This is counter party risk. Usually the counter party risk in nominal if you contract with solid individuals with solid track records, credit, reserves, etc., but now with even the largest, supposedly secure financial institutions having difficulties and being "forced" (BofA) (quotation mark alert ;) ) to merge with severely troubled (Countrywide) mortgage companies, the balance sheets of these companies are increasingly under threat.
This is where counter party risk comes in. The vanilla swap contract that Mike and Fred entered into has a monetary value (asset) based upon the cash flows. If Mike or Fred (counter parties, Mike in this case) can not pay their part, the swap no longer has any significant value and is no longer an asset to the solvent(?) holder of the other side of the swap. Fred now takes a hit to his revenue (lack of cash flow payments from Mike) and to his balance sheet (the swap is no longer an asset and has to be removed from the asset side of the balance sheet). The problem now is whether Fred used this asset (the swap contract) to back (as collateral) a loan on his helicopter. If Fred did and Helicopter Lending Inc. finds out that this collateral is no longer worth anything then it will ask/demand/threaten Fred to back the loan with CASH. If Fred doesn't have the cash, he then defaults along with Mike. This scenario then dominoes throughout the financial industry and now the Fred's and Mike's of the world sell off contracts for pennies on the dollar (if they can find someone to buy them) to raise cash to back their other obligations. This further degrades the balance sheet as once lofty value assets are replaced with lower value cash or other financial instruments. If the balance sheet becomes unbalanced and companies run afoul of financial regulations and loan covenants, panic ensues. This is bad for everyone as institutions hoard cash to meet obligations or regulations, stop lending and consumers stop buying. This is the new fear on Wall Street.
To tie these two things together (yes I think they are related) the Fed may have lowered rates to help the financial institutions re balance their capital needs without resorting to a massive sell off of financial instrument assets. Whether this works or not is dependent upon the suckers that are in the barrel. If you think this rate reduction was to help you or me directly (we may be helped by not having our economy melt down), sorry, think again.
To tie this to a previous post about the value of the dollar, as interest rates decrease, the value of the dollar compared to other currencies decreases. This makes it more expensive to travel and increases the price of commodities like oil. Reducing interest rates also makes inflation likely higher.
Well till next time.
I'm sure everyone will soon hear of how the Fed is saving the economy by reducing interest rates by 3/4%. The news will go on and on about how this is a good thing and the ship will soon right itself. To use one of my more recently blogged expressions "Um, no". When the Fed lowers SHORT TERM INTERBANK interest rates eight days before its next meeting, it's NOT good. This is a sign of a drastic action for a desperate situation.
The public rarely knows what is the new, in vogue fear of Wall Street until after its happened. From what I have read (you never know the new fear unless you shift through the latest public fear to find the next one. You do this by reading several articles and picking up on the two or three sentences which coincide with the other articles. Now if I was any good with this I would be blogging from my beach house on Maui/Bali/Perth/Newport Beach/my own island etc. so take this with the knowledge that I can only guess as I'm an interested student and spectator) the latest fear is counter-party risk.
This type of risk is associated with the different parties subscribing to a financial instrument. Take a vanilla swap for instance. Two "people" Mike and Fred agree to pay each other a cash flow based on the USA short term interest rate (there are many good and valid reasons for doing this, but I won't bore you with the details). Mike has lost A LOT of money betting (yes, gambling) on Ma and Pa Kettles mortgage and can not pay Fred his cash flow. This is counter party risk. Usually the counter party risk in nominal if you contract with solid individuals with solid track records, credit, reserves, etc., but now with even the largest, supposedly secure financial institutions having difficulties and being "forced" (BofA) (quotation mark alert ;) ) to merge with severely troubled (Countrywide) mortgage companies, the balance sheets of these companies are increasingly under threat.
This is where counter party risk comes in. The vanilla swap contract that Mike and Fred entered into has a monetary value (asset) based upon the cash flows. If Mike or Fred (counter parties, Mike in this case) can not pay their part, the swap no longer has any significant value and is no longer an asset to the solvent(?) holder of the other side of the swap. Fred now takes a hit to his revenue (lack of cash flow payments from Mike) and to his balance sheet (the swap is no longer an asset and has to be removed from the asset side of the balance sheet). The problem now is whether Fred used this asset (the swap contract) to back (as collateral) a loan on his helicopter. If Fred did and Helicopter Lending Inc. finds out that this collateral is no longer worth anything then it will ask/demand/threaten Fred to back the loan with CASH. If Fred doesn't have the cash, he then defaults along with Mike. This scenario then dominoes throughout the financial industry and now the Fred's and Mike's of the world sell off contracts for pennies on the dollar (if they can find someone to buy them) to raise cash to back their other obligations. This further degrades the balance sheet as once lofty value assets are replaced with lower value cash or other financial instruments. If the balance sheet becomes unbalanced and companies run afoul of financial regulations and loan covenants, panic ensues. This is bad for everyone as institutions hoard cash to meet obligations or regulations, stop lending and consumers stop buying. This is the new fear on Wall Street.
To tie these two things together (yes I think they are related) the Fed may have lowered rates to help the financial institutions re balance their capital needs without resorting to a massive sell off of financial instrument assets. Whether this works or not is dependent upon the suckers that are in the barrel. If you think this rate reduction was to help you or me directly (we may be helped by not having our economy melt down), sorry, think again.
To tie this to a previous post about the value of the dollar, as interest rates decrease, the value of the dollar compared to other currencies decreases. This makes it more expensive to travel and increases the price of commodities like oil. Reducing interest rates also makes inflation likely higher.
Well till next time.
Tuesday, January 15, 2008
Ummmmm OK
Very few articles I read have as much "fun" per line as this Bloomberg article. Now you may ask yourself "where is the fun?", believe me its there.
First: ``OPEC should understand that if they can put more supply on the market, it would be help,'' Bush said in an interview with reporters traveling with him in the Middle East. ``I realize there is not a lot of excess capacity in the marketplace.'' Now calling on OPEC to raise output to help out our economy, which of course is just fine and dandy (just ask any politician in power), is laughable. OPEC has lost its ability to control the price and supply of oil. China and India are on the brink of a huge explosion in oil demand. The worlds oil suppliers are producing like crazy to get that $95 a barrel oil to market. The Dollar is losing value and has not yet hit bottom (when the Fed reduces interest rates, the Dollar falls in value). Oil is priced in dollars. No one wants a useless currency, so the producers need more of it to offset the risk of the dollar being worth less in the present and future. It all adds up to a bad situation. Add in the credit market squeeze and the prospects are frightening. The difference between the 70's and 80's oil shocks and this one is that this is demand driven whereas the earlier shocks were supply driven. Oh an FYI. The "extra" 2 million barrels a day that Saudi Arabia supposedly has is wax, yes black/brown waxy sludge which is only good for producing low quality petroleum based products if anything at all, NOT gasoline. No one wants this sludge because of its low utility and high cost to refine and transport.
Next: Bush ``oil prices are very high, which is tough on our economy,''. Well um duh!
Next: Bush also reiterated that he remains optimistic about the U.S. economy, though he continues to watch for warning signs. ``We're going to watch very carefully,'' he said. -- Um like the price of oil going through the roof, the dollars demise, the current recession, housing, huge/major/colossal/gargantuan counter-party risk in the banking sector, hidden inflation (FYI the gov. decides what it includes in the inflation number which it reports. If it doesn't like a factor, it can discount that factor or remove it completely. Processes are in place so that it can't just wily nilly the numbers each time, but it can change policy to impact the number that is reported. Food and fuel costs were excluded some years ago because the prices were too volatile and swung the inflation number back and forth. I don't know about you but after my house payment, our next biggest monthly expenditures are Food and Fuel.), negative savings rates, etc. I may not be the smartest cookie in the jar but these seem like pretty good warning signs of an impending doom.
Next: In the interview with reporters, Bush also said he reassured Arab allies during his trip that the U.S. still views Iran as a threat, in spite of the new intelligence report that said Iran stopped its active nuclear program in 2003.
By the way, Iran has a huge youth segment (20 to 25 year olds) who don't believe in the current regime. They don't hate the West and see their country being dragged down through bad policy and rhetoric. Iran will solve its own problems in time.
By the way part two :). This whole "Iranian fast boat" incident smells funny to me. The administration made a big deal out of something the financial markets took in stride. To me this has happened before and will happen again. Always take in the whole picture, political/financial (follow the money)/societal, of something that is reported. If this had not happened before or been known by the markets to have occurred before, then the price of oil would have exploded; it didn't, it decreased by the close of the day. The market knew these things happened and didn't see this incident as anything out of the ordinary. When the sun doesn't quite shine the right way on a oil rig in the North Sea, traders use that to push up the price of oil, but a supposedly one time, never happened before, immediate threat to the US Navy registers a daily price drop, I smell political propaganda, fear mongering, and grandstanding.
Now just to clarify, I'm not a conspiracy guru, nor am I worried the gov. is spying on me, nor am I a far right/left winger, nor am I crazy (though that is a nickname I have been given), I'm independent and side with the idea that makes the most sense to me. To me the US is on never before experienced ground. We have the makings of a financial death spiral brewing, it would take extraordinary circumstances to make that happen, but the brew is closer to fruition than I've ever known it. We have political gridlock and wildly out of touch politicians running things. Nothing screws up solid business like a politician and when the two combine nothing good can come. For full disclosure, I have looked at living in other countries and suggest you peruse where you might want to live. My advise, chose somewhere which has rich mineral deposits, access to nearby growing markets, a solid workforce, and a stable government. Minerals are a good hedge against political and financial uncertainty. Till next time keep to the sunny side of life :)
First: ``OPEC should understand that if they can put more supply on the market, it would be help,'' Bush said in an interview with reporters traveling with him in the Middle East. ``I realize there is not a lot of excess capacity in the marketplace.'' Now calling on OPEC to raise output to help out our economy, which of course is just fine and dandy (just ask any politician in power), is laughable. OPEC has lost its ability to control the price and supply of oil. China and India are on the brink of a huge explosion in oil demand. The worlds oil suppliers are producing like crazy to get that $95 a barrel oil to market. The Dollar is losing value and has not yet hit bottom (when the Fed reduces interest rates, the Dollar falls in value). Oil is priced in dollars. No one wants a useless currency, so the producers need more of it to offset the risk of the dollar being worth less in the present and future. It all adds up to a bad situation. Add in the credit market squeeze and the prospects are frightening. The difference between the 70's and 80's oil shocks and this one is that this is demand driven whereas the earlier shocks were supply driven. Oh an FYI. The "extra" 2 million barrels a day that Saudi Arabia supposedly has is wax, yes black/brown waxy sludge which is only good for producing low quality petroleum based products if anything at all, NOT gasoline. No one wants this sludge because of its low utility and high cost to refine and transport.
Next: Bush ``oil prices are very high, which is tough on our economy,''. Well um duh!
Next: Bush also reiterated that he remains optimistic about the U.S. economy, though he continues to watch for warning signs. ``We're going to watch very carefully,'' he said. -- Um like the price of oil going through the roof, the dollars demise, the current recession, housing, huge/major/colossal/gargantuan counter-party risk in the banking sector, hidden inflation (FYI the gov. decides what it includes in the inflation number which it reports. If it doesn't like a factor, it can discount that factor or remove it completely. Processes are in place so that it can't just wily nilly the numbers each time, but it can change policy to impact the number that is reported. Food and fuel costs were excluded some years ago because the prices were too volatile and swung the inflation number back and forth. I don't know about you but after my house payment, our next biggest monthly expenditures are Food and Fuel.), negative savings rates, etc. I may not be the smartest cookie in the jar but these seem like pretty good warning signs of an impending doom.
Next: In the interview with reporters, Bush also said he reassured Arab allies during his trip that the U.S. still views Iran as a threat, in spite of the new intelligence report that said Iran stopped its active nuclear program in 2003.
``I defended the intelligence community but I made it clear that they are an independent agency,'' Bush said. ``They come to conclusions separate from what I may or may not want.''
I found this to be the most "fun" of all. Did Bush want Iran to continue its nuclear program. Why? I have always been uneasy about the saber rattling concerning Iran and this just makes it worse. I always hoped (my Pollyanna side showing through) that intelligence communities were searching for the truth and not something that fit a specified pre-determined scenario. In this case maybe, just maybe, they did that.By the way, Iran has a huge youth segment (20 to 25 year olds) who don't believe in the current regime. They don't hate the West and see their country being dragged down through bad policy and rhetoric. Iran will solve its own problems in time.
By the way part two :). This whole "Iranian fast boat" incident smells funny to me. The administration made a big deal out of something the financial markets took in stride. To me this has happened before and will happen again. Always take in the whole picture, political/financial (follow the money)/societal, of something that is reported. If this had not happened before or been known by the markets to have occurred before, then the price of oil would have exploded; it didn't, it decreased by the close of the day. The market knew these things happened and didn't see this incident as anything out of the ordinary. When the sun doesn't quite shine the right way on a oil rig in the North Sea, traders use that to push up the price of oil, but a supposedly one time, never happened before, immediate threat to the US Navy registers a daily price drop, I smell political propaganda, fear mongering, and grandstanding.
Now just to clarify, I'm not a conspiracy guru, nor am I worried the gov. is spying on me, nor am I a far right/left winger, nor am I crazy (though that is a nickname I have been given), I'm independent and side with the idea that makes the most sense to me. To me the US is on never before experienced ground. We have the makings of a financial death spiral brewing, it would take extraordinary circumstances to make that happen, but the brew is closer to fruition than I've ever known it. We have political gridlock and wildly out of touch politicians running things. Nothing screws up solid business like a politician and when the two combine nothing good can come. For full disclosure, I have looked at living in other countries and suggest you peruse where you might want to live. My advise, chose somewhere which has rich mineral deposits, access to nearby growing markets, a solid workforce, and a stable government. Minerals are a good hedge against political and financial uncertainty. Till next time keep to the sunny side of life :)
Monday, January 14, 2008
Wow, what a long time!
A month and a week. Thats how long its been since I last wrote anything. Well now that the holidays are over, the snow is on the ground and the sicknesses have taken over the house, maybe I'll remember to write. Who knows?
What I'm reading now:
Infectious Greed: How Deceit and Risk Corrupted the Financial Markets
by Frank Partnoy
What I just finished watching:
Ewen and Charlie go from the top of Scotland to Cape Town SA on BMW Motorcycles (Thanks Aunt Nell!!!)
What I'm reading now:
 |
by Frank Partnoy
What I just finished watching:
|
|
Friday, December 7, 2007
Part 1 of the itinerary
Some of these explanations will be short and sweet, while others may be only one place (Australia) but these are the reasons I chose the places I did.
Orem to Yellowstone to Banff, Canada, to Glacier NP
I've had this route plotted since I was a Junior in High School. As soon as my parents bought me that new car (never happened, I was such a good kid though :) ) I was going to drive up through Pocatello (sp?) ID to Yellowstone. Hike around, see the bears, bison, wolves, fish, water falls, girls, trees, geysers, etc. and then head north to Banff, Canada. Why Banff? You see I had a friend in 9th-10th grade who's father ran the rivers near Banff and brought back amazing pictures and stories about the country around there, so I wanted to see it. While looking at a map and planning my route I noticed that it would be approx the same amount of miles to drive to Glacier NP and back home as it would take to retrace my route. So add Glacier NP to the list of places to visit. In the original plan I would have come home after Glacier, but in my "dream" plan I continue eastward.
One thing about driving. I like to drive. With 4 kids screaming, spilling, whining, upchucking, crying, etc., not so much. But with Lisa or by myself, driving is my preferred method of travel. One caveat though is I must have an interesting destination/road/country to keep me occupied. I have no desire to drive for drivings sake.
Next up -- Into the world of flat
Orem to Yellowstone to Banff, Canada, to Glacier NP
I've had this route plotted since I was a Junior in High School. As soon as my parents bought me that new car (never happened, I was such a good kid though :) ) I was going to drive up through Pocatello (sp?) ID to Yellowstone. Hike around, see the bears, bison, wolves, fish, water falls, girls, trees, geysers, etc. and then head north to Banff, Canada. Why Banff? You see I had a friend in 9th-10th grade who's father ran the rivers near Banff and brought back amazing pictures and stories about the country around there, so I wanted to see it. While looking at a map and planning my route I noticed that it would be approx the same amount of miles to drive to Glacier NP and back home as it would take to retrace my route. So add Glacier NP to the list of places to visit. In the original plan I would have come home after Glacier, but in my "dream" plan I continue eastward.
One thing about driving. I like to drive. With 4 kids screaming, spilling, whining, upchucking, crying, etc., not so much. But with Lisa or by myself, driving is my preferred method of travel. One caveat though is I must have an interesting destination/road/country to keep me occupied. I have no desire to drive for drivings sake.
Next up -- Into the world of flat
My travel dream/plans?????
This post comes from a response I wrote on Trailrunnings about your dream vacation. I think I'll blog about why I chose each destination in this itinerary.
Start in Orem (woo hoo) drive, yes drive, north to Yellowstone, then East to Glacier NP. From there head to Chicago, Navuoo, Missouri, North Carolina Coast, New York State and then to NYC. On to Paris and the beaches of Normandy, French Riviera and into Spain and Portugal. Cross the Mediterranean at Gibraltar. Ride across N. Africa to Egypt on a KTM 950 Adv. and back across the Med. to Italy. Go up the left side of the "boot" into Switzerland, Germany, Austria and then back down the right side of the "boot". Cross the Agean?? to Croatia, Montenegro, Bosnia and down to Turkey and Greece. Fly to Thailand then on to Vietnam. Down to Bali, all of Australia, then to New Zealand. Fly to Hawaii and then on to Chile, Peru, Costa Rica, Nicaragua, Baja and Copper Canyon Mexico. Fly to San Fransisco and drive home. Easy huh?
Start in Orem (woo hoo) drive, yes drive, north to Yellowstone, then East to Glacier NP. From there head to Chicago, Navuoo, Missouri, North Carolina Coast, New York State and then to NYC. On to Paris and the beaches of Normandy, French Riviera and into Spain and Portugal. Cross the Mediterranean at Gibraltar. Ride across N. Africa to Egypt on a KTM 950 Adv. and back across the Med. to Italy. Go up the left side of the "boot" into Switzerland, Germany, Austria and then back down the right side of the "boot". Cross the Agean?? to Croatia, Montenegro, Bosnia and down to Turkey and Greece. Fly to Thailand then on to Vietnam. Down to Bali, all of Australia, then to New Zealand. Fly to Hawaii and then on to Chile, Peru, Costa Rica, Nicaragua, Baja and Copper Canyon Mexico. Fly to San Fransisco and drive home. Easy huh?
Wednesday, December 5, 2007
Quote
I found this quote today on a ride report at advrider.com;
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain
This quote may fit into a post I may write later today.
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain
This quote may fit into a post I may write later today.
What to do?
It's funny how your mind works. At night I'll see something on the news and think "I need to blog about that tomorrow" but when I get the chance the moment has passed and the desire is no longer there. What to do?
Tuesday, November 27, 2007
New Financial Hero?
OK, so I found this blog today while researching the sub prime crisis link. It's what my dream blog would be. Call me a finance nerd all you want, but I really enjoy this stuff and this guy has all the right stuff. The Citigroup explanation contradicts my own thinking and knowledge but it's wonderfully laid out and described. The Retail Financial Advise post should be required reading before investing money in anything! Expand your knowledge and learn something.
A very fun time reading about others Christmas folly's
Click on this link to read stories about awful Christmas gifts. If you are a husband/boyfriend or mother-in-law, then you'll need a thick skin. I for one have only really given one great gift and it wasn't even the holiday's.
It's been awhile!
When the largest bank in the world, Citigroup, accepts a $7.5 BILLION cash infusion and calls it a good thing for the company (link), you know something is amiss within the organization. Of course I don't have all the info concerning who, what, where, how, etc., I do find it interesting how this whole sub prime mess is being spun by the different organizations involved. See what the largest bank in Europe did yesterday here. It's not a happy holiday's type of atmosphere on Wall Street this year.
Sub Prime Mess Re-post
I'm copying and pasting my post (from trailrunnings) onto my blog so that I don't have to keep switching back and forth from my blog and trailrunnings. Original date Nov 8th 2007.
The following is ONLY my OPINION and does not mean anything more than that. Since my moto is unridable (sp?) with a flat tire and lack of truck, I have been forced to think about finance. Because this is what I went to the Red School for, I have a propensity to dwell upon the fate of money. The large financial institutions like "Investment" Banks, nationally and regionally expansive "savings" banks, large pension funds, insurance companies, etc. gorged themselves on cheap debt and those pesky little things called "sub-prime" mortgages. I'll leave a through dissection of why these entities did this for another blog entry (I know you won't be able to wait, but too bad) but it has to do with borrowing at a low interest rate and buying a higher interest rate paying device, using the low interest borrowed money, and making the "spread". This is only one of innumerable reasons for this sub-prime crisis, so don't quote me on this as the ONE and ONLY reason ;). So these institutions bought these devices, sometimes known as CDO's among other acronyms, to earn higher than "normal" returns on their money. Everyone thought they were smart and making "risk free" money on the spreads. Traders, investors, banks, etc. made big money in the form of bonuses, returns and fees from these instruments. It was in the individuals, if not the companies, interest to keep this game going. As in most things, the cycle has caught up to the instruments and the ones paying the monthly payments. You see, all of this was built upon a bad risk. The risk of a newly married couple making 50K in California defaulting on their $1,500 interest only monthly mortgage payment is relatively small. The risk of that same couple defaulting on their newly adjusted principal and interest monthly payment of $3,000 is much higher. Factor in that this same couple fabricated income to purchase this home next to their best friends or speculate that the price would continue to climb, and the risk of default is almost certain. Add in a declining real estate market so this same couple can't sell this burden and you have what I'll call the Cake of Disaster (can I trademark that phrase). This couples mortgage was most likely sold as soon as it closed and packaged into a financial instrument that pays out cash to the investor. These financial instruments were then "rated" based upon the quality of the mortgage credit by rating agencies. The ratings given were supposed to determine the risk associated with the stream of cash flows. The higher the perceived risk, the higher the return. These agencies at best apparently didn't do their homework and rubber stamped issues or at worst were persuaded to rate riskier issues better (this persuasion could take the form of cash, promised access, preserving relationships, etc.). Since many government pension funds, insurance companies, and other regulated entities can only buy investment grade financial instruments, the rating agencies may have been influenced to better the ratings by the firms bundling these mortgages so that the bundling firms could sell them easier.
The financial institutions feasted on the frosting of the cake, "the interest, fees, etc.", got to the next layer and thought this taste funny, but hey were all making amazing money and so will be able to afford the doctor, "the markets", and then got to the middle. The ooey-gooey middle where nothing had gone the way it should. All of the fancy financial models, "the recipe", failed. Eggs went un-blended, flour was in clumps, "the CDO valuation puzzle", and big chunks of salt, "defaulting loans", were the morsels left to chomp on. This of course necessitated a trip to the emergency room, "the Federal Gov't.", on what most likely will be all of ours dimes, nickels, quarters, and dollars. The financial losses that have been reported in the media are somewhat misleading. Some of what was lost is "real" money. Some is what is called balance sheet writedowns. The balance sheet writedowns came from being unable to value the financial instruments in a firm (desirable) way that the companies had as assets on their books. This inability to value these things is what is causing problems. Since the instruments value come's from the cash flows of the mortgage payers, when all or some of that cash flow disappears or is uncertain (the math behind what is termed uncertain boggles the mind, literally), the instrument is now very difficult to place a value on. This change in perceived value is what is being wrote down. Now don't take these writedowns and tell me they aren't real money (just see what happens to the stock price and your wealth when the writedowns are announced), I know they are and matter greatly.
What I'm about to write is not an endorsement nor suggestion to buy nor sell particular securities and/or their associated derivatives. Since few of these financial institutions have publicly announced their losses and balance sheet write downs (can Citicorp. really believe that a switch was thrown on Oct. 1st, the start of the "4th" business quarter, and that is when they started losing money????) you can actually bet that more problems will surface in the next six months and make some of those nickels and dimes back. The stock ticker SKF is an instrument (yes just like CDO's, kind of, in certain ways, if you look at it through squinty eyes backwards and upside down) that moves opposite of a basket of financial company stocks. This means that if this basket index moves up, the value of SKF goes down. But if you believe that the financial companies are still trying to hide losses that MUST eventually come out (unless the Gov't bails them out) then bad news for this basket of financial stocks is still likely. This bad news would be good for the value of SKF shares. For those interested in reducing their risk, SKF has a correlation to the DOW of -.85. This means that if the DOW goes down, then SKF goes up and vice-versa. Buy SKF and the DOW and make less but possibly lose less. One caveat to this scenario, SKF has only been around since Feb 2007 and not all market conditions and temperaments have been experienced and been taken into account.
For those who made it to the end of this post, I now will reveal why I wrote it. It wasn't to educate, nor to push an investment idea, I wrote this to put little ones, and possibly their parents, to sleep. Just bring up the blog post, start reading to them and within seconds they'll be asleep. For the little ones who perk up while you read this post to them, sign them up at the next possible moment to attend a Hedge Fund class and start making retirement plans. Hedge funds are where the real bonus money is.
Watch for more economy analysis' in the coming weeks (Lisa said it was OK ;)) if I am not forever banned from posting again (from the same person who gave me permission). Until next time (maybe I'll list some fascinating finance books to read, wow what an idea!!!)
Finance Red
The following is ONLY my OPINION and does not mean anything more than that. Since my moto is unridable (sp?) with a flat tire and lack of truck, I have been forced to think about finance. Because this is what I went to the Red School for, I have a propensity to dwell upon the fate of money. The large financial institutions like "Investment" Banks, nationally and regionally expansive "savings" banks, large pension funds, insurance companies, etc. gorged themselves on cheap debt and those pesky little things called "sub-prime" mortgages. I'll leave a through dissection of why these entities did this for another blog entry (I know you won't be able to wait, but too bad) but it has to do with borrowing at a low interest rate and buying a higher interest rate paying device, using the low interest borrowed money, and making the "spread". This is only one of innumerable reasons for this sub-prime crisis, so don't quote me on this as the ONE and ONLY reason ;). So these institutions bought these devices, sometimes known as CDO's among other acronyms, to earn higher than "normal" returns on their money. Everyone thought they were smart and making "risk free" money on the spreads. Traders, investors, banks, etc. made big money in the form of bonuses, returns and fees from these instruments. It was in the individuals, if not the companies, interest to keep this game going. As in most things, the cycle has caught up to the instruments and the ones paying the monthly payments. You see, all of this was built upon a bad risk. The risk of a newly married couple making 50K in California defaulting on their $1,500 interest only monthly mortgage payment is relatively small. The risk of that same couple defaulting on their newly adjusted principal and interest monthly payment of $3,000 is much higher. Factor in that this same couple fabricated income to purchase this home next to their best friends or speculate that the price would continue to climb, and the risk of default is almost certain. Add in a declining real estate market so this same couple can't sell this burden and you have what I'll call the Cake of Disaster (can I trademark that phrase). This couples mortgage was most likely sold as soon as it closed and packaged into a financial instrument that pays out cash to the investor. These financial instruments were then "rated" based upon the quality of the mortgage credit by rating agencies. The ratings given were supposed to determine the risk associated with the stream of cash flows. The higher the perceived risk, the higher the return. These agencies at best apparently didn't do their homework and rubber stamped issues or at worst were persuaded to rate riskier issues better (this persuasion could take the form of cash, promised access, preserving relationships, etc.). Since many government pension funds, insurance companies, and other regulated entities can only buy investment grade financial instruments, the rating agencies may have been influenced to better the ratings by the firms bundling these mortgages so that the bundling firms could sell them easier.
The financial institutions feasted on the frosting of the cake, "the interest, fees, etc.", got to the next layer and thought this taste funny, but hey were all making amazing money and so will be able to afford the doctor, "the markets", and then got to the middle. The ooey-gooey middle where nothing had gone the way it should. All of the fancy financial models, "the recipe", failed. Eggs went un-blended, flour was in clumps, "the CDO valuation puzzle", and big chunks of salt, "defaulting loans", were the morsels left to chomp on. This of course necessitated a trip to the emergency room, "the Federal Gov't.", on what most likely will be all of ours dimes, nickels, quarters, and dollars. The financial losses that have been reported in the media are somewhat misleading. Some of what was lost is "real" money. Some is what is called balance sheet writedowns. The balance sheet writedowns came from being unable to value the financial instruments in a firm (desirable) way that the companies had as assets on their books. This inability to value these things is what is causing problems. Since the instruments value come's from the cash flows of the mortgage payers, when all or some of that cash flow disappears or is uncertain (the math behind what is termed uncertain boggles the mind, literally), the instrument is now very difficult to place a value on. This change in perceived value is what is being wrote down. Now don't take these writedowns and tell me they aren't real money (just see what happens to the stock price and your wealth when the writedowns are announced), I know they are and matter greatly.
What I'm about to write is not an endorsement nor suggestion to buy nor sell particular securities and/or their associated derivatives. Since few of these financial institutions have publicly announced their losses and balance sheet write downs (can Citicorp. really believe that a switch was thrown on Oct. 1st, the start of the "4th" business quarter, and that is when they started losing money????) you can actually bet that more problems will surface in the next six months and make some of those nickels and dimes back. The stock ticker SKF is an instrument (yes just like CDO's, kind of, in certain ways, if you look at it through squinty eyes backwards and upside down) that moves opposite of a basket of financial company stocks. This means that if this basket index moves up, the value of SKF goes down. But if you believe that the financial companies are still trying to hide losses that MUST eventually come out (unless the Gov't bails them out) then bad news for this basket of financial stocks is still likely. This bad news would be good for the value of SKF shares. For those interested in reducing their risk, SKF has a correlation to the DOW of -.85. This means that if the DOW goes down, then SKF goes up and vice-versa. Buy SKF and the DOW and make less but possibly lose less. One caveat to this scenario, SKF has only been around since Feb 2007 and not all market conditions and temperaments have been experienced and been taken into account.
For those who made it to the end of this post, I now will reveal why I wrote it. It wasn't to educate, nor to push an investment idea, I wrote this to put little ones, and possibly their parents, to sleep. Just bring up the blog post, start reading to them and within seconds they'll be asleep. For the little ones who perk up while you read this post to them, sign them up at the next possible moment to attend a Hedge Fund class and start making retirement plans. Hedge funds are where the real bonus money is.
Watch for more economy analysis' in the coming weeks (Lisa said it was OK ;)) if I am not forever banned from posting again (from the same person who gave me permission). Until next time (maybe I'll list some fascinating finance books to read, wow what an idea!!!)
Finance Red
Monday, November 12, 2007
$100 Oil
What happens when oil hits $100? Well this article paints a gloomy picture of that scenario. http://www.bloomberg.com/apps/news?pid=20601109&sid=a1aGJ64Na3g8&refer=home
For those that actually read this blog and pay for their gasoline, (I've received only one comment so far, Thanks Colby) how many have curbed their driving habits with the run up in fuel costs? What is your tipping point in terms of $ per gallon in which you would drastically cut back on driving if possible?
For what its worth, I try not to drive anywhere, within reason. I'll drive to work and to the store, but beyond that I really have to have a good reason to drive beyond a few miles. Our trips down south now take on a miserly tone as I try and draft behind the vehicles in front of me and stay below 75mph at all times. Our kids will most likely see less of the Western US than I did because the price of gasoline is so much more of a budget buster. My tipping point would probably be around $3.15 per gallon in the summer and $3.50 in winter (summer being easier to ride a bike in). Anyway there you go Colby, a meager post on Oil.
For those that actually read this blog and pay for their gasoline, (I've received only one comment so far, Thanks Colby) how many have curbed their driving habits with the run up in fuel costs? What is your tipping point in terms of $ per gallon in which you would drastically cut back on driving if possible?
For what its worth, I try not to drive anywhere, within reason. I'll drive to work and to the store, but beyond that I really have to have a good reason to drive beyond a few miles. Our trips down south now take on a miserly tone as I try and draft behind the vehicles in front of me and stay below 75mph at all times. Our kids will most likely see less of the Western US than I did because the price of gasoline is so much more of a budget buster. My tipping point would probably be around $3.15 per gallon in the summer and $3.50 in winter (summer being easier to ride a bike in). Anyway there you go Colby, a meager post on Oil.
Friday, November 9, 2007
The Reason
This is the reason it took me so long to find my moto. BMW decided to discontinue its largest selling model, the bike I hunted for, the F650 GS, and replace it with this monstrosity. I mean, come on, yellow and black. Comfort and power for two up adventuring. Better components and improved frame. More power. Did I mention it has more POWER! I just don't know what they were thinking. The F650, my F650, were/are great bikes. Why change? Oh yeah, more power! Um, um, um, drool, drool, drool, drool, oh how I hate this bike. So, um anyone have about 10K lying around that they want to give me so that I can prove how inferior this bike is to the exalted F650? Anyone? Anyone? I'll guess I have to save my pennies. One financial aspect I'll throw in here, do you know a penny is worth more than a penny (if it was minted before 199?).
Why?
Why am I doing this? Well it started when trailrunnings posted that since she hasn't been posting lately that maybe I could post a few things finance related. Well I did. It took me my lunch hour to write a simple, brief sub-prime mortgage mess explanation and it turned out to be very long winded and boring. But I found it very relaxing. It got my mind working and provided a respite from the workings of work. So I started my own blog for myself and my sanity, someplace to write down thoughts and ideas, share items I find interesting and otherwise keep my fingers exercised.
For my first post, I suggest that anyone interested in motorcycles and/or adventure, follow the link to advrider.com and enter the forums. Find "Ride Reports and pics, pics, pics". Search for "Angola, its not like they said". Start reading (WARNING! Cultural pics and brief language included in this Ride Report) disregard the inane replies (very few) and then find the nearest KTM or BMW motorcycle dealer and start making plans for an adventure. If you find yourself captivated by the story and don't want to wade through all the replies to get to the next day follow this link www.4shared.com/file/27666139/f93973b7/Angola_Trip_-_updated.html
and download the file. This link will take you to a PDF version of the ride report only.
For my first post, I suggest that anyone interested in motorcycles and/or adventure, follow the link to advrider.com and enter the forums. Find "Ride Reports and pics, pics, pics". Search for "Angola, its not like they said". Start reading (WARNING! Cultural pics and brief language included in this Ride Report) disregard the inane replies (very few) and then find the nearest KTM or BMW motorcycle dealer and start making plans for an adventure. If you find yourself captivated by the story and don't want to wade through all the replies to get to the next day follow this link www.4shared.com/file/27666139/f93973b7/Angola_Trip_-_updated.html
and download the file. This link will take you to a PDF version of the ride report only.
Subscribe to:
Posts (Atom)