Fasting Friday......
Seems appropriate, given that it is now Lent.....
Although one could apply this to the US Credit markets, who are on an involuntary fast at the present time, fueled by those who have sewn-shut mouths (credit demand disappearing due to lack of postable collateral) and those who has sewn-shut rutsacks of grain (due to lack of willingness to lose any more of it due to the blatant fraud!)
So this morning Spamazon comes out and spikes the NDX futures with their "announcement" that, in response to the recent precipitous decline in their share price, they will be buying back stock funded with new debt! (Of course the annoucnement didn't quite phrase it that way, but that's what how I read it!)
And like Pavlov's dogs, people rush in, bidding up AMZN $3 in the premarket.
But wait a minute here. We have a company that pays no dividend and has no place to invest their money that will grow their business, and thus feels compelled to take on new debt to buy back shares to "manage" their share price?
Why do I keep thinking of Countrywide Financial which did exactly the same thing (although they DID pay a divvy!) only to be saddled with debt servicing costs and a collapsed share price anyway - in other words, they not only got to eat a capital loss but in addition got to pay interest on the capital loss! How did that work out for CFC bag, er, shareholders, with the stock now trading under $7 - the buyback was initiated at $40!
But this was good to turn around what was promising to be a mild market rout this morning, flipping the NDX by 20 points within minutes - all of which "held" into the close!
And did it stay local to Spamazon? Nope. Apple, Google, RIMM, all up 2% or more this morning.
Because one company decided to take on more debt in a raw attempt to prop up its share price.
Now do I in fact care which way the market moves? No. I'm perfectly happy to make money on the market going up or down. Of course I'd like the fundamentals and direction to align, becuase that's a lower-risk trade than if the market moves against those fundamentals.
Why?
Because prop jobs, or slam jobs, when they go against the fundamentals underpinning the market, have a habit of disappearing with frightening speed and that usually leads to an equally frightening evaporation of capital from your account!
This morning we had yet another "KoolAid Drinking Reporter" - this time its Bloomberg's Caroline Braun. She cites many "bloggers" who sounded alarm bells at the latest H.3 report.
I'm one of them, by the way.
Well, if I'm a tinfoil hat wearer (in her opinion) for noticing that Citibank was forced to borrow hard money from the Arabs at 14% interest, yet is allegedly a "perfectly solid and wonderful US financial institution", and the banks (in aggregate) are in fact funding their reserve requirements via the TAF specifically to avoid transparency in going to the discount window then I accept the label with pride.
Tell 'ya what Caroline - why don't you do your "journalism job" and tell us why ****ibank had to borrow money from the Arabs at 14% interest if everything is ok, why these other "safe and sound" banks are borrowing money via preferred issues in the 7%+ range when Fed Funds is 3%, and why this demonstrates that ALL THESE INSTITUTIONS ARE PERFECTLY GOOD AND SOUND BANKS WHEN THEIR DEBT ISSUES ARE PRICED AT JUNK BOND LEVELS!
I know that part of the media's "purpose" is to lead the sheep in where they can be SHEARED, but in my view this has gone well beyond the usual yellow journalistic pumping that compels me to wrap dead fish in the newspaper.
The fact of the matter is that the "hard money" guys - you know, those Arabs and other foreigners who have actual money which we gave them in exchange for their oil and cheap imported products, are increasingly demanding senior status for the use of their money AND interest rates which exceed that which I pay to borrow on my credit cards!
To put it bluntly, Citibank's credit, in the eyes of these folks with actual money, is worse than MINE, as I can borrow UNSECURED at a LOWER RATE OF INTEREST THAN CAN ****IBANK WHICH IS FORCED TO SEEK SECURED FUNDING!
To put this in even MORE stark relief, JOE SIX PACK AVERAGE can STILL get a 30 year fixed mortgage for a bit over 6%, secured by his house, WHILE CITIBANK WAS FORCED TO PAY FOURTEEN PERCENT, OR MORE THAN TWICE AS MUCH, FOR SECURED FUNDS!
I think that Caroline needs to revise her thesis just a little bit - when not only I (and I admittedly have a very high FICO score and am quite liquid) but Joe Overlevered Sixpack can borrow for less than half the cost of one of our nation's largest banks, I believe that something is wrong with that bank's risk profile and balance sheet.
Do you disagree Caroline? Or is your next missive going to be to tell us how the management of Citibank intentionally overpaid by more than 100% for the capital they either wanted or needed to access?
Ok, on to the rest.
The Department of Justice is now, according to the Wall Street Journal, no longer simply interested in Bear Stearns. They now are seeking information from Merrill Lynch as well.
Gee, nothing like closing the barn door after all the horses have left (and the losses taken). But isn't that how our "enforcement" mechanism works? Even though the alarms were sounded years ago on the rampant fraud in the mortgage space, never mind that mathmatically it is impossible to get 300 bips of margin out of a pool that only has an actual risk-adjusted premium of 200, it is only when a few trillions worth of losses are taken and the hard money folks say "screw you!" that we see actual investigations.
This is just a total load of crap. Yet it is oh-so-typical.
Cuomo, on the other hand, appears to be the real deal.
Here you have a guy who's both a law enforcement official and instead of sucking off the teat of campaign contributions, indirectly of course, but still there, he's not afraid to start issuing subpoenas and perhaps even indictments.
Now that would be precious - and delicious.
In reality, indictments are exactly what we need, and not against people - we need 'em against businesses and specifically, the Wall Street banks that claimed that there was more margin in these deals than was mathmatically possible.
Intent there is simple to prove - 1 + 1 still equals 2 and always will.
Mathmatics is a bitch as it is both the only true science and is impossible to argue with.
Unwind all the money paid to everyone up and down the line - the fees the banks and ratings agencies collected, specifically, and I bet you will find that the actual available return in these deals were less than Treasuries.
In other words these securities were flatly unmarketable as you cannot possibly make the claim that there was less risk in them than in US Treasury debt, yet via any "fair" computation of their price THEIR COUPON HAD TO BE LOWER THAN TREASURY BONDS!
Cuomo need do nothing more.
If he goes down this road it's game over for the Wall Street banks, because as soon as you take those margins out and find that what's left by the time the securities get to the buyers there is less risk-adjusted premium than in Treasuries, yet they were sold with a coupon higher than that, you have established that they were mispriced.
Now who's the expert here? A Wall Street bank which makes its money off the spread, or an investor who buys based on the representations from that bank and the ratings agencies?
Now consider that the only way these banks could sell even ONE of these issues is if they put them out there with a HIGHER coupon than Treasuries. In other words, "fairly priced" nobody would have bought them - and the people with an incentive to misprice are the ones who make money from the mispricing.
You run that by a jury, I believe you get a conviction.
Every time.
Ok, on to consumer credit, released yesterday.
Growth was 2% on an annualized basis last month, which is, historically, horrible. It is particularly bad given that December is, of course, the holiday season and Christmas spending is a huge part of the economy, with most of it coming on credit.
Even worse, while revolving (credit card) credit issuance went up by 2.7% last month, non-revolving (e.g. cars, houses, etc) increased only by 1.8%.
And, to add to that, delinquencies are up big as well.
Oh, never mind that securitizers were active there as well, selling off tranches of credit card debt! Of course this was all priced off historically-low default rates as people refinanced their credit cards and effectively avoided default by tapping their "phantom wealth" from their house!
Don't worry the crooners tell us, it will all be ok. The hard money folks who got screwed by buying mortgages that were intentionally mispriced won't mind when it turns out that the credit card securitizations were mispriced using exactly the same mechanism - the belief that house prices would continually increase at double-digit annual percentages, and therefore, credit cards would never default because consumers would simply take the money from their house "appreciation" and pay off the line!
This would be funny if it wasn't so serious.
Folks, we are talking about a sixteen trillion dollar, more or less, phantom appreciation, with about one third of that actually extracted and spent.
While the rest of that is "paper gains" and when the "paper losses" come it will suck for those who think they have wealth but find they do not, the impact of defaults in all of these spaces when this six trillion dollars of spending through credit creation based on false asset values cannot avoid being severe.
People keep talking about this as if its a "recession caused by ordinary business cycles."
Uh, no.
It was an intentionally blown bubble and was exploited by these Wall Street and Main Street folks for their profit at your - yes, your - expense.
There are many who blame Greenspan for this. Nope.
This was not the fault of the Federal Reserve. It was the fault of Wall Street, the Realtors, the Mortgage Brokers and others in the field, all of whom made an incredible amount of money fueling speculation.
How many times did you hear during the housing bubble "buy now or be priced out of the market"?
Now were you a fool if you listened? Sure. Just like you were a fool if you listened during the Tulip Mania or any of the hundreds of other bubbles that have been blown throughout the years.
Guess what folks - it really is a "dog eat dog" world out there. No, that Realtor down on the corner isn't interested in whether you get a "great deal" on a house, no matter what they tell you. No, that mortgage broker is not interested in whether or not house prices are reasonably related to affordability (that is, three times median income for a median house in a given area); they are only interested in whether an early-payment default will result in the transaction being "put" back on them.
Just one question that ought to put this in perspective for all your folks out there in the "consumer" world:
Have you ever heard a car dealer tell you its a bad time to buy a car?
That's what I thought.
Oh, and what are you going to get if you don't pay attention? Let me put it this way - you'll be very interested in this law, because its about the only thing that will save you.
Here's your technical!
Although one could apply this to the US Credit markets, who are on an involuntary fast at the present time, fueled by those who have sewn-shut mouths (credit demand disappearing due to lack of postable collateral) and those who has sewn-shut rutsacks of grain (due to lack of willingness to lose any more of it due to the blatant fraud!)
So this morning Spamazon comes out and spikes the NDX futures with their "announcement" that, in response to the recent precipitous decline in their share price, they will be buying back stock funded with new debt! (Of course the annoucnement didn't quite phrase it that way, but that's what how I read it!)
And like Pavlov's dogs, people rush in, bidding up AMZN $3 in the premarket.
But wait a minute here. We have a company that pays no dividend and has no place to invest their money that will grow their business, and thus feels compelled to take on new debt to buy back shares to "manage" their share price?
Why do I keep thinking of Countrywide Financial which did exactly the same thing (although they DID pay a divvy!) only to be saddled with debt servicing costs and a collapsed share price anyway - in other words, they not only got to eat a capital loss but in addition got to pay interest on the capital loss! How did that work out for CFC bag, er, shareholders, with the stock now trading under $7 - the buyback was initiated at $40!
But this was good to turn around what was promising to be a mild market rout this morning, flipping the NDX by 20 points within minutes - all of which "held" into the close!
And did it stay local to Spamazon? Nope. Apple, Google, RIMM, all up 2% or more this morning.
Because one company decided to take on more debt in a raw attempt to prop up its share price.
Now do I in fact care which way the market moves? No. I'm perfectly happy to make money on the market going up or down. Of course I'd like the fundamentals and direction to align, becuase that's a lower-risk trade than if the market moves against those fundamentals.
Why?
Because prop jobs, or slam jobs, when they go against the fundamentals underpinning the market, have a habit of disappearing with frightening speed and that usually leads to an equally frightening evaporation of capital from your account!
This morning we had yet another "KoolAid Drinking Reporter" - this time its Bloomberg's Caroline Braun. She cites many "bloggers" who sounded alarm bells at the latest H.3 report.
I'm one of them, by the way.
Well, if I'm a tinfoil hat wearer (in her opinion) for noticing that Citibank was forced to borrow hard money from the Arabs at 14% interest, yet is allegedly a "perfectly solid and wonderful US financial institution", and the banks (in aggregate) are in fact funding their reserve requirements via the TAF specifically to avoid transparency in going to the discount window then I accept the label with pride.
Tell 'ya what Caroline - why don't you do your "journalism job" and tell us why ****ibank had to borrow money from the Arabs at 14% interest if everything is ok, why these other "safe and sound" banks are borrowing money via preferred issues in the 7%+ range when Fed Funds is 3%, and why this demonstrates that ALL THESE INSTITUTIONS ARE PERFECTLY GOOD AND SOUND BANKS WHEN THEIR DEBT ISSUES ARE PRICED AT JUNK BOND LEVELS!
I know that part of the media's "purpose" is to lead the sheep in where they can be SHEARED, but in my view this has gone well beyond the usual yellow journalistic pumping that compels me to wrap dead fish in the newspaper.
The fact of the matter is that the "hard money" guys - you know, those Arabs and other foreigners who have actual money which we gave them in exchange for their oil and cheap imported products, are increasingly demanding senior status for the use of their money AND interest rates which exceed that which I pay to borrow on my credit cards!
To put it bluntly, Citibank's credit, in the eyes of these folks with actual money, is worse than MINE, as I can borrow UNSECURED at a LOWER RATE OF INTEREST THAN CAN ****IBANK WHICH IS FORCED TO SEEK SECURED FUNDING!
To put this in even MORE stark relief, JOE SIX PACK AVERAGE can STILL get a 30 year fixed mortgage for a bit over 6%, secured by his house, WHILE CITIBANK WAS FORCED TO PAY FOURTEEN PERCENT, OR MORE THAN TWICE AS MUCH, FOR SECURED FUNDS!
I think that Caroline needs to revise her thesis just a little bit - when not only I (and I admittedly have a very high FICO score and am quite liquid) but Joe Overlevered Sixpack can borrow for less than half the cost of one of our nation's largest banks, I believe that something is wrong with that bank's risk profile and balance sheet.
Do you disagree Caroline? Or is your next missive going to be to tell us how the management of Citibank intentionally overpaid by more than 100% for the capital they either wanted or needed to access?
Ok, on to the rest.
The Department of Justice is now, according to the Wall Street Journal, no longer simply interested in Bear Stearns. They now are seeking information from Merrill Lynch as well.
Gee, nothing like closing the barn door after all the horses have left (and the losses taken). But isn't that how our "enforcement" mechanism works? Even though the alarms were sounded years ago on the rampant fraud in the mortgage space, never mind that mathmatically it is impossible to get 300 bips of margin out of a pool that only has an actual risk-adjusted premium of 200, it is only when a few trillions worth of losses are taken and the hard money folks say "screw you!" that we see actual investigations.
This is just a total load of crap. Yet it is oh-so-typical.
Cuomo, on the other hand, appears to be the real deal.
Here you have a guy who's both a law enforcement official and instead of sucking off the teat of campaign contributions, indirectly of course, but still there, he's not afraid to start issuing subpoenas and perhaps even indictments.
Now that would be precious - and delicious.
In reality, indictments are exactly what we need, and not against people - we need 'em against businesses and specifically, the Wall Street banks that claimed that there was more margin in these deals than was mathmatically possible.
Intent there is simple to prove - 1 + 1 still equals 2 and always will.
Mathmatics is a bitch as it is both the only true science and is impossible to argue with.
Unwind all the money paid to everyone up and down the line - the fees the banks and ratings agencies collected, specifically, and I bet you will find that the actual available return in these deals were less than Treasuries.
In other words these securities were flatly unmarketable as you cannot possibly make the claim that there was less risk in them than in US Treasury debt, yet via any "fair" computation of their price THEIR COUPON HAD TO BE LOWER THAN TREASURY BONDS!
Cuomo need do nothing more.
If he goes down this road it's game over for the Wall Street banks, because as soon as you take those margins out and find that what's left by the time the securities get to the buyers there is less risk-adjusted premium than in Treasuries, yet they were sold with a coupon higher than that, you have established that they were mispriced.
Now who's the expert here? A Wall Street bank which makes its money off the spread, or an investor who buys based on the representations from that bank and the ratings agencies?
Now consider that the only way these banks could sell even ONE of these issues is if they put them out there with a HIGHER coupon than Treasuries. In other words, "fairly priced" nobody would have bought them - and the people with an incentive to misprice are the ones who make money from the mispricing.
You run that by a jury, I believe you get a conviction.
Every time.
Ok, on to consumer credit, released yesterday.
Growth was 2% on an annualized basis last month, which is, historically, horrible. It is particularly bad given that December is, of course, the holiday season and Christmas spending is a huge part of the economy, with most of it coming on credit.
Even worse, while revolving (credit card) credit issuance went up by 2.7% last month, non-revolving (e.g. cars, houses, etc) increased only by 1.8%.
And, to add to that, delinquencies are up big as well.
Oh, never mind that securitizers were active there as well, selling off tranches of credit card debt! Of course this was all priced off historically-low default rates as people refinanced their credit cards and effectively avoided default by tapping their "phantom wealth" from their house!
Don't worry the crooners tell us, it will all be ok. The hard money folks who got screwed by buying mortgages that were intentionally mispriced won't mind when it turns out that the credit card securitizations were mispriced using exactly the same mechanism - the belief that house prices would continually increase at double-digit annual percentages, and therefore, credit cards would never default because consumers would simply take the money from their house "appreciation" and pay off the line!
This would be funny if it wasn't so serious.
Folks, we are talking about a sixteen trillion dollar, more or less, phantom appreciation, with about one third of that actually extracted and spent.
While the rest of that is "paper gains" and when the "paper losses" come it will suck for those who think they have wealth but find they do not, the impact of defaults in all of these spaces when this six trillion dollars of spending through credit creation based on false asset values cannot avoid being severe.
People keep talking about this as if its a "recession caused by ordinary business cycles."
Uh, no.
It was an intentionally blown bubble and was exploited by these Wall Street and Main Street folks for their profit at your - yes, your - expense.
There are many who blame Greenspan for this. Nope.
This was not the fault of the Federal Reserve. It was the fault of Wall Street, the Realtors, the Mortgage Brokers and others in the field, all of whom made an incredible amount of money fueling speculation.
How many times did you hear during the housing bubble "buy now or be priced out of the market"?
Now were you a fool if you listened? Sure. Just like you were a fool if you listened during the Tulip Mania or any of the hundreds of other bubbles that have been blown throughout the years.
Guess what folks - it really is a "dog eat dog" world out there. No, that Realtor down on the corner isn't interested in whether you get a "great deal" on a house, no matter what they tell you. No, that mortgage broker is not interested in whether or not house prices are reasonably related to affordability (that is, three times median income for a median house in a given area); they are only interested in whether an early-payment default will result in the transaction being "put" back on them.
Just one question that ought to put this in perspective for all your folks out there in the "consumer" world:
Have you ever heard a car dealer tell you its a bad time to buy a car?
That's what I thought.
Oh, and what are you going to get if you don't pay attention? Let me put it this way - you'll be very interested in this law, because its about the only thing that will save you.
Here's your technical!
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