The Butterfly

I have been quiet lately because of the enormous happenings happening ( :) ) on Wall Street and Main Street. All I can say is WOW, what a month September was. I can't find words or explanations for any of it but I do have my opinions. Remember this is a credit crisis and NOT a stock problem. Forget about the DOW and focus on the LIBOR rate, overnight lending rates, swap spreads, etc. Find a interest rate running commentary here. Once these levels get back to "normal" stocks will follow.

Why "The Butterfly" for a title? I saw one today. That's it.

Holy Manipulation Bat Man

With respect to my previous blog about short sellers now comes this. Apparently when short sellers "manipulate" the market its bad, but when government policies MANIPULATE the market its GOOD and will bring "balance" back to it. HAHAHAHAHAHAHAHAHAHAHAH!!!!!!!!!!! You see, with the new rules in place, the people who were taking the unpopular view that a stock would decrease (how un-american and communist to think that a stock would actually go down because the fundamentals don't matter any more or didn't you get the memo from Nanny oh I mean Uncle Sam) because of the basic rules of finance are forced to purchase shares to cover their positions. This buying is proping up the market and when it concludes what then? Oh yea another Sunday is approaching so look for another World Saving announcement soon.

Polyanna to be appointed SEC chief

When you see headlines like this, you should grow very uncomfortable. This is the recipe for the next bubble. When all you can do is buy what are you going to do? Right, buy. Short sellers bring stability and sanity to a market by trying to find the truth in companies balance sheets and trading on what they perceive as an opportunity. I will be the first to admit that there has been abusive short selling and rumor mongering, but I don't recall there ever being a ban on buying certain internet companies stock in the late nineties that had more hype then substance. Short selling is needed and is NOT a bad thing as the media and gov. make it out to be. Much like speculators who grease the financial markets by taking the other side of the trade, short sellers balance out the buyers and keep companies "honest". Both speculators and short sellers are vilified and pilloried by the press for no good reason other than for someone to blame. Remember to have an up you need a down, to have good, you need evil, for happiness you need sadness. Its the way the universe works and the way its intended to be.

But its a Wednesday

A few posts ago I wrote about how the Fed. is saving the world one Sunday at a time. Well they couldn't wait until Sunday. The Fed has taken over AIG, the nations biggest "insurance" company. I put insurance in quotation marks because of the fact that if they were only in the insurance business, they wouldn' t be failing. In return for an approx 85 billion dollar loan, AIG will sell its many parts, to pay back the loan, to others all the while paying 11.4% interest to the Gov. or more precisely you. Unfortunately you and I will never see that 11% money except in the form of more regulation after this all shakes out (it will eventually end, whether it ends next month or 50 years from now :) ). The more troubling happenings now is that the overnight dollar loan rate has topped 10%. This means banks are hording cash and lending has stopped because of counter party risk (remember I blogged about counter party risk last year). This is the really frightening thing now.

The Fed will be back again on Sunday with an announcement about WaMu and then after that it gets hazy. Maybe a Hedge Fund you have never heard of or a local bank that bet too much on home developments. Who knows except maybe the CEO's and Presidents of these institutions.

WoW!!!!!!

For a finance geek such as myself today is an amazing (bad, good, scary, down right frightening) day. Two of the biggest firms on Wall Street disappear on the same Monday. Wow is all I can say. Lehman Bros and Merrill Lynch

Happy Birthday

As the title suggests, one year ago today we had a blessed event happen to us. Yes its been a struggle emotionally to go to work while leaving the new one to its own devices. I'm constantly on the internet researching places to take the new one so that it and I can experience this world together. It has me wrapped around its handle bar. It's fallen down many times as it tries to negotiate this world of rocks, sand and roots, but its never let me down. It has a voracious appetite but usually loses pounds instead of gaining them with each feeding (of cash and gas). HAPPY BIRTHDAY KTM!!!! (Keeps Taking Money). Anyway here's too year number two, may it bring more time together. ;)

Saving the World one Sunday at a time

I found this quote to be interesting with regards to the Fannie Mae / Freddie Mac debacle.

Update 11:20 PM. This comes via e-mail from James Bianco of Arbor Research:

As of this writing (Friday night, 10:14), it appears no one has a clue as to how the Fannie/Freddie Government bailout is going to work. I guess will have to wait for the now common Sunday night/Monday morning press releases to save the financial system from ruin....

If you???re are keeping score at home we had Sunday night/Monday morning ???save the world??? press releases in August 2007 (cut of the discount rate), December 2007 (TAF), January 2008 (ease 75 bps), March 2008 (Bear) and July 2008 (first Fannie/Freddie rescue) and now September. Anyone want to believe this is the last one (which will be the sixth in 14 months) will be the one that finally works and saves the world?

Along the same line, here's another article to ponder. (for some reason blogger has this italicized)

I AM MAN! HEAR ME ROAR!!!!!

Do you think the Russian government wakes up each morning and repeats that phrase 10 times while looking at its self in the mirror? While I admit that I haven't kept up with the Russia-Georgia conflict (who can with NBC fawning all over Shawn Johnson and totally forgetting about the American, Nastia Luikin, that actually won the all-around gold), this article may shed some light on the subject if my following theory is correct.

Where's Georgia? Isn't that the place where the last Olympic Games were held (at least in the minds of many self centric Americans HeHeHe. I'm only kidding!) My theory revolves around the fact that Georgia is a small, poor country, that has a pro-western stance and a gov which wants to join NATO. On the other side we have Poland. A country with a long, dark history of war and suppression. But two things Poland has going for it is that history and it's "European". Let me explain. If the Russians invaded Poland like they have Georgia, the international ie European / North American response would be swift and potentially world shaking. So how do you control the actions of the Polish government without actually setting a boot in Poland? You invade Georgia. What???? You read the article didn't you? Come on tell the truth.

You see Poland agreed this past Thursday to allow an American anti-missle system to be placed on its soil (you can bet your house, if its worth anything, that the Russians knew this was going to happen a long time before it did). This anti-missle system is supposedly there to protect Europe and North America from missles launched from roge states such as Iran, Syria, etc. Russia's problem with this is that they see the anti-missle system as a threat to their power. After all if my missle's can't hit you are you going to be afraid of me? So what is a thug country to do when two of its former "allies" turnig to the evil West for saftey and security. Well the answer, as any thug knows, hit something. So the Russians invaded the small, weak soverign county of Georgia. See the Russians could kill two birds with one stone. Take out Georgia and influence Poland's upcoming decision to allow U.S. bases on its soil. All with one military action. While an action against Poland would evolve into possible war, an action against Georgia would only garner strong words and little else. Unfortunatly for the Russians their action against Georgia did not sway the Polish from agreeing to allow the systems. This has now led to a top ranking Russian general threatening Poland with a possible nuclear strike. Yes I said NUCLEAR. But you read the article right, so you already know this.

This is my theroy. Take it for what it is, A THEORY. So why do the Russians really care whether Europe and North America are trying to protect themselves from Middle Eastern missles. Money. Yes it usually comes down to money and who gets paid. How can Russia sell its technology and missles to Middle Eastern regimes if the missles would be shot down over Poland before they had a chance to effectively wipe out a chunk of the Western world. After all these missles would cost 10's of millions of dollars each and could line a whole lot of pockets in the cold, snowy Moscow nights. Who would pay all that money to Russia(ns) if the missles wouldn't hit their target.

So basically Russia invades Georgia to influence Poland's decision to allow an anti-missle system on its soil which the Russians are against because they would then not be able to sell missles and missle tech. to Middle Eastern regimes. The end.?

Sleep well.

Somebody KILLED a Bear!

This is some interesting reading. No really it is.

Why yes, motocycling is part of this blog.

This blog has turned into more of a financial rant then a balanced depiction of my life so I'm out to change that. One goal (ok my only personal goal) for the July 4th weekend was to ride AF canyon on my 250. Well after lots of non-starts and changes I got my wish on Sat. morning. My



brother was kind enough to guide my slow butt on some of northern Utah's best trails (and the only single track I have done). Here are some pics.

Update to previous Posts

How much money could you have made? Well as of today 6/30/08, (since only Trailrunnings actually reads this blog HAPPY ANNIVERSARY Love HBOO) SKF is trading at $153.96 and MBIA is at $3.80. If you had bought SKF individual shares when I originally blogged about it on 11/8/07 LINK you would have made $57.15 for a return of approx 59%. For MBIA, if you had shorted the shares on 2/8/08 LINK (my post date) you would have made $10.80 with an undetermined % return because of leverage. Why yes I'm that good and I'm still living in my condo, so you can see I didn't whole heartily invest my life savings into these two schemes. ;)

Those darm speculators!!!!

As "speculators" are now the scapegoat for the run-up in oil prices I find it funny how the gov. (do they even deserve to be capitalized now) specifically the senate (again, the respect that capitalizing a letter in the name of an organization is very undeserved in this case in my opinion. And after all this is my forum for my opinions ;) ) drags "Hedge Fund" operators to testify in front of a panel of POLITICIANS! If my memory serves me right, politicians are failed lawyers who in turn failed math in school :). Do they even know how markets really work? Speculators grease the wheels of the markets by taking risks others don't want to take. These same "speculators" built American markets from scratch and will continue to make and lose vast sums of money (whether in formal markets or ????) long after the politician has moved onto the next new thing that gets their face on camera. While markets behave irrationally at times, this is what they do. Sometime in the future the oil market, baring any unforeseen calamities (again, politicians and administrations can force a "calamity"), will right itself and fall below its intrinsic value. When this happens (I predict after the Nov. elections) a politician will be there to take credit. Can you tell I have a chip on my shoulder with respect to politicians.

Instead of dragging speculators in front of know nothing panels, what the representatives of the people should be doing is balancing the federal budget by eliminating PORK!!! My views have lately been influenced by reading Alan Greenspans book "The Age of Turbulence" specifically his years as Fed Chairman. He experienced Presidents from Richard Nixon to george II and found the bush's (again notice the lack of capitalization. Wow, I'm mean today) to be the most politicized of them all. This means instead of focusing on what would make the American economy strong, robust and flexible, and in turn those same citizens, they chose to do the politically expedient and "friendly" thing (do you know that george II didn't veto any of the first 60 bills that crossed his desk. The power of the veto is one of the BASIC checks and balances of our governmental system. To not use this as a check on congress, opened the floodgates to new and creative ways of wasting YOUR money). This has lead to record deficits that have decreased the value of the dollar and thus increased our costs of most raw materials (as most commodities are priced in U.S. Dollars). This is what the senate should be investigating, but they are a smart bunch and know if they throw out the word "speculator", they will deflect the real blame away from them and onto the age old evil doer, the Speculator.

PS The President, from Nixon to georg II, with the best economic record when it came to doing the right thing for the American economy most of the time (they can't be perfect all the time with respect to economic issues. They after all, are politicians) according to his record and the accompanying results from those policies, is................... drum roll please ........................................................................................................................................................................................................................................................................ Bill Clinton, a tax and spend Democrat who put programs and policies in place to retire the debt of the US by the mid to late 2000's. george II, a fiscally conservative republican, has taken that legacy and turned a possible zero debt balance into 9 Trillion dollars of crushing debt. For a few hastily figured figures, that equates to 360 Billion dollars in INTEREST per year (at 4% anum.), 986 Million per day, 41 Million per hour, 684 K per minute, 11 K per second. See you later.

AH!!!!! The magic of MtM accounting.

How would you like it if as you spent more on your credit card, the higher your net worth would climb? Well thats the case if you are marking to market (MtM) your debt value. According to this article, the Wall Street Banks are able to do just that.

Banks and other institutions are able to mark to market the value of their outstanding debt and then "book" the difference between the notational value and the market value as REVENUE. The amount of debt owed doesn't change, just the value. As the article states, the banks also use MtM to value assets such as securities, derivatives, etc. and this type of accounting does have merit, but I just can't see the truth through the increased fog this brings to balance sheets, income statements, etc.

For an example of how this works suppose I had $15,000 of credit card debt, a $30,000 savings bond, and I'm paid $20,000 per year. Assuming the simplest scenario my net worth equals my savings bond amount minus my outstanding debt, or in this case 15K. If my yearly expenses matched my yearly income I have a net zero cash flow statement and don't add anything to my net worth. Now lets say I add $1,000 to my debt. This should decrease my net worth by $1,000, correct? But according to MtM, I have increased my annual income (Revenue) by $2,000. What???? Yep that's right I GOT A RAISE by buying that new flat panel TV at Costco. How is this possible you say, well let me tell ya!

Again lets assume a simplified scenario. Your previous debt had a market value of $15,000 because you had an excellent credit record and you had always made good on your debts. People were willing to "buy" you debt for 15K. You weren't risky. But once you bought that TV alarm bells went off in some credit card issuers basement and now you were RISKY. Now no one will touch your 16k of debt for more than 14k. The MARKET VALUE of your debt has decreased 2K (from 16K to 14K). Well according to FASB Statement 159 you can book the decrease in the MtM debt value to revenue. Thats right you "made" 2K more this year. You now show a positive net income of 2K (no other expenses changed throughout the year) and now look good to your investors oh I mean family. If I account for this increase correctly then my "increase" in revenue of 2K minus my increase in debt of 1K adds $1,000 to my net worth. Of course none of these revenue increases adds cash to the bank account but it sure looks good when getting more loans or trying to increase my "stock price".

IT'S ABOUT RISK!!!!!!!!!! NOT MONETARY SUPPLY

The Fed can drop rates all day long and IT WON'T MATTER! Lenders are not being compensated for the risk of the unknown with a lower interest rate. They will not lend money without being compensated for the RISKS they are taking. The Fed needed to raise rates or at the very least stay still with rates. By raising or keeping rates steady the Fed would have strengthened the dollar, kept its self a viable entity and put a slowdown on inflation. But NO!, they had to do the politically expedient thing that we have all been conditioned too mean prosperity and reduce rates to help "spur" on the ailing economy. The thing is, the credit crunch is about the perceived risks of the borrowers and NOT a tight monetary system. Lenders are not being compensated for their RISKS!!! with low interest rates. Get ready for higher prices at the pump and the grocery store. The following is something to be concerned about.

"While easing borrowing constraints, the central bank has also pushed money market yields below inflation, giving consumers an incentive to spend or take on more risk in their investments to earn a return. The Fed's preferred inflation barometer, the personal consumption expenditures price index, minus food and energy, rose at a 2.2 percent annualized rate in the first quarter. Six-month Treasury bills yield 1.7 percent."

You Want What!!!????

I want HIGHER interest rates. "Why, that is un-american" you (and almost anyone else) says. Now do I want to go back to early eighties 12-18% rates? No. But if things continue the way they are going thats where we'll be. We, as a nation, have been conditioned to think that as the Fed drops rates that economic bliss will follow. This time it may be different. Now while I will be the first to say that the phrase "this time it's different" is a misnomer and usually false, sometimes things are different because they are caused by different things ;).

First, as the Fed keeps lowering "interest" rates the dollars value declines and so more dollars are needed to buy something. This is known as inflation. This is what we have now. People hedge against inflation by buying tangible items such as oil, gold, grains, metals, etc. This increased demand drives up the prices of those basic items and also the items derived from those basic things (gasoline, jewelry, bread, steel, etc). So what we basically have now is inflation (and possibly a commodities bubble). Keeping inflation (and bubbles) in check has been the Fed's mantra for close to 30 yrs if not longer and by lowering interest rates further it's driving inflation higher. The Fed needs to keep interest rates level or even raise them 25bp (0.25%) to put a slowdown on the inflation we are all feeling at the pump and grocery store.

Second, as the Fed reduces rates, the Risk-Return equation gets skewed. A higher inflation rate means your real investment returns are less. This leads to more risk taking in that you chase a higher yield to help compensate for the higher inflation rate. Just what the average American needs now is MORE risk, volatility and the stomach ulcers that come with watching their portfolio rise and fall like the proverbial yo-yo. This skewing the the Risk-Return equation also hits the banks. With a low interest rate atmosphere combined with total fear of the unknown unkonwns (see link) lenders are NOT being compensated for their perceived risks.

It will only be a matter of time until we need to cap inflation, strengthen the dollar and return this country to prosperity and as it now stands about the only way to do that will be with some very tough love as in extremely high interest rates to compensate for risk and pop the inevitable bubbles. Or we could all go the way the politicians want us to think we should go and start being paid daily and running to the store to buy normal things before they double the next day (think German women with wheel barrows full of Marks running to the corner store to buy ONE loaf of bread in the 1920's). Of course there would be an upside too. Just think of being able to pay off your home with only one days pay. Your mortgage is priced in dollars isn't it? Maybe thats what all the overextended gamblers, oh I mean home owners, are banking on. :)

Therapy

I don't know if thats how you spell "therapy" but this link was my therapy (thanks Spencer) for todays previous post. Don't worry, its pretty clean.

I'mmmmm Soooooo Tired!!!!!!

I haven't written anything for awhile because as today's title suggests I'm so tired of the goings on in the financial world. I hardly check Bloomberg anymore and rarely read my financial blogs. It's frustrating to be bombarded by bailouts and such of those who took great risks and over leveraged themselves whether they are homeowners or CEO's. "Moral Hazard" is the term used to describe the mechanism by which a risk taker is punished if the risk THEY take on VOLUNTARILY goes bad. Well the Gov. and the Fed are making sure that moral hazard has been wiped clean off the face of risk.

While I feel for the family who got in over their heads because of the appearance of home values with no ceilings and the cash machine those homes became, it still stands that if they can read they knew what they were doing. An age old axiom is that "never sign anything unless you understand it", its evident that some did not understand the docs. they signed. Unfortunately myself and those who did not take on these risks and in turn "missed" out on the benefits (ie cash, flat panel TV's, new cars/boats/vacations, etc.) get to pay for those who did accept, sign, and cash out on these same risks and now have nothing to show for it.

We now have the Fed stepping in with new regulations to help "protect" us in the future from these same problems. The best thing for the Fed to do is to let the market work! Stop lowering interest rates (the rates could go to zero and we would still have a credit problem. The banks are afraid to lend money because of the uncertainty of their balance sheets, not the rate on interbank loans) and destroying the value of the dollar because of the inflation, whether real or imagined (did you see the gov Feb. inflation figure of 0%, HaHaHaHaHaHa.....,.) lower interest rates can cause. Let the market work! Companies NEED to fail! The owners, managers, employees, consumers, need to be RESPONSIBLE for their actions. They need to be punished for poor choices and risks. Competition needs to see failure to find success (I'm beginning to sound like those people who sum up life in one sentence :) ) Responsibility is a lost word in many aspects of todays society where everyone wins a medal and trophy no matter how "good" they are.

So as of today I am starting a campaign to bing back moral hazard. Maybe we can rally at the capital! Imagine 50,000 voices chanting "BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD!..." ad infinitum. It would be great. We could make signs saying "Make Moral Hazard, not War", "Get us out of this Non-Moral Hazard place", or "Death to Non-Moral Hazardites", etc. Only then can/will our voices be heard. Who's with me?????? Anyone? Anyone? Bueler? Bueler?

Apparently I am alone in this view. How sad for us, our children, grandchildren, and our country.

For an Explanation of the previous post see....

1. http://www.bloomberg.com/apps/news?pid=20601087&sid=anMNUEv7YGAM&refer=home

JPM got a whale of a deal. The Bear Stearns building alone is worth approx. $1 Billion. Add that to the fact that the government appears to have guaranteed the super risky part of Bear's portfolio and you see that there is very little risk to JPM, but a HUGE upside. The value all depends on the term sheet that JPM and the Gov. agreed.too.

For full discloser I did take some liberty with parts of the letter. I have not found any info. regarding insider stock sells or stock selling/put option impropriety by the mgmt. of BS which I eluded to. In two or three years these events will make a great book.

Crazy Co.

To: All Crazy Co. Stock Holders

From: I. M. Nowrich, President Crazy Co.

Re: Once in a life time or week (we'll see) opportunity


For all you Crazy Co. stockholders that last Friday thought they were getting a bargain basement purchase price of $30/share, have I got a deal for you. Yes, today you can buy the same share in Crazy Co. for $2-4, yes you heard me right, $2-4!!!!

Now you never mind that last Wednesday the CEO of Crazy Co. was telling you that we had plenty of capital to weather any storm, or that on Thursday that mantra was repeated several times. Because, as you know if you repeat a lie often enough to yourself and others, it will eventually become the truth. In fact try it. Keep telling yourself in a zen/mantra like state that "your purchase (remember you purchased it by your own free will and that nothing we did influenced your decision to buy except maybe repeating over and over about the awesome financial strength of our company) of our beaten down stock was the deal of the century and that our CEO had too much to lose if he stretched the truth about Crazy Co.'s financial position". Repeat this suggested mantra (you may also make up your own, but please, no swearing or bad mouthing the officers or directors of Crazy Co.) while sitting in the fetal position, one time for each dollar you lost. When you are done everything will be fine, we guarantee it. No, really. Has the CEO of Crazy Co. ever steered you wrong (well except for last week)???

And now since we have guaranteed your happiness, you in turn, will not want to sue Crazy Co.'s officers nor directors for false material statements*. At the advise of my attorney, that you as shareholders are paying for (a big thank you for approving the board who went along with my suggestion to sign us up for some executive legal insurance. You know legal bills can get expensive and that might have led me to sell one of my 21 beach houses to cover my own legal bills. So again THANKS!!) I would like to apologize for not being able to get you a better deal. I believe if I could have had a few more days I could have gotten the stock price to $1 or with a little luck $0.50.

If you would like to contact me about this letter you can email (email only. You see I'm not sure who will answer the phone at our offices. You may start talking to one of those pesky SEC officers) your comments to I.M.Nowrich@crazyco.com. I may be a little slow in my replies because I'm currently traveling in Crazy Co.'s G5 jet (again, a huge THANKS) to an undisclosed tropical location with no extradition treaty with the good 'ol U.S of A.

Legal disclaimer; go ahead and sue me (see disclaimer referencing a previous sentence above). You see I sold at $160 and bought put options (to hide my trail, no insider trading muck for me) at $70, so I now have more money than Mr. G up in Washington.

Sincerely,

I. M. Nowrich
3/17/08

*By reading this statement you implicitly agree to a “no suit” clause in the aforementioned documents that we are writing as you read this. By reading the previous sentence you agree to the conditions forth with that will be written into those same documents. To lodge a protest against these terms please fill out the form that will be included in the “non suit agreement” packet that will arrive at your address of record. By opening this packet marked “How much will you win if you sue Crazy Co.” you agree not to sue Crazy Co., officers and directors of the same company and any and all affiliates, relatives, companies, dogs, etc. of those same officers or directors.

It's Happened

The fifth largest U.S. securities firm, Bear Stearns, has failed (Link). OK so it hasn't actually failed (yet) but when the Fed comes in and bails you out because you are considered too big to fail then....? A side note is that the Fed teamed up with JPMorgan to stabilize Bear Stearns and guaranteed JPMorgan against any bad debt which they take on. In other words you and I are now on the hook for a private companies bad decisions and management. On another side note, Bear Stearns' chairman Jimmy Cayne recently closed on a $26 million apartment in NYC (Link). And finally JPMorgan has a history of "saving" the financial system in the USA. In 1907 J.P. Morgan the man literally locked bankers into his parlor until a compromise was agreed upon to save the nation from the Panic of 1907. This single act made possible the wondrous 20th century that the USA enjoyed. For more info about J.P. Morgan the man, I recommend the book "House of Morgan" (Amazon) available at your local library.