We Profited From Bank Bailouts

Posted by Ray on August 31, 2009 under Main | Be the First to Comment

According to the New York Times the US taxpayer has profited from the bank bailouts, I am still waiting for my tax credit or dividend check, either is fine by me. However, I find this hard to believe since we really do not know the full extent of the bailouts given out by the Fed. Since we do not know the full extent of the bailout I think it is unrealistic to assume we made any money at all.

According to the article the taxpayer earned about $4B from the bailout, but CIT received some $2.2B which we are not likely to see any return of principal from at all. Not to mention that we do not know if any of the 84 bank failures received any Federal funds or not there is no way we can make the judgment that we made any money on anything. I am not saying that we definitely did not profit or will not profit, but I am saying that there are only a few instances that we know of that we can verify we made or lost anything.

Certainly we will suffer some losses on the AIG, Freddie and Fannie rescue which cost us hundreds of billions of dollars which would make a $4B gain seem truly insignificant. Not to mention that, supposedly, the Fed made some $12 trillion available to banks, but that money is completely unaccounted for. Based on just that evidence I find it extremely difficult to see what or where we stand and with the Fed blocking everyone’s view of who received what last fall we will likely never know exactly what we risked and what we own from these banks.

The article goes on to say that we should all breathe a sigh of relief that the government acted and no further catastrophe happened in the financial system. Of course, they must not remember the time between November and March where the S&P had a pretty steady decline to 666, ironic if I do say so myself. During that decline those who did not go out lost trillions on their investments and more than likely sold near the lows. If they did not then they are just about flat since that time frame. My point is that people did feel more pain as the banks received their bailouts and bonuses in most cases. I guess I just don’t feel as lucky as the expert’s claim I should.

The irony is that we are still owed some $6.2B from banks that have not paid their dividends yet to the government. It is unclear whether they were referring to the quarterly dividends or if the banks received a pass on interest payments because of their weakened state, I am betting on the latter. One must not forget that BoA and Citi are still deeply troubled, according to the Times, and we could still suffer substantial losses on those investments.

The complete irony to this whole situation is the fact that none of these institutions showed any sign of strength until the FASB curbed its mark-to-market rules. It is a very safe bet that if the mark-to-market rules were in effect we would still have tremendous problems with most of these banks, of course profits went through the roof upon the relaxing of these rules. The banks also survived the stress test which was nothing more than, in my opinion, propaganda as we are at the top end of the ‘rigorous’ parameters of that test as we speak. If things do get worse then it is safe to assume that the stress tests were, more or less, for show and confidence.

Considering the escalating rate of delinquencies across all types of credit lines these institutions are facing more trouble in the near future. If the FASB gets its way and banks have to mark loans-to-market then forget it as most banks would have to write down hundreds of billions more in bad loans. Because of that I do not think that the FASB will get its way, even though they should because it is honest accounting.

The bottom line seems to be that fancy accounting seemed to fix the problem, but that will not be the long-term solution. I am not rooting for bank failures, but I am rooting for full disclosure of bank assets, like SIV’s and other “off” balance sheet assets to be thrown into the mix. If you do not truly know what risk the bank has, on or off the balance sheet, then you cannot make an educated or informed decision. Without knowing exactly who and what the Fed did last year we have no idea if we are profitable or not on these bailouts, not that it matters because even though we put up the money we never get any of the return.

We simply cannot have the Fed printing and loaning out money to banks and not be told what is going on. This is our money that we are talking about and we deserve to know what exactly happened and who benefited. No one is talking about politicizing the Fed, but what we are asking for is transparency of what they are doing because at the end of the day we, the taxpayer, will either suffer from their mismanagement or benefit. Until we know what happened or who got what then there should not be any reports of a profit or loss because we just do not know. Government, under any circumstances, is not entitled to privacy, period.

Foreclosures: What’s really going on

Posted by Ray on under Main | Be the First to Comment

Apparently I was wrong about the impact of foreclosures when I said that banks were holding onto the properties and not placing them on the market. It came to light via Diana Olick, who I respect at CNBC, in a report earlier today. It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough.

According to the report banks are waiting as long as possible to try keeping people in their homes by using the Obama Making Home Affordable plan. Unfortunately, people cannot simply refinance when you are unemployed or underemployed which is the primary problem now. Bank of America told Diana that since most of the properties are owned by third party investors the bank has an obligation to place properties on the market as soon as possible.

However, the sheer numbers of foreclosures are the problem and slowing the process down of getting the inventory on the market. What the report did not comment on are the homes that the banks still hold the mortgages on. For example my bank actually holds my mortgage, but if I was foreclosed on the bank might not place my home on the market and hold it until the market improved. Clearly, most banks do not hold these mortgages now as they were securitized, but it raises the question that if banks actually held the mortgages would we have these problems to begin with. Furthermore, if the banks held these mortgages would the loans have been made and if they were made would the bank work harder to keep people in their homes.

I think the answer is clear, if banks held these mortgages we would have less pain because foolish loans would not have been made. Its funny how banks become more conservative with their own money than they are when they package the mortgages up and sell them off to yield hungry investors. Unfortunately we will never have a true answer to that question as banks, mostly, sold these mortgages off and continue to do so.

Here is what LPS Applied Analytics had to say:

He says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.

Then he offered the following very detailed chart of what’s called “roll rates” or the rate at which troubled loans are moving through the system. Note the “average” is a four year average, and two of those years were the worst ever in the mortgage market, so as Jadlos notes: Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.

Regardless, the foreclosed homes on the market are approximately 1.5 million, which sounds like a lot, and it is. However, the numbers of problem homes that are ‘seriously delinquent’ total an astounding 3.5 million. Unfortunately unemployment is still on the rise and that number should easily increase in the near future which is a major problem. It also indicates that the real estate market is still not even remotely healthy and there will be more pain on the way. Once that tax credit is gone I think we will see just how weak the real estate market is.

Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market and there are lots of institutions that hold these bonds. It is said that the majority of CRE outstanding will not be able to refinance because values have dropped so badly, 36% or so year-over-year. Ordinarily the rollover of commercial property into new debt or loans was not a problem, but when the existing loan value is so much higher than the value of the property no one will refinance it. Actually, I am betting the Fed will figure some way out to refinance these properties, why not at this point it’s only our money they are playing with.

The bottom line is that there are still major problems and while some data looks positive the remaining data is negative. The negative data pretty much trumps the positive data and points to lower prices. I know we will get a much better view of this when the incentives go away in November. However, I am willing to bet there will be another program rolled out in either early winter or spring to boost sales again. I am wondering how many people are suffering from buyer’s remorse about their new home purchase especially when they get the property tax bill.

Which Way Will We Go?

Posted by Ray on under Main | Be the First to Comment

I can say with 100% certainty that I am not sure which way the markets will trade. What I do know is that perfection has been priced into equities and they currently trade at 130x current earnings and 26x future earnings. I know that only 25% of the S&P 500 has beaten earnings expectations with even fewer beating on the bottom line and estimates have been substantially reduced.

I realize that my bearishness has not paid off, well not totally at least. I called a top on August 7^th and we basically have seen slightly higher prices over that close, but nothing to be jealous about. In fact, we are trading right in the area that I said was the top and we are on our way back down, kind of. Frankly, this is not the selloff I was looking for, but there are telling signs that I am correct. Treasuries had not sold off during this parabolic rally, which should make you nervous, and that is currently my largest positions, 2 year notes to be exact.

I expect treasuries will outperform in the near term as the dollar gains strength, although today we are seeing a weaker dollar along with weak stocks and weak commodities which is a bit odd. Perhaps we are seeing the decoupling of commodities from the dollar and stocks, but I do not think that is the case. What I do think is happening is people are taking profits from some commodities like gold and oil, both of which have done fairly well this year. However, industrial metals are fairing OK today with silver up 8 cents and palladium, one of my favorites, up over a dollar which is more than likely due to the weaker dollar, but it is possible people see these metals as the recovery play, which is what I am doing on a longer term basis.

Regardless, I do believe this is the beginning of the selloff which could be as little as 7-8% to as large as 20%, depending on who you listen to. I am in the camp of somewhere between the 8-20% range based on a severely overbought market and the underlying fundamentals. If we do not produce 4% GDP growth then there is simply no way equities can remain at these prices which mean there is a lot more pain for those who are not defensive at this stage. I do like corporate bonds which have only 2% GDP growth built into their prices which makes them much less risky than stocks.

I just finished reading an article on CNBC.com where they tell you that selling may happen in September, but you do not have to be the seller, which I found odd. Basically, it said that you should hold your stocks even though a correction could be coming (I thought we were over the buy and hold philosophy?). Frankly, I think that since we do not know how severe the selloff might, or might not, be one would be more inclined to reduce some risk now and be ready to buy when they think it bottomed.

Now, I sold all but about 7% of my equity holdings, which is my comfort zone, and am ready to buy when I think prices are right. I may or may not be right to do this, but so far I have done OK with this strategy and I do believe, based on what rising treasuries are telling me, that I am correct. I just do not see how one can be so completely bullish on the market right now, but that is what makes a market work. The only reason I can foresee strong equity prices is because the liquidity provided from the Fed is so great that there is no place to put assets, but even that philosophy is setting you up for disaster as the Fed could rein in that liquidity fairly quickly.

No matter what you may think I am sure you can agree with me on a few points. Nothing goes straight up and when AIG, Fannie and Freddie are the leaders in the market, up over 200% apiece, there is a problem. There is virtually no equity left in those firms and the government also indicated that they will replace Freddie and Fannie with something else in the future. As for AIG there is nothing there to really salvage as they owe the taxpayers some $130B, but for some reason the stock is parabolic. That type of leadership is not what you want to see in a market that is up some 50% from its lows.

For those reasons, plus slightly less bad fundamentals is why I do not want to risk capital at this stage on the long side. Being short is just plain dangerous as well mostly because of the massive liquidity, but the fact that you really cannot borrow shares to short is another major reason to not short anything, you can’t. The whole thing is just odd and anyone who thinks that it is not weird that the market never goes down is simply not thinking logical. Whether you agree with me or not you know that nothing, ever, goes straight up like what we have seen since July.

I suppose if I was a conspiracy theorist I would have a logical explanation like the Fed is buying stocks or some other government controlled entity. However, I am not that demented, I don’t think at least, but I do think something stinks to high heaven here. How long can we see stocks and bonds trade up in tandem? It just doesn’t make sense, period.

While I feel comfortable in my bearish position I am also willing to say that there is nothing stopping the market from going to the moon. Especially if you cannot short stocks or you make it so expensive that shorting the stock is not a realistic solution, which is not a conspiracy theory as we all know this is happening. Either way we will see what happens, but I cannot stress, based on the pure mathematics, not just my opinion, that there is just a ton of risk in stocks right now.

Why American Car Makers Fail

Posted by Ray on August 30, 2009 under Main | Be the First to Comment

Just when you think the Big 3 learned their lesson they go and repeat the same things that got them in trouble to begin with. One would think that after 2 decades of bad decisions and one other major bailout from the government the industry would get its act together, but that is not the case. The only one of the Big 3 I have respect for is Ford, who told the government to pound salt over the terms of a bailout, but that makes me question why they went to the bailout table to begin with.

However, all three just made the worst decision of all time, well kind of. It appears that they bought into the whole ‘the economy is recovered’ and that the artificial demand for cars, through cash for clunkers, is somehow permanent. In fact, there is little demand left for new cars and all the pent up demand for cars was pushed forward to now through the very expensive government incentive.  Unfortunately, the greatest recipients of the whole cash for clunkers deal were the Japanese car makers, not the Big 3.

Toyota has realized this and has recently cut their production by 10% and, for the first time ever, closed a plant down. However, the Big 3 has done the exact opposite of Toyota, which shouldn’t surprise anyone. GM and Ford recently announced the addition of more shifts, rehired workers and boosted output by 10%. All when traffic in dealerships is reported down 10% below Junes traffic.

I guess when you are backed by the government, except for Ford, you can afford to do this, but it is not reassuring to me to see that type of decisions being made. Especially since we are, more than likely, not out of the recession and the consumer is still not spending money. Not to mention that 25% of people buying cars under the cash for clunkers program have buyer’s remorse which goes to show they really never wanted to buy a car, but free money is free money.

What you can surmise from this is that the big 3 are living in a fantasy land while Toyota, Honda and Hyundai continue to clean the clocks of its US competitors. It makes zero sense that the Big 3 would ramp up production when the more successful Japanese makers are cutting back, perhaps GM and Ford know something we don’t, but I highly doubt that.

Based on this recent decision to ramp up production it is really no wonder why 2 out of the Big 3 failed, miserably I might add. Not to mention this is Chrysler’s third chance at survival after they were successful after the first bailout, but their second failure just illustrates how bad their business plan was to begin with.  In my opinion, I think any car maker is far from a buy as I see shrinking credit and lack of demand driving car sales further down instead of up.

Investors Fleeing Cerberus

Posted by Ray on under Main | Be the First to Comment

Frankly, I am not really surprised by this in the least. It was beyond me why the firm took such large bets in the automotive sector. For years, if not decades, most rational people knew the auto industry was a loss leader and steered clear of it. Daimler couldn’t even get Chrysler to work, so I am not sure how Cerberus thought it was going to do any better.

Regardless, this outflow of assets is a message to hedge funds that performance does matter, especially when you are paying 2 and 20% of profits. It is fair to say that the gilded age of hedge funds are just about over. As of Friday 71% of Cerberus investors want out of the fund, perhaps over the Chrysler event, or perhaps because of bad performance, but they simply want out. This is strange since Cerberus even offered lower fees in another fund as an alternative, which was rejected.

This means that roughly $5.5B will be liquidated which could have some impact on the markets, but it probably will not be noticeable to the average investor. However, is this going to be a trend since hedge funds have not been performing extremely well this year? I believe it is. Simply put, very few managers are worth 2 and 20 in fees and there are still way too many hedge funds still open, even after the significant reduction over the past 12 months.

The closures of multiple hedge funds will eventually have a significant impact on the markets as they must liquidate to fulfill its redemption requests. I suspect we will see the concentration of hedge funds will be left to only a few of the long-term successful firms. No matter what the case may be it is clear that hedge funds will continue to close down and that will lead to pressured selling, perhaps this fall. I believe that fewer hedge funds are, at the end of the day, good for the markets as there will be less leverage in the marketplace.